Sentinel Capital Partners has found its sweet spot in the small market and is riding a wave of buyout activity. The firm has acquired four companies so far this year and recently entered into a binding agreement for a fifth deal, a take-private of a Canadian company slated to close in mid-November. The buyout shop also exited three companies this year. The shopping spree left the firm’s latest vehicle, Sentinel Capital Partners II LP, about 65 percent invested and Sentinel Capital will likely be in the market with a new fund next year.
Sentinel Capital Founder David Lobel credits the firm’s longtime relationships with banks as a key component in weathering the credit crunch. That’s not to say the small mid-market has been unscathed. Lobel has seen an increase in interest rates “by about a hundred basis points across the board” and a slight contraction in the amount of debt available. “Before the problems occurred we might be able to secure five and a half times EBITDA in the form of debt. Today that has dropped by about a half a turn. It’s now more like five times,” he said. If you can live with those terms, it’s not difficult to secure financing if you know the right people, he added. “In the big markets, that’s not true. You can know all the people that you want, but the fact is, when there are no buyers, there are no buyers. In our market there are buyers.”
Deals that require less than $125 million in debt financing generally don’t require syndication, Lobel said. In a typical Sentinel Capital deal—which generally requires a check of $100 million—the firm might make a $35 million equity investment. Then it approaches one mezzanine debt provider for $20 million, and raises the remaining $45 million in senior debt from two or three regional banks looking to deploy debt in $15 million to $25 million senior debt slugs. In the past, Sentinel Capital has borrowed senior debt from Wisconsin-based bank Marshall & Ilsley and American Capital Strategies Ltd., based in Bethesda, Md. For mezzanine financing, Norwest Mezzanine Partners, a Minneapolis firm, and New York-based New Canaan Partners have been providers. “When you take out syndicated debt and bring in smaller regional banks there is ample funding out there to do small deals. That’s the key to our business,” Lobel said.
In September, Sentinel Capital announced that it entered into an agreement to acquire Spinrite Income Fund, Canada’s largest producer and marketer of craft yarns. The public company is traded on the Toronto Stock Exchange, and Lobel said the deal is expected to close on Nov. 16. It’s valued at close to C$81 million, including C$35 million in assumed debt.
In mid-October, Sentinel Capital announced the acquisition of Vintage Parts, a Beaver Dam, WI-based independent supplier of replacement parts for cars, recreational vehicles and construction equipment. The firm bought Vintage Parts from James Finlay Ltd., a subsidiary of the Swire Group, a Scottish conglomerate. While Vintage Parts’s management invested in the transaction, it was not a significant portion of the equity stake.
Lobel attributes the healthy deal flow to the relative security of the small buyout sector. The New York-based firm targets companies with roughly $6 million in annual cash flow, up to $25 million in EBITDA and enterprise values ranging from $25 million to $100 million. While he doesn’t think the current deal pace is out of the ordinary for his firm, Lobel points out that it’s not the norm in today’s climate. “That’s what’s unusual, that it’s occurring during this period of time,” when the scarcity of debt financing has sidelined some of the bigger buyout shops, he said.
Last month, Sentinel Capital sold Nivel Holdings LLC, a distributor of after-market replacement parts for golf carts, to
At the end of September, the firm sold Metro Dentalcare to American Dental Partners Inc., which reportedly paid $85 million in cash and a contingent earn-out of up to $10 million payable in 2008 based on the company’s EBITDA from 2007. Sentinel Capital owned the company for two and a half years and made 5x its money with a triple-digit IRR, according to Lobel.—J.P.