Sterling Group, a Houston-based private equity firm, is armed with $2 billion to invest in North American industrial businesses.
The firm, which acquires controlling interests in manufacturing, distribution and industrial services companies, closed its fifth and largest fund since its founding in 1982, reaching its target in four months.
Getting investors on board during a pandemic shook up the process.
“It definitely resulted in a very challenging fund raising market, as so much of fund raising has historically been done in person,” said Franny Jones, the firm’s managing director of investor relations. “Our investors are committing to a 10 year partnership.”
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Ordinarily, potential investors would spend a full day at Sterling’s offices on the 24th floor of Nine Greenway Plaza to hear the pitch.
“When the pandemic hit in the beginning of March, that really limited people’s ability to travel and our ability to fund raise in the traditional way,” Jones said. “We quickly had to pivot to doing a lot of those meetings through videoconferencing.”
Sterling’s Fund V is among 225 funds to close worldwide in the second quarter, according to Preqin, a company that tracks investment activity. The fund count — the lowest in five years — is down from 425 in the second quarter 2019.
Funds raised $110 billion globally in the second quarter, according to Preqin, down from $150 billion the year earlier.
Sterling, which invests in businesses with enterprise values from $100 million to $750 million, expects to begin marking purchases for the new fund in the beginning of 2021, Jones said. The time frame for deploying the funds is six years.
Kirkland & Ellis served as legal counsel for Fund V, which, like previous funds, will primarily target corporate carve-outs — acquiring a division or segment of a larger company — and family businesses. Sterling’s previous fund, which closed in 2015, totaled $1.25 billion.
Sterling typically holds investments for three to five years with a target of tripling its money during that time frame, Jones said. The businesses are ultimately sold to other private equity firms or to strategic companies in the same industry.
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Investments have included DexKo, a major manufacturer of trailer axles created by carving out smaller divisions of two larger companies; Evergreen North America Industrial Services, an industrial cleaning business based in La Porte; and, most recently, Stripe-A-Zone, a North Texas provider of striping services for roads, highways, airports and parking lots as Sterling gains a foothold in the road safety business.
Families, who often sell for liquidity reasons or because the next generation is not interested in running a business, often stay on to grow the business, Jones said. Employees are typically offered the chance to invest alongside Sterling through equity offerings and options programs.
“We’re looking to help management take advantage of opportunities that have been there, but they haven’t had the time to focus on,” Jones said.
The pandemic, Jones said, could create opportunities to grow companies coming out of downturns.
“We are finding conversations about new partnerships are picking up.”
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