Duke Street Exits Paragon, Nets 3.5x Return

Target: Paragon Healthcare Group

Buyer: HgCapital

Seller: Duke Street Capital

Price: $560 million (£322 million)

Debt Provider: Dresdner Kleinwort Wasserstein

Financial Advisors: Seller: Close Brothers; Buyer: Christie & Co., Deloitte Touche, Merrill Lynch, Pinder Professional and Consultancy Services, PricewaterhouseCoopers

Legal Counsel: Seller: CMS Cameron McKenna; Buyer: Linklaters

If London’s Duke Street Capital were going to publish a guide to how to exit a buyout investment, it would no doubt build its lessons around its recent sale of Paragon Healthcare Group. Duke Street announced earlier this month that it sold Paragon to HgCapital for $560 million (£322 million), making a 3.5x return.

The deal generates an internal rate of return (IRR) of 50% for Duke Street and allowed Paragon’s management team to cash out of their stake in the company and re-invest alongside HgCapital. Debt for the deal was provided by Dresdner Kleinwort Wasserstein.

Paragon Healthcare Group operates more than 250 facilities and provides services for adults with learning disabilities and other problems. Duke Street initially purchased the company in 2001 when it was named Milbury and put more than $63 million in equity in the deal, according to Thomson Financial (publisher of Buyouts) from its Duke Street Capital IV fund.

“When we acquired the business, it wasn’t part of a competitive auction,” says Corinne Philipps, an investment director with Duke Street Capital who oversaw the sale of Paragon. She says that the story of Duke’s investment of Paragon is an ideal illustration of the firm’s buy-and-build model.

Duke Street installed a new management team in the company. The management team reorganized the company and with Duke’s backing made four acquisitions, including Thelma Turner Homes in 2002. The company also expanded its services and managed to increase its revenues steadily. Duke Street recapitalized Paragon in 2004 along with two other portfolio companies, fitness club operator Esporta and hotelier Galaxy Hotels, with a total of £450 million. Paragon’s revenues rose from $123 million (£78 million) in 2004 to $174 million (£100 million) in 2005. “It’s a very good example of the elements we seek to apply to all of our investment companies,” says Philipps.

Paragon generated healthy interest when it was put on the block for an asking price of about $600 million (£350 million). Apax Partners, Cinven, Fortress Investments and wealthy U.K. investment mogul Vincent Tchenguiz were reported to be among the unsuccessful bidders for the company. “We had a lot of interest from a variety of potential credible buyers,” says Phillips.

She says that HgCapital not only had the most attractive offer, but were very quick in terms of price and deliverability. They had done a lot of due diligence very quickly and lined up financing. They also negotiated terms with the management team.

HgCapital owns Castlebeck Care, a competing company that operates facilities for patients with learning disabilities and other mental problems. The firm is also an investor with pharmaceutical supplier Doc Morris.

Earlier this year, HgCapital announced a final close on its latest private equity fund, HgCapital 5, with $1.7 billion. The fund will focus on European middle market private equity deals, mostly in buyouts. The fund brings HgCapital’s total capital under management to $3 billion. HgCapital is headquarters in London and has offices in Amsterdam and Frankfurt.