Until recently Peter Grant was the U.S. chairman of RBC Capital Markets, the investment banking arm of the Royal Bank of Canada, for which he spent the last five years at the company’s Minneapolis headquarters. Then Grant decided to do something else in the heartland.
Just over a month ago, Grant launched a new leveraged buyout firm, Stone Arch Capital, which focuses on middle-market companies in the Midwest. Grant is one of three founding partners along with Charlie Lannin, a former general partner of Norwest Equity Partners, and Mark Michaels, former Willis Stein partner.
Grant talked recently with Buyouts. Below is an excerpted version of his comments.
Q: First, why the name Stone Arch?
A: It’s the name of an old stone bridge across the Mississippi, built in 1883 by James Hill, for the transcontinental railway. It was symbolic of the bridging of two important regions of our country as the nation was expanding.
Q: How is your fund-raising effort progressing?
A: We just completed our PPM. We’re hoping for a $150 million first fund with a cap of $200 million. We’re talking primarily to institutional investors in the United States.
Q: What’s the financial range of your investments?
A: We’re a lower, middle-market buyout firm, with transactions focused in the $20 million to $100 million dollar range, typically companies with revenue from $25 million to $150 million, in manufacturing, distribution and logistics. We want our target firms to have an EBITDA of around $5 million; these will be companies already performing, not in a turnaround situation.
Q: Where are you focused?
A: Our focus is on the 12 states of the Midwest. There are about 75,000 companies in the region that fit our target range. Plus, about 23% of the country’s GDP comes from the Midwest, but only 11% of the buyout dollars are located here.
Q: What’s your investment
A: We want controlling interest in our investments, but we also want management teams with equity-some of their own skin-in the game. That is the best way to incentivize managers.
Q: Are there any other firms doing this?
A: Endeavor Capital, a regional firm based in Portland that serves the Pacific Northwest, is a good example of what we hope to become for the Midwest.
Q: But there aren’t any firms in your region already?
A: There aren’t many in Minneapolis. There is Norwest Equity, Goldner Hawn and Churchill. All of those are larger, with fund sizes of $400 million or more. And there are a lot of firms in the $25 million and under market, so we’ll be somewhat differentiated in our target market based on the size of investments.
Q: How will you identify
A: The three of us have experience in this region. Each of us has contacts and a co-investing track record here. Also, we have assembled an advisory council of senior executives in industry sectors that we believe will help us evaluate businesses. In addition, we have a network of industry operating executives interested in working with us.
Q: What is the exit strategy for your investments?
A: We’ll improve cash flows, via growth initiatives and margin improvement, and exits will likely be through sales to other financial buyers or to strategic buyers rather than through the public market.
Q: How long do you anticipate holding investments?
A: It will depend upon the industry, but we expect three- to five-year holds.