MidOcean Partners Tries To Get Back In The Swim

MidOcean, founded in 2003 as a spinout of Deutsche Bank’s principal investing business, is investing out of MidOcean Partners III LP, a 2006-vintage fund that closed with $1 billion in commitments and that was supplemented by a $24 million fundraise in 2007 for MidOcean Partners III-E LP and $478 million more in 2009 for MidOcean Partners III-A LP, according to the Thomson One database.

But Fund III has struggled. As of Sept. 30, 2011, it was showing an investment multiple of 0.9x and an IRR of -5.8, according to Sacramento Private Equity Partners, a fund of funds managed by Oak Hill Investment Management LP. Fund III appeared to be about 70 percent drawn as of the same date.MidOcean did not respond to requests for comment on this report.

MidOcean got its start when James “Ted” Virtue and Graham Clempson, a pair of dealmakers at DB Capital Partners, pulled together an investor group to pay $1.6 billion for a collection of more than 30 disparate companies from Deutsche Bank, which was seeking to reduce its exposure to the private equity asset class and raise additional capital for its core banking business.

Anchor investors backing the team included NIB Capital Private Equity, a Dutch buyouts investor that would later become known as AlpInvest Partners NV and today is part of The Carlyle Group LP, and the Ontario Teachers’ Pension Plan. Virtue became CEO and would run the company from its New York office, while Clempson would be the European managing partner, running those the operations from London.

Coming out of the dot-com recession and reeling from the terrorist attacks of Sept. 11, Deutsche Bank’s portfolio companies—a collection that included Jostens Inc., the class-ring company, European resort operator Center Parcs, and the packaging maker Jefferson Smurfit—“looked like losers,” as The Wall Street Journal would describe the transaction later.

And in the early going there were other signs MidOcean might be having difficulties. In 2004 Timothy C. Collins, the senior managing director of Ripplewood Holdings, a New York buyout firm that was having its own difficulties coming out of the recession, spoke publicly about the possibility of jointly marketing a fund with MidOcean, as the Dow Jones news service reported at the time.

That partnership never came together, as one market watcher familiar with both firms told Buyouts for this report. Both Collins and Virtue were famously strong-willed managers, this market watcher said, and it appeared that the two groups never came to terms on how the fund would be operated.

Then along came United Biscuits, a British maker of cookies and other snack foods that had been part of the Deutsche Bank portfolio. MidOcean and co-investor Cinven Ltd, a British buyout shop, struck a deal in October 2006 to sell United Biscuits to The Blackstone Group and PAI Partners in a £1.6 billion ($2.6 billion) transaction that earned the sellers more than 2x their investment, as The Times of London reported at the time.

While MidOcean had been harvesting the Deutsche Bank portfolio all along, selling into a rising market, the enterprise value of the United Biscuits deal by itself was well more than the entire bank portfolio had been worth less than four years earlier, and the exit put Virtue “among Wall Street’s top deal makers,” as the Wall Street Journal put it.

The losers of Fund II turned out to be a long-run success; Fund II was returning 2.16x as of March 31, 2011, according to the Canada Pension Plan Investment Board.

Some Deals Founder

The high profile exit also provided a boost to the marketing of Fund III, MidOcean’s first vehicle as an independent shop, which held its final close in early 2007 with $1 billion in commitments, near the peak of the mid-decade boom in fundraising. Buyouts, reporting on the fundraising in February 2007, noted that MidOcean had completed three deals totaling $1.8 billion in a two-day span. Two of those—the pizza chain Sbarro Inc. and trade publisher Penton Media—would turn out to be long-term headaches for the firm, while the third, weather-gear maker Totes-Isotoner Corp., would pay off nicely.

Penton, in which MidOcean had partnered with Wasserstein Partners LP, was hit both by recession that gripped the country in 2008 and by a shift toward electronic media away from print. The company filed a prepackaged Chapter 11 in February 2010 to eliminate $270 million in debt, as Buyouts reported at the time. MidOcean and Wasserstein, acting as secondary lenders in the bankruptcy, agreed to invest as much as $51.2 million in the reorganization to position the publisher for a digital future. MidOcean still lists Penton on its Web site as a current investment.

Sbarro, which had many of its 1,000 restaurants in shopping malls, was clobbered by the recession, and the company entered into Chapter 11 by April 2011. An attempt failed to negotiate a strategic sale while in bankruptcy, and the company emerged from its reorganization by November with significantly reduced debt and a $35 million capital infusion. MidOcean lost its entire stake, as sister news site peHub reported at the time.

Totes-Isotoner has proven to be a happier tale. MidOcean took its majority stake in Totes-Isotoner through a recapitalization, according to peHub, which reported at the time that existing Totes shareholders Bruckmann, Rosser, Sherrill & Co. and company management retained a minority stake. Totes, a Cincinnati-based maker of umbrellas, gloves and other consumer products, expanded through an add-on acquisition in 2008, Northern Cap & Glove, according to the MidOcean Web site. The firm was able to pay investors a $325 million dividend through a recapitalization last June.

Along the way, MidOcean has had to shift its strategy. In the go-go market of the past decade, the firm pitched its trans-Atlantic operations as a differentiator to investors, but that strategy largely failed to bear fruit. The firm decided to wind down its staff in London to manage its two remaining investments, both of which are losing money, the Sunday Telegraph reported in April 2008, quoting Clempson, MidOcean’s London managing partner, as saying: “After a strategic review we felt that there are going to be better opportunities for us in America rather than Europe. We are keeping our London office and three partners in London, but we have decided to re-allocate resources back to New York.”

And it branched out into lending in June 2009, establishing MidOcean Credit Partners, which like the firm’s buyout business, focuses on the mid-market.

The firm also has fortified its operating staff, most notably by hiring veteran turnaround specialist Robert S. “Steve” Miller in December 2009 to be its chairman. Miller, who formerly was chairman of the auto parts maker Delphi Corp. and was vice chairman of Chrysler Corp. when it received its federal bailout in 1980, is now also chairman of American International Group, the insurer that was saved by the government during the financial crisis.

MidOcean has remained active on the deal front (see table), including new platforms. In January it acquired Jones & Frank, a maker of fuel pumps and tanks for gas stations, as well as a series of add-ons for Penton Media and for the Bushnell Outdoor Products Inc. platform, a maker of binoculars and other products that the firm bought in August 2007.

The firm scored a $3 billion exit in February, selling the cable TV distributor Insight Communications Co. Inc. to Time Warner Cable Inc. as part of a group that also included Carlyle Group and Crestview Partners. Terms were not disclosed.

MidOcean is also said to be exploring a return to the market to raise a new fund. While the Insight Communication exit is not included in the publicly available performance data, some observers believe that the performance of Fund III, with its negative IRR and return multiple of less than 1x, could prove to be an obstacle for investors who are deluged with alternatives in a crowded fundraising marketplace.

Still, the firm pushes on. Just last month, MidOcean announced another add-on deal for Bushnell, Primos Hunting, a maker of game calls and other outdoor gear. It would be the sixth add-on for that platform.