At the helm of Sole Source Capital, David Fredston has raised more than $200 million for the private equity investment firm’s second fund. Founded by Fredston in 2016, Sole Source Capital (SSC) targets opportunities in the lower-middle market, where the firm’s experienced team can apply its differentiated quantitative and operational approach.
The new investment puts Sole Source Capital’s Fund II roughly halfway to its target of $400 million, which would more than double Fund I’s cap of $160 million. The new level of commitment also means that Fund II already surpasses the total collected by SSC’s inaugural fund. Form D fundraising documents reveal that SSC partners and parallel vehicles started marketing in December 2019. The funding has been sourced from a combination of endowments and foundations, high-net-worth investors, and family offices.
David Fredston: Experience and Background
David Fredston’s proven experience has helped Sole Source Capital to meet its funding goals, even amid the difficult environment generated by COVID-19. PE firms with first- and second-time offerings have had to rise to meet the new challenges brought by the strain on funding. According to the latest reports, firms with senior-level partners who come from brand-name managers seem to have the fundraising edge. With that in mind, the news that Fredston has succeeded in this round of funding should come as no surprise.
Prior to launching Sole Source Capital, Fredston worked with Gores Group for six years. During that period, he was a principal on the M&A team and served as head of origination. Of course, this was not Fredston’s first venture into investment and finance. Before he landed the position with Gores, he oversaw Long Green Capital Management. His background has afforded him many strengths, which he is now applying as the founder and Managing Partner at Sole Source Capital.
The Creation of Sole Source Capital
Fredston created Sole Source Capital in 2016 with a clear vision for the firm and the opportunities it would pursue. SSC would be an operationally focused, control investor in companies with EBITDA of between $5 million and $20 million. Many of these companies would be either founder- or family-owned businesses, a key indicator that they are a good fit for SSC’s operational focus.
In particular, Sole Source Capital targets deal flow in recession-resistant industries across North America. These sectors include industrial services, diversified distribution, and manufacturing, among other areas. SSC rigorously sources these deals, ensures strong downside protection, and executes key operational changes that rapidly deliver value.
This approach enables Sole Source Capital and Fredston’s team to stand apart in the lower-middle market. As a result, Sole Source Capital has executed a number of impressive deals and delivered consistent performance since its founding, becoming a leader in a variety of niche sectors. In particular, SSC tends to focus on transactions of interest, including management buyouts, company carve-outs, and specialist situations.
An Impressive Debut Fund
To better understand Fredston’s success, we can look deeper at Fund I. The fund made five platform investments, including Supply Chain Services. The business is a Minnesota-based provider of automated data collection solutions. Toward the start of 2020, SSC acquired the business as part of the core investment approach created by Fredston.
This deal aligns with Sole Source Capital’s proven track record. For example, in 2018, the firm acquired Individual FoodService, a non-perishable food service company, which was sold by Kelso & Company. Upon buying the California business, SSC made the move to merge it with Trade Supplies.
According to the latest PitchBook data, Sole Source Capital’s debut fund is a vintage top performer. As of March 2020, Fund I generated an investment multiple of 1.92x with a net IRR of 105.4 percent. These impressive figures highlight the ongoing success of Sole Source Capital and Fredston.
Sole Source Capital’s team boasts a wealth of market-leading partners who joined in 2017. Much like Fredston, Dewey Turner was previously a Gores Group executive before coming on board with SSC. He now heads the operations team. Scott Sussman was previously an investment professional with Ivory Investment Management, Empyrean Capital Partners, and SAC Capital Advisors. He now leads M&A for Sole Source Capital.
About Sole Source Capital
Focused on a diverse range of recession-resistant industrial subsectors, Sole Source Capital is a leading name among investment firms active in the lower-middle market. The firm’s principals and operating advisors aim to help management teams achieve their goals. By maintaining collaborative engagement relationships, the experienced team of advisors can lead the way when working with portfolio companies, ensuring the highest levels of success and best outcomes.
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