PE Hub–Chatting with Phil Curatilo of Key Principal Partners

In some ways, Cleveland–based lower middle market LBO shop Key Principal Partners is like a mini–American Capital Strategies. (In many, many ways it is not.) But both firms are capable of one–stop financing for deals, have seen a resurgence of interest in their mezzanine offerings, and are flexible to do a variety of transactions.

I asked Phil for his thoughts on valuations in the lower middle market and investing in Canada.

EG: KPP has around two thirds of its $500 million fund left to deploy. Where are you seeing the most deal opportunities and at what prices?

PC: We do primarily non–control investing, and we have seen more opportunities for those types of deals. Also, we feel there are fewer competitors for those kinds of deals.

Anecdotally, owners are saying valuations aren’t attractive now, but they still need the capital to acquire a competitor, invest in more managers or develop new products. They don’t want a traditional recap with private equity because the offers are lower now, so they do a non–control deal. Two years ago, there were more change of control opportunities, but today its more non–control.

Further, valuations of companies with EBITDA between $5 million and $20 million have come down in the sectors we’re investing in. Housing, automotive and industrial manufacturing have seen valuations come down.

EG: KPP has done a few deals in Canada recently, what is attractive about buyouts in Canada, and what should LBO shops remember when looking at deals up there?

PC: Building materials and building products companies in Canada continue to be areas we love to invest in, because we have the operational expertise in the area, and the housing bubble never achieved the bubble status that the U.S. market had. It’s been more consistent and stable.

Right now it’s a little more challenging because Canadian dollar has appreciated more than the U.S. dollar. Also, transaction expenses are typically higher because Canada does not recognize the LLC as a legal entity, making structural issues more challenging than you’d think.

KPPs Canadian building products holdings include Atis Group, a windows and doors maker, and Plastival, a vinyl fencing and railing maker.

About Key Principal Partners

Key Principal Partners (KPP) is a $1 billion private investment firm that provides expansion capital to profitable middle-market companies with at least $30 million in revenue. The firm has the flexibility to provide any combination of subordinated debt, preferred equity and/or common equity in either non-control (minority ownership) or control (majority ownership) positions. KPP can invest between $10 million and $40 million to facilitate the growth, acquisition, refinancing, deleveraging or liquidity needs of private company owners and their management teams. Affiliated with KeyCorp, KPP is headquartered in Cleveland, and has additional offices in Greenwich, and San Francisco.

About KeyCorp

Cleveland–based KeyCorp is one of the nation’s largest bank–based financial services companies, with assets of approximately $97 billion. Key companies provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. For more information, visit www.Key.com.