Riverside Asks Executive To Monitor Credit Markets Full Time

With the appointment of Anne Hayes to be its partner for capital markets, The Riverside Company joins a growing group of buyout shops that assign senior investing pros to stay in touch with volatile credit conditions.

But to Hayes, the new job—a first for the Cleveland firm, which specializes in deals involving small companies—is simply an expansion of work she has been doing for two years, when credit conditions were tighter than they are today.

Riverside has historically divided up its workload among its 70-odd investing pros, Hayes told Buyouts. The shop has a long-standing origination team that does nothing but scout deals. When a target becomes ripe, the origination team hands it off to transacting partners, who take the deal through letter of intent up to closing. The firm also has a group of exit specialists, Hayes said. “This is really an extension of that” strategy of specialization.

Herself a transactor in the Riverside Capital Appreciation Fund family, the firm’s flagship North American buyout fund group known as RCAF, Hayes will now spend less time digging into single deals and more on focusing on deal structure, working on a broader array of transactions, she said.

“It’s a reasonably big investment of Riverside’s resources and a big vote that this will provide more value in our system to have me make this transition,” said Hayes, who joined the firm in 2001. “Ten years ago the financing piece of each company was done just within the deal team.”

Other firms also have taken similar steps, among them GTCR Golder Rauner LLC, Warburg Pincus, Hellman & Friedman and Parthenon Capital Partners. But while those shops might invest in the mid-market and large-cap deals, Riverside focuses on small businesses, companies typically with EBITDA of $5 million up to $15 million or $20 million. Special areas of focus for RCAP include health care and education, although the fund also invests in a variety of areas, including distribution and manufacturing.

Hayes, who will continue to work out of the firm’s New York office, has a banking background, having done stints at JP Morgan Securities, Morgan Stanley & Co. and Citicorp Securities before she earned her MBA in finance at the University of Pennsylvania’s Wharton School.

Her new role means that Hayes will have less involvement at the front end of a deal, in performing the initial diligence, negotiations and reaching a letter of intent, and more involvement after the firm signs a letter of intent, working on the right mix of senior and subordinated debt, preparing documentation for the lenders, and getting the deal ready to close.

The work is a lot like directing traffic, seeing what kind of target companies are getting looks, as well as how Riverside’s own people perform looking at deals, Hayes said. “That took quite a lot of time to figure out. In a reasonably high-volume shop, we wanted to make sure we were doing it better, not just better, but better and faster.”

Prolific Dealmaker

Unlike many firms, which may do no more than a handful of deals a year, Riverside last year completed two dozen acquisitions globally, the majority of which were financed. The firm counts 33 companies in its current RCAF portfolio. It is investing out of Fund 5, which closed in May 2009 at $1.17 billion.

The firm’s philosophy is to invest in market leaders, companies that are No. 1, 2 or 3 in their niche, which may mean small niches given the size of the companies, Hayes said. “We want to stay with our ‘little leader’ philosophy. But we do a lot of them.”

As a result, one important aspect of Hayes’s new job is to run Riverside’s Partner Lender Program, an existing framework through which the firm manages its relationships with lenders. Today, the program includes a group of about 20 lenders, representing pure senior debt providers, pure mezzanine lenders and some who can provide a mix of one-stop or unitranche financing, Hayes said. “This is a pretty solid group, I would say, at this point.”

Riverside usually puts together its own syndicate of lenders for a given deal, rather than having a single source of credit that then syndicates out the loan. A given consortium usually involves fewer than five senior lenders, Hayes said. “You want people who really care about this business, that it matters to them how they come across to this community.”

Riverside vets new lenders before letting them into the Partner Lender Program, looking, for instance, at their lending to other sponsors, making sure they are interested in the size range of deals that the firm does. In the case of new lenders, such as those that have entered the market since the end of the credit crisis, Hayes wants to get to know the individual decision-makers. “We’re looking for true partners in our deals,” Hayes said.

By using a single group of lenders repeatedly, the firm has been able to achieve a level of comfort with them, Hayes said. “We got deals financed right through the credit crisis.”

Today, credit conditions are favorable for borrowers. Hayes said the firm is able now to achieve total leverage up to 5x EBITDA for companies in its size range, at rates of Libor plus 450 to 500 basis points, with floors of Libor plus 125-150 basis points. And with a growing number of lenders entering the market, including local banks and a growing number of business development companies, pressure is increasing on the fees that the lenders charge, she said. “It’s a reasonably good market to get your deals financed right now.”

Although she will be stepping aside as a transactor, Hayes plans to remain on the portfolio company boards where she now serves, including the board of the Crisis Prevention Institute, which provides specialized training to employers in dealing with disruptive and assaultive behavior, and Justrite Manufacturing Co., a maker of safety products to deal with fires or hazardous material spills.

“When our fund manager announced internally that I wouldn’t be working on new deals, I corrected her and said, ‘That’s not true. I’ll be working on every new deal,'” Hayes said. “It’s kind of fun to be a cheerleader for everyone’s deals, not just your own.”