Talking Top Quartile with John Hatherly of Wynnchurch Capital

Wynnchurch Capital Partners III, the vintage 2010 buyout fund from Chicago-based Wynnchurch Capital, generated a 39 percent net IRR as of December 31, according to an annual meeting document from a source. An annual study of public pension fund data by Buyouts estimated a top-quartile IRR threshold of 21.4 percent and a median of 12.9 percent, for the same vintage year. John Hatherly, managing partner, who founded the firm in 1999, spoke with Buyouts on June 22 at the PartnerConnect Midwest 2016 conference. The below interview is taken from Hatherly’s talking points for his keynote appearance at the conference.

Bring us up to date on Wynnchurch.

We’ve come a long way from our initial fund in 2000 that raised $160 million. Nowadays, we manage $2.4 billion, with four funds. We’ve got 30 investment pros working in Chicago, Los Angeles, Detroit, Toronto and Montreal. We invest across the performance continuum from companies in deep distress to great companies at a good value. Overall, we’re value oriented and operationally focused.

How did fundraising go for Fund III? 

We faced a difficult fundraising environment in 2010. LPs had limited visibility on allocations and commitments as they tried to comprehend the impact of the [global financial crisis]. The market was paralyzed. We shifted to a European carry and offered an 80 percent fee offset for Fund III. After 18 months and 128 meetings, we raised more than $600 million. Given the time period our placement agent, Credit Suisse, provided good value. Skipping ahead to Fund IV in 2014, we raised $1.2 billion in just a few months, with an American carry. It’s a different world.

What was the first deal in Fund III?

We bought Wolverine Automotive at the end of 2010. It was a carve-out from a bankrupt parent, Eagle Pitcher, that made rubber gaskets and brake shims with about half of its business in original equipment manufacturers and the other aimed at the automotive aftermarket business.

What’d you do to turn it around and how’d you do on the exit?

We paid about 4.9x EBITDA for a well-positioned company with an opportunity to grow and improve operations. It was something of a sleepy company and the management retired in place once the deal closed. We overhauled senior management, made growth a priority [and] added a new sales head and sales team. We focused on new products and devising solutions for our customers. We also ended up expanding through an add-on acquisition and dropping new business into our plants. We owned Wolverine Automotive for five years and sold it to ITT for a 3.7x cash-on-cash return and a 33 percent IRR.

How did you navigate the early years after the financial crisis in terms of your deal-making?

It ended up having a positive impact on our portfolio. It helped us improve our operational focus and our turnaround experience. Overall, we’d rather buy in a bear market and sell in a bull market.

We bought some great businesses in 2011-2012 including U.S. Pipe, Northstar Aerospace, Indiana Limestone, Foss Manufacturing and NSC Minerals. USP, Northstar and Indiana Limestone were all losing money when we bought them, but they were well-positioned market leaders, with asset coverage and intelligent turnaround plans.

What about deals that drove performance in the fund?

Among several that helped performance, two stand out: Northstar Aerospace and U.S. Pipe.

We bought Northstar Aerospace out of bankruptcy as a sole-source supplier of gear boxes for Apache and Chinook helicopters. It was losing $14 million a year. We brought in new management, renegotiated customer contracts, improved quality and grew it up to $60 million in EBITDA. We’ve made about 2.5x our investment so far and still own 100 percent. We expect to make a 7x return on that deal.

U.S. Pipe was a corporate carve-out from Mueller Corp that was losing $22 million a year. Our view was that the industry dynamic would shift as more manufacturing capacity got shuttered and pricing power would improve. This ended up taking place and we were able to increase our prices. At the same time, we improved operations and shifted the business toward distributors rather than direct customer sales. We made five acquisitions including its largest competitor. EBITDA was about $125 million a year when we sold it in April for a 5x return on our investment.

Any lessons learned from deals that didn’t work out?

We bought Loadmaster, the No. 2 manufacturer of offshore derricks. A downturn in the sector led to a 70 percent drop in revenue. We haven’t given up on the business, but the outlook is difficult since the market for offshore rigs isn’t expected to pick up for the next three years. We’ve hunkered down and worked with the company’s lenders. We’ve restructured the debt and made a small capital infusion. It’s rare for private equity funds to totally avoid difficult situations and we’re no exception. The lessons here are the downturns can be more severe than expected; don’t overleverage with cyclical businesses.

How did Fund III contribute to the evolution of the firm?

Every fund helped us develop our firm, team and our culture. We grew our team from within by promoting two managing directors to partner and four vice presidents to managing director, while adding several associates.

And what about plans with portfolio companies that remain in Fund III?

We have 11 companies left in the fund, including two that we purchased in 2015. We’re looking to exit four businesses in the next 12 to 18 months. We’re looking to add on to four companies and exit those in the next 36 to 48 months. Three others require a lot of TLC.

Funds I and II were also top quartile. What’s the approach to strong performance numbers across multiple funds?

The four key tenets of our investment philosophy are: 1) buy market leading/well positioned businesses; 2) value buy and don’t overpay or overleverage; 3) put the best team in the field and 4) ensure there is a growth or operational improvement opportunity and that there is a detailed plan to capitalize on the opportunity. You have to learn from your successes and failures and stick to your investment philosophy.

Action Item: Contact Wynnchurch,

Photo of John Hatherly courtesy of Wynnchurch

Correction: This story has been updated to correct the figure for Wynnchurch’s fee offset in Fund III. The fee offset was 80 percent, not 100 percent.