Firm: Norwest Mezzanine Partners, Norwest Equity Partners
Fund Names: Norwest Mezzanine Partners III LP ($500 million); NEP IX LP ($1.2 billion)
Backer: Wells Fargo & Co.
Offices: Minneapolis, Minn.
Leader: Tim DeVries, managing general partner of both firms
Strategy: Norwest Equity invests in transactions valued between $50 million and $500 million in a variety of sectors; Norwest Mezzanine invests $10 million to $50 million in deals in a variety of sectors
Number of Investment Professionals: 17 at Norwest Equity, 6 at Norwest Mezzanine
In August Norwest Mezzanine, founded in 2000, scored its first deal using
The timing couldn’t be better for the former. The credit crunch has increased demand for mezzanine financing, as senior lending has grown scarce and expensive amid what is now a full-blown credit crisis. Mezzanine multiples in mid-market deals grew to 1x EBITDA in Q2 2008, up from 0.20x EBITDA in Q2 2007, according to Standard & Poor’s, which defines mid-market deals as acquisitions of companies with less than $50 million of EBITDA. A big reason has been higher prices for senior debt: The average price for all investment-grade senior loans rated ‘BB’ and ‘B’ rose to about Libor + 625 in June, up from an estimated Libor + 225 of a year earlier, according to S&P.
Norwest Mezzanine has so far done two deals with its third fund. In August it provided $40 million in support of the
Manu Bettegowda, partner at Olympus Partners, said Norwest Mezzanine had the flexibility to fit into an existing mezzanine arrangement sponsored by
Norwest Mezzanine has already invested more this year than it did in all of 2007. The firm has made four investments totaling $98.5 million, compared to three investments from January to Oct. 30 of 2007, and a total of $91.6 million for all of 2007. “Early 2008 was pretty strong,” said Tim DeVries, who is managing general partner of both Norwest Equity and Norwest Mezzanine. And the pipeline look lucrative, thanks in part to the credit crunch. “We are going to raise prices, clearly,” DeVries said. “The cost of capital is rising, and we would be irresponsible not to act accordingly.”
Interest rates for mezzanine have remained in the 13 percent to 17 percent range, DeVries said, while yields—which Norwest Mezzanine defines as current pay interest + deferred interest + warrants—have been in the 15 percent to 18 percent range. How much Norwest Mezzanine will be raising prices is unclear, DeVries said, because the market is so turbulent. But he expects yields to continue to hit the high teens. Norwest Mezzanine arranges its prices on a case-by-case basis, DeVries said. “I would expect that our targets are going to rise there a little,” he said of the mezzanine fund return targets.
Norwest Equity, meanwhile, has not executed a conventional leverage buyout in the last 18 months. DeVries said the firm held back because of the scarcity of senior debt—a problem all buyout shops are struggling with—and also because it thought most targets were over-valued.
Instead, the firm did four small, all-equity majority-stake deals, the most recent being Shock Doctor, a sporting goods manufacturer that Norwest Equity bought in April for an undisclosed amount. The firm occasionally did all-equity deals even before the credit crunch, but it hasn’t been a core strategy.
The firm’s last large-scale buyout took place in April 2007, when it teamed up with
DeVries said he’s not worried about the shift in strategy.
To help sustain deal flow, Norwest Equity, which invests across a broad array of industries, has decided to group staff into teams with particular industry expertise. Todd Solow, partner, is pursuing investments in the consumer sector; John Thomson, partner, and Mike Healy, director, are targeting financial services; and Dan Gladney, an operating partner with a background in the health care industry, and Tim Kuehl, partner, are going after health care. Partners will continue to be available to work on any deal, such as when Kuehl teamed up with Solow to lead the investment in Shock Doctor, the sporting goods manufacturer. “I think you’re going to see those efforts really get traction and be an important part of our success,” DeVries said.
Norwest Equity also has the advantage of having a mezzanine fund at its disposal to help finance its own deals. Prior to the credit crunch, Norwest Equity used mezzanine financing for about a third of its deals, with the majority coming from Norwest Mezzanine, DeVries said. The last time Norwest Mezzanine was the sole mezzanine provider on a Norwest Equity deal was in September 2006, when the firm bought Duni Corp. Inc., now called InnoWare Inc., a maker of disposable plastic containers and paper products for the food and retail markets.
DeVries anticipates Norwest Equity using more mezzanine financing, but he couldn’t say for sure whether it would work more frequently than usual with Norwest Mezzanine. He noted that Norwest Mezzanine started in 2000, just as the technology craze began to ebb and credit was scarce. Today’s environment is even tougher, he said, but deals struck now, as prices fall, could yield exceptional returns. “I anticipate in the next 12 to 24 months, there is going to be a period of great opportunity for equity and mezzanine players, and we want to be poised with capital in equity and mezzanine funds to do a lot of good business,” he said.