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Posted: February 01, 2012

A Stronger Economy and Deal Diversity Driving Private Equity Aid

ACG Special Section

David Lewis

Nobody in the private equity funding business is arranging a ticker-tape parade just yet, but investing in confetti futures may not be such a bad idea.

"Without patting ourselves on the back, we had a fantastic year last year, in 2011," says Warren R. Henson, president and senior managing director of Denver-based investment banker Green Manning & Bunch. "We had a really fabulous year. The middle market, from $10 million to $250 million in this part of the country, was very active. Two-thirds of our companies were sold last year to strategic buyers. That means large Fortune 500 companies or foreign companies coming into Colorado and buying local businesses."

Luckily, Henson keeps track of more than his own firm's success, and the data Green Manning & Bunch compiled for private equity and venture capital investment in 2011 reflects a couple of important points.

First, the comeback of these investment sectors reflects an overall strengthening of the Colorado economy. Second, it reflects welcome diversification.
Last year, about 40 private equity transactions in the state amounted to about $866 million in investment; another nine deals worth $267 million were announced by year's end but not completed.

(In order to express the size of 2011's average private equity deal these figures exclude the largest private equity deal in Colorado by far last year, New York- and London-based Clayton, Dubilier & Rice's $2.82 billion acquisition of Greenwood Village-based Emergency Medical Services Corp.)

As important as the sheer numbers is the diversity of the in-state industries represented. Energy, notably oil and gas, is ascendant. Mining also is represented. Health care is a strong target. So are construction, pharmaceuticals, software, insurance, biotech, chemicals and the hospitality industry.
These business sectors represent half of the state's private equity funding story, the fundees, so to speak. The other half are the in-state funders, who like Green Manning & Bunch, appear to have come out the other end of the Great Recession without being too badly burned.

Like most of the Colorado-based companies funded by private equity investors last year, most of the private equity investors here focus on the middle market. That market is defined in a range from about $25 million (or less, as Henson noted) to $250 million, or even higher.

Private equity investors, as well as private debt investors, also vary their style and approach to the companies they acquire. None takes a purely hands-off approach, but some get more involved in the businesses they buy into than others.

David Kessenich, managing partner of Denver-based Excellere Partners, a $750 million fund, says his company strives to involve itself in the fulfillment of the entrepreneurs' founding vision.

"We start pretty small and help entrepreneurs pursue their vision for building a much larger best-in-class company, so our businesses typically grow three fold to five fold in size over a three- to five-year period," he says. "That's with both organic growth and add-on acquisitions that meet their strategic objective."

Excellere Partners was founded in 2006, right at the top of the market. The company's portfolio, on an average weighted basis, grew organic revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) by about one-third, "Very significant revenue and EBITDA growth," Kessenich notes.

How do they do it?

"It's a combination of picking companies in great industry sectors that put the wind behind our backs, as well as supporting our management teams and building out a very scalable foundation to really capture the market opportunity that's in front of them," he says.

As an example, Kessenich offers Excellere's first investment, MedExpress Urgent Care. The company, based in Morgantown, W.Va., had six urgent care centers in West Virginia and Pennsylvania.

"When we exited that business to Sequoia Capital, the company had grown almost nine-fold in size by every metric; it had 50 centers in West Virginia, Pennsylvania, Florida and Colorado," he says.

The MedExpress Urgent Care value proposition can be summed up simply: Visits to standard emergency wards require a national average of four to 4½ hours; visits to a MedExpress facility take about 45 minutes from intake to triage to medical care and discharge.

Not all equity transactions take place in glamour sectors. One of Henson's favorites was the November sale for an undisclosed amount of family-owned Fowler & Peth, a distributor of roofing and building supplies with yearly sales of about $60 million, to Peabody, Mass.-based Beacon Roofing Supply Inc.
In case you were wondering, the rumors are true, insiders say: Lack of capital is not a problem. Not only is there plenty of equity capital around from strategic buyers - companies looking for an acquisition as a fit with their existing operations - but debt capital is relatively plentiful as well.

"You've probably read about there being lots of cash on the balance sheets of strategic buyers," Henson says. "In a lot of cases of strategic buyers there's less risk in making an acquisition - in adding a customer base, giving more scale geographically, adding a product offering - than there is in us trying to do it ourselves. There's also a lot of capital in the financial world."

Much the same goes for debt financing. "We did a couple of debt financings last year in addition to these sell-side deals. Debt financing is readily available, so when private equity firms buy a company, just like when you buy a house, they would leverage that transaction, and financing is readily available in the middle markets. In the really large transactions, debt isn't as readily available because there aren't as many lenders to go to."

Chris Wilson is founder and principal at Fortitude MB, which specializes in debt financing for mid-market transactions.

"Fortitude looks to make principal investments in alternative asset-based debt and special asset opportunities. That sounds complicated, but what we look for are opportunities to provide debt financing or structured debt financing - meaning a combination of debt and equity," he says. "So we would be potential principal investors for companies in situations that can't attract traditional financing - they don't qualify for bank debt or have a very complicated situation that has some hair on it where you need someone to dig in and understand."

Private debt financing, however, mirrors equity financing.

"Our requirements generally are emblematic of the market, which is that people who have capital are being much more selective and cautious on how and when they invest that capital," Wilson says. "To some extent, the bar has gone up on quality. But maybe more importantly the checks and balances to verify that quality have also gone up."
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David Lewis is a freelance writer based in Denver.

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