Firm: Sentinel Capital Partners
Fund: Sentinel Capital Partners IV LP
Offices: New York
Leader: David Lobel, Founder
Strategy: Buying companies generating $5 million to $25 million of EBITDA in consumer products, food and restaurants, franchising, manufacturing and service sectors
Number of Investment Professionals: 16
Raising money in a downturn turned out to be a breeze. Investing it in one promises to be more challenging.
When it first contemplated raising a fourth fund late last year, the management team at
Now, of course, the question turns to how the firm will deploy the fund, which it plans to invest in about 20 companies, up from 13 with its third fund. Slowing demand and rising costs are pressuring restaurants, consumer products and other sectors that Sentinel Capital thrives in; lenders, meanwhile, have pulled back across the board, even in a middle market that once claimed to be immune from the credit crunch. “If I buy a business today, six months from now will I be happy? It’s very difficult to answer that question,” David Lobel, founder, told Buyouts.
Adopting a more cautious approach to due diligence is one way that the firm is responding. A couple of years ago, when the economy was thriving, a manager at a target company might tell Sentinel Capital’s team that its profits would be up 10 percent over the next year. The firm might have taken issue with the exact figure, but it would usually sign on to an optimistic growth projection based in part on the direction of economy. “Today you can’t make that assumption,” Lobel said.
Indeed, Lobel said the firm recently walked away from a deal in the restaurant industry because it was uncomfortable with a price that the firm would have been glad to pay just two years ago. Another buyout firm was willing to pay the price. “We thought there was at least six months, maybe a year, of ongoing downward pressure on the American consumer,” Lobel said. “Only time will tell whether we were too conservative or whether the other guy was too aggressive.”
These days, Sentinel Capital, which has 16 investment professionals and plans to hire five more, including a VP or director of business development, is also paying more attention to a target company’s performance over the last few months and less to its trailing 12-months numbers. The aim, of course, is to determine how the company is performing now, in an economic downturn. It is also important to determine how well it will perform 12 months from now, when conditions may be even worse.
Such a strategy has paid dividends before. In March 2002, for example, the firm was trying to approximate the low-water mark for Alemite, an 80-year-old company that makes industrial lubrication equipment and whose profits had been sliding for about a year. Sentinel Capital reasoned that the company would reach its low point in December 2002, estimating that the recession that had started in June 2001 would last around 18 months, based on the length of prior recessions. It bought the company in June 2002 for about $38.5 million, $13 million of which was equity. Lobel recalled that the business continued to struggle for six to eight months after the deal. But the economy started to turn around in 2003, and Sentinel Capital eventually quadrupled the value of its investment when it sold Alemite in June 2006.
“We called it right,” Lobel said.
LPs Have Faith
Investors see many more such correct calls in Sentinel Capital’s future.
When Lobel and his partners first reached out to prospective investors, they found that about 95 percent of them wanted a meeting, compared to 50 to 60 percent for previous funds. “We’ve never gotten 95 percent of the people we’ve went to to say, ‘Yes, we’d like a meeting,’” Lobel said. In the end, 17 new investors signed commitments for the fund.
What investors got was standard “2-and-20” terms and the chance to back a firm that has had a fairly constant investment team over its 13 years. Aside from co-founders Lobel and John McCormack, Sentinel Capital’s three other partners—Eric Bommer, James Coady and Paul Murphy—all joined between 1997 and 2000 as principals or, in Bommer’s case, vice president. The firm has yet to lose a partner. “They do a good job of promoting from within and building up their team, which has positioned them to manage larger funds,” said one LP. “They’ve never had a problem putting capital to work.”
Another big enticement for investors: the firm’s steadily improving performance buying companies generating $5 million to $25 million of EBITDA in consumer products, food and restaurants, franchising, manufacturing and service sectors. Sentinel Capital’s first fund, a $48 million vehicle raised in 1996, delivered a net IRR of about 20 percent, according to a source familiar with the performance of the funds. Fund II, a $126 million vehicle closed in 1999, achieved a net IRR of 22 percent. And its third fund, the $319 million
Among the firm’s most recent successful investments have been ones in Alemite, the lubrication equipment maker; Fasloc Inc., a company that makes products used to improve mine safetey; Metro Dentalcare, which provides dental services; Nivel Parts & Manufacturing Co. LLC, which makes golf cart replacement parts; and Spinrite, which makes craft yarn products for the needlepoint market. Exits from these companies produced multiples of cost and gross IRRs of 3.8x/42 percent, 5.7x/436 percent, 4.8x/103 percent, more than 4.0x, and 6.5x/401 percent, respectively, according to an excerpt of an offering memo obtained by Buyouts.
“They’ve been around a long time, and they get better each time without moving out of their strategy,” said Charlie Huebner, managing principal at
Former executives of Sentinel Capital portfolio companies also testifed to the firm’s network of contacts, and to its ability to see opportunities where other firms don’t.
Its network helped the firm sell American Driveline Systems Inc., formerly called Cottman Transmission Systems Inc., in 2004 after a prospective buyer balked on a deal near the finish line, according to Todd Leff, the company’s CEO. Sentinel Capital had acquired the franchisor of car transmission centers in 1999 for $50 million. After the first buyer pulled out, Lobel contacted
, CEO of Border Foods Companies, a franchisee of restaurants such as Taco Bell and KFC, said that Sentinel Capital bought his company in 1996, when restaurants were out of favor and the technology bubble was filling up. Engler at the time owned 16 Taco Bells and had an opportunity to buy 63 more—effectively, the entire Minneapolis-St. Paul market. Sentinel Capital backed the $33 million deal, and in 1999 sold its interest in the company in a deal valued at $58 million.
What Sentinel Capital picked up on was that Engler’s business plan called for reining in costs and freshening up the restaurants, things that didn’t require much more capital. “That was the big ‘A-ha’ these guys got,” Engler said.