If one were to map out the ideal life span of a portfolio company, KRG Capital Partners’ investment in Chronic Care Solutions Inc. may be a good place to start. At the end of November, Denver-based KRG recapped its portfolio company to the tune of a 1.7 cash-on-cash return and a realized IRR of 48 percent.
The firm became majority owners of Chronic Care, a medical and pharmaceutical supplier in February 2002, paying a total of $24.2 million in two investments for a 60% stake in the company. Management held onto the remaining 40%, and by the time KRG recapped Chronic Care in November, the firm was able to take out a common stock dividend of $40.6 million, suffering only a six percent dilution to its equity and retaining 94% of its original ownership.
“We originally looked at Chronic Care due to our focus on diabetic supplies and service offerings that focus on the morbidities related to diabetes,” said King. “We embarked on a strategy to build a company made to offer the diabetic a full range of services.”
American Capital Strategies provided debt for the recap by way of $39 million in senior and junior sub notes. Antares Capital, Merrill Lynch Capital and Key Bank pitched in $47 million in senior credit faculties, which included a revolver and senior term loans.
“The company has grown substantially, and at the same time, has only $5 million in net debt outstanding,” said Mark King, KRG’s co-founder and a director with the firm. Simultaneous to the recap, KRG purchased an add-on with a complimentary business model, although King declined to go into detail due to a confidentiality agreement with the sellers.
Indeed, through add-ons and organic growth KRG doubled Chronic Care’s EBITDA to $16 million (pro forma) in 2003 from $8 million just two years ago. Revenue more than doubled to $75 million (LTM ending Oct. 31) from $35 million in 2001.
According to King, projected EBITDA for Chronic Care will jump to the mid-$20 millions, and the firm will look to sell the company within a year’s time. “I would guess the buyer will come from the strategic side,” forecasts KRG Principal Dave Kennesich. “Either health care services companies, claims processors or insurance companies looking to vertically integrate, or pharmaceutical retailers of products complimentary to Chronic Care.”
“The recap is returning about 40% net of the total capital to our limited partners that we’ve invested to date from Fund II,” said King. Fund II closed with $450 million in April 2001, and the firm has used it for five platform investments. “This is the first liquidity event from the fund,” he said.
To date, Fund II has invested approximately $95 million.
Limited partners in KRG’s second fund include: Duke Management Co., ING, WestAM Private Equity Group, Allianz, Credit Agricole, HFI Private Equity, Pennsylvania Public School Employees’ Retirement System, AIG Global Investment Group, GE Capital Merchant Banking Group and Bank of America.