What has been your biggest challenge since forming Blue Wolf Capital Management in 2005?
During 2005 and increasingly in 2006 and 2007, valuations for mid-market companies seemed way out of line with fundamentals. Companies that we were interested in seemed much pricier than we could understand. In the last several months, increasingly that’s no longer the case. We see that the air is coming out of the bubble and that gives us more confidence in our ability to put capital to work in a way that will earn good returns.
What do you see as the most significant, promising new segments in companies that have governments as customers or have employees represented by labor unions?
We work not only with companies that have government customers but also with businesses substantially affected by government policy or regulation, even if the business or the customers are in the private sector. For the next several years, the American and global economies will be typified by turbulence, restructuring and a very challenging financing environment. Because our method of investing is to solve problems created by conflict between complex constituencies or changes in long-standing relationships that must be implemented to make an investment or a company viable, we think that the current environment, although its effects on the broad population are very unfortunate and will be very painful, gives rise to an enormous number of investment opportunities for us because of the widespread turbulence and rapid change.
What are the criteria for companies that Blue Wolf finds attractive?
We look for situations where our partners can add value by resolving difficult and conflicting situations, whether between companies and regulators, or companies and unions, or other constituencies, such as creditors or vendors who are stakeholders in companies, whose relationships need to be restructured. We look for situations where our partners can add value beyond that which more generalist firms are typically able to do. We’re able to create value in a company simply by resolving those problems. We think that will typify companies in a broad range of industries and situations over the next several years.
Tell me about your most recent deal and what attracted you to it.
Our most recent deal was the formation of a new company, Healthcare Laundry Systems, to provide laundry services to not-for-profit hospitals in the Chicago area. We liked three things about that business; first, its secure and stable revenue model, providing linen to a diversified set of hospitals. Health care services are independent of state revenue fluctuations and Medicare and Medicaid reimbursement cycles, and it’s far less complicated than running a health care institution. Second, because the sellers were two consortiums of not-for-profit hospitals, we were able to craft a transaction that met their objectives, which included, but were not limited to, price, and we like to be able to do that. And third, it was a highly unionized company, and we were able to negotiate new collective bargaining agreements, which helped create a stable future for the company’s workforce. The sellers, who were complex and unconventional, responded to our ability to problem solve.
What kind of investment opportunities are you looking at now?
We’re looking at a wide variety of manufacturing businesses and government contractors. In manufacturing, sectors include pulp paper and automotive, which are highly unionized and are undergoing change. And we’re looking at government contractors at the federal and state level that are looking to change their business model to take into account the tremendous constraints on government spending, which will be in place in the next few years as tax revenues fall. We’re looking at several providers of services to departments of education at the state and local levels. Because education departments are funded by property taxes, which are coming under a lot of pressure, the contractors are feeling pressure, and we found that there are a lot of conversations to have with people about potential restructuring and recapitalization because life is changing so quickly.