Investment Partner

Kohlberg & Co.

The 2007 vintage was a rough one for domestic buyout funds. Between the credit crunch, financial crisis and Great Recession, firms had their work cut out just to score a modest profit. But some firms managed to do far better than that. Below we have five questions for an executive at one of those that did—Shant Mardirossian, an investment partner at Mt. Kisco, N.Y.-based Kohlberg & Co. According to figures from Idaho PERS, Kohlberg Investors VI LP as of last September had generated a 1.36x investment multiple and 16.65 percent IRR. That puts the fund squarely in the top quartile for that vintage, according to a recent analysis by Buyouts.

Shant, what made 2007 such a tough vintage year for buyout firms? Obviously the economic downturn was playing out for most firms. Those that did not maintain their discipline during that period in terms of valuations, and conservative leverage, or ended up in situations where they were lacking operating resources, were at a disadvantage.

Your 2007-vintage fund, a $1.5 billion pool that started investing in June of that year, is one of the top performers in our database. Why has it done so well? One reason is that we stuck to our discipline in terms of multiples. Our average purchase multiple was 6.5 times EBITDA. We also maintained a conservative approach to leverage where our average debt multiple was about 3.5 times at acquisition. The refinancings [dividend recaps] we did were all done as a result of improved performance and debt reduction. We just re-levered the companies back up to what we normal underwrite to, which is about 3.5 times, significantly de-risking our investments. We’ve also improved the performance of our portfolio companies.

How much money have you returned to investors?  If you look at all 12 investments we made with Fund VI, we have exited three of them fully, taken one public, and we have had several partial exits. For the first eight investments, we have already returned back 100 percent of that invested capital. One of the reasons this has been such a strong performing fund, despite hitting a recession, is our focus on operational improvements. Across the portfolio we have delivered 40 percent organic improvement in EBITDA since initial acquisition.

Tell me more about your investment strategy. Our average transaction size is $250 million to $300 million, and we’re looking at companies that generate between $20 million and $100 million of EBITDA. We focus on three broad areas—industrial manufacturing, consumer products manufacturing and services. Our services sector is broken down in three areas—business services, health care services and financial services.

Every one of those areas is supported by 11 operating partners that are full time and exclusive to us. They are a very important and integral part of our team and strategy. We will only do deals where we have operating partners that are able to work throughout the process from beginning to end. Most of them have served with us as a CEO of a previous portfolio company on one or several occasions. All of them have the ability to step in as interim CEOs and are heavily involved in the due diligence and establishing the strategic plan upfront, the cost savings opportunities, the growth opportunities, and assessing the management team.

In fact, we do quite a few corporate divestitures; that is an area of expertise we have because we’re able to bring in the management resources. In many cases, the business doesn’t necessarily have the management team in place or the managers aren’t at a senior level. So we can do the kind of deals others will shy away from, because we have the operating resources to bring in from the beginning.

Tell me about one of your best-performing portfolio companies from the 2007 vintage. US Infrastructure Corporation was a transaction where we did two simultaneous acquisitions. We worked with a manager that we had known before. We combined the two companies to make it the leader in providing utility location services, an important element in underground construction projects. We were able to deploy significant cost savings as a result of the consolidation and also deliver revenue growth as a result of overlapping territories. We bought the two companies in 2008. We sold the combined company in 2010 to Ontario Municipal Employees Retirement System for 2.8x our $60 million equity investment, which was about a 55 percent gross IRR.

Edited for clarity.