Birch Hill Equity sets sights on another billion-dollar fund

While a target size has not yet been set, Birch Hill co-founder and Partner Stephen Dent told peHUB Canada: “We expect Fund V will be similar to Fund IV [a $1.04 billion vehicle raised in 2011]. We’re pretty happy about where we are in the market.”

Fund IV focuses on acquiring and investing in Canadian companies valued between $30 million and $600 million in a wide range of industries. The fund, which is about 70 percent committed, had generated a 4.1 percent net IRR and a 1.1x multiple as of March 31, according to the California Public Employees’ Retirement System, an LP in the fund.

Dent said conversations about its successor will soon be initiated with existing LPs — pension funds, corporations, insurance companies and other institutional investors from around the globe. These LPs, many of them backers of Birch Hill funds since the 1990s, will be joined “as needed” by new LPs when broader fund marketing gets underway in early 2015.

Dent is hopeful about Fund V’s launch, which will occur in far better market conditions than the last go-around. Fund IV was raised in the wake of the global financial crisis and in an especially brutal fundraising climate. It nonetheless surpassed its target by 22 percent.

Over the years, Toronto-based Birch Hill has scored some major portfolio exits. They include Constellation Software’s IPO in 2006 and strategic sales of Blue Wave Energy, Atria Networks, Marsulex, Cookie Jar Entertainment and Carmanah between 2010 and 2013. Taken together, realizations have generated a gross 25 percent IRR and a 3.2x gross multiple on invested capital since inception, according to the firm.

“We’ve had satisfying results that I believe owe to a great group of people who have been together a long time,” said co-founder and Partner John MacIntyre. “A remarkable consistency of approach has also played a role.”

MacIntyre added that Birch Hill has from the outset emphasized company building in its investments, rather than financial engineering. “We see success in collaborating with strong management teams and our investment partners to achieve optimal growth,” he said.

Dent agreed, noting: “We chose to invest in a set of activities and assets to accomplish long-term growth. That requires dollars, management talent and time.”

The significance of time is seen in Birch Hill’s longer-than-average hold periods. Most companies reside in the portfolio for up to seven years. Some, like Constellation, are held even longer to make sure the impact of growth initiatives is fully reflected in revenue and EBITDA.

“If in a situation where organic or acquisition-led growth is taking time to be achieved on a high-return basis, it makes sense to stick with it,” said MacIntyre.

Dent and MacIntyre believe a conservative approach to leverage, and a disciplined approach to price, are also essential factors in Birch Hill’s strategy. “It’s hard to fix over-paying and over-levering later on,” said MacIntyre.

Birch Hill’s recent deals include a merger in May between portfolio company Shred-it International, a document destruction services provider, and a subsidiary of U.S.-based Cintas Corp. The new business, which retains Shred-it’s brand and headquarters, operates in more than 400 markets in 18 countries and serves more than 300,000 customers. Birch Hill remains the majority investor.

Birch Hill has also shown enthusiasm for corporate carve-outs of late, last month buying Motion Specialties and MEDIchair, the retail and home medical units of Centric Health Corp.

Birch Hill typically does a couple of transactions a year, including in today’s “low-growth, high-valuation” market, where “cheap money is the driver,” said Partner David Samuel, who joined the firm in 2005. In this environment, “Birch Hill’s longevity serves it well.”

“There are companies to buy in every market,” said Dent. “These days we need to be very discerning and work a little harder to find them.”

Birch Hill was founded in 1994 as the in-house PE group of TD Bank. In 2005, an MBO created a privately managed firm with TD staying on as an LP. During its 20 years, the firm has deployed more than $2.2 billion in 55 investments, 60 percent of which have been fully realized, Birch Hill said.

Correction: The word “invested” was changed to ”committed” in the third paragraph.