Specialty funds may have a leg up in fund-raising over general-purpose venture capital funds. Witness the success of Inverness Capital Partners. It set out in May 2002 to raise outside capital for the first time. Its goal: Raise $90 million. A little over a year later, the Wayne, Pa.-based fund has commitments north of $100 million and it’s set to close in September with $125 million.
Inverness is part of the Graham Group of York, Penn., a privately held industrial and investment concern with direct investments in operating businesses that produce annual sales in excess of $4 billion in plastics, packaging, machinery, building products and manufacturing. The Graham Group was previously Inverness’ sole investor, initially putting up about $20 million.
“A large part of what we’re looking to do is build a robust, diversified private equity group with a variety of private equity offerings that would be a key player in the mid-Atlantic,” says Kenneth Graham, president and founding managing principal of Inverness.
Inverness did well enough investing the Graham Group’s money that it has attracted interest from other large limited partners. LPs in the new fund include Air Products (NYSE: APD), Mercantile Bankshares (NASDAQ: MRBK), the Prince Group, Wilmington Trust (NYSE: WL) and individuals, in addition to the Graham Group. The fund is also in talks with financial giant MBNA (NYSE: KRB) and is waiting on a commitment from a large European firm,
Inverness’s familiarity with industrial companies enabled it to raise its first fund so easily, says Graham, who is also senior group vice president for global business development for Graham Packaging Co. and a member of the board of directors of Graham Machinery Group. “We’re operating in an arena that we understand and that we know,” he says.
As proof of that know-how, Air Products says it invested in Inverness to get access to technology and investments that fill its strategic needs. It put $6 million into the fund. “Our focus is to primarily invest in opportunities that have strategic values,” says Rich Badesso, director of venture investments for the company. “If we invest in a company or in a fund and it generates a return, that’s wonderful, but we’re really interested in understanding what the strategic returns are.” Air Products’ corporate venturing group has two funds and about a dozen companies in its portfolio. It usually invests in earlier stage products; investing in Inverness paves the way for a more diverse portfolio.
Graham says he’s happy with the limited number of large institutional investors the fund has attracted, adding that there are no plans to seek any more significant commitments beyond the potential LPs the fund is in discussions with. “The biggest difficulty was getting the first few institutional players,” he says. “We don’t want to have a bunch more relationships there because you’ve got to be able to focus on relationships and manage them if you want to succeed.”
Inverness will invest in industrial companies with a focus on advanced materials/processes, advanced packaging, industrial equipment/components, manufacturing IT, robotics and plant automation. It looks at a wide variety of industrial sectors, from oil, gas and chemicals to automotive and aerospace to consumer products.
Potential portfolio companies will have revenue of between $5 million and $25 million. Inverness plans to invest in about 15 expansion-stage companies from its inaugural fund, with investments of $4 million to $8 million per company.
Inverness insists on taking a board seat with every one of its investments. It is presently negotiating a deal in which it would invest $1 million of a $6 million round and take a board seat.
Besides Inverness, the Graham Group’s affiliates include Graham Capital Co., which manages the group’s securities, real estate and alternative investment portfolios; Graham Partners, a $227 million buyout fund; and Striker Investment Group, which makes equity investments in small to medium-sized companies.
Industrial companies in the Graham Group include Graham Machinery Group, which provides machinery for plastic molding production; Graham Packaging Co., a provider of plastic packaging products that the group sold to Blackstone Partners in 1998; and Western Industries, a specialty plastics and metal manufacturer. “The products are such that if you drop it on your foot, you’re going to feel it,” says Graham.
“In the early 90s we charted a course to transition the group from an industrial and operating group with some indirect alternative investments and our goal was that by the year 2000 we would transition to largely an investment group, though always connected deeply and directly to our industrial heritage,” Graham says. Since it achieved its goal, the group spends more of its resources on investments.