MiddleGround Capital closed in quick time a process through which it moved its portfolio company Banner Industries into a continuation fund and combined it with another business, sources told affiliate title Buyouts.
The deal stands out as a single-asset process successfully closed by a GP without intermediation. It is among a slew of GP-led secondaries that are, or are expected to, close by the end of the year.
The rationale for the deal was to accomplish a combination of Banner Industries, a metal processor and distributor, with Castle Metals, a public company the firm tried to acquire in the past, sources said. MiddleGround acquired Banner Industries in 2019.
Hamilton Lane was lead investor on the deal, which raised about $440 million, the source said. The deal also included several new investors, the source said.
The deal allows for the firm to finance the acquisition, as well as return capital to limited partners in MiddleGround’s debut fund, which closed on about $459.5 million in 2019.
MiddleGround acquired Castle Metals earlier this year using recallable capital from the debut fund, since the pool had no capital left for new acquisitions, the source said. The firm warehoused the investment with the intention of financing it through the continuation fund, the source said.
The secondary was structured as a full exit from Fund I, giving existing LPs the ability to re-invest in the continuation fund, the source said. The deal included about $65 million to $70 million of capital from re-investing LPs. MiddleGround kicked in 100 percent of its proceeds into the CV deal, and topped it up to $20 million, the source said. The portfolio company management rolled half of its deal closing bonus into the process as well, the source said.
MiddleGround completed three add-ons prior to the secondary. A portion of capital raised in the deal is reserved for future acquisition activity, the source said.
Banner was producing around $100 million of revenue and $9 million of EBITDA at the time of acquisition, which grew to around $350 million of revenue and $65 million of EBITDA, the source said and Buyouts previously reported. The business combination was expected to drive revenue to around $1 billion and $110 million of EBITDA, a source said.
With the continuation fund exit, MiddleGround has returned all the capital from Fund I, which is producing a DPI of 1.0x, the source said.
MiddleGround is running the deal as it brings its next fundraising cycle into the tough markets. The firm is targeting a total of $2 billion across three funds: MiddleGround Partners III, targeting $1.2 billion; Mobility Opportunity Fund II, targeting $500 million; and its debut ESG-focused fund, Industrial Revolution Strategy, targeting $300 million. The firm is working with Lazard as placement agent on the process, Buyouts previously reported.
The GP-led secondaries deal is among a handful that are moving toward close in the last months of 2023. GP-led activity has been slower this year than previous years as buyers look for only the highest quality assets from well-known GPs. Pricing has also been tricky on GP-leds as LPs expect target assets to trade at robust pricing, while buyers may be looking for discounts.
The market had about $50 billion of total activity, with GP-led deals representing about 35 percent in the first half, according to PJT Park Hill’s volume report.
Update: Expected revenue and Ebitda numbers as part of the business combination were updated with the most recent projections.