Private equity investors in the Milwaukee area are looking at two growing categories of opportunity – the ever-increasing number of businesses that are struggling with heavy loads of bank debt and a similar number that are having difficulty accessing traditional bank capital.
While most private equity investors are not looking to buy distressed companies that might otherwise be headed for bankruptcy or receivership, many of Milwaukee’s private equity players are more than willing to assist companies with high levels of bank debt.
“There are a lot of good companies out there, and as banks pulled back, there were some deals that were over-leveraged,” said John Reinke, managing director with Generation Growth Capital Inc., a Milwaukee-based private equity group. “Those deals that are a little bit upside down but are still solid companies, those are the ones we’re trying to find right now. Those are good deals where we can get into companies when everybody else is running scared.”
Generation Growth Capital finished raising a nearly $30 million fund in December. To date, the company has made two acquisitions. Its most recent acquisition, which also closed in December, was of Martell Construction Inc., a Green Bay concrete construction firm. Martell employs about 75 workers.
In December of 2007, Generation Growth purchased Choice Construction Companies Inc., a Menomonee Falls-based structural steel firm.
Generation Growth Capital is now looking to diversify its holdings, rather than focus on bolt-on opportunities for its existing portfolio companies, Reinke said.
“We’re looking at manufacturing now,” he said. “We want to start doing deals. We view (today’s conditions) as an opportunity.”
The firm’s due diligence model, which has developed over the last few years as it has raised capital, will work especially well in today’s marketplace, Reinke said.
“We geared our due diligence process almost as a turnaround process,” he said. “Rather than going in and doing the standard due diligence process, we’ve got to make sure that all of our systems tie back to operations, so that they reflect reality and are assessing where we are creating value in the supply chain or business. That’s where we can make some quick steps with management teams, to the point where we can augment them and bring some quick value to the business. It is a much more hands-on diligence process.”
Recognizing that some business owners might be more interested in a partial recapitalization of their business because of the difficulty in accessing traditional bank capital, Generation Growth Capital also is flexible with its investment strategy.
“We’ll take minority positions. We’ll even explore sub (subordinated) debt with the right opportunity that is a growth piece,” Reinke said. “We’ve certainly explored a number of those now. We’re trying to be cautious, but we’re certainly in business and looking at things.”
Several other Milwaukee-area private equity firms are taking a similar approach to the marketplace.
“We are interested in good companies with good management teams who are running out of runway and need a financial partner to weather the storm,” said W. Kent Velde, president of Lakeview Equity Partners LLC. “The key criteria is the management team. We are potentially interested in backing deals with equity if we see some features of the company that appeal to us.”
Like Generation Growth Capital, Lakeview Equity is considering partial or minority stakes with some future investments.
“We are looking at a number of transactions that do not involve the sale of the business,” Velde said. “I suspect that anyone with capital would be looking at this.”
Like Lakeview Equity, PS Capital Partners LLC is looking for opportunities in today’s marketplace while increasing due diligence to prevent any investments that would lead to losses. While it continues looking at over-leveraged companies and business owners looking to increase some of their personal liquidity, PS Capital believes another asset class will soon start to show more availability.
“The third type we haven’t seen yet is because of the leverage issues with larger companies, there may be subsidiary spinoffs – the business units of a larger entity that needs to raise cash,” said Paul Stewart, managing director with PS Capital. “We think they may be kicking off in the next six to 12 months and would be more of a standard buyout.”
Brass Ring Capital Inc., which has offices in Milwaukee and Minnesota, also willing to purchase minority stakes and do recapitalizations with business owners, said Steven Peterson, managing director-Milwaukee. The firm is seeing a growing number of companies for sale that have operational or debt issues.
“Our dilemma is that we are turning down deals we would have looked at more closely two years ago,” Peterson said. “The last thing we want to do is (make an acquisition) and two months out, the bottom isn’t where we thought it was. My general perspective is that if you have a good business, you’re probably going to ride out the storm and are probably not in the market now. We’re seeing less of those and more of everything else.”
Stewart said a higher level of due diligence is essential when looking at businesses for sale today.
“The challenge with all of these is to try to determine the go-forward level of sustainable cash flow,” he said. “Visibility is very low right now. Customers can’t tell what they’re going to be buying right now. And any company that has high visibility is in a unique position, and therefore it will be much easier to get a transaction done. And if they’ve got a personal issue but they’re company has high visibility, they’re in a great spot.”