Many bankers say the Dodd-Frank Act is killing them, but Incline Equity Partners can thank the reform law for its birth.
PNC Financial Services Group Inc. spun off its private equity division in April to avoid running afoul of the act's restrictions on bank investments in private equity funds.
Jack Glover, Wali Bacdayan and Justin Bertram, the team that was managing PNC Equity, launched the new firm and has been in fundraising mode. The firm is named after the famous inclined railways in Pittsburgh that ferry passengers to and from the city's surrounding hills.
"We will be employing the same strategy as we did at PNC, but on our own," Glover says. "So far, things have been going well."
Over the past couple of years, more and more banks have jettisoned their private equity arms for regulatory and other reasons, including Bank of America Corp., KeyCorp and Wells Fargo & Co.
Some believe PNC moved too quickly. "The spin-off was not surprising in one sense because of Dodd-Frank, which limits banks' abilities to participate in private equity," says Bill Tyson, co-head of investment banking with BB&T Capital Markets. "On the other hand, it was a little surprising because PNC's private equity group had a great track record and I was surprised PNC wouldn't have done everything in its power to become compliant while keeping the group."
Tyson has sold a number of companies for PNC Equity and continues to work with the new firm. "It's hard to build a cohesive team with a good track record like that of PNC Equity's," he says.
The split was amicable, in fact so amicable that Incline is managing PNC's two private equity funds. In 2001, PNC raised a $200 million fund, which invested in 11 companies. It has exited eight of those investments. Incline is tasked with finding exits for the remaining three. In 2007, PNC raised a $272 million fund, which has invested in 10 companies and has only had one realization to date.
Incline is also raising money for its own fund, Incline Equity Partners III. (Though the fund is Incline's first, it is named Fund III because it follows PNC Fund I and II). Fund III has a target of $300 million and is expected to hold a final close in the second or third quarter.
Limited partners in Incline Equity Partners III are the usual suspects including pension funds, high-net-worth individuals and endowments. Pennsylvania Public School Employees' Retirement System has already committed up to $50 million in the new vehicle, which had collected more than $100 million by the end of November 2011. Madison Capital Funding has also invested with the firm.
"We invest with funds that focus on the middle market and target types of businesses we like to finance," says Christopher Williams, a senior managing director with Madison. "The businesses Incline invests in are niche businesses that have pretty strong market share and a decent growth profile."
PNC will not be investing in the new fund as a result of Dodd-Frank limitations.
"Most of the investors in PNC Equity's previous funds have reupped with us," says Glover. "We were partners with PNC for 15 years. They were wonderful partners and we would have loved to continue to manage capital for them, but that's not where we are."
Incline will continue to invest in value distribution companies, business and industrial services companies and light manufacturing companies. Its targets generally have values below $125 million. Incline is prepared to write equity checks of between $15 million and $30 million.
The firm continues to fundraise, but its partners also keep busy scouting out add-on acquisitions for PNC's platform companies, as well as exit opportunities.
Incline has already had some successes. For example, in November, Incline recapped Revolution Dancewear, a Niles, Ill.-based maker and distributor of dance recital costumes and dancewear.
"The business experienced rapid growth in earnings and has paid down significant debt so it made sense to recap it," Glover says. "And it allowed us to get an interim return on our investment."
In September, Incline was able to sell The Country Vintner to Brockway Moran & Partners. TCV, headquartered in Ashland, Va., is the second largest independent distributor of fine wines in the U.S. PNC purchased the business from its original founder in 2008. The company distributes wine in Virginia, North Carolina, the District of Columbia, Delaware, Maryland and Florida.
"We completed three add-on acquisitions, as well as made operational improvements," Glover says.
Going forward, Glover is optimistic about 2012 and Incline. "The economy is not great, but it's not as bad as it was. Deal flow in 2011 was up considerably over 2010 and we expect to add at least two more platform companies in the next six months," he says
