After a year of absorbing body blows,
In recent weeks, the Boca Raton, Fla.-based firm scored two impressive exits and wrote up its portfolio. And it’s ready to do new deals.
The situation began brightening for Sun Capital in October when it reported modest write-ups for the first half of 2009. Across its portfolio, the value of the firm’s holdings increased by 3%, including an 8% write-up for its latest fund, Sun Capital Partners V, which experienced a year-end 2008 writedown of 60 percent.
Also in October, Sun Capital earned back a little respect from investors when it allowed them to reduce commitments made to its $6 billion fifth fund by $1 billion.
In recent weeks, the firm has also sold off two investments, earning respectable returns on each. On Nov. 13, Sun Capital announced the sale of Timothy’s Coffees of the World to Green Mountain Coffee Roasters Inc. for $157 million. Sun Capital purchased the specialty coffee supplier for $19.9 million in equity, and the sale represents a 5.25x cash-on-cash return and 186% IRR for the firm’s fifth fund.
In early December, Sun Capital closed its sale of K.K. Tarami, a Japanese maker of fruit gelatin products that was held in the firm’s fourth fund since 2007. The exit represented a 16.4x return on Sun Capital’s $3 million equity investment in the company and generated a gross IRR of 216 percent. The deal was Sun Capital’s first and latest in Asia.
In both instances, product innovation helped drive profitability and growth. In the case of Tarami, the company was unprofitable at the time of purchase. Through increasing productivity, introducing products and improving material sourcing, the company’s sales increased by 40% and EBITDA increased by 246 percent.
Now, after cutting $1.3 billion in operating costs since the fourth quarter of 2008, more of Sun Capital’s companies may be poised for sales as the market slowly recovers.
Meanwhile, the firm is about to ramp up as a buyer. The firm plans to increase its deal activity next year, possibly to 2008 levels, when it did 23 deals. Sun Capital was much less active in 2009, purchasing fewer than 10 companies.
Principal Scott Edwards says that the firm does not believe the best time for distressed investing has passed.
“The best returns come not from investing early but more in the middle to end of the cycle,” says Edwards, who adds that it has become easier in recent months to value and understand what it takes to turn a company around.
The firm’s outlook is positive, Edwards says. “I feel a lot better today than I did back in February.”
In addition to rising fund values and the two exits, the collective EBITDA of Sun Capital portfolio companies is rising and the portfolio is healthier “by every single metric,” including liquidity, covenants and operating statistics, he says.
That doesn’t mean Sun Capital is able to put the tough times behind it. The firm continues to deal with the past two years of missteps, including 16 portfolio company bankruptcies, multiple rounds of layoffs, resignations and even a founding partner’s family drama.
Moreover, Sun capital’s largest investment, Kellwood Co., remained valued at zero in the firm’s portfolio as of October, despite the fact that the apparel marketer was able to push back its debt maturities until 2014 through a bond exchange. —Erin Griffith