18 Mar Private equity capital still available in tight times
In the current recession, credit is tight as banks are not lending as much money to businesses to help meet their capital needs. And, the money banks lend tends to be weighed down by higher borrowing costs.
But for CEOs who are serious about growing their companies or addressing leverage concerns, private equity firms are still raising capital and investing it in businesses that are poised for growth.
In these trying times, Milwaukee-based Mason Wells continues to get deals done, providing a boost to the economy.
“For companies and corporations, this a tough time to go to their existing lenders, whether it’s for equipment, plant expansions, replacement, to buy a competitor or invest in a product line,” said Greg Myers, a managing director for Mason Wells. “The financing sources are challenged right now.
“Companies that have run into problems with senior lenders can’t finance their way out of it. There is a certain percent of the business community not getting the support from their bank or their lender – they don’t know where else they can turn to.”
While it involves equity and the willingness to take on a partner, private equity can offer an attractive solution, Myers says. The involvement of a private equity firm not only provides much-needed capital for growth initiatives, but also brings strategic focus and financial expertise to these organizations.
On December 31, 2008, Oliver Medical LLC, a portfolio company of Mason Wells Buyout Fund II, acquired Tolas Healthcare Packaging a Feasterville, Pennsylvania company. The move combined two successful medical and pharmaceutical packaging suppliers, broadened their product line and expanded their coating and manufacturing capacity.
Two years ago, the family-owned Oliver Packaging didn’t have a fifth generation of management ready to come in and assume leadership of the fourth generation, family-owned business located in Grand Rapids, Michigan. With its expertise in medical packaging businesses, Mason Wells was able to help provide liquidity to the family owners of Oliver. Eighteen months later, Oliver and Mason Wells approached Tolas, which was owned by Oracle Packaging. Oracle was seeking capital for its non-medical operations and decided to divest Tolas.
“That was a situation where Oracle felt the debt markets were not providing them with what they needed,” Myers said. “They were looking for financing, and the sale of their TOLAS healthcare business could help provide liquidity.”
Using its extensive contacts in the industry, Mason Wells recruited a new CEO to take over from two family members retiring at Oliver. Oliver’s purchase of Tolas completed at the end of December. Total revenue for Oliver Medical/TOLAS is $125 million.
“We don’t go in and try and run the companies,” Myers said. “I was in Grand Rapids (at Oliver) the other day. We are active at the board level, so we have opinions. We look to partner with the management team.”
An outside private equity firm can provide insight into a firm’s long-term strategic planning and help identify new markets and products that fit with the scope of the business.
A survey by Ernst & Young that compared the 100 largest private equity exits worldwide to the performance of publicly traded companies in 2007 found that the private firms increased in value at an annual compounded rate twice that of public companies. According to the study, organic sales growth was a key to the private equity firms’ growth. That was not accomplished by cutting jobs, as employment increased by 12 percent, the study said.
Mason Wells’ investment strategy focuses on companies headquartered in the Midwest with revenues of $25 to $250 million and earnings before interest, taxes, depreciation and amortization (EBITDA) of at least $5 million. Since 1982, Mason Wells has invested in over 50 companies in three specific industry sectors: engineered products and services, outsourced business services, and specialty paper and packaging.
Nationwide, mergers and acquisitions activity is currently down over 40 percent compared to last year.
“There’s still deals getting done – we’ve got one in process now,” Myers said. “When you look at the total deal flow, it is clearly down, but that is more a reflection of general market conditions. The pipeline of deals is not as robust – valuations are down – companies that are interested can’t go and get the bank financing. So, this is not the best time for them. There are a lot of people sitting on the sidelines.”