Lincolnshire Gets On Board With Transportation

With the national economy showing signs of forward momentum, Lincolnshire Management Inc. chose transportation, with a big dash of professional education thrown in, as the first industry in which to pursue a roll-up strategy in its 2008 fund.

Altogether the mid-market buyout firm has made two significant investments in the past year in companies that serve the nation’s transportation and logistics needs—a rollup of two aviation-training companies, announced in January, and a $35 million rescue investment last July in a troubled maker of truck trailers.

Allan Weinstein, a managing director at the New York firm, is quick to point out that Lincolnshire takes an industry-agnostic approach to its portfolio, investing in a wide range of companies, and has no particular affinity for investments in transportation. “It’s really opportunistic,” Weinstein said in an interview. “Any investment we make is primarily a function of the merits of that specific investment.”

It just happened that the transportation sector—from air travel to car sales—has been particularly pummeled in the economic slump, making companies serving that industry especially attractive for the kind of value investing that Lincolnshire favors.

Transportation markets had been falling since as early as 2006, well before the general economy went into a two-year slump beginning in 2008, said Bruce McDonald, a managing director at the investment bank Houlihan Lokey and the head of its transportation and logistics M&A group. The sector began to stabilize only in the fourth quarter of 2009.”Anyone who is making investments now is at a time in the cycle that should speak well for value creation over a medium term time frame,” McDonald said.

To establish a platform for its expansion into aviation, Lincolnshire teamed in January with GTI Group LLC, another New York private investment firm, to form a company called Flight Training Acquisitions LLC. That shell company became the vehicle for the firms to acquire Delta Connection Academy Inc., a pilots’ school in Sanford, Fla., and Aerosim Technologies Inc., a maker of flight simulator systems in Burnsville, Minn. (Delta Air Lines Inc. and the management teams of the two companies also participated in the deals.)

The combined company, the first investment for Lincolnshire from its $835 million Lincolnshire Equity Fund IV, closed in late 2008, is expected to reach sales of $40 million this year. Press reports at the time of the deal put the value of the combined company at just less than $50 million, in a deal that was said to have been capitalized entirely with equity.

From a financial standpoint, Flight Training Acquisitions met Lincolnshire’s key investment criteria—typically a minimum of $5 million in cash flow, with the sweet spot falling in the $10 million to $50 million range, Weinstein said—but the strategic opportunity also looked appealing. Demand for commercial pilots is likely to increase because of the demographics of the industry. A wave of retirements is looming in the next five to 10 years, partly as a result of Federal Aviation Administration age requirements.

But the greater potential may be overseas rather than in the United States, he said. “The United States is an ideal location for training international pilots.” Even for a domestic flight in China, communication between the cockpit and the tower is likely to be in English, he said. “The international language of aviation is English.”

Lincolnshire also sees synergy between the pilot school and the simulator business.

Aerosim uses flat-panel displays and relatively simple mockups of aircraft cockpits, making its products cost effective but also efficient for training, Weinstein said. “The combination of the flight academy and the simulator will allow us to do more sophisticated types of training.”

Thus, a student could master flying skills at the academy, then use the simulator to prepare for certification on a particular kind of jet, he said. Lincolnshire sees Flight Training as a platform for future investments in the sector.

Trailers For Sale

Weinstein was less comfortable discussing Lincolnshire’s other recent investment in transportation, a $35 million commitment made last July to Wabash National Corp. (NYSE: WNC), a maker of semi-trailers in Lafayette, Ind. But the public record is fairly clear.

Wabash, hit by the slump in manufacturing that resulted from the financial crisis of 2008, had fallen out of compliance with its bank covenants by early 2009 and was in the process of “reviewing its strategic alternatives” when Lincolnshire showed up. Fortified by the $35 million cash infusion, Wabash was able to renegotiate its bank loans. In exchange, Lincolnshire received the right to appoint five directors to the company’s expanded, 12-member board, and to exercise certain oversight over the company.

Lincolnshire and Wabash had some history together. Wabash had provided Lincolnshire an exit in March 2006 for its investment in Transcraft Corp., a maker of truck trailers that the firm had held in its portfolio since 1999. Lincolnshire was reported at the time to have made between 2.5x and 3.0x its equity on the $71 million exit.

While Wabash remains under pressure, it does appear to be stabilizing. The company reported a profit for the quarter ended Dec. 31, the first positive quarterly net income it had scored in more than a year. (At press time, Wabash was scheduled to report first quarter results on Tuesday, May 4.)

For the most part, Lincolnshire seeks to avoid making too many investments in any single segment of the market, believing that a diversified portfolio is best, Weinstein said. “We definitely are mindful of concentrations of any sort.” Since its founding in 1986, Lincolnshire, which has $1.7 billion of capital under management, has made 55 investments in industries as diverse as recycling, broadcasting and business services.

But Weinstein acknowledged that the firm occasionally builds up an accumulation of interests in particular areas. For instance, in the early part of this decade, Lincolnshire found itself with a pair of prominent holdings in sporting goods equipment; it had bought football-helmet manufacturer Ridell Inc. in 2001, and the tennis-racket maker Prince in 2003, he said. “There are times when a particular sector is out of favor, and those times do favor value investors entering an industry.”

McDonald of Houlihan Lokey said he believes the affiliated businesses around transportation — the training services, the manufacturing of rolling stock — may be more attractive than the “highly commoditized” transport services themselves.”It will be a slow and steady recovery as either freight trends improve or travelers feel more comfortable about traveling,” McDonald said. “We should have a gradual but fairly long term recovery across both modes of transportation.”

Lincolnshire exited its last big foray in transportation-related services in June 2007, when it sold port operator Amports in a sponsor-to-sponsor deal with an infrastructure fund affiliated with AIG Global Investment Group. Lincolnshire had had a long-standing holding, American Management and Logistics Inc., an automotive-services company it bought in 2002, but AMLI had only a small share of the transshipping market, Weinstein recalled.

“We identified the leading market share provider in the space, partly because it was a good fit, but we also felt the dynamics of that business justified further investment,” he said. Amports, which the firm bought for $135 million from Associated British Ports, was in the same business as AMLI — loading, unloading, inspecting and distributing cars for automotive importers and exporters — but had much more scale. Buyouts reported at the time of the exit that Lincolnshire originally put $46 million of equity into the company to acquire a 90 percent stake, and Lincolnshire melded the two complimentary companies together.

After holding Amports for about a year, the $425 million exit generated Lincolnshire a 5.3x multiple of invested capital and a net IRR of 416 percent on the combined company, executives reported at the time. That exit, the firm’s first from its $400 million, 2005 vintage Lincolnshire Management Equity Fund III, returned 57 percent of each limited partner’s commitment to the fund.

Weinstein would not discuss prospective add-ons for its new transportation holdings. But with just one platform to show so far for its 2008 fund, Lincolnshire is clearly looking to be a buyer. “I think it’s a good environment to make investments,” Weinstein said. “We think there are a lot of attractive opportunities.” One big reason is that the economy is getting back in gear, he said. “When there is stability in the market, it is easier for people to make decisions to sell a business.”