Key Principal Partners spins out of KeyCorp

Key Principal Partners, a mezzanine lender that focuses on the small to mid-market, has spun out of financial institution KeyCorp to become an independent firm called Cyprium Investment Partners.

The Cleveland, Ohio-based firm, which launched in 1998 and closed its first fund the same year on $125 million, moved to become  independent from the bank because of financial reform rules in the US known as Dodd-Frank that put stricter limits on the ability of financial institutions to operate private equity funds.

“We were an asset diversification tactic for KeyCorp, not a part of Key’s core competitive strategy,” said John Sinnenberg, former chairman of KPP and now chairman and managing partner of Cyprium. “What the independence does is remove any kind of legislative or regulatory uncertainty. It removes uncertainty for our investors and our portfolio companies.”

KPP targets investments in “non-sponsored” companies, or those without any kind of private equity backing. The investment environment has been active, Sinnenberg said, though not as active as the market for small to mid-market companies that have private equity backing.

What the independence does is remove any kind of legislative or regulatory uncertainty. It removes uncertainty for our investors and our portfolio companies. John Sinnenberg

The firm collected $522 million for its second fund in 2002 and $500 million for its third fund in 2006. The third fund is about 80 percent drawn, though Sinnenberg declined to comment about when or if KPP will launch a fourth fund. He said the firm’s external limited partners were on board with the spin-out.

The firm’s partners all went along with the transaction, save for co-founder Timothy Fay, who left prior to the spin-out to join SeaCoast Capital Partners.

Under Dodd-Frank, bank holding companies are limited to investing a maximum of 3 percent of their Tier 1 capital in private equity. In response, US banks have been shedding private equity assets, including selling fund stakes on the secondaries market and spinning out teams.

Last week, Bank of America spun off its final private equity fund, creating a firm called North Cove Partners that has more than $6 billion under management. North Cove plans to raise a private equity fund in the future while continuing to manage the bank’s portfolio.

North Cove is led by managing partners Chris Birosak, Brian Gorczynski and Angel Morales, who have worked together for eight years, initially with a Merrill Lynch Global Private Equity and more recently as part of BAML Capital Partners.