Jim Mattly, president and CEO of armored car business Loomis Fargo & Co., says his company’s success over the past 10 years would not have been possible in a public company environment. It was the private equity funding that allowed the company to flourish over time, he says.
“A public company environment could not stand that long period of no growth, even though [our] operating profits were improving,” Mattly says. Loomis Fargo could not have made the necessary changes without the help of Wingate Partners, he adds. The Dallas buyout firm recently sold its 51% stake in Loomis Fargo to Stockholm security giant Securitas for $102 million – roughly 10 times the amount of its original investment. (Wingate invested close to $10 million in Loomis over a period of 10 years, beginning in 1991, when it acquired Loomis Armored Inc. from Australia-based Mayne Nickless Ltd.)
Over the past decade, Mattly says, Loomis Fargo experienced two extensive turnaround periods. The first began in 1991 and lasted three-and-a-half years, causing flat revenue, while profits improved.
The second occurred after Loomis merged with Wells Fargo Armored in 1997.
In the mid-’90s, Loomis was the third largest service provider in the industry with revenue in excess of $100 million, but the company remained unprofitable. Then in 1997, Loomis completed the acquisition of Wells Fargo Armored, the second largest service provider in the industry, and formed Loomis Fargo & Co.
Like many, but of course not all, presidents and CEOs whose companies have been acquired by buyout firms, Mattly attributes the success of the turnarounds to his company’s private equity owner. Without Wingate’s capital and expertise, the newly found success of the company could not have been reached. And if the company had gone with a strategic buyer, the company might have taken a different route altogether.
The Financial and Strategic Choice
Generally speaking, the reasons portfolio companies seek private funding can be as straightforward as the need for capital infusion and financial or sector expertise.
But more than that, owners who are concerned about estate planning and diversification of wealth can stay in the game by bringing in equity buyers.
In addition, a critical contrast exits between an equity group and a strategic buyer. When companies are trying to decide between a financial buyer and a strategic buyer, sources say, strategic buyers are considered to be more corporate from a portfolio company’s point of view. Corporate environments are more conservative, and the management of portfolio companies often wind up as employees when they had been the decision-makers.
And not to be forgotten is the focus on money. Corporations are typically built on a traditional salary and bonus structure, whereas equity groups are more performance-oriented. Additionally, equity groups often put a strong incentives program in place, the end result of which is much more lucrative. For example, if management has even 5% to 15% ownership in a company, that could translate into $10 million in equity value for an average sized company.
“They’re happy to pay out a big amount of money because they’re making a big amount,” says investment banker Jeff McKenzie, a manufacturing expert with Houlihan, Lokey, Howard & Zukin, an investment bank with nearly 5,000 deals under its belt.
Making it Work
Ned Valentine, a partner with Richmond, Va.-based investment bank Harris Williams & Co., says the reasons portfolio companies seek sponsors runs the gamut. “Some portfolio companies just want liquidity. If liquidity is the [point], the only concern the firm has is finding good stewards. If they’re looking for [a business partner, in other words, more than liquidity], then they want industry knowledge and relevant transaction experience from buyout firms. They want a group that has a track record from (a) a return standpoint and (b) the ability to get deals done, as well as credibility with the banks…”
But in either case, whether the company wants liquidity or a partner, says Valentine, four factors have to be in place for the relationship between a private equity firm and a potential portfolio company to work: compatible personalities, style and vision, as well as both party’s comfort operating in a leveraged environment.
When things go awry between portfolio companies and buyout firms, it’s usually because one of these boxes hasn’t been checked. Either that, or the fundamentals of the business get radically changed along the way, Valentine says.
Jeffrey Villwock, a managing partner with Harpeth Capital LLC says expertise is important to companies looking at buyout firm suitors. “Capital is what makes the world go round, but [portfolio companies] also want expertise from [their] financial partners,” he says.
Additionally, Villwock says, companies want relationships with potential merger partners or suppliers out of their marriage into private equity.
Bobby Tesney, president and CEO of WinsLoew Furniture Inc., based in Birmingham, Ala., agrees. He says GPs typically bring good management people and talented advisers in the financial end of the business, where manufacturers need help. But in the buyout world, sellers can’t just take, take, take, without giving anything. (Tesney’s company was seeking to go private 13 years ago when it sought private equity funding, and Miami-based Trivest “won.” )
“No one will give you capital without some restraints and controls. You have to find the buyout firm that suits your needs,” he says. “But those restraints are tempered when the capital allows growth that might otherwise be impossible, and the financial advice proves incomparable.”
WinsLoew faced a predicament two years ago. It was a small-company stock that was thinly traded and want for analyst coverage. Trivest came to the rescue, paying more than double what the company’s stock represented. Since then, WinsLoew has actively expanded its buisness through acquisitions and now has an estimated 22% market share in the casual furniture category.
Seek and Ye Shall Find
Frequently, Harpeth Capital’s Villwock says, what portfolio companies seek are relationships with firms that have what he calls “the Good Housekeeping Seal of Approval”- that is, prestige.
“Prestige helps increase the profile of whatever it is you’re doing. If you’re buying hospitals or hospital companies, and you’re Clayton Associates, everyone knows who you are. You get to see things that other people are not going to see. And prestige can help in an exit [multiple]; people will perhaps pay more for a high quality partner,” Villwock says.
McKenzie of Houlihan, Lokey, Howard & Zukin, says the financial benefits portfolio companies derive from private equity can be worth the original amount plus the return. His firm calls this phenomenon “two bites of the apple.”
“A typical un-leveraged company can sell 90% equity value as a result of leverage and end up with 20% of the company,” he says by way of illustration. “In three to five years, [that] 20% can be worth as much as the initial amount on the table with a really good return,” he says.
And finally, it’s no secret that the characteristics portfolio companies look for in sponsors often become quite personal.
“A lot of decisions are based on first impressions,” says Valentine of Harris Williams & Co. “Portfolio companies want good people to work with; someone who is a straight shooter, who treats them as a partner, [and who has] a decent sense of humility.”