07/21/2010

RoundTable Resistant to Marketing Malaise

RoundTable Healthcare is calling the shots when it comes to raising capital.

After just a few weeks of marketing, the Lake Forest, Ill., buyout firm held the final close for its RoundTable Healthcare Partners 3 vehicle on July 17 with $600 million. And investors were willing to put up far more for the entity, which pursues buyouts of pharmaceutical, healthcare-distribution and medical-device companies.

The shop also raised $200 million for a mezzanine-finance vehicle called RoundTable Healthcare Capital 2.

Not only do the results run counter to the experiences of most private equity firms these days, but they come despite an increase in the percentage of profits that Fund 3's limited partners might have to surrender. RoundTable will start by taking its usual 20% of carried interest. But once returns hit two times equity, the carry jumps to 25% - and then 30% if the multiple exceeds 2.7 times. There also is a concession in that the performance fees don't kick in until returns reach 10%, as opposed to a more typical hurdle rate of 8%. Still, those sorts of charges are practically unheard of in today's market, especially for a buyout shop.

In fact, many buyout specialists are moving toward lower fees. And while a few high-flying venture capital firms take a 30% cut of carried interest, a lower charge is typical even in that sector. For RoundTable, the ability to move in the opposite direction with apparent ease testifies to a high level of investor regard.

Before it began raising capital, market players predicted RoundTable would be able to raise $1 billion - a figure the outfit apparently could have hit if it wanted. Indeed, the shop wound up taking only half as much as some investors were willing to commit, and most thought it would accept more than it did.

RoundTable, led by Joseph Damico and Lester Knight, has consistently produced big profits. For example, it agreed on July 14 to sell drug company Bioniche Pharma to Mylan for $550 million, a price that alone would return a huge portion of the capital from the shop's second fund. That vehicle held its final close with $500 million in 2005.

RoundTable's first fund raised $400 million in 2001. It has exited four deals, with three returning at least seven times capital and the other generating a gross return of five times equity.

Another reason investors like RoundTable is that the firm doesn't charge them transaction fees or financing costs. They also appreciate the fact that the firm avoids portfolio companies that might suffer from changes in U.S. government policies.

One downside for backers of Fund 3: Because the vehicle's performance fees jump so abruptly with each tier of gains, there would be brief periods at the beginning of each step up where investors' net returns would actually dip below prior levels.