DALLAS – Saunders, Karp & Megrue has launched an affiliated firm in Dallas that will invest in lower middle-market deals using capital from the New York firm’s $500 million private equity fund.
Saunders Karp General Partner Barron Fletcher will return to his native Texas to head the new venture, dubbed SKM Growth Investors. The firm will seek to invest between $5 million and $15 million in equity in small but profitable companies, and expects to make both control and minority investments in the restaurant, specialty retail and manufacturing sectors, he said.
In pursuing smaller deals, Saunders Karp follows in the footsteps of other private equity firms, such as Summit Partners and Thayer Capital Partners, that recently have sought to build profits by focusing on a market traditionally overlooked by firms of their size. Summit is marketing a $150 million fund that will invest in companies bypassed by the firm’s main fund, which has more than $1billion in committed capital. Thayer Capital, which closed in January on $880 million, is teaming with Virginia-based private equity firm Winston Partners to raise a $100 million small deal fund, to be called Winston/Thayer Partners. Winston/Thayer saw a first close in June on $32 million, according to Rick Rickersten, a general partner at Thayer.
Lowering the Equity Bar
Saunders Karp turns down approximately 300 deals per year because they fall below the firm’s low-water mark of $15 million, Fletcher said. He added that approximately 85% of privately-held companies in the U.S. have revenue of less than $100 million, but more than 90% of private equity dollars go toward companies with annual revenue exceeding $100 million. SKM Growth Investors will experience far less competition in the small deal market than its parent company has in the larger market, Fletcher said.
The new firm will be based in Dallas in part because Fletcher wants to return to the area, and in part because the city has close proximity to many of the geographic areas SKM Growth Investors plans to target, including the Midwest and Western states.
Fletcher said the new firm will begin looking at investments immediately using capital from existing Saunders Karp funds. SKM Growth Investors may raise its own fund once its track record has been established.
Fletcher has worked on small deals for Saunders Karp in the past. Last fall, he led the $41 million buyout of Party Concepts, a chain of greeting card and gift shops. In 1995, Fletcher organized the recapitalization of the Souper Salad, a Texas-based restaurant chain.
“The problem with small deals is that they get put on the E list,” Fletcher said. “No one can justify taking the time to focus on them. I’m setting up a business to jump on all the deals we pass on because of size. It will essentially double our universe of opportunities.”