Michael Dailey founded Southport, Conn.-based Dailey Capital Management in 1998. The firm, which organizes and invests in leveraged buyouts of small, private, middle-market businesses, is currently raising a $50 million fund targeted at high-net-worth individuals, and expects to enter the marketplace with its first investment fund for institutional limited partners sometime next year.
Before starting his own investment firm, Dailey was president and CEO of Triad Capital Management. During his 20-year private equity career, he has recorded nearly 30 profitable investments and generated more than a 40% return net to his investors without any capital losses.
Dailey Capital?s approach is different from that of other buyout players. What is your strategy, and how does it set you apart?
Not accidentally, we have a strong bias toward the lower middle market. We believe that most larger segments of the buyout market have become extraordinarily mature over the last several years, and that the lower middle market is one of the few exceptions to that rule. It?s also one of the few environments remaining with the characteristics necessary to produce the sorts of returns that Dailey Capital investors have become accustomed to.
Fact Sheet Michael Dailey, President and CEO, Dailey Capital Management
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I think what helps to differentiate us is a very careful approach to vetting investments. We identify attractive industries and markets from both growth and exit perspectives. We then look for management that is ideally suited to the opportunity, and these steps are all a prerequisite to our acquisition of a platform or our enthusiasm for an investment of any kind. We feel that if the approach we?ve adopted historically is executed carefully and correctly, smaller deals will provide stronger returns and excellent opportunities to create value. We focus on well-situated companies in good markets with strong management that can use financial and other help to move the businesses forward.
How do you architect a deal?
We?re looking for companies with revenue of $15 million to $100 million with annual EBITDA in excess of $2.5 million. A leading focus for us is that we make investments without exception predicated on the availability of superior management talent. Sometimes that?s resident, more often it?s not. Once identified and acquired, portfolio companies are managed actively towards a pre-identified premium exit event, most often over a three- to five-year horizon. The kinds of opportunities we?re looking for are ownerships, restructurings and closely held and family owned companies, growth equity, recapitalizations, consolidations and rollups, management buyouts of public and private companies, and something that?s commonly referred to as “fallen angels” ? companies with solid brands and products that need a strategic or financial boost to get back on track.
We try and stay away from markets which would expose our investors to low growth, mature markets where profit margins are typically depressed by efficiency and competition, markets characterized by competitive threats which arise from scale and capital. We also try and avoid investments that are undifferentiated or unduly exposed to technological obsolescence or product substitutions.
How long does it take you to complete a transaction?
It could take anywhere from six to 12 months [to complete an investment]. The rigors of the vetting process commonly result in an idea or target being rejected somewhere intervening that six to twelve months framework. For every idea or investment we undertake measurable due diligence in connection with, there?s probably just a one in 10 prospect that we will actually execute on the investment and close within that six- to 12-month timeframe.
We normally study something for months prior to making an investment with the end objective in mind of keeping the returns in excess of 35% and the accompanying beta disproportionately low. In fact, we haven?t incurred a loss in 20 years, and the average investment in our portfolio has returned better than 40% on an annual compound basis toour investors.
When did you realize that the lower middle market niche was a winner?
Back in 1979, 1980. It?s a largely underserved segment of the marketplace. Of the $65 billion that was raised in the buyout business last year, less than 2% of that money has trickled down to what I?ve defined as the lower middle market.
Our experience has been that there?s considerably more value here. You?re buying products, not infrequently, at half the EBITDA multiple that our contemporaries in the upper reaches of the market are paying. Leverage geometry is measurably superior in the lower middle market. Even in this troubled debt market, we?re still capable of leveraging at two to one, whereas our peers that are bidding for much larger companies, frequently in the public sector, are having to pay twice that amount and, as a result, their investors are benefiting from considerably inferior leverage than what we?re capable of.
More favorable leverage implies two leading characteristics of decisive importance to a limited partner. On the one hand, we?re capitalizing these transactions with lower-cost money, which has the predictable effect of increasing the returns on their investment. As a result of having less equity on the table, we lower their risk profile at the same time.
Is that what is fueling opportunities in the lower middle market these days?
Yes. I think the generic superiority of lower middle market investment characteristics are more conspicuous now than any time in recent memory. I think it?s curious that more investment capital hasn?t focused on our segment of the marketplace, but I?m happy for that curious reality at the same time.
What kinds of deals are hot right now?
I think the investment marketplace is brimming over with opportunities. We like the tower business. We think it?s reviving, and we think it has good long-term potential. We like the fitness/rehabilitation business. We think that?s a very demographically preferenced place to be. We like the security alarm industry very much. We also think small to medium-sized insurance companies boast a very durable franchise profile and yet, in many cases, are undervalued in today?s market.
You?re currently pursuing two buyout transactions. When will those deals close?
We?re pursuing an investment in the tower business in the Northwest. We are in the process now of attempting to close on the first of three platform acquisitions, which we have designed to result in a fully integrated and vertical companies that will entail site acquisition, engineering, construction and ownership.
We?re also in the process of closing, I hope, within the next two weeks on a reinsurance investment. And we?re attempting to make an investment in the fitness/rehabilitation business.
How many deals do you plan to complete by year-end?
Probably by the end of this year, we will have closed on three transactions. Given the high level of our selectivity, a devotion to a continuation of the track record, and the fact that we?ve consciously chosen to manage modest sums of money ? we don?t want to be pushed by the money or influenced by transaction pressure ? I think that doing two or three deals a year in the market segment that we?ve adopted, I?d be happy with that going forward.
What do your peers think of your strategy?
You?d have to ask them. I hope they?re envious of the track record, but anyone who?s track record over 20 years features no losses is sometimes welcoming to a presumption that you?re too risk-averse and that your limiteds would have been better served by a more aggressive approach to the marketplace. So long as my limiteds remain supportive, those are the opinion leaders I?m really concerned about.
How did you manage to maintain such a stellar track record ?
Our record was largely made possible by the fact that we have always been wary of being too circumscribed in our approach to any given segment of the marketplace. What we?re sure of is that almost all of the really attractive values in this economy reside and will continue to reside in the lower middle marketplace. More anecdotally, in the final analysis [of an investment], I always take a long walk in the woods just prior to closing on an investment. I close my eyes and I assume that all of the money required to make this deal is mine and my family?s. I try and remove from my mind the fact that other people?s money supporting the capitalization mitigates my personal risk.
If I don?t emerge from that walk with a transcending of enthusiasm and commitment to the investment, as if it were mine personally, and as if all of my own money were at stake in the deal, then I don?t feel as if I?m acquitting myself as a trustee by going ahead and making the deal. Money I?m placing at risk on behalf of others has to be every bit as important as if it were my money alone, and that?s kind of the seminal litmus test for me.
Conact Robyn Kurdek:Robyn.Kurdek@tfn.com
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