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May 18, 2009

Prophet Equity Defies Odds With $200M So Far For Debut Fund


5/18/2009 Prophet Equity may well be an endangered species: a first-time fund manager that has managed to attract both the attention and the money of institutional investors.

The Southlake, Texas, firm has closed on a little more than $200 million of the $250 million in capital it's seeking from outside investors for its debut offering, Prophet Equity LP, according to people familiar with the fund-raising. The fund has attracted commitments so far from investors including Danske Private Equity and Denmark's Industriens Pensions.

Prophet started marketing its fund last summer and held an initial closing of $135 million at the end of last year, one person said. Since then, it has held a series of rolling closings that have pushed it just past the $200 million mark.

The closings stand out in an environment where even veteran firms have had a tough time locking in LP money. But Prophet may be targeting the right strategy at the right time: The firm aims to invest in turnarounds and restructurings of small, asset-intensive U.S. companies, typically ones with enterprise values of between $10 million and $250 million, according to the firm's Web site. Although it has yet to make its first investment, the firm plans to back two to three deals each year.

Prophet was launched by Ross Gatlin, a former founding partner of Insight Equity Holdings LLC, also of Southlake, and has since expanded its team to a dozen people.

However, limited partners in the fund said that the firm's appeal extends beyond strategy and track record. Prophet itself has initially chipped in $20 million to the fund on top of its LPs' commitments, and it has an eye toward increasing its pledge to as much as $50 million. Assuming they hit the $250 million target, that would ultimately bump its total fund size up to $300 million.

"It's a significant portion of their net worth," said one limited partner, who declined to be named. "If we lose, they lose too."

Meanwhile, a second person said that even though it's still raising its first fund, Prophet has agreed early on to a cap on the size of its next one at $325 million to show LPs that it does not plan to grow fat on management fees.

Finally, this person said that the firm has an unusually egalitarian carry structure that extends to every employee in the firm.

"They've got the alignment of interests right and that's what we like to see," said the limited partner.

Reach Prophet Equity at 817-898-1500.

Featured in the Dow Jones LBO Wire May 18, 2009

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