How Moving To Sidelines Helped Olympus Score Big

Year founded: 1988

Investment strategy: Growth equity and buyouts in six key industries—business services, logistics and transportation, healthcare manufacturing and services, financial services, consumer and restaurant, software and information technology services

Key executives: Robert Morris and Louis Mischianti, both managing partners; total staff of 20

Office location: Stamford, Conn.

Assets under management: $5.7B

Fundraising status: Olympus Growth Fund VI closed at $2.2 B, or $2.5B including recycling option

Number of active portfolio companies: 12 investments from Fund IV and Fund V

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As valuations of target firms were cresting at more than 10 times EBITDA, executives at the Stamford, Conn., firm told their investors they planned to sit out making any acquisitions until prices dropped.

“We raised the fund with this marketing shtick: ‘We think it’s a lousy time to invest, so how about giving us your money?’” said Robert Morris, managing partner of the 25-year-old Stamford, Connecticut-based growth equity and buyout specialist.

When it closed its Olympus Growth Fund LP with commitments of $1.5 billion in May 2007, Olympus Partners pledged not to collect a management fee until its first fund investment.

That promise held until about 14 months later, when the firm triggered its investment period and started shopping in the midst of the financial crisis. Braving the choppy waters at the time, one of Olympus Partners’s deals closed the same day Congress initially rejected the historic TARP program in the fall of 2008.

“We spent 24 percent of our fund in the next 12 months,” Morris said. “It was the highest percentage of any fund we spent in a 12-month period, during a [time] when people were running for the exits.”

The strategy worked.  

As of Dec. 31, the vintage 2007 Olympus Growth Fund V LP was ringing up an internal rate of return of 26.3 percent, according to data from backer Regents of the University of California. The performance earned Olympus Partners a berth in the upper end of top quartile funds of the same vintage, according to data compiled by Buyouts. Other LPs in Olympus Growth Fund V include the State of Virginia, California State Teachers’ Retirement System and the YMCA Retirement Fund.

It’s no fluke. Olympus Partners has had four funds with top-quartile rankings following its approach to private equity: creating value through growth at the portfolio company, not through financial engineering and dividend recapitalizations.

While private equity firms often claim they take a longer view that looks past big swings in the market, Olympus Partners prides itself on knowing when to keep its powder dry in order to hold out for better deals.

On The Sidelines

All told, Olympus Partners has had four periods of 12 months or more in its history when it didn’t invest any money.

After sitting it out for much of late 2007 and early 2008, the firm moved to buy Snyder Inc, a maker of storage tanks, for a pro forma acquisition multiple of 8.3x, in July, 2008. Then in September of that year, Olympus Partners bought Norwesco Inc, another storage tank maker, in the same month that Lehman Brothers collapsed, again for a pro forma acquisition multiple of 8.3x.

During a time when cash was in demand and credit was hard to get for buyers, Olympus Partners found eager sellers for both firms, which were the top two players in the business of polyethylene and steel containers. The firm combined the two companies under the name Tank Holdings Corp to create North America’s leading player. It integrated seven add-on deals and increased EBITDA by more than 80 percent in less than four years.

The deals generated a 2.8x multiple on invested capital upon exit in June, 2012, via a sale to Leonard Green & Partners LP, in partnership with management.

In April 2009, Olympus bought Phoenix Services, another contrarian move since it was a player in the hard-hit steel industry, knocked down by the sharp drop in construction at the time. But for a price of 4.1x trailing EBITDA at the acquisition, Olympus Partners saw value in a firm offering an environmental service of disposing of waste slag from steel making, partly because of the company’s client list of top players that remained in business despite the downturn. The company also offered value to the steel industry since it could provide recycled ore at a fraction of the cost of buying new ore for steel-making. The firm’s slag also offered another use as a material to reduce acidity in water since its chemical make-up is alkaline.

From trailing EBITDA of $6 million at closing, the business grew to $98 million and delivered a multiple on invested capital of 3.8x as of June 30, according to Olympus Partners.

Olympus Partners made a total of ten portfolio company investments using Fund V, with an average multiple on invested capital of 1.8x. Morris points to the acquisitions of Phoenix Services, Snyder Inc and Norwesco Inc as particularly lucrative, since the firm benefited from low purchase prices and a subsequent economic recovery. The positive results helped the firm reward its loyal base of LPs. More than 90 percent of committed capital in Olympus Growth Fund V came from institutions in prior Olympus Partners funds.

“One of the things that private equity doesn’t do a good enough job of is taking advantage of what the market gives you,” said one long-time public pension backer who did not want the pension’s name used.  “When the market gives you an opportunity and it’s very pricey, you should spend time selling and being mindful of putting money to work. They’ve done that.”

Morris, who founded the firm in 1988 after managing General Electric Pension Trust’s $1.6 billion private equity portfolio, said he has a similar view on leverage as the late Forstmann Little & Co co-founder Ted Forstmann, a widely cited critic of lofty debt levels. Typically, Olympus Partners grows EBITDA of portfolio companies and reduces leverage multiples.

“One of the things we focus on is making sure we don’t get in trouble with too much debt,” he said. “We have not had any companies in Fund V that have had any serious operating problems.”

With a tight focus on risk management, Olympus Partners has recorded total debt losses of just 0.2 percent, or $6 million, out of a total third-party debt investment level of $3.35 billion from the origins of the firm until the end of 2012.

“We take enormous diligence and pride in not losing money,” Morris said. “The absence of losers helps. You’re never going to get things all the way right, but we spend a lot of focus on avoiding problems and not allowing small problems to become big problems.”

Overall, Morris said he’s fortunate to have attracted LPs that remain comfortable with the firm’s “patient” style.  Many investors have been with the firm for decades.

Among the current roster of LPs, New York City Retirement Systems pledged $225 million to Olympus Growth Fund VI, the firm’s new fund with a target value of $2.5 billion. The move came as part of a strategy by the retirement system to allocate funds away from venture capital and into growth equity—a popular approach nowadays. Morris said the firm seems to have gotten it right for its investors in Fund V.

“We’ve had situations where things haven’t gone well, but we’ve learned our lesson,” he said. “Part of the reason for the success of Fund V, is from buying things when multiples are lower—an experience we learned in the past.”

Success on that front has helped Olympus Partners draw more than $2.5 billion in investable capital for Olympus Growth Fund VI, surpassing its earlier fund by roughly $1 billion. The latest fund has formally closed at $2.2 billion, not including an extra 15 percent recycling option to help reduce fees for LPs.

And once again, Olympus Partners finds itself holding off on any major purchases because of lofty valuations nowadays.

“When it comes to multiples, Isaac Newton was right—what goes up can come down,” Morris said. “We have not made an investment other than those with our existing portfolio…for nine months already.”