Charlotte’s role in the world of private equity has mushroomed this year, with four groups raising a combined $7.3 billion, with plans to acquire stakes in dozens of middle-market businesses over the next decade.
Very few other U.S. cities outside of New York can make a similar claim, reflecting the Queen City’s emergence as a global financial power, says Kevin McCarthy, who’s been part of the scene since joining First Union Bank in the 1990s. He later headed Wachovia Securities’ Middle-Market Capital Group, then co-founded the Kian Capital PE firm in 2013. It raised $400 million two years ago.
While the Georgia capital area has a much larger population, Charlotte has a bigger, more diverse private-equity industry, he notes. That’s in sync with the city’s important role in U.S. banking for decades. The city’s three big PE groups — Ridgemont Equity Partners, Falfurrias Capital Partners and Pamlico Capital — are rooted in the history of Bank of America and First Union, which evolved into Wells Fargo.
In 1993, BofA predecessor NationsBank started a private-equity operation, initially led by Chet Walker. It was later called Banc of America Capital Investors, which invested more than $3 billion in about 140 companies over the next 15 years.
A similar story occurred at First Union, where a private-equity unit formed in 1988 and was renamed Wachovia Capital Partners after the two N.C. banks merged in 2001. By 2010, it was managing $2 billion on behalf of its limited partners.
The 2007-09 financial crisis prompted reforms that limited how much capital banks could invest in PE firms. Incoming Bank of America CEO Brian Moynihan started winding down the private-equity business as he streamlined what was then the largest U.S. bank.
In 2010, Bank of America spun off its private equity arm with existing partners Walker Poole, Trey Sheridan and the late Travis Hain taking control of the new Ridgemont Equity Partners. Its first fundraising was a $735 million fund in 2013 that included investors such as the State of Wisconsin Investment Board. Noticeably absent was BofA, which was still shaky financially and reducing risk.
A similar switch occurred after Wells Fargo took over Wachovia in 2008. About a year later, partners including Scott Perper, Watts Hamrick and Eric Eubank II formed Pamlico Capital, with backing from investors including AlpInvest, HarbourVest and Lexington Partners.
ALL-WEATHER INVESTING
Fast forward to this past March, when Pamlico raised $1.75 billion for its sixth fund. That same month, Charlotte’s Falfurrias Capital Partners signed up $1.35 billion. It was founded in 2006 by former top BofA executives Hugh McColl Jr. and
Marc Oken, along with Ed McMahan Jr., the son of a Charlotte business leader and veteran state lawmaker.
Falfurrias has enjoyed enormous success, including high-profile sales of Bojangles in 2011 and earlier this year, Sauer Brands, which owns Duke’s Mayo. Its investment committee chair is former BofA exec Chet Walker, while former bank CFO Joe Price is a partner.
Other significant PE groups in North Carolina include:
° Carousel Capital, which Erskine Bowles and Nelson Schwab founded in 1996. Charles Grigg and Jason Schmidley now lead the Charlotte firm, which raised $700 million in 2020.
° Summit Park, formed in Charlotte by Bob Calton and Jim Johnson in 2006. It focuses on the lower middle market and has completed 50-plus investments totaling more than $2.1 billion in combined enterprise value. It raised $245 million in 2018.
° Plexus Capital, which was started in 2005 in Raleigh and Charlotte by former Centura Bank executives including Bob Anders and Michael Painter. It has focused on structured capital, raising about $3 billion in debt instruments to help partner companies grow. In October, it also raised $345 million for its second private-equity fund as a natural complement to its larger debt-oriented funds, says partner Alex Bean.
Those capital infusions were eclipsed by Ridgemont’s fifth fund in September, which attracted an N.C. record $3.9 billion, officials say. The firm now manages more than $11 billion with current stakes in 27 companies that employ a combined 30,000 employees.
Ridgemont’s payroll has increased to 70, up from 15 upon the split from BofA in 2010. Falfurrias has 55 employees, while Pamlico has about 45 and Carousel about 20.
Ridgemont’s success reflects an excellent investment record, including a previous $2.3 billion fund that closed in 2022, a cohesive partnership team and a consistent emphasis on industry sectors that thrive through economic cycles, says Jack Purcell, who is co-managing partner with John Shimp.
Purcell’s career track reflects that consistency. He grew up in a suburban Philadelphia town, Phoenixville, then came to Davidson College to play baseball. He had no local ties. Upon graduation, Chet Walker hired him at BofA , and he’s stuck ever since.
“We view Charlotte as a huge competitive advantage,” he says. “The culture of the firm is very different from a lot of our competitors in the middle market.” The city’s welcoming nature and dynamic growth has proven appealing for recruiting associates, while leaders of potential portfolio companies appreciate the firm’s steady approach, he adds.
Like most peers, Ridgemont doesn’t disclose the returns of its funds. But PE groups can’t raise billions of dollars unless investors are happy.The latest money came from about 100 investor groups, double the number in the 2022 fund, Purcell says. Previous investors each wanted to invest again.
What changed is that a chunk of the money came from outside the U.S., including Asia, the Middle East, Western Europe and Australia. That was intentional, Purcell adds, because those investors tend to be growing capital faster than Ridgemont’s core of U.S. insurance companies, endowments and public pension funds.
Purcell also credits Ridgemont’s fundraising success to Laura Fahrney, who heads investor relations. She joined the business in 2013 after working for the Blue Point Capital PE group. “She’s one of the top two or three heads of investor relations of any size fund in the U.S,” he says. She’s also a rare female partner in an industry that in Charlotte remains almost exclusively a white male province in terms of investing professionals.
CHALLENGING TIMES
Raising $7 billion over the past year is notable given that business valuations are higher, while the uncertain economy is fragile, says Kian’s McCarthy. “You don’t want to pay peak value and then see the economy go the wrong way,” he notes.
Global PE firms closed funds valued at $223 billion during the first half of the year, on track for a 20% decline from a year earlier, according to a report by the EY consulting firm. Valuations and investment returns have declined amid a sluggish economy, it said.
Investors remain confident in middle-market companies that are in demand during good and bad economies, which for Ridgemont means business services, healthcare and industrial companies. Its portfolio includes Charlotte-based Crete United, which has acquired more than 40 commercial HVAC, electrical, plumbing and building automation companies, and Spartanburg, South Carolina-based Agape Care Group, a major operator of hospices.
Definitions of middle market vary, but Ridgemont says it focuses on businesses valued at $100 million to $1 billion, and it will invest as much as $500 million in a business. The deals usually follow at least three years of relationship building, Purcell says.
In contrast, Kian concentrates on companies with $10 million to $150 million in revenue that have previously not taken private equity funding, McCarthy says.
He and other PE leaders say massive opportunity exists because so many founder-led businesses need additional funding and expertise to spark new growth. Ridgemont estimates there are 50,000 U.S. companies with revenue from $50 million to $1 billion, with only a fraction owned by private-equity groups.
Increasingly, those companies and investors in PE firms favor groups with expertise in specific sectors, Fahrney says. “The notion of being a generalist is just a no go anymore,” she says. “You need a way to inject resources and talent to help create value. Capital itself is not in short supply.”
BETTER RETURNS
Private equity has plenty of critics, dating back at least to the infamous 1988 buyout of RJR Nabisco by pioneering PE firm Kohlberg Kravis & Roberts, or KKR. The initial PE groups said their work was valuable because too many corporate leaders emphasized asset growth over shareholder returns. Critics contend PE companies too often load up on debt, reduce costs with little concern for workers and show limited long-term vision.
In any case, the industry is a major, sometimes dominant force in many business sectors including car washes, medical practices, restaurants and child care centers. The largest PE groups, including Blackstone, Carlyle Group, KKR and Apollo, manage hundreds of billions of dollars and hold vast economic influence.
That power won’t weaken as long as the funds make more money for their investors than is possible through traditional stock and bond investments. U.S. pension funds had an 11% annualized return through their PE investments between 2000 and 2023, compared with about 6.8% for public stocks, according to a study last year by the New York-based Clifwater investment firm.
There’s also an obvious drive for financial success underlying PE groups that experts consider a factor in the industry’s rise. In short, pro athlete-type compensation is possible in the industry, so it attracts some very driven people.
Partners at top-performing U.S. firms with assets under management of $2 billion to $10 billion typically made about $1.7 million to $2.5 million in base and bonus pay in 2023, according to an annual survey by the Heidrick & Struggles consulting firm. But the real money involves “carry,” or the partner’s share of the profits generated by a fund.
For example, Ridgemont’s challenge is to turn $3.9 billion into much more over the next decade.
For PE firms in that $2 billion to $10 billion range, the average partner had a “carry” of $21 million to $35 million for their current fund, and $30 million to $39 million for all of their funds, the survey noted. McColl has said his compensation soared after he left his bank CEO perch and launched merger advisory and PE businesses.
Investment success helps explain why about 40 Ridgemont employees put a combined $250 million in the latest fund. Purcell says that is about four or five times more than PE members typically put into funds on a relative basis. He also notes that Ridgemont is more egalitarian than many peers, allowing more participation deeper into the organization.
“We think it leads to better alignment with our investors,” he says. “We all have a significant percentage of our net worth in
these funds.”
Still, Ridgemont’s success is more than about financial returns, its leaders insist, citing what they call Charlotte’s distinctive culture. “There’s something about being in the state for over 30 years and having a business model that has largely remained unchanged,” Fahrney says. “It has evolved in a lot of good ways.” ■
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.