PS Capital Partners takes stake in Hartland printer

PS Capital Partners LLC, a Milwaukee-based private investment firm, recently completed a recapitalization of Hartland-based JTS Direct LLC, a printer of advertising inserts used in shared mail and newspaper inserts.

With the investment, PS Capital Partners took a minority ownership stake in JTS Direct. Terms of the acquisition were not disclosed, but it did allow JTS Direct to pay down existing bank debt and significantly improve its balance sheet, said J.T. Shinners, president and CEO of the company.

JTS Direct’s main business is in shared mail and newspaper inserts, but the company is also offering digital and mobile phone marketing programs that tie in with its traditional printed offerings, Shinners said.

“We’re trying to consult smaller retailers. We tell them if you want to be a successful retailer, you want to mimic the best like Target, Wal-Mart, Best Buy or Kohl’s,” he said. “None of them ever miss a week of print and delivered mail. They also use many other channels including the Internet and mobile phones. The best campaigns are multi platform. We’re trying to bring that ability to the smaller retailer.”

Paul Sweeney, one of the partners in PS Capital Partners, said Shinners’ background in the printing industry, his company’s forward-looking business model, its position in the marketplace and his personality made the firm a desirable investment.

“They’re in a unique segment of the printing industry,” he said. “He’s an unbelievably nice guy. And we invest in people we like that we can work with and who understand our philosophy. With JTS, they all came together.”

Shinners founded JTS Direct in 1998 and sold a majority stake of the company in 2002. In 2008, he bought the company back. Three months later, the Great Recession began in earnest and business fell off almost immediately.

In 2009, JTS Direct’s revenue fell 23 percent. It closed its second printing operation in Lebanon, Ind., where it employed 45 to 50 workers, and consolidated those operations into Wisconsin.

The purchase of the company and the consolidation were funded with traditional bank debt. While JTS Direct’s business rebounded last year, that debt load was an anchor on its balance sheet.

The recapitalization has paid off that bank debt and positioned the company for future growth, Shinners said.

“We had a significant balance sheet problem with that debt,” he said. “We had strong P&L (profit and loss), which fit well with PS Capital’s strategies. They can fix a balance sheet but they don’t want to fix P&L.”

JTS now has about 85 employees in its 34,000-square-foot facility in Hartland. Last year it had about $18.6 million in revenue, and is forecasting $19.5 million in revenue for 2011. In 2009, the company had about $17 million in revenue.

“Our rebound was made up with equal parts of new business and economic recovery by our customers,” Shinners said. “Our forecast for 2011 is a modest increase, with about the same formula we had with our growth from 2009 to 2010, equal parts new customers and existing customers who are recovering.”

When he was taking early steps in his recapitalization project, Shinners talked with many Milwaukee and Chicago area private equity and individual investors. Paul Sweeney and Paul Stewart, the two partners in PS Capital, quickly became his preferred buyer.

“It was their philosophy of helping companies grow and succeed,” Shinners said. “Their objective is not to flip companies in a specific period of time. It’s a different approach. For someone like me, I’m a relatively young man. I plan to be around (the business) for a long time. It was critical for me that I had patient partners.”

Being “patient partners” is inherent to PS Capital Partners’ business model. Unlike most private equity firms, PS Capital does not operate with a raised fund or number of raised funds that it uses to acquire businesses.

Before starting PS Capital Partners in 2001, Sweeney and Stewart were partners at Horizon Partners Ltd., a middle market private equity firm based in Milwaukee. When they were thinking about starting PS Capital, the pair looked for a different model to take longer-term investments in companies.

“If the management team is aligned and your investors are patient you will be able to recognize the right time for a recapitalization, a sale or a buyout,” Stewart said.

At PS Capital, Stewart and Sweeney have a network of affluent friends and business contracts that they draw upon to raise capital for each individual purchase. Members of that network can pick and choose which deals they’d like to participate in.

“Our investors own shares in the companies (instead of participating in a fund),” Stewart said. “There is more flexibility in return on investment to the investor than with a direct investor (in a fund).”

Ted Kellner, executive chairman of Milwaukee-based Fiduciary Management Inc., has been an investor with PS Capital Partners since its formation in 2001. He met Sweeney and Stewart when one of his other business ventures, H&K Partners, was acquiring a series of KFC restaurants. The attention the pair gave to his deal has carried through into each of the investments that Kellner has participated in at PS Capital Partners, he said.

“I know they’ve done their due diligence,” Kellner said. “I know that they’ve dug into the business and the management. I know their discipline. They’re great businessmen and they’re great guys. That’s a rare combination.”

The recapitalization of JTS Direct was PS Capital’s tenth deal in its tenth year of operation. The firm now owns stakes in eight companies, and nine of its 10 investments have been in Wisconsin.

Instead of looking for companies that are highly scalable over short periods of time that they can flip in a five to seven year period like a traditional private equity buyer, PS Capital tends to look for companies with management teams and business models that can grow significantly over time.

“We generate a portion of our return through the repayment of bank debt,” Sweeney said. “Our model is more of a don’t screw it up and let (the management team) do what is working. We’re not taking a bet the farm approach to get returns.”

Some of PS Capital Partners’ companies have seen significant growth since they have been added to its portfolio. For example, Cudahy-based Superior Health Systems, which was acquired in late 2007, grew by 30 percent in both 2009 and 2010. The company, which handles laundry for hospitals and senior housing facilities, opened a new facility in Batavia, Ill. in 2009.

Superior Health Systems now operates three facilities, with 290 employees.

“When we bought the company in 2007 we had an annual run rate of 24 million pounds of laundry,” said Scott Reppert, CEO. “As of last December, we did a little more than 53 million.”

PS Capital Partners partnered with Reppert to acquire the company – PS Capital owns the majority of it, while he holds a minority stake. The Milwaukee investment firm made sense not only because of their long-term view, but also because they are willing to re-invest in companies that are growing, Reppert said.

“When we would start to talk to (potential investment partners) about double digit growth and the types of investment we would need, it was difficult for people to wrap their heads around it,” he said. “Paul and Paul had no reluctance. They have that tolerance for growth.”

Stewart and Sweeney have given Superior Health Linens access to their network of connections, which has in turn introduced the company to new attorneys, bankers and other service providers. Portfolio companies like Superior Health Systems are also able to tap into Sweeney and Stewart’s insight, to help them best develop their business plans.

“They develop their flock of CEOs. They take a vested interest in us, both personally and professionally,” Reppert said. “They ask my opinion and have me participate in meetings with them. That’s not normal (in typical private equity arrangements). We’ve really lucked out.”

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