GP Profile: Fortiland launches debut fundraise with ‘focus investing’ strategy

The sponsor developed its strategy during the pandemic in 2020, taking the decision to establish a “focus investing” approach that will target sector consolidation with a visible pipeline.

Having screened various sectors in Europe, Fortiland settled on a specific subsector of the B2B distribution, although it is not disclosing the specific subsector at this stage. “In Italy, this is a sector with more than 1,700 companies, of which around 80% are generating less than EUR 2.5m revenues,” Petrone said.

The fund’s sector of choice should give its investors downside protection, Petrone said. Although the companies it is targeting provide a “first-class service” in their fields, they are not capital-intensive, and they have good margins and high cash conversion, he said.

“Although we won’t get the usual diversification of deploying over a number of different sectors in a longer investment period, this is an uncorrelated sector that will not undergo significant shocks,” Petrone said. “This strategy can be implemented only in resilient sectors since it might take up to four years to create a national champion and the fund has to be neutral to specific vintage impacts related to economic cycles.”

Focus investing
The visibility that LPs will have on the fund’s portfolio is an aspect that is specific to the sponsor’s focus investing approach. “We wanted to start signing a certain number of acquisitions and entering in negotiation with others before raising a fund to consolidate the market and to have doable, concrete projects before meeting LPs,” Petrone said.

The vehicle’s lack of blind pool reduces risk for LPs and allows Fortiland to present the credibility of the fund, Petrone said. “This is a differentiating factor, allowing us to stay highly competitive in a market where banks are less eager to finance deals in the current debt scenario and it’s harder to find opportunities,” he added. “We are approaching it bottom-up, rather than seeking commitments first.”

The fund’s EUR 60m-EUR 80m target is based on the amount that the sponsor will need to acquire the appropriate size and number of targets for its strategy with the aim of generating alpha through selectivity, Petrone said. It is expected to hold a first close in mid-July, with the aim of holding a final close up to 12 months after this, he said.

The firm is now holding its first meetings with potential LPs. “We are seeking professional European investors such as family-offices, fund-of-funds, pension funds and asset managers who are looking to diversify their portfolio and looking for upside with an optimal risk/return profile,” he said.

Consolidation in sight
The fund expects to deploy EUR 20m-EUR 25m of equity to capitalise a holding company to acquire its first cluster of six to seven companies, Petrone said. The sponsor has signed option agreements for each of the potential targets, meaning that it does not expect to encounter any risks to the execution of its deals.

The fund’s first capital call will be for this amount and is expected to take place at the start of September. It will make a maximum of three to four capital calls in total, Petrone said, with the aim of creating a group of companies with combined turnover of EUR 120m that it could scale to more than EUR 200m.

The fund has a six-year lifespan and expects to hold the investment for up to four years, aiming to create value during the investment period through commercial, logistic, marketing and financial synergies, as well as cross-selling from consolidation.

The specific B2B distribution subsector that it is targeting has a number of interesting dynamics, Petrone said. It is “highly fragmented, with strong and sustainable gross margins” Petrone said, adding that the sector operates on a local basis and with a strong level of specialisation. The companies that it is targeting serve local clients such as factories, hotel, restaurant and catering businesses, and hospitals, which have specific needs that cannot be procured through normal distribution channels, he said.

Fortiland has built its pipeline over the past 24 months by working with two recognised managers who are experts in its target market, with whom it analysed the dynamics of the industry, the potential of implementing a roll-up strategy, and the commercial and operational upside from such implementation, he said. “We have met and initiated negotiation with a number of potential sellers and signed a certain number of acquisitions,” he added.

Fortiland will ensure that its portfolio company is ESG compliant, Petrone said.

Looking ahead
The fund could make returns of more than 50% internal rate of return (IRR) and more than 3.5x money, Petrone said. These figures are based on the strategy’s optimised risk/return ratio, the downside protection of its target sector, the initial full-equity deployment and the “margin of safety” of its entry level valuations, he added.

Although the sponsor is initially investing in Italy, Switzerland and France could also be strategic markets for the firm, Petrone said.

For future funds, Fortiland plans to keep its approach almost identical to this one, but each investment basis need to make sense, he said. “We are analysing each sector and its dynamics, understanding why each one is fragmented, engaging top notch managers. You need to put in several years of hard work to understand a sector, and we would only proceed when we are very convinced on the sector. So, our approach is to go back to market only when we have a number of acquisitions signed and high conviction of the sector.”

Prior to founding Fortiland in 2020, Petrone held a number of roles in the private equity sphere, including as an investment advisor with special situations firm DBAY Advisors, as well as with asset managers Armònia and LFPI.

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