Sterling Group pays back Fund II LPs

Sterling Group, a Houston-based mid-market firm that has been active for more than 30 years, has paid back all called capital to its LPs in its second fund after exiting five investments out of nine held in the fund.

Fund II, which closed on $470 million in 2005, has been fully deployed, and has four remaining portfolio companies to be exited, according to Sterling partner Kevin Garland. LPs in the second fund have been paid back all called capital, he said.

“[Two exits this year] pushed us over having returned all called capital to investors, net of fees and carry,” Garland told Private Equity International in a recent interview.

The firm is investing Fund III, which closed on $820 million in 2010. That fund is about 40 percent deployed, Garland said.

Kevin Garland

Fund II’s LPs got their called capital back after the firm completed two exits this year. The first was the sale of Roofing Supply Group to Clayton Dubilier & Rice, which generated a return of more than 2.5x for Sterling. The firm acquired Roofing Supply in 2006 but had to turn its attention to protecting the company in the downturn after the housing market collapsed.

Sterling, which has a strong focus on operational improvements (the firm was founded by operators in 1982), took the company’s bottom line margins from 5 percent to 9 percent, Garland said.

In November, Sterling Group sold Velcon, a maker of fuel filter products, to engineering giant Parker Hannifin for an undisclosed amount. One source in the market said the sale produced a strong return for Sterling.

The firm acquired Velcon in 2009 at the height of the global financial crisis, lining up financing in the frozen credit markets from its long-trusted lender BNP Paribas, which headed up a small lender group. Sterling grew and globalised Velcon through add-on acquisitions and professionalised the management, Garland said.

Sterling Group was formed in 1982 by Frank Hevrdejs and the late Gordon Cain and spent the first 17 years of its life investing without a dedicated fund, amassing almost $6 billion in transactional value. The firm raised its first private equity fund in 2001 with total commitments of $120 million.