Crain's Chicago Business
October 28, 2002
by Steven G. Strahler

A relatively little-known Chicago-based buyout group has raised nearly half-a-billion dollars for its first investment fund, at a time when better-known private-equity firms are struggling with dwindling returns.

Lake Capital LLC, led by Terence M. Graunke and Paul G. Yovovich, has a track record of acquiring and operating firms in marketing and other business services sectors--which, combined with its size, makes the fund attractive to investors, according to industry players.

In the past, it's raised money for buyouts on a deal-by-deal basis. Now, the firm is raising a $500-million upfront kitty to bankroll multiple acquisitions--standard operating procedure for established private-equity firms-just when market skepticism abounds over the dismal recent performance of many buyout funds.

"Anybody raising money today is a hero," says John Svoboda, principal of Svoboda Collins LLC, another Chicago-based private-equity firm. Although the downturn in stock and bond markets has left investors searching for alternatives, many are skittish about private-equity funds. And wary lenders have been holding back on the credit needed for leveraged transactions.

A report released this month by the University of Texas Investment Management Co. said that only four of the 38 private-equity funds in which it has invested since the start of 2000 have had positive rates of return in the post-bubble investment environment.

In contrast, Lake Capital investors have enjoyed a "series of significant realizations," or cash returns, according to Chad Schultz, Chicago-based co-head of Credit Suisse First Boston's (CSFB) private fund group, Lake Capital won't disclose figures, but says it has met its overall goal of a threefold return on investment over periods that average about four years.

Pressure to find deals

Prior to establishing its fund, the firm and predecessor companies under Mr. Graunke raised about $400 million for six deals from other buyout firms like Frontenac Co. and the private-equity arm of Bank One Corp.

Lake Capital was able to assemble the new fund in six months, "which in our business is warp speed, in any market," says Mr. Schultz, whose firm tracked Lake Capital's performance over three years before signing as its placement agent, or fund-raiser.

The firm now must show it can deploy a large pool of cash as effectively as it handled deal-by-deal investing. Lake Capital's previous business model allowed it the luxury of finding attractive buyout targets before taking investor's money. Raising that capital upfront puts pressure on the firm to find deals and start generating returns quickly.

The upside of raising the fund is the ability to move fast when opportunities arise. Despite awaiting a commitment from one more investor, the fund has already made a $100-million investment in startup Huron Consulting Group, formed here last spring by a group of ex-Andersen employees. (Lake Capital was an Andersen client.)

Mr. Graunke who was CEO of marketing communications firm (and Lake Capital investment) Lighthouse Global Network until its sale in 2000 for $592 million, says the meltdown of Andersen and a push to separate consulting and auditing practices at other accounting firms will produce opportunities.

"We've got plenty of targets," he says. "Obviously, the challenge is to find good service businesses with some forward revenue visibility."

Besides Lake Capital's track record, pension funds and other institutional investors were attracted to the new fund by its relatively small size and its focus on medium-sized companies as acquisition targets. Larger buyout funds found it much easier to raise the money than to quickly invest it once the marked turned.

Investors became antsy as they continued to pay management fees to fund operators even though there were no investment outlays to show for it.

"People aren't interested in these mega-funds anymore," says CSFB's Mr. Shultz.

Mr. Graunke says his fund will support eight or nine acquisitions. Lake Capital's equity stakes typically range from $50 million to $100 million.

Its current portfolio includes DVC Group Inc., a New Jersey-based "behavior marketing" firm, and Nth Degree, a Georgia-based event and trade show marketer.

Eye on global expansion

In selecting its investment targets, Lake Capital looks for firms that can be primed for international expansion. It opened a London office in 1998.

"There's been a reasonable flow of cross-border activity in that (business services) sector," says C. Christopher Coetzee, a managing director in Robert W. Baird & Co.'s investment banking division, which has worked with Lake Capital.

Another private-equity veteran says Lake Capital's leaders: &qout;They've got what the market is looking for today. They're an experienced investment team, but they're also experienced operators."

After serving as an executive for a decade with telecommunications firm Centel Corp., Mr. Yovovich was president of Advance Ross Corp., a Chicago-based tax-refund service, from 1993 until its 1996 merger with CUC International Inc.

"Terry's a great salesman with a great track record, and Paul's a strong operator with a great track record," says Mr. Svoboda.

At Huron Group, which has about 300 employees, "they made the whole thing possible," says Susan Gallagher, group managing director. "I get real articulate strategic thinking back, yet they don't jump in and tell you how to run your business."

©2002 by Crain Communications Inc.