Out-of-state private equity groups (PEGs) are showing increased interests in owning Wisconsin companies. According to a new report by Mertz Associates Inc., a Waukesha-based mergers and acquisitions brokerage, 172 Wisconsin companies are currently owned by a PEG. Only 30 of those companies are owned by Wisconsin-based PEGs.
For years, Wisconsin was overlooked by the private equity world, according to Paul Sweeney, a partner at PS Capital Partners, a Milwaukee-based PEG.
"Private equity has grown significantly, and the funds have covered the big markets, the big metro areas like the coasts, Chicago, Detroit and St. Louis," Sweeney said.
The increased interests in Wisconsin companies reflect the economic rebound of the state, according to many private equity investors.
"Milwaukee is a better city and southeastern Wisconsin is a better economy than it was when I came here 11 years ago," said Steve Peterson, managing director of Brass Ring Capital, a Milwaukee PEG. "It seems to be moving forward today. A lot of the bloodletting is over, and people have rolled up their sleeves."
M&A activity continues to be hot in 2006. Nationwide, private equity M&A activity has grown from about 500 transactions in 2001 to about 1,300 in 2005, according to the Mertz Associates report.
Over the last 10 years, private equity funds have grown to unprecedented levels because pension funds, insurance companies, banks and other financial institutions have started funneling money into them. PEGs are under pressure to put that money, especially large sums from public institutions, to work.
"The big elephant is the pension money," said Paul Stewart, a partner at PS Capital Partners. "They have driven a lot of growth in private equity firms and funds."
Another reason Wisconsin companies are attracting more interest from out-of-state PEGs in recent years is that the state hasn’t had as much local
investment competition, compared with most metro markets, according to Linda Mertz, managing director of Mertz Associates.
Wisconsin has many smallto mid-market companies, many of which are family-owned, with between $5 million and $100 million in annual revenues. A 2005 survey prepared for the Wisconsin Manufacturing Extension Partnership said 82 percent of the state’s manufacturing corporate parents have less than $100 million in annual revenues, compared with 65 percent in other states.
"There is so much money out there to be put to work," Mertz said. "(PEGs) are willing to take smaller businesses with smaller sales that used to be perceived as too small."
Another factor driving the out-of-state interest in Wisconsin is demographically driven, investors say. Many baby boomers in family-owned businesses in Wisconsin are thinking about retirement, and private equity can be attractive to them.
"(Many owners) are looking for an opportunity for an outside owner to step in," Stewart said. "That sort of occurrence is going up, and there are more opportunities for private equity there."
Wisconsin’s strong manufacturing base, including highly engineered products, work ethic, skilled employees, quality management pool and recent return on investment for PEGs also are making the state attractive to private investment, Mertz said.
Wisconsin’s manufacturing companies have been attractive for investors such as The Riverside Co., a New York-based PEG. The company currently owns Nordoco Inc. in Milwaukee and Hudson-Sharp Machine Co. in Green Bay. It previously bought four other Wisconsin companies.
Riverside looks for small-market firms in manufacturing, business services and distribution. Wisconsin and the Midwest have many opportunities for those types of investments, said Robert Landis, principal with Riverside.
"We started focusing (on Wisconsin and Michigan’s Upper Peninsula) in the past four years, when we realized we hadn’t done a lot there," Landis said.
Riverside also has a small office in Chicago, where it is able to have regular contact with its Wisconsin companies and learn of potential deals in the Midwest, Landis said.
Many Wisconsin businesses, especially in the manufacturing sector, have found ways to change their business models to remain competitive against global competition, investors say. Some of those companies have both skilled workers and management teams that know best how to run the day-to-day operations. Such human assets are highly attractive to PEGs, said Cary Musech, principal of Minneapolis-based Tonka Bay Equity Partners LLC.
"There are a lot of old economy companies that have been around a while," Musech said. "They’re not high-tech, but just basic companies that can grow. The economy is changing, and there are still a lot of these types of companies that are in need of capital to grow and in need of generational transfer."
Tonka Bay Equity Partners’ investments are focused in the Midwest, including several Wisconsin holdings.
Milwaukee-based M&I Bank and Green Bay-based Associated Bank have joined as investors in Tonka Bay’s new $125 million Bayview Capital Partners II Fund. The new private equity fund will pursue investments in companies throughout the Midwest, including Wisconsin.M&A activity continues to grow in 2006, bringing out investment money that had been sitting on the sidelines since the recession of 2001.
Private equity groups employ their funds in two different ways venture capital and buyouts. Venture capital helps start new companies, while buyouts purchase existing companies with the intent of growing them.
"I think the overall volume increase is a function that the economy has come back since the early 2000 time frame," said Tom Smith, managing director of Mason Wells, a Milwaukee-based private equity group. "Sellers sell when their businesses are performing better."
Another reason out-of-state PEGs have been able to acquire Wisconsin companies is that only 14 of the 1,954 PEGS in the nation are based in the state. Wisconsin comprises almost 2 percent of the nation’s population, but has only 0.2 percent of the nation’s PEGs.
Three factors have hindered the development of additional PEGs in Wisconsin the overall size of the market here; the lack of a strong private equity tradition here; and the fact that relatively few large financial institutions are based here.
"You don’t have a lot of investment banking firms in Milwaukee there are three or maybe four," Landis said. "And I don’t think transportation in Wisconsin is as easy as Chicago or New York. When investment bankers aren’t knocking on doors, there isn’t as much awareness as there should be."
Wisconsin isn’t alone in its lack of private equity groups.
Mason Wells’ research shows that although the upper Great Lakes region (comprised of Wisconsin, Minnesota, Iowa, Illinois, Indiana, Michigan, Ohio and Pennsylvania) represents about 25 percent of the nation’s gross domestic product, only about 10 percent of the private equity capital is headquartered in the region.
"The fact of the matter is that financial capital markets have not been traditionally robust in Wisconsin and within the Midwest region," Smith said. "And it’s still underserved. There is more capital needed in the state of Wisconsin for private equity buyout and venture capital than is available here. That’s why the money centers from outside are hunting here. It’s a fertile market that’s underserved."
Robert Finkel, managing partner of Prism Capital, a Chicago-based PEG with investments in Wisconsin and other Midwestern states, agreed.
"The Midwest in general is under-funded, under-covered and under-appreciated, in my view," Finkel said. "Private company investing has become far more competitive, but it makes a lot more sense for a Chicago-based firm to look at Wisconsin based deals than a Silicon Valley fund."
The Wisconsin-based PEGs, although few in number, remain active.
Milwaukee-based Mason Wells’ buyout portfolio includes eight companies, five of which are headquartered in Wisconsin. It recently launched its Buyout Fund II, a $300 million fund dedicated to buyouts and recapitalizations.
Milwaukee-based PS Capital Partners has five investments, all in Wisconsin. The firm does not have a formal private equity fund it draws from. Instead, it has a network of investors it calls upon for each investment.
Milwaukee-based Brass Ring Capital is a relatively new PEG. Brass Ring Capital made its first acquisition in August 2005 when it completed a recapitalization of Infinity Precision, a Minnesota maker of automated production equipment.
While some Wisconsin PEGs aren’t anxious to see more competition, it would be good for the state to develop more of a private equity tradition, according to Gus Taylor, senior managing director with Facilitator Capital Fund, a Milwaukee PEG.
"We’re as anxious as anyone to see the infrastructure grow in Wisconsin," he said. "It serves our needs and those of the community. As (PEGs) get larger, they spin off other services like banking, law firms and accounting. It all gets driven by an active private equity community."
If interest by PEGs in Wisconsin companies continues, the number of groups based in the state will likely increase, Taylor said.
"We’re starting to see more awareness (of Wisconsin) in the last 18 months," Landis said. "There are more equity funds in the market, and there’s more money chasing deals."
Anatomy of a Deal
Jeff Clark, owner and president of Waukesha Tool and Stamping, has helped grow his company’s revenues more than 31 percent since 2001.
He was hired by the previous owners of Waukesha Tool and Stamping in December 2000. By partnering with PS Capital Partners, a Milwaukee private equity group, Clark was able to purchase the company last year. Clark oversees day-to-day operations at the company and owns a minority share, along with a group of managers.
Even before he was approached to run the company as its general manager, Clark had conceptual talks with the former owners about purchasing the Sussex-based maker of metal stamping dies, which also performs stamped metal fabrication work.
Before joining Waukesha Tool and Stamping, Clark worked at Milwaukee-based Production Stamping, assisting the company through its acquisition by Facilitator Capital Fund, a Milwaukee private equity group, in 1999.
"Part of our talks (with the former owners) were that they were nearing the retirement age," he said. "They had to work through a transition in the next five years. But there was no detailed discussion of what that meant."
Over the next three years, Clark worked to revitalize Waukesha Tool and Stamping. The company installed some principles of lean manufacturing, began turning its inventories faster and trimmed its workforce from 80 to 55, largely because sales were lagging.
By early 2003, the former owners were ready to talk to Clark about his possible purchase of the company.
After more than two years of negotiations, the deal was finally executed in early March 2005.
The following is a timeline of how the deal progressed.
Early 2003
- Negotiations begin. The value of the company is mutually agreed upon.
- "One of the toughest parts of it is the owners reaching the emotional side of letting go, and reaching a decision where they can make a decision to let go," Clark said.
- Clark tries to finance the deal on his own with no outside investment. "There were all sorts of models and methods we explored to see if we could reach an accord that way," he said.
July 2003
- Clark is introduced to PS Capital Partners through a mutual friend. An initial letter of interest fell short of the former owners’ expectations, and Clark decided to pursue the deal on his own.
- "We were very close," he said. "I wanted to look at some other options to finance it, and I wanted to see if the current owners would help with financing that. We really worked on that for about a year."
Late Spring/ Summer 2004
- It becomes obvious to Clark and his group of management partners at Waukesha Tool and Stamping who agreed to buy into the deal that they need some degree of outside financing, because they were too highly leveraged.
- "We weren’t able to reach a deal with the (former) owners and financing community that would have given us enough room in the deal that I would have been comfortable with," he said.
- Clark reconnects with PS Capital Partners, who re-examine the proposal. Negotiations resume.
December 2004
- Clark, his management group and PS Capital Partners sign a letter of intent to purchase the company.
March 1, 2005
- Clark, his management team and PS Capital Partners officially take ownership of Waukesha Tool and Stamping
