Talking Top Quartile with Béla Szigethy of Riverside Company

Could you talk about the fundraising environment for this pool and how much you ultimately raised?

Back in 1999 and 2000 when we raised this fund, the environment was difficult but not nearly as difficult as it’s been over the past three years. The final tally for the fund was $413 million. For Riverside, it was our first fund with larger institutional investors coming into it.

You started raised the fund during a time when Internet and telecom stocks were soaring. Was venture investing more in favor at the time?

You were hearing a lot of good things about venture capital investing. Buyout investing wasn’t perceived to be as attractive. But because we focused on the lower end of the middle market, we were able to convince investors that there were excellent opportunities to make good returns. And we did.

Could you walk us through some of the key deals in the fund that drove performance?

There were a total of 21 platforms in this fund—and we actually started making investments as early as late ‘98 into ‘99 and then into 2000. Of the 21 investments, four worked out poorly for us, or about 19 percent. But five of the deals, or 24 percent, worked out as planned by generating a return of 1.5x to 3x and 12 of the deals worked out better than planned—above 3x cash-on-cash return. Eighty percent of the deals did well and nearly 60 percent of the deals did very well. It was a typical, good Riverside fund in that we had a large number of outperformers. That’s the secret to our success. We’ve been able to generate more than our fair share of deals of 3x to 5x or better cash-on-cash returns. That’s what drove this fund to its successful outcome.

Was the fund affected by the big Nasdaq sell-off of 2000 and the lower valuations of tech and telecom firms that followed?

It was impacted by the crash in telecom and tech and multiples in 2000 and then it benefited from the recovery that took place from 2002 through 2007. For the most part, it existed during a period of economic expansion and that never hurts. The 2008 financial crisis impacted some of the later exits.

It seems like you made some exits during the prime years prior to 2008?

We had a fair share of nifty fifties in that fund—deals that generate a very healthy $50 million-plus in gains. One was a distributor of aftermarket transmission repair parts, Axiom Automotive Technologies; HammerBlow Towing Systems, a manufacturer of towing products; BeaconMedaes, a manufacturer of gas systems for hospitals and clinics. The biggest hit in the fund: CapRock Communications. It provided satellite communications to offshore oil rigs. We bought it in 2002 when telecom was flat on its back and this company was tainted by the telecom debacle. We sold it in 2006 and it was a wonderful play on telecom as well as services to the oil and gas industry. Selig Sealing Products—it provided tamper-evidence liners for consumer packaging—was also a nifty 50.

How did this fund contribute to the evolution of the Riverside Company?

It was the fund that took us from a smaller mom and pop organization to a company with better processes, better personnel, a larger organization, and in many ways it put Riverside on the map. It’s very difficult to buy small companies and achieve consistently good returns with them. The very fact that we were able to buy 21 companies—all small, all imperfect in their own way, and generate consistent returns across a large number of deals—caught investors’ attention and made them realize that the Riverside Company was a pretty good way to invest in the smaller end of the middle market.

How your presence in Cleveland helped you source deals?

It’s been fundamental to our success. We’re closer to the manufacturing base of the country. We’re closer to that action than if we were solely in a big city like New York. We also opened a San Francisco office in 1997 and Dallas in 2001, so we had a national presence for the first time with the 2000 Capital Appreciation Fund.