As waves of baby boomers continue to reach retirement age, many have faced the prospect of selling the manufacturing companies they’ve built over the years.
But what sets them apart is how they differ from previous generations, particularly when it comes to the priority they place in finding a buyer who fits with the culture at their companies.
That’s according to private equity and other investment firms that aim to capitalize on a growing market of potential sellers at middle-market manufacturing companies, many of whom are looking to preserve their legacies.
Grand Rapids-based Auxo Investment Partners formed in October to fill a void for owners stuck choosing between traditional private equity firms, which can value returns over maintaining a company’s legacy, and family investment offices, which often lack the professional services that private equity can bring to the table.
“There’s not much left in the middle,” Managing Partner Jeff Helminski told MiBiz in a previous report. “We think we can bring to market a solution that has that professional expertise in terms of helping these companies grow but because of who our capital sources are and our aligned relationships with them, we can take a long term perspective … which feels more like a family office.”
Auxo, which is also comprised of Jack Kolodny and Fred Tedori, plans to focus on North American-based middle-market companies in the manufacturing, industrial and business services markets, Helminski said. The firm will target companies with earnings before interest, taxes, depreciation and amortization (EBITDA) between $1.5 million and $15 million.
The firm will hold its companies for a minimum of five years but could easily stretch out its ownership horizon for several decades, said Helminski, who along with Kolodny left Grand Rapids-based Blackford Capital earlier this year.
To date, Auxo has raised roughly half of the $50 million in equity that would allow it to acquire 10 to 15 companies over the next five years.
Tillerman & Co. LLC, a merchant bank and investment banking firm, also formed, in part, to target middle-market companies in the manufacturing, agribusiness and other industries where owners want to preserve their legacies.
The Grand Rapids-based Tillerman intends to acquire a select number of companies valued between $3 million and $75 million from owners who are ready to retire but who want to see their legacy maintained. The firm will step in to help grow the operations, and will hold companies over a long period of time.
“There is money chasing deals constantly,” said Philip Blanchard, a managing partner at Tillerman. “Where there seems to be a vacuum in the market is money willing to appreciate the legacy of the owner. Everyone talks about how baby boomers are ready to sell, but what they don’t talk about is that the company is like a family member. They probably spent more time with it than they did with their children or their spouse.”
The firm proved its theory with its first acquisition in March 2016 when it purchased Jackson Flexible Products Inc., a manufacturer of specialty rubber components for the aerospace industry based in Jackson, Mich.
Because Tillerman was willing to grow the company in place, the owner agreed to sell for less than he was offered by a strategic investor, Blanchard said.
“We think it’s a niche that hasn’t been exploited, especially by the approach that we take,” Blanchard said. “We’re not a fund, we’re patient capital.”
A GLOBAL TREND?
An appetite for longer holding periods appears to be spreading among the largest private equity firms nationwide.
New York City-based Blackstone Group LP, the world’s largest private equity firm, in June announced it had nearly finished fundraising for a $5 billion fund that intends to hold companies for up to eight years, more than double the firm’s typical holding period, according to a report in Bloomberg. Blackstone expects to maintain the fund for 20 years, according to the report.
Elsewhere, Carlyle Group LP Partners closed on a $3.3 billion fund aimed at longer-term holdings, according to reports. Earlier in 2016, Luxembourg-based CVC Capital Partners also raised $4.4 billion for a fund with a 15-year lifespan.
Indeed, research points to better returns for private equity firms that increase the time they hold onto funds.
A 2015 Global Private Equity report published by Boston-based Baine & Company Inc. notes that private equity funds held for less than three years tended to underperform the S&P 500 index when modified to reflect the “timing and size of PE investment flows.” At the same time, the study noted private equity funds held for five years matched the modified S&P 500 index, while funds held for a 10- to 20-year period outperformed the index.
Establishing a longer-term fund with investors who are on board with the time frame also helps insulate private equity funds from market downturns, said John Pollock, managing director of Grand Rapids-based LV2 Equity Partners LLC.
“You don’t want to be a fund that’s forced to sell in a down market,” Pollock said. “That’s a terrible thing.”
For its part, LV2 Equity Partners was established with a longer-term philosophy to focus on manufacturing companies “in driving distance” from its headquarters, Pollock said.
“They’re in our backyard anyway and we are more intimately involved with the management team — that’s always been part of our tenets anyway,” he said.
M&A transaction volume has fallen steadily since the fourth quarter of 2014, decreasing to 662 deals in the third quarter of this year from 1,024 deals two years ago, according to the latest data available from PitchBook.
As a result, the mix of increased competition between private equity firms and from outside investors such as family offices has also driven investors’ focus to smaller companies.
While deployable capital has remained plentiful, private equity firms have moved down market in recent years to chase a shrinking pool of deals. That’s led private equity firms to talk with smaller, closely held businesses that champion legacy and employee retention, Pollock said.
Moreover, private equity firms have faced heightened competition from family offices, which have increasingly opted to invest directly in businesses in recent years, he added.
For potential sellers, family offices offer the possibility of much longer hold periods and have traditionally maintained a track record of growing companies in place.
A survey of 100 Midwest family offices conducted in late 2014 by Chicago-based McNally Capital found that nearly 75 percent prefered to invest directly in companies versus in private equity funds, according to a previous MiBiz report. The same survey found 59 percent of family offices opted to make direct investments in 2010.
“If private equity funds are going to compete against that, they have to be willing to hold longer,” Pollock said.