The corner office on the 37th floor with the expansive windows offers a spectacular view of Manhattan, a stately setting seemingly far removed from the mundane world of airport baggage carts, resourcinol and frozen-food trays.
But within those unglamorous niches grew riches from the portfolio of buyout firm Castle Harlan. Leonard Harlan, the president and co-founder of the firm, has never lost sight of the firm’s core business, and no penthouse view could obscure that focus.
“We buy dull companies in mundane industries. That’s what’s been said of us. Yes, we do, and we grow them and energize them,” said Harlan, during an interview in his Midtown Manhattan office. “I love this business. It’s a turn on. And when I see people achieve great success, it makes me feel good. I feel like I’ve won.”
Harlan has won a lot more than he’s lost in a career spanning more than 35 years, starting with Donaldson, Lufkin & Jenrette. He joined DLJ in 1965 when it was a small company, with two dozen employees total. So small you could meet people easily, which is how he met a man named John Castle. The two joined the firm within a week’s time of each other as vice presidents, became partners three years later, and then went their separate ways.
But they stayed in touch, dining about once every quarter and discussing what it would be like to start a firm together. The goal wasn’t realized until 1987 22 years after they met – but it’s been a success story ever since.
The firm’s acquisitions have consistently generated strong growth, with high resale prices. For example, the $280 million fund it launched in 1992, Castle Harlan Partners II LP, using the niche strategy, achieved a 68% annual return. As Harlan put it, “It’s not how you buy a company, it’s what you do with it once you own it.”
On one level, Castle Harlan looks for the same ingredients most other buyout firms would: a well-established business, capable management in place, or an available group of managers with a proven record who are willing to invest their personal capital; a strong operating income with predictable cash flow. Or, alternatively, a company with declining profitability that can be reversed through strategic redirection.
What distinguishes it from others, though, is the type of sectors it explores: hidden treasures. The two founders are among 14 professionals in the firm including six on the investment committee (a seventh partner resides in Australia, with Castle Harlan Australian Mezzanine Partners).
The firm’s professionals rely on a legion of talent scouts people they have met or done business with over the years to unearth companies that dominate certain niches. In 1993 Castle Harlan acquired Smarte Carte Inc., the nation’s No. 1 airport baggage-cart vendor. At the time Castle Harlan figured that with the economy growing, air travel would rise with it. They figured right. After the buyout, the vendor added 7,500 carts to the existing 25,000 and installed devices that accept credit cards. Smarte Carte saw cash flow almost triple. Castle Harlan later sold it to the Dallas buyout firm Haas, Wheat & Partners for $113 million, from its original $9.7 million equity investment.
Two current holdings reflect the diversity of Castle Harlan’s niches. Ion Track Instruments is the world leader in building explosive detectors, with 60% market share. The company’s products were on display at the Sydney Olympics, but probably no one knew it. And that was the intention.
Another Ion Track product enables a rapid, non-intrusive scan for concealed contraband at airports, prisons, customs checkpoints, government buildings and other high-security locations. The Federal Aviation Administration signed a three-year deal to use the products at U.S. airports
“Unfortunately, this is a growth industry,” Harlan said of explosive detection devices. And while that’s bad for the world, it’s good for Castle Harlan.
In all of his firm’s businesses, Harlan wants to see employees at all levels put money into the company, to have a vested interest, so they can reap the returns when the company is sold.
Although much of its success can be traced to identifying and cultivating opportunities in niche markets, Harlan said, “the quality of our relationships is the cornerstone of our business.”
And that extends to the executives who sit on Castle Harlan company boards, including heavyweights such as Al Casey, former head of American Airlines.
The monthly board meetings are productive, and start out with the question: “What keeps you up at night?”
“The board meetings are just dynamite. They are so stimulating,” Harlan said. “We wrestle with real issues, not, did someone overspend on an expense form last month.”
Castle Harlan is currently focused on the investments and management of its two most recent investment partnerships, Castle Harlan Partners II L.P. and Castle Harlan Partners III L.P. CHPII, a private equity investment partnership formed in 1992 with $275 million of committed capital, was fully invested in 1996. Today, with its foreign affiliates, CHPII owns four companies with a value exceeding $162 million in its portfolio. Since its creation, CHPII has achieved a compound annual rate of return of more than 70%. CHPIII, an investment partnership established in 1997 with $630 million of committed capital, is actively pursuing additional investment opportunities. In 1998, Castle Harlan completed the liquidation of holdings in Legend Capital Group L.P., its first private investment partnership.
Castle Harlan got into Australia out of a desire to expand overseas. It was seeking a country with a rule of law, where the money markets were open and available, where Castle Harlan could feel comfortable with the culture, and where LBO market activity was not strong.
Australia met the criteria, and the Australian Mezzanine Partners formed out of a merger. The fund has raised $550 million (Australian), the largest private equity fund in the country, and is headed by Bill Ferris, regarded as one of the fathers of the Australian venture capital industry, and Joe Skrzynski.
“We have an advisory board down there that is second to none, it’s just such a stellar group,” said Harlan, a member of the executive committee of Castle Harlan Australian Mezzanine Partners (CHAMP), which combines the best of Australian and U.S. private equity managers.
Harlan spends four weeks a year in Australia doing committee work. He does set aside 10 of those days for vacation. Given his record, he deserves it.
His past is not forgotten. There are scores of framed photographs adorning Leonard Harlan’s office, albeit not one with a celebrity or famous politician. On display instead are pictures of family, family achievements and some friends. There is even a picture of Harlan’s kindergarten school, a classic brick schoolhouse in Oakhurt, NJ, that someone sent him.
“They show my roots,” he said of his photos.
There are photos of his sons’ college graduations one from Williams College, the other Harvard then Oxford. (Leonard Harlan is a Harvard Business School graduate, and for nine years was director of the Harvard Business School Club of Greater New York).
There are photos of his parents, an 87-year-old mother and 96-year-old father. Last week, Leonard and dad were planning on playing 9 holes of golf. The mother, by the way, is tooling around in a new car.
Harlan still keeps close ties with five friends he met in junior high more than 50 years ago. The group, which is scattered about the country, meet at one of the friends’ houses one weekend a year. They gathered ostensibly to go fishing, or some other event. But in reality, they spend it talking about the good old days.
While many men his age have since retired, Harlan has no plans to. He has found a nice balance of work and vacations, and he isn’t about to change. “I’m just a very lucky guy who can combine business and pleasure,” he said.
Castle Harlan Inc.
Born: June 1, 1936, Newark, N.J.
Education: B.M.E., Cornell University, 1958; M.B.A., Harvard Business School, 1961, D.B.A. 1965
Career Path: Donaldson, Lufkin & Jenrette 1965 – 1969; The Harlan Co. 1969 – 1996; Castle Harlan 1987 – Present
Last Book Read: A Bright and Shining Lie: John Paul Zann and America in Vietnam by Neil Sheehan
Favorite Book: Captain Corelli’s Mandolin by Louis De Bernieres
Favorite Movie: Schindler’s List
Last Movie Seen: Pearl Harbor
Favorite Food: Pot Roast (Brisket of Beef)
Favorite Musician: Louis Armstrong
Favorite Travel Destination:
Pet Peeve: Why can’t governments manage themselves like businesses?
Most Admired Historical Figure: Harry Truman
Favorite Quote: “A friend is not a fellow who is taken in by sham, a friend is one who knows our faults and doesn’t give a damn.” – Anonymous
Hobbies: Biking, walking
Investment Philosophy: Buy low, sell high