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Southlake Equity Fund Has $280M for Purchases
June 24, 2005

Insight Equity to buy majority stakes in troubled cos.
Dallas Business Journal
Holli L. Estridge

A Southlake investment group managed by former Carlyle Management Group executives has raised $280 million to buy and turn around troubled companies. Insight Equity I L.P.'s key investors include the University of Notre Dame and the Qwest Pension Fund. Insight reached an initial $111 million target in early May, according to a May regulatory filing with the State Securities Board.

The private equity fund is currently oversubscribed, Insight Chief Restructuring Officer and Managing Director Ross Gatlin said, meaning the organization has already exceeded its fundraising target of $250 million. Funds stand at approximately $280 million. Insight plans to focus investments on companies in the manufacturing, automotive and transportation, aerospace and defense, distribution, service and technology-related industries. The group seeks opportunities to gain financial control by acquiring more than 50% of a company's common equity and board-level operating control.

"We want to be able to make board-level implementation decisions and become involved with corporate governance, along with the management team," Gatlin said. Gatlin continued that Insight, on average, will invest in companies with $50 million to $300 million purchase prices, taking on between $15 and $50 million in equity. Insight's first purchases, in 2003 and 2004, included the assets of Minnesota-based prescription lens manufacturer Vision-Ease Worldwide and Euless-based Direct Fuels, a specialty refiner and independent distributor of gasoline to the Metroplex. Insight closed the sales on a "pre-fund" basis, using funds and capital from its co-founding partners.

Going forward the investment group will combine equity and leverage for future purchases of company interest or assets on a case-by-case basis, said Victor Vescovo, Insight's chief operating officer and managing director. Vescovo said the firm will focus each year on acquiring one to two North American-based mid-market companies with less than $500 million in revenue. Notre Dame and FLAG Private Equity II L.P. of Connecticut have been major contributors to the fund, accounting for $35 million, according to the May filing. Three Massachusetts investors, including Qwest Pension Fund, added $25 million. Mellon Trust of New England serves as trustee for the Qwest Pension Fund, according to regulatory filings.

So far the Insight fund has a total of 14 accredited investors, according to documents filed with the State Securities Board. Accredited investors are wealthy individuals who have a net worth exceeding $1 million or annual income exceeding $200,000, or institutional investors such as banks, pension funds or nonprofits.

The fund is operated by Chief Executive Officer and Managing Partner Ted Beneski, who, before founding Insight Equity, was a co-founder and senior vice president of the Carlyle Management Group -- The Carlyle Group's corporate business turnaround entity. The Carlyle Group, a global private equity firm based in Washington, D.C., has a focus-industry set similar to that of Insight. Carlyle's local investments have included Aviall Services, Vought Aircraft Industries and the Dr. Pepper/Seven Up Bottling Group.

Beneski and Gatlin have shared experience with Carlyle Management. Beneski, Gatlin, and Vescovo held senior-level positions at Bain & Co.'s Dallas office, advising clients in a variety of areas, including mergers and acquisitions and operational turnarounds. Bain is a management consultancy.

Insight aims to exceed 30% internal rates of return annually and to create greater than $500 million in value over five years. Insight is right to expect high returns in its identified market sectors, according to Bob Parrino, director of the Hicks Muse Tate Furst Center for Private Equity Finance at the University of Texas at Austin McCombs Business School.

"Those are businesses where private equity has been invested for a long time," Parrino said. "If you're going to leverage a business significantly with 60% to 70% debt, with tangible assets, you can create a stable, positive cash flow if it's managed well. However, private equity firms in general are beginning to face more competition, he said. "Some funny things are happening in the private equity market. It now goes beyond traditional private equity, as more hedge funds begin to invest," he said. "You already have the private equity firms competing with each other, and now the hedge funds are coming in."

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