Heritage Adds To New Track Record With Testing Biz

Target: Saunders & Associates, Inc.

Price: Undisclosed

Sponsor: Heritage Partners, Black Canyon Capital

Financial Adviser: Seller: RSM EquiCo

Legal Counsel: Heritage Partners: Choate Hall & Stewart LLP; Black Canyon Capital: Skadden Arps Slate Meagher & Flom; Seller: Snell & Wilmer LLP

Heritage Partners earlier this month inked its third one-off deal under its new management team. Paying an undisclosed sum, the Boston-based lower mid-market firm bought Saunders & Associates, a maker of testing equipment for electronics, alongside private capital investor Black Canyon Capital.

Saunders & Associates’s founder cashed out his holding in the company; Heritage Partners and Black Canyon Capital own 49 percent of the voting stock and 60 percent of the equity. The business’s management team controls 51 percent of the voting stock and 30 percent of the equity, with the option to increase that equity stake to 50 percent. The deal structure is part of Heritage Partners’s management-focused strategy, said Partner Peter Hermann.

Although the firm got its start twenty years ago, Heritage Partners underwent a sea-change in early 2007, when senior-level retirements allowed managers Peter Hermann and Mark Jrolf to take the reins. Under prior management, the firm’s last fund, Heritage Fund III LP, performed disappointingly, Hermann said. The fund generated a negative 28.4 percent IRR, losing almost half of its investment as of September 2007, according to the Washington State Investment Board. Heritage Fund III is fully deployed but Heritage Partners hasn’t raised a fund since that one, which closed in 1999.

To build a new track record, Heritage Partners tapped some limited partners and family offices for equity for a series of one-off deals. The firm acquired OneSource Distributors in July 2007 and Centra Industries in November. Saunders & Associates marks its third deal. A fourth, for an aerospace company, is in the works.

Heritage Partners won’t test the fundraising waters till the end of this year or early 2009, hoping to woo investors with returns from its one-off deals. A likely target for the fund would be $250 million to $300 million, Hermann said.

Financing for the latest of those one-off deals took a good deal of perseverance to line up, Hermann said. Even when employing a conservative debt-to-equity ratio, the firm approached at least 20 debt providers before finding a willing lender in Gladstone Capital Corp., a publicly traded business development company.

“We certainly had to talk to many more [lenders] than you normally would have had to,” Hermann said.

Convincing lenders was difficult in part because of Saunders & Associates’s business model. In a reversal of an overwhelming trend, Saunders & Associates manufactures its products in the United States for export to Asian customers. The company’s testing equipment serves the makers of cell phones, TVs and auto electronics, and those companies are based in Japan, Taiwan and China.

But Heritage Partners is confident that growing global demand for electronics will allow Saunders & Associates to maintain its 20 percent growth rate, which outpaces the equipment testing industry average of eight percent to 10 percent. In addition, the company just opened an office in Japan, where 60 percent of the world’s electronics are made.

Black Canyon Capital, which co-invested on the deal, is a flexible debt and equity firm based in Los Angeles. An affiliate of Canyon Capital Advisors, Black Canyon Capital was formed in 2004.—E.G.