Clearlake backs company serving the deaf

At first glance, Clearlake Capital Group’s $125 million investment in GoAmerica (Nasdaq: GOAM), a Hackensack, N.J.-based telecom company serving the deaf and hard of hearing, appears to be a private investment in a public equity, or PIPE. But on closer look there’s nothing straightforward about the one-year-old firm’s fifth disclosed deal.

The firm is earmarking part of the money to roll two additional competing businesses into the fold—a carve-out of Verizon’s Tele-Relay Services division, and Hands On Video Relay, a family-owned business in Rocklin, Calif. The deal closed mid-January, with Clearlake Capital owning 47% of the new entity. The remaining stake is divided between a 13% float and Hands On Video Relay shareholders.

Clearlake Capital, based in New York, led the debt financing, contributing $30 million in second-lien debt in addition to its $40 equity check.

“Had we not provided the debt financing, we could not have pulled it off in the time frame we did,” says Behdad Eghbali, a partner with Clearlake Capital. Churchill Financial and Abelco Finance, an affiliate of Cerberus Capital Management, committed $55 million in first-lien debt.

The enlarged GoAmerica will hold the No. 1 market share in IP relay, a service that uses broadband networks to pass on transcribed conversations to wireless devices, making phone calls more seamless for the deaf and hard-of-hearing. IP relay, as an industry, was flat last year, but GoAmerica grew at a mid-single digit growth rate, Eghbali said.

The market for the company’s video relay service, which connects users to videos of American Sign Language interpreters over wireless devices, grew by 48%in 2007 and has high gross margins, Eghbali says. Clearlake Capital estimates that 100,000 to 150,000 users have created a $600 million video relay market. The firm plans to expand the business into further verticals, such as foreign language translation. With 1 million deaf in the United States, the market is not huge, but video relay services is profitable, Eghbali says.

At least one other buyout firm has ventured into the space before. GoAmerica’s main rival, Sorensen Communications, is backed by Chicago-based LBO shop GTCR Golder Rauner.

Having opened its doors in January 2007, Clearlake Capital considers tricky investments like this its specialty. Developing a plan to combine the three businesses took months, but the firm believes in the strength and non-cyclicality of a business catering to the deaf and hard of hearing.

Meanwhile, Clearlake Capital continues to raise money for its first fund, according to a source familiar with the situation. In the coming months, the firm will determine whether to hold a final close on fund I and embark on a second vehicle, or to continue the fund-raising effort on the first pool.

Clearlake Capital’s major backer and partner is Reservoir Capital Group, a New York based investment firm known for backing new private equity firms and hedge funds.

Two-thirds of Clearlake Capital’s founding trio of principals hails from Tennenbaum Capital Partners, a Santa Monica, Calif.-based distressed investment buyout firm.

Clearlake pursues distressed investments and leveraged buyouts. Portfolio companies include, an Internet retailer; Compudyne, a public security services company; and Triax, a specialty pharmaceutical company.

Though the company leads or co-leads every transaction, it has previously taken minority investments alongside AIG, Canyon Capital, D.E. Shaw and Carlyle Mezzanine Partners. —Erin Griffith