Castle Harlan Times Market Well For 4.5x Exit

Bolstering efforts to raise a new $2 billion fund, buyout firm Castle Harlan jumped ahead of the declining credit market last month to seal an $880 million, 4.5x exit from a British plastic pipe supplier.

The New York-based LBO shop in June agreed to sell Polypipe Group, but the firm revealed the deal to the world only last month when the deal officially closed, a reflection of the market’s uncertainty, said Howard Morgan, a senior managing director of Castle Harlan. The Bank of Scotland, a regional bank that specializes in financing management buyouts, invested alongside a team of 50 Polypipe executives to take over the company. The deal netted an IRR of 150 percent for Castle Harlan, which is out raising between $1.5 billion and $2 billion for Castle Harlan Partners V LP.

As recently as June, Castle Harlan wasn’t sure it was going to sell the company. But it was contemplating some form of liquidity event for Polypipe, which had recently completed back-to-back deals to shed its German subisidiary and to buy a complementary U.K.-based business for $85 million. Thanks to the deals and the labors of a newly installed management team, Polypipe was beating revenue and EBITDA projections. Castle Harlan wanted to take some chips off the table, Morgan said.

The LBO firm, which bought Polypipe in September 2005 for $527 million, had already taken money out of the growing business once. In May 2006 the firm executed a dividend recapitalization using high-yield payment-in-kind notes, extracting an undisclosed sum from Polypipe. Castle Harlan initially expected to do the same thing again because Polypipe’s growth prospects warranted a longer hold period than 20 months.

But by late spring 2007, when the second debt offering was being put together, Morgan said he didn’t like what he saw on the leveraged-loan horizon. A rash of announced buyout-backed and strategic deals threatened to flood Wall Street with some $300 billion worth of bank loans and high-yield notes through the summer. Morgan said he wasn’t sure if the firm could be certain of completing another PIK note recap.

Instead, Morgan said he took “some rifle shots” to see if sponsors would line up to buy Polypipe, while at the same time Castle Harlan completed the paperwork for a debt recap. “It was absolutely a horserace between what was the better and more certain deal, both for us and for management,” Morgan said. “We were of a view that we had to have certainty before July 4.”

Morgan’s hunch turned out to be correct. Soon after Castle Harlan signed the deal in June, the debt market swooned. Investors shunned most buyout-backed credit packages, especially PIK notes, and Polypipe’s potential debt offering would likely have met the same chilly fate as other frozen LBO deals.

Through the sale Castle Harlan was able to return 4.5x invested capital to Castle Harlan Partners IV LP, a vintage-2003, $1.2 billion vehicle.—J.H.