04/28/2010

Pegasus Downplaying Fund 5 Ambitions

Pegasus Capital has trimmed the capital-raising expectations for its newest buyout fund, while calling off a shift in its investment focus.

The moves follow a lukewarm response from potential backers of the vehicle, Pegasus Partners 5. Now the Cos Cob, Conn., firm is telling limited partners that it hopes to raise $1 billion, while characterizing the figure as unofficial and subject to change.

When it put the marketing effort in motion in September, Pegasus was aiming for $2 billion. The outfit also said it would shift away from its roots as a special-situations investor, and would instead back healthy companies whose products or services cut business expenses via reduced consumption of energy or other natural resources.

While that tactic was already part of Pegasus' repertoire, and even drew encouragement from some prospective limited partners, many existing backers were puzzled by the switch.

The upshot: Pegasus is going back to its original strategy, which calls for investments in mid-size businesses that are distressed or undervalued. They could include energy-savings specialists. Among past Pegasus deals that match both descriptions was an investment in mining company Molycorp Minerals, whose products are used in clean-energy production and water treatment. There's also waste-oil recycler Universal Lubricants.

In another change for Fund 5, Pegasus has dropped plans to direct up to 10% of the vehicle's equity to an in-house merchant-banking operation that would advise companies with an environmental-sustainability bent.

With the lower equity target and a return to its traditional strategy, expectations are that Pegasus is in for an easier fund-raising campaign.

Pegasus raised $750 million for its 2007-vintage fourth fund, not including co-investments. Both that vehicle and the firm's third fund have produced rates of return of roughly 25%, while Fund 2 returned some 15%. Pegasus was started in 1995 by Apollo Advisors co-founder Craig Cogut. He now runs the firm with Rodney Cohen.