GP Profile: Heartland Industrial Staggers Forward

The future looked so bright. Accompanied by great fanfare, David Stockman, the former budget wunderkind under Ronald Reagan, left his perch as managing director of The Blackstone Group in 1999 to start up his own private equity fund, Heartland Industrial Partners.

The world was buzzing with the seemingly limitless possibilities of the “new economy.” But an untempted Heartland Industrial adopted a decidedly old-economy approach. Its strategy, premised on Stockman’s belief that the Rust Belt was “sexy,” involved buying up underperforming companies in tired industries such as auto parts and textiles. With seeming ease, Stockman and his colleagues raised $1.4 billion from prominent investors, including the Michigan Department of Treasury and the private equity arm of the Ontario Teachers’ Pension Plan, and built a staff of around seven professionals in Greenwich, Conn. The firm’s start was so promising that Stockman earned this magazine’s award for “Buyout Pro of the Year” in 2001, and Heartland Industrial took “Firm of the Year” honors in 2002.

Fast forward to 2007. In March, the federal government indicted Stockman on charges of illegally propping up the profile of a failing portfolio company, auto supplier Collins & Aikman, through years of fraudulent accounting. In March 2005, as Collins & Aikman appeared to be on the verge of insolvency, Stockman “embarked on a public campaign to mislead investors, potential financiers and others by minimizing the extent of the fraudulent accounting and hiding [the] dire financial condition,” according to the Securities and Exchange Commission. Stockman resigned from Collins & Aikman in May 2005, the company declared bankruptcy days later, and by summer 2005 Stockman had ceded control of Heartland Industrial to his partners.

Heartland Industrial renegotiated the terms of its fund with limited partners in early 2006, and the firm is now laboring to wring any remaining value it can from its four investments. Thoughts of a second fund, meanwhile, are more or less dead. The firm declined to comment for this story.

Four Portfolio Companies

By the end of 2002, through an array of acquisitions, Heartland Industrial had created four portfolio platforms: Collins & Aikman, the supplier of interior parts to American auto manufacturers; Metaldyne Inc., an engine parts maker; TriMas Corp., a specialty manufacturer that Heartland Industrial carved out of Metaldyne; and Springs Industries, a textile producer.

Five years later, the scorecard for the portfolio is dismal, largely because half the fund went into two failed auto parts companies. Collins & Aikman is still mired in Chapter 11, selling off pieces to vulture investors such as Wilbur Ross. Metaldyne was recently sold to a subsidiary of Ripplewood Holdings, but at a significant loss to Heartland Industrial. TriMas, a relative bright note, this month renewed its years-old bid to go public. And Springs Industrial merged with a Brazilian textile giant, although Heartland Industrial hasn’t exited from the combined company.

With the U.S. auto industry reeling, Collins & Aikman’s stock fell so precipitously that Stockman took over as the company’s CEO in 2003, leaving behind Heartland Industrial’s Connecticut office and moving into a motel next door to the Michigan headquarters. Two years later, the company entered Chapter 11 and took Stockman down with it. Facing accusations of improper accounting and misleading shareholders, Stockman quit the company and, soon after, stepped down from the leadership of Heartland Industrial.

In March of this year, the SEC and federal prosecutors indicted Stockman, charging him with fraudulently inflating Collins & Aikman’s income. By Stockman’s own admission, Heartland Industrial lost $360 million—a quarter of its fund—in its investment in the supplier. Heartland Industrial still holds 41 percent of Collins & Aikman, whose market capitalization is estimated at around $5.4 million.

Stockman has denied the charges, arguing that his retaining stock in Collins & Aikman and his efforts to pump money into the company prove he believed in the company’s promise. He blamed the company’s demise on an industry-wide slump and said he ran Collins & Aikman “like a town meeting—everything was done in the open and meetings often included dozens and dozens of employees,” according to a statement issued through his lawyer. “It is inconceivable that crimes and conspiracies could be committed in that environment,” Stockman said in the statement.

Metaldyne, meanwhile, was sold this year for $1.2 billion to Asahi Tec, a Japanese company that is itself a portfolio company of an affiliate of buyout shop Ripplewood Holdings. The exit wasn’t particularly gracious, however, since Heartland Industrial had by the fall of 2006 lost about $270 million of the $340 million invested in Metaldyne. Still, in the context of a crumbling industry that claimed casualties on a regular basis, avoiding a complete washout could be seen as a small achievement, according to a source familiar with Heartland Industrial’s investments.

It also wasn’t really an exit. As part of the Metaldyne buyout, Heartland Industrial and its partner, Credit Suisse, reinvested the $1.2 billion from AsahiTec back into AsahiTec’s publicly traded parent, RHJ International, a holding company controlled by Ripplewood. This arrangement effectively ties Heartland Industrial’s stake in Metaldyne to RHJ’s fortunes. RHJ’s stock is down more than 9 percent since closing the Metaldyne deal.

Heartland Industrial’s third platform, Springs Industries, formed a joint venture with Coteminas, a publicly traded Brazilian textile company, in January 2006, taking the new name Springs Global. Heartland Industrial and the management of Springs Global didn’t relinquish any of their stakes in the merger. Combined they hold 39 percent of the newly formed conglomerate. Springs Global has yet to follow through on a plan to go public. In the meantime, any value that Heartland Industrial realizes will come through Springs Global’s improving revenue.

The fourth company, TriMas, is probably the most successful in the portfolio. Although management has tried for three years to take the company public, TriMas continues to report solid returns. Its publicly traded debt is rated “outperform” by Lehman Brothers analysts. The company submitted an amended S1 in May to raise as much as $143 million in a public offering. The company plans to use $10 million of the proceeds to terminate the annual fee it pays Heartland Industrial, according to the regulatory filing. Heartland Industrial owns 72 percent of TriMas, a stake that would drop to less than 48 percent following the IPO. Between 2004 and 2006, TriMas’s revenue and EBITDA both increased, the latter by 4.5 percent over the two-year period, according to the filing.

The Future

By 2005, around the time Stockman’s reputation entered a freefall, Heartland Industrial began reshuffling not only its executive suite but also its terms and conditions with limited partners. One of its three founding partners, Tim Leuliette, a Detroit auto industry veteran who was touted as the firm’s operating talent, left the firm in 2006 to concentrate full-time on his position as chairman and CEO of Metaldyne. Heartland Industrial is now run by Daniel Tredwell, who was billed as the firm’s financial guru.

By 2005, it had also become apparent than many of Heartland Industrial’s investments—and, by extension, its entire Rust Belt strategy—wasn’t living up to expectations. Following a string of negotiations with investors, Heartland Industrial recast the terms of its partnership agreement in early 2006. The firm won’t disclose the details of its reworked agreement, although a buyout professional familiar with such arrangements said the limited partners most likely agreed to lower the threshold for Heartland Industrial to earn carried interest. Otherwise, the firm wouldn’t generate enough cash to keep any professionals on board. Tredwell also assembled a new management team to oversee the fund.

Heartland Industrial’s biggest investor is the state of Michigan, which funnelled $225 million into the fund. Representatives from the state did not respond to a request to comment. Other public pension funds—including the Canadian Pension Plan Investment Board, the Ontario Teachers’ Pension Plan and the Teachers’ Retirement System of Louisiana—did not respond to requests for comment. Two of Heartland Industrial’s private sector backers, MetLife and Columbia Partners, did not return calls seeking comment, while a third, Mesirow Financial, declined to comment.

Heartland Industrial’s Web site (www.heartlandpartners.com), which once featured biographies of principals and prominent mentions of portfolio companies, now consists of a single page with a phone number and e-mail address. The firm’s sole focus, according to the source familiar with Heartland Industrial’s investments, is on salvaging returns for LPs. Raising a second fund isn’t being contemplated, the source said.