Sterling Group shoots for $1.75bn in launch of fifth flagship offering

If Sterling Group Partners V meets its goal, it will be the largest flagship fund raised in the Houston private equity firm's 38-year history.

Sterling Group has returned to the market with a fifth mid-market buyout fund, setting a target of $1.75 billion, according to Form D fundraising documents.

The target contained in the filing is below the $2 billion reported by Buyouts, Wall Street Journal and other sources. It is not clear if the higher number is the vehicle’s hard-cap.

If Sterling Group Partners V meets the goal, however, it will be the Houston private equity firm’s largest flagship fund to date, exceeding by 40 percent the $1.25 billion secured by its predecessor in 2015.

Fund V has yet to raise commitments, the Form D documents showed. Limited partners that pledged to back the pool include New York State Teachers’ Retirement System, which is investing up to $200 million, and Illinois Municipal Retirement Fund, which is investing up to $60 million.

Along with NYSTRS, LPs in Fund IV included Canada Pension Plan Investment Board, Pennsylvania State Employees’ Retirement System and State of Wisconsin Investment Board, PEI data show. They helped Sterling Group wrap up fundraising in only three months.

Sterling Group’s latest offering faces a tougher market environment because of the covid-19 pandemic. In addition, one of the firm’s existing investors elected not to re-up.

Pennsylvania SERS in April declined a recommendation to commit $50 million to Fund V, Buyouts reported. The pension system flagged concerns about a perceived lack of team diversity, a higher-than-average loss ratio, and an expectation that Sterling would delay investing until toward the end of the year or early 2021.

One of the oldest PE firms in the US, Sterling was founded in 1982 by Gordon Cain and Frank Hevrdejs. Its operationally-focused strategy, largely unchanged since inception according to firm’s website, targets controlling stakes in businesses in the basic manufacturing, distribution and industrial services sectors.

Preferred investment opportunities, located across North America, generally have enterprise values ranging from $100 million to $750 million. About 80 percent of Sterling deals have been corporate carve-outs and partnerships with family-owned companies.

Sterling also has a credit fund that provides mezzanine and second-lien loans to mid-market businesses as well as equity co-investments. The pool, which collected $200 million in 2017, partners in PE deals in sectors like consumer, distribution, food and industrials.

Sterling has 10 portfolio companies disclosed on its website. The most recent platform investment, announced in December, is Bad Boy, a Batesville, Arkansas manufacturer of riding lawn mowers.

The partnership team of Sterling consists of Greg Elliott, John Hawkins, Brian Henry, Scott MacLaren, Gary Rosenthal, Brad Staller and Kent Wallace. MacLaren, the newest member, was appointed partner last year.

Sterling Group Partners III, which closed in 2010 at $820 million, generated a net IRR of 28.7 percent as of September 30, 2019, according to a report by California Public Employees’ Retirement System.

Sterling did not respond to a request for comment on this story.

Action item: See Sterling Group’s ADV filings .