Avon-based Ironwood Capital is starting its fourth investment fund with the goal of raising $300 million to invest in lower middle-market companies over the next five years.
The firm has already received about $75 million in commitments for the fund — called Ironwood Mezzanine Fund III LP — which will focus on later-stage, cash-generating companies in the business services, value-added manufacturing, distribution, consumer products, and healthcare sectors.
Marc Reich, Ironwood’s president and founding partner, said the new fund will be the firm’s third mezzanine fund and fourth fund overall.
Reich said Ironwood typically invests in companies with annual revenues in the $30 million to $70 million range, but will look at companies as large as $200 million as well.
“Our focus is on the lower end of the middle market,” Reich said.
Reich said his firm typically raises money from institutional investors, particularly insurance companies that are prevalent in Greater Hartford.
The firm actually traces its roots back to Hartford health insurer Aetna.
Reich said he established Aetna Financial Services Inc. in 1985, which served as the investment banking unit of Aetna Life & Casualty Co. About six years later he, along with Ironwood’s senior managing director Carolyn C. Galiette and others, purchased that business from Aetna and formed Ironwood Capital.
Ironwood started as an investment banking firm sticking to its roots by concentrating on smaller deals for middle market debt issuers. But as competition for that business began to heat up in the late 1990s — particularly from larger Wall Street banks — Ironwood evolved its business model into an investment management firm.
Since 2000, Ironwood has raised and managed money for three different funds and has about $400 million of capital under management. Reich said Ironwood is still in the process of investing its second, $172-million mezzanine fund. Once 90 percent of that fund is allocated, the firm will move forward with its new fund, which has already received about $75 million in commitments.
Reich said Ironwood expects to raise all of the $300 million by the second quarter 2012, and it will take about five years to invest it.
The vast majority of Ironwood’s deals are done outside Connecticut, but there are some in-state companies in the portfolio, Reich said. Among them is New England Linen Supply Company Inc. in New Haven, which rents and sells textile and linen products to foodservice companies. East Windsor-based Al’s Holding Inc., a manufacturer and distributor of fountain drinks, is also in Ironwood’s portfolio.
Reich said the firm has always been a generalist investor, with no ties to one particular industry.
However, one area the firm hasn’t focused on is biotechnology, but that could change, depending on the success of the state’s Bioscience Connecticut initiative.
Connecticut’s $864 billion investment in the UConn Health Center, and the proposed $1.1 billion Jackson Laboratory project in Farmington could prove to be a game changer in spurring biotech spin offs.
If that happens, as state officials claim it will, there will be investment opportunities and with its close proximity to the area, Ironwood could capitalize.
“We certainly have the intellectual capital to invest in that space,” Reich said. “It’s something that we are considering.”
That intellectual capital includes Victor R. Budnick, a managing director at Ironwood, who is the former head of Connecticut Innovations, the state’s quasi-public technology investing and innovation arm.
Besides its mezzanine funds, Ironwood has also partnered with Missouri-based Advantage Capital on a $72 million fund earmarked to invest in about 25 Connecticut companies.
That fund was established earlier this year as a result of the revised Insurance Reinvestment Tax Credit program, which provides incentives for insurance companies that invest in high-growth businesses through state-registered fund managers.
The program leverages private capital provided by insurance companies. That money is then invested by state-certified fund managers. In exchange, insurance companies receive credits toward their tax liability on premiums they collect.
Reich said insurance companies have narrowed their investment focus considerably in recent years, but they continue to be good, quality investors. And insurers still have an appetite for fixed income investments.
“Since 2008, everyone is hunkering down a little bit,” Reich said.
Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.
