Interview: Commenda Capital
The following is an interview with Commenda Capital. The views expressed here are not representative of Merit Harbor Group, LLC, InvestmentBank.com or its affiliates.
Can you please provide a brief history of your firm? Its founders?
Commenda Capital is a merchant bank that was formed by merging the efforts of Batten Capital (Debt and turn arounds) and Runningen Associates (Equity and Advisory) to provide a broader array of capital to middle market companies. The principals of the firm have more than 20 years of experience in the investment and chant banking industry. Tom Minick and Johnny Chee-How opened the first GE Capital office in Atlanta in the 1990s. John Runningen established the health care practices of both Morgan Kegan and The Robinson Humphrey Company during the same period. Both firms were known for their expertise in healthcare and information technology (IT).
John Runningen is a Founder and Principal of Commenda Capital, LLC. For more than 30 years he has successfully participated in or led numerous investment banking or M&A transactions for growing companies nationwide, with aggregate value of $18.6 billion and he has served as a Director on more than a dozen corporate boards.
Previously Mr. Runningen was a Managing Director of Runningen Associates, LLC, an investment bank that originated corporate advisory, M&A, strategic planning, and investment banking transactions for middle market companies nationwide. This company partnered with the Batten Group to form Commenda Capital in 2011 to provide strategic capital and advisory services to established and growing companies. Previously, Mr. Runningen served as Senior Vice President at WebMD (NASDAQ: WBMD) after it merged with Healtheon in 1999. Mr. Runningen was also a General Partner at Cordova Ventures, a $250 million venture fund based in Atlanta.
He has experience in the IT, telecom, manufacturing, distribution, pharmaceuticals, real estate and transportation industries. Mr. Runningen received his BA degree from Luther College and his MBA from the Freeman School of Business at Tulane University.
Tell us about your typical deal? Size? Industry? Geographic locale? Can you please provide an example?
Our typical deal size ranges from $10 million to $200 million in Revenue with EBITDA of $500K to $40 million. Deal sizes would be from $5 million to over $200 million. The vast majority are in the $5 to $50 million valuation range. Geographically we remain focused on the continental USA although we do occasionally work with foreign investors seeking a greater presence in the US as well as with US based companies seeking overseas marketing relationships and sales channels. Industry sectors include manufacturing, distribution, third party logistics, transportation, health services, medical devices, Information technology, and HCIT. We do not have a dedicated Fund. Our Sources of Capital are “on-call” from:
- 120 Individual Investors
- 15 Foundations
- 10 Family Offices
- 5 Hedge Funds
How are your deals typically structured? Are you most often a majority investor or a minority investor? Do you prefer to keep existing management in place or do you simply take over the existing business with your own management?
We are a FINRA registered broker-dealer and, as such, serve as a financial advisor and placement agent for companies seeking capital. This approach enables us to have the greatest flexibility in finding the best fit for strategic partners and sources of capital for our clients. We help companies refine their business plan and corporate operating structure to earn them the highest valuation multiples on a capital raise or sale. We also help them “package” their “Pitch” to other strategic partners, sales channels, investors and potential acquirers to achieve optimal valuations.
What makes you different than other private equity firms? How does your differentiation make you a better buyer in a crowded market?
Our many years of developing specific industry expertise differentiates us as does our ability to commit our own funds to deals as well as short term debt to bridge the company to an event. Such an event might be a capital raise, merger, acquisition or divestiture, which is consistent with their long term growth plan. Our very high “Hit ratio” of successful client companies differentiates us from most of the other middle market investment-banking groups. While our vetting process can be very onerous, our success ratio in achieving greater long-term value is very high as well.
What do you look for when you are courting target companies? What separates a good company from a great company? What are mistakes you have seen from targets that, if remedied, could make the process smoother for all involved?
What we are looking for is Innovation in Key Areas = “Secret Sauce”. To discover what makes each company unique we look for:
- Something that is unique and proprietary to your product or service. “We’re different and better because. . . .” (e.g. Patents and I/P)
- Manufacturing and Operations – “How you manufacture or deliver your product is different and better because . . .”
- Market and Competition –
- Is there a market for your product? Is it growing?
- Where is the growth coming from?
- Who are your customers and are they price sensitive?
- Who are your competitors – will they provide an exit for you?
Commenda’s initial focus will then be on . . .
- Development of detailed financial projections and growth strategy
- Prepare Sales channel analysis
- Review of outsourced manufacturer and vendor contracts
- Evaluate intellectual property (I/P) and process
- Legal/tax structure review
- Draft the revised strategic plan
Post funding Commenda’s focus will shift to . . .
- Assist management in executing the growth strategy.
- After achieving higher revenue and cash flow levels, arrange lower cost growth capital to replace the Batten Group Bridge Loan.
What added value do you bring to the process? How can you further assist sellers in preparing them to be ready for exit?
The biggest “Value Add” that we bring to our clients is a very large and extensive contact base of investors with operating experience as well as our own experience in starting and growing companies. We start thinking about an exit on the very first day of working on a project. We focus on the best exit by targeting those sectors of the market providing the highest valuations. We identify the likely buyers in each of those sectors, whether it be from a competitor, vendor, strategic partner, Private Equity Group (PEG), or Venture capital company (VC). While our team has done numerous public offerings over the years, we have not found this to be a viable exit option for most of the smaller middle market companies with a Market cap below $150 million.
What is your typical investment horizon? How does your mission and goals for the fund impact your investment decisions and how you treat sellers’ businesses both short and long term?
Because of our diverse investor base, we can be short term lenders or very long term investors that buy and hold for 10 years or more. The vast majority of our transactions are 5 – 7 years, since that is when the principals are looking for an exit. We have this much flexibility because our investors are “On-Call” and we are not managing to meet arbitrary parameters of a fund with a set termination date.
Tell us about your buy-side process including the time it typically takes from initial engagement, through indication of interest, due diligence and through final close.
Each of our engagements consists of two parts. The first Phase is to assess the company, all aspects of its operations, its financial history as well as projections on a monthly basis. We are looking for trends, efficiencies that may be available, restructuring options to enhance value, the potential to license, franchise, or to sell and lease back assets so the company can free up cash to grow the company on the least dilutive basis possible. Often this is not possible. So then we explore debt options, and if the balance sheet is thin we go to various equity options for growth capital. In each case we are seeking additional ways to accelerate growth and value for investors. If this is not possible, then we might consider going straight to a sale if that meets our client’s goals.
Tell us something interesting about your fund, its founders or managers that is typically not widespread knowledge.
Runningen was employed by or advised the following companies during their start-up phase. His “hit ratio” in an industry where the majority of all start-ups fail over ten years is just the opposite -90% have succeeded and created a sea change in their respective market sectors] Today many have grown to become publicly traded companies or PEG acquisitions with valuations in the billions as highlighted below:
- Universal Health Services (through Qualicare) [NYSE: UHS] – Initial employee during seed stage start-up with QualiCare, which was merged into UHS to double its size in 1983 and establish leadership in psych hospitals.
- Surgical Care Affiliates [NYSE: SCAI] – IB after IPO
- Medical Care International [Now ASC Division of Hospital Corp. NYSE: HCA] – Seed Stage advisory and post IPO advisory on numerous acquisitions.
- Medtronic’s Sofamore Danek Spinal Division – [NYSE: MDT]–Seed Stage Advisory, IPO and Sale to MDT
- WebMD [NASDAQ: WBMD] – Seed stage with WebMD and Runningen was in senior management after merger with Healtheon in 2000.
- Immucor [Former NASDAQ: BLUD now Privately Owned] – IB Post IPO
- Cryolife [NASDAQ: CRY] – Financial advisor during venture stage through IPO. Continued in IB role and market maker post IPO.
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