Casablanca Crafting ‘Toehold’ Activist Vehicle

Less than a year after launching its debut vehicle, event-driven manager Casablanca Capital is marketing an activist fund that would take so-called toehold positions in mid-cap companies.

The focus of the planned vehicle plays to the strengths of Casablanca founders Donald Drapkin and David Taylor, who previously managed a special purpose acquisition company for Lazard called Sapphire Industrials. A pitchbook for the Casablanca Value Opportunities fund suggests the firm is looking to raise $200 million to invest in 6-10 North American companies with market capitalizations of $1 billion to $5 billion.

A toehold investment allows an activist manager to begin building a position in a targeted company without triggering SEC disclosure requirements. Thus toehold stakes can’t exceed 5% of a company’s outstanding shares — at which point a manager would be required to file a Form 13D. Casablanca envisions deploying capital from the planned fund to establish toehold positions, then consulting limited partners about possibly increasing the stakes. Any additional capital commitments likely would take the form of co-investments alongside the fund.

Since forming in late 2010, Casablanca has pursued several activist plays, including supporting Carl Icahn in a proxy fight targeting Mentor Graphics of Wilsonville, Ore. That investment generated a 23% internal rate of return over 15 months for Casablanca’s investors, according to marketing materials for the toehold vehicle. Casablanca secured $175 million of commitments for its Mentor stake, including $150 million from Canadian pension fund manager Alberta Investment.

Most of Casablanca’s client assets are in an event-driven program that encompasses a large separate account and a commingled vehicle dubbed Casablanca Event Driven Opportunities Fund. The $8 million fund, which launched last September, had generated a cumulative return of 10.6% as of March 31. The firm’s event-driven portfolio totals $80 million.

Casablanca’s nine-person investment team is evaluating prospective targets for the toehold fund, including companies in the agribusiness, business-services, technology and utility sectors. The vehicle won’t use leverage or hedge its long exposure.

Before founding Casablanca, Drapkin served as chairman of Lazard’s investment committee and chief executive of Sapphire Industrials, which liquidated in 2010. Earlier, he held senior management positions at Ronald Perelman’s MacAndrews & Forbes, which has a diverse roster of portfolio companies.

Taylor previously was a managing director at Lazard, and before that worked at Dresdner Kleinwort. Other Lazard alumni who followed Drapkin and Taylor to Casablanca include Gregory Donat, who oversees activist investing, and Benjamin Fackler and Manoj Parvataneni, co-managers of the event-driven fund.

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