Talking Top Quartile With Kohlberg & Co

1 Tell us about your best investments from Kohlberg Investors VI, including any data points that helped boost overall returns?

In particular, we are pleased with the performance of United States Infrastructure Corporation (“USIC”) and Bauer Performance Sports (“Bauer”), both of which were purchased in 2008. With USIC, we completed two simultaneous corporate carve-out acquisitions of top providers of utility locating services, forming the No 1 player in the industry.  Management was quickly able to realize significant cost and revenue synergies, creating an attractive and sustainable earnings growth profile that led to a sale of the business to the Ontario Municipal Employees Retirement System for 2.8x original invested capital and an IRR of 56%. In the case of Bauer, after its purchase out of Nike, the company accelerated product development, leading to significant increases in market share across its core hockey categories, while also supplementing organic growth and business line breadth through strategic acquisitions in lacrosse, baseball, and team apparel.  This led to a successful IPO of the company in 2011, and through the combination of secondary offerings and our residual ownership position results in a valuation of 2.7x invested capital and an IRR of 26%.        

2 2007 was a pivotal year for private equity funds, with extremely robust fundraising and mega acquisitions with loads of debt. Take us back to how your 2007 fund fit in with the times and how you may have done things differently than some of your peers?

The core of our strategy across 25-plus years has been working with our management teams to design and implement operationally focused initiatives to drive growth, reduce costs and reposition businesses for enhanced exit opportunities.  As a result, our success is much more tied to elements under our control rather than external factors of the economic cycle and market dynamics. The strong performance of Kohlberg VI, which was invested in equal parts before, during and after the economic downturn, bears this out.

3 In April, your firm closed Kohlberg Investors VII with $1.6 billion in commitments. As you look forward, what are the greatest challenges ahead as interest rates rise?

Generally speaking, increasing interest rates signal a healthy and growing economy that has traditionally buoyed private equity. In such an environment, it is paramount that we stick to our core principles of purchase price discipline and conservative capital structure formation.

4 Since its launch in 1987, Kohlberg & Co has stuck to its policy of using moderate amounts of debt financing in acquiring companies.  Could you walk us through how this approach originated with the firm and how it’s manifesting itself today?

Throughout our history we have relied on operationally intensive strategies and business transformation to create value instead of relying on excessive leverage.  We believe it more important for our management teams to be focused on strategic execution rather than worrying about an unduly heavy debt burden. 

Note: Interview has been edited for clarity. Kohlberg & Co’s Sam Frieder, managing partner; Gordon Woodward, chief investment officer, answered questions in a jointly-worded email to Buyouts.

(Correction: An earlier version of a note for this article misspelled the name Kohlberg & Co in the final sentence.)