Michael Heisley: Raising A Fund To Keep His Company Growing

Name: Michael Heisley
Title: Chairman, Heico Companies LLC
Firm: Stony Lane Partners
First Fund Target: $750 million ($1 billion cap)
Synopsis: Leads new buyout shop to invest in distressed industrial companies; partnered with Jeff McDermott, former co-head of investment banking for UBS

Michael Heisley has followed a simple rule of thumb over the past three decades while shepherding distressed companies back to health. And it was in his mind when he decided to launch turnaround investment firm Stony Lane Partners, whose goal is to raise a debut fund of $750 million.

“My motto is very simply this: That which has ceased to grow has begun to die,” said the veteran turnaround operator and chairman of Heico Companies LLC, a private Chicago-based conglomerate of revitalized industrial companies.

Recently, Heisley was afraid that Heico had ceased to grow. The company’s strategy over the years has been to borrow against the cash flow of its successful operating companies and put the money toward either capital improvements or toward buying new companies through Heico Acquisitions, the company’s purchasing arm. “Over time our deals got bigger, and they were really just getting a higher priority than doing the capital expenditures that we needed to keep our companies competitive,” Heisley said.

Heisley turned to an assistant dean from Northwestern University’s Kellogg School of Management to figure out a plan to address the problem. Heisley concluded after the session that it was time to divide his operating and acquisition units, and explore new avenues to raise money.

By raising a private equity fund, Stony Lane can focus on acquisitions, while Heico can concentrate on generating growth. To be sure, Heico, despite the presence of Stony Lane, maintains the right to make acquisitions, and its portfolio companies may even buy a distressed asset on occasion. But Stony Lane will handle the bulk of the buying going forward.

Fundraising Plans

As with most maiden firms, Stony Lane Partners can’t just snap its fingers to raise money, despite having blue-chip UBS by its side as placement agent.

We caught up with Heisley when he had just finished a road show in which he met with investment officers from some 60 pension funds, university endowments, family offices and other institutional investors. Has Stony Lane secured any commitments yet? Heisley demurred, answering with another phrase he’s fond of: “You got nothing until you can see the green.” Next step, planned for this month, is to hold something of a due-diligence open house in Stony Lane’s Chicago office so investors can drop by and learn more. Heisley’s goal is to hold a first closing in November, followed by a final closing some time in early 2008. A source with knowledge of the fund put the target at $750 million, with the first $100 million coming from the partners. The cap has been set at $1 billion.

Jeff McDermott, the former co-head of investment banking at UBS, joined Stony Lane as a partner earlier this summer. The veteran investment banker will help source deals and set divestiture plans from day one—a departure from Heico’s buy-and-hold strategy.

Altogether, the buyout shop will have three principals based in New York and four in Chicago. It will also enjoy support from Heico’s roughly 9,000 employees, who will assist on everything from strategic planning to interim management to due diligence. Heisley views the deep bench as a considerable asset. “If we go to look at machines and equipment, we’ve got a guy who does maintenance on the same type of equipment. He can tell you what the condition is,” Heisley said.

The firm plans to target companies that have filed for bankruptcy—or are close to doing so—and that generate between $200 million and $1 billion in revenue, our source said. Given the current state of the economy, Heisley has his eye on construction industry supply companies, particularly those serving residential contractors. Stony Lane is working with UBS to create a computer program to track all the highly leveraged companies in that sector. “We’re going to follow them for maybe a year or two before they actually need assistance,” Heisley said.

Beyond that, Heisley’s betting that a wave of distressed companies will soon come ashore in the wake of the credit crunch. Needless to say, Stony Lane will be competing for deal flow from dozens of turnaround investment firms, as well as buyout firms that tackle distressed opportunities on an opportunistic basis. The firm aims to differentiate itself from other turnaround shops by targeting troubled companies in need of true operational overhaul, not just balance sheet restructuring. And it doesn’t see opportunistic buyout firms as providing much in the way of real competition. “The problem with that [approach] is, the type of people you need to do distressed are different from the type of people you need for regular acquisitions,” he said. In fact, Heisley envisions other buyout pros approaching Stony Lane as a partner when they need operational turnaround experts.

Earning His Stripes

Heisley is understandably proud of what he’s accomplished since abandoning his roots as a computer salesman back in the late 1970s, selling his Pennsylvania home for $150,000, and using the proceeds to buy his first business, Conco Inc., a sewer and drain equipment manufacturer. (The buyout shop’s name is a nod to that first gamble: the home Heisley sold was located on Stony Lane.)

Heico posts annual sales north of $2 billion, and generates in the neighborhood of $180 million in EBITDA. The portfolio of roughly 20 companies includes CopperCom Inc., a Florida-based maker of switches used in the telecommunications industry; Davis Wire Corp., a wire manufacturer with plants in California, Washington and Colorado; and Ivaco Inc., a Canadian steel company. With a net worth of roughly $1 billion, Heisley ranked 374 on Forbes Magazine’s most recent list of The 400 Richest Americans.

Not all of Heisley’s business decisions have been slam dunks. In 2000, he bought a majority stake in the NBA’s Vancouver Grizzlies, which he moved to Memphis, Tenn., in 2001. While the team made it to three straight playoffs during Heisley’s reign, and Memphis has benefited from his considerable philanthropic efforts, the team finished in the cellar last season. The turnaround vet laments that he can’t give the franchise more attention.

“I’m a very busy guy,” Heisley said. “Take people like [Dallas Mavericks owner] Mark Cuban and the Maloof brothers [Joe and Gavin] in Sacramento. To me, they represent what ownership should really look like—guys who are intimately involved with the fans, the players, the community and everything else.”

But, as with Heico, Heisley believes he knows what he has to do to get the Grizzlies winning again. “You’ve got to keep growing, keep changing your product line, keep changing your services,” Heisley said. Otherwise, you’re going to die.