Dealmakers’ Delight

Competitively priced companies for sale expand local private equity firms’ investment options

By Arielle Kass

January 26, 2009

For most private equity firms in the area, 2008 was nothing to brag about. But the leaders of a number of them are banking on a better 2009.

“Nobody wants to forecast this level of economic activity through 2009,” said Mark Mansour, managing director of MCM Capital Partners in Beachwood. “Everybody’s in the same boat.”

Even in the midst of a painful recession, though, several private equity leaders can see something to which they can look forward.

One silver lining amid the current clouds is that businesses are selling for less, which increases the likelihood of better returns down the road. Cheaper companies also give private equity firms the chance to invest in businesses they might not have been able to afford before.

And for those firms that deal with distressed companies – or plan to start – 2009 couldn’t be better.

“We’re going to be pretty opportunistic,” said CapitalWorks chairman Rob McCreary. “I’d be surprised if people don’t look at this as a really interesting opportunity.”

Like many other local firms, CapitalWorks in Cleveland had a few deals fall apart in the fourth quarter of 2008, closing only one for the year. Mr. McCreary said he’d like to close three or four deals in 2009 – and “three’s a big year for us,” he said.

“We have capital, we’re creative, (and) we’re not afraid of distressed situations,” he said. “That’s where a lot of deal activity is coming from right now.”

At Edgewater Capital Partners in Beachwood, managing partner Chris Childres said the firm intends to step up the rate at which Edgewater is purchasing companies. Over the next two years, he said, he expects to deploy most of the capital from his current fund; about 85% of the money raised is still available.

Now is the time to rush to buy because both earnings and multiples are depressed, meaning a good company with a bad balance sheet has the potential to be available for much less than it could later bring in.

“Everybody at the firm feels the need for an accelerated pace right now,” Mr. Childres said. “There’s more opportunity right now.”

Filling the gap

Firms that deal with alternate financing also are looking forward to a good year. Key Principal Partners Corp. chairman John Sinnenberg said some of the firm’s portfolio companies struggled in the down economy, but he expects a lot of interest from companies that are short on cash.

Key Principal Partners, in Cleveland, deals with mezzanine financing, or making up the difference between what a company can borrow from a bank or other investors and what it needs. With more banks reluctant to lend, mezzanine funds likely will be in high demand from companies looking to grow, Mr. Sinnenberg said.

“We fill that gap in the middle,” he said. “That makes it a perfect market for us.”

While some private equity firms are looking to distressed companies to keep them busier in 2009 than they were last year, others are bracing for a tougher year than the one out of which they came.

The Riverside Co. had a record year in 2008, co–CEO Bela Szigethy said of the company, which has headquarters in Cleveland and New York. The company made 31 acquisitions and deployed $400 million, but expects the coming year to be much slower. Still, Mr. Szigethy said he would be “cautiously aggressive” going forward.

“We’re not shutting the doors; we’re not sitting on our hands,” he said. “These are the best times to invest. It’s very easy to sit on your hands and do nothing. We’re going to fight that inclination.”

David Given, managing partner of Blue Point Capital Partners in Cleveland, said he intends to wait until conditions improve before he buys or sells any more businesses.

“I’m really not seeing the light at the end of the tunnel yet,” he said.

Blue Point made two new investments in 2008; it usually makes five in a year. But Mr. Given said he has no deal goals for 2009.

‘We all feel the pinch’

Some private equity leaders, such as senior managing director Stephen Perry at Linsalata Capital Partners in Mayfield Heights, said they think the market will begin to pick up toward the end of the year. But elusive outlooks and hard–to–find capital make it difficult to get deals off the ground now, he said. That may remain the case for much of 2009.

Some firms have reported other troubles, too. While no one has said they can’t make a capital call, some investors have asked for more time to fulfill their obligations. Most said they don’t plan to raise new money in 2009, either.

Still, the firms are trying to make the most of the economy. Evolution Capital Partners managing partner Brendan Anderson said his portfolio companies have started off the year well, and managers are getting ready to do more with less at the Pepper Pike firm. Paul Cascio, general partner of Brantley Partners in Beachwood, said he’s using this time to increase the value of companies he already owns. He plans to add two new employees this year.

Gates Group Capital Partners CEO and senior managing director Mike de Windt said he has hired three new people at the Mayfield Heights headquarters and hopes to expand the firm’s purview from dealing mostly with parking structures to investing in other transportation projects, such as ports and rail. He also is working on Gates’ first public–private partnership.

“We all feel the pinch on the financing side,” he said. “But it could be a time of opportunity, as well.”

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.