American Capital Strategies Ltd., a publicly traded mezzanine and buyout firm, has for the first time teamed up with Los Angeles-based private equity firm Brentwood Associates to invest in ThreeSixty Sourcing Hong Kong Ltd., a global sourcing firm that manages the Asian sourcing primarily for U.S.-based consumer products companies.
American Capital invested $35 million – $15 million through a senior credit bridge facility, and $20 million in senior subordinated debt with warrants – while Brentwood Associates purchased a 60% equity stake in the company for an undisclosed amount. American Capital recently raised $50 million in public equity, thereby expanding its capital resources to nearly $1 billion. The ThreeSixty investment marks the firm’s entrance into Asia.
“Demand for most of the products sourced by ThreeSixty should hold up given their price points and distribution channels,” said Jeri J. Harman, principal with American Capital. “We were enamored with their capabilities,” she continued. “Outsourcing of consumer products is a large and fast-growing market as companies continue to drive down costs.”
ThreeSixty Sourcing handles roughly $300 million of mostly hard goods for companies in categories such as sporting goods, luggage, books and housewares.
The investment will finance the spin-off of ThreeSixty Sourcing from DS-Max Hong Kong, a Brentwood portfolio company, into a stand-alone company, said David Wong, general partner of Brentwood Associates. He said that a few of Brentwood’s portfolio companies have already benefited from using ThreeSixty Sourcing, including Bell Sports and Oriental Trading Co., a discount catalog.
“Some companies have had savings in the order of 10% to 20%,” he said, adding the goal now is to “continue to add middle-market clients with sales under $1 billion. A big target will be other private equity firms’ portfolios.”
He added that a large part of the investment will go toward systems to accelerate growth.
Both Brentwood and American Capital affirm that ThreeSixty Sourcing is poised to grow not only despite deflationary pressure, particularly in consumer goods, but because of it. The reasons are two-fold: one, they believe companies whose resources are strained will look to ThreeSixty Sourcing – and outsourcing in general – as a means to cut business costs as they won’t need to finance large staffs in Asia; and two, ThreeSixty’s client base is the discount store, for which sales may increase in hard economic times.
ThreeSixty will provide service from product development through shipping and will strive to be transparent in the process, Harman said.
Back to Market
In other American Capital news, the firm recently sold 1.8 million shares of common stock to the public at $28.25 per share for a total gross proceeds of roughly $50 million. This represents the firm’s fourth follow-on equity issuance since its IPO in August 1997. The firm trades on the Nasdaq.
First Union Securities Inc., a subsidiary of Wachovia Corp., underwrote the sale. American Capital has granted the underwriter an option to purchase an additional 270,000 shares at $28.25 per share to cover over-allotments.
“First Union took the full risk of distributing the stock,” said John Erickson, chief financial officer of American Capital. The decision to raise more equity was the result of positive market conditions rather than any other overriding factor, he added.
“The timing was right,” said Erickson. “Our stock closed at an all-time high when we did the transaction.”
Surprisingly, the transaction itself took only an hour and a half. “Our access to equity is much more rapid than the traditionally structured buyout fund,” he said.
American Capital has a $1 billion market cap, but Erickson said the additional $50 million means his firm is well-capitalized, regardless of market conditions going forward.
“We’re in a position to take advantage of opportunities now,” he said. With the firm’s ability to invest equity, subordinated or senior debt, Erickson said his firm is at an advantage due to current market conditions.