Sun Capital Partners: Busy firm helps troubled companies see the light

Last year the firm completed 30 deals. So far this year, it’s already done six, which puts it on pace to match last year’s number. And the firm hasn’t been busy doing just deals. It also raised more than $2.4 billion for two separate funds. Additionally, Sun opened an office in southern China, which will help it with sourcing and vendor relationships. “China touches a lot of our businesses. We could improve things by getting feet on the ground,” said Rodger Krouse, co-CEO and co-founder of Sun.

But the middle market, turnaround deal specialist—though swelling in size—is careful to put limits on where and how it wants to invest. Take China, for example. Sun doesn’t want to expand into China by buying troubled companies there—not yet anyway.

“We don’t think the deal environment is ready yet for our kind of transaction,” said Krouse. Other countries are more developed than China in their treatment of distressed companies. More recently in Japan and for some time in Western Europe, the governments have been working harder to cope with bankruptcies situations. “In China, the banks continue to support troubled companies, which otherwise would need to address liquidity problems with investors like us,” said Krouse.

Sun also insists it doesn’t want to expand out of its historic niche. The firm is known for its speed to closing—often under 30 days—which has been somewhat tailor-made for the types of companies it buys. When it bought Mervyn’s in 2004, along with Cerberus Capital Management, Lubert-Adler and Klaff Partners, the letter of intent was executed on July 29 and the deal closed on Sept. 3.

Part of that streamlining, explained Krouse, comes from how it specializes in underperformers and turnarounds (underperformers being classified in the third and fourth quartile in EBITDA and turnarounds as companies with negative EBITDA). Those kinds of companies often have liquidity problems and need a quick close. “We’ve tailored our approach to that,” he said. “There’s a certain commonality to these transactions, and we’re very comfortable with them.” Sun’s troubled targets are also often motivated to sell, since the ship is sinking, or the house is burning, whatever metaphor you want to use. Once the deal is done, Sun’s 15 senior operators who “teach, coach and guide” management move in quickly.

Despite fundraising success, Sun insists it will stay planted in its niche. The company’s last two transactions were for companies with $59 million and $79 million in sales.

What was that number again?

Last year the firm purchased a record 30 companies—15 portfolio companies and 15 add-ons. In 2005, Sun also sold 12 companies. Its most recent deal is the buyout of highly engineered polypropylene-based fabrics LINQ Industrial Fabrics Inc. from American Industrial Partners earlier this month. In 2004, the firm completed 15 buy-side transactions and in 2003, the firm bought 18 companies.

Meanwhile, on the fundraising front, LPs often say they like to see teams that have worked together awhile. How about 26 years? Sun’s co-founders, Krouse and Marc Leder, met when they were 18, while they at Wharton. The two then got better acquainted at Lehman Brothers where they were both analysts before launching Sun in 1995. Both are 44.

LPs last year committed $1.5 billion to Sun Capital Partners IV, which fit in line with the firm’s near exponential growth in fund sizes. Sun’s first group of investments raised $28 million, though it wasn’t a formal fund. Its second fund garnered $200 million and its third $500 million. Krouse said Sun raised its most recent fund quickly, sending out its PPM in early spring, asking for subscription documents three weeks after that then closing a few weeks later.

Also this month, Sun announced it closed its Sun Capital Securities Fund LP— Tranche II, at $935 million in capital commitments, a non-control, evergreen fund that reinvests profits. The securities fund lets Sun invest more in public situations and other types of transactions that are still within the realm of distressed and turnaround. Sun raised the first tranche in 2004 for $300 million and investments included the one in Mervyns.

Its largest LPs include Goldman Sachs Asset Management, Commonfund, Wilshire Associates, and the endowments of Duke, Notre Dame and the University of Virginia.