31 Dec Linsalata Capital Partners: Private Equity Group Interview
The following is an interview with Eric Bacon of private equity firm Linsalata Capital Partners. The views and opinions expressed in this interview are those of the interviewee and do not represent the opinions of Merit Harbor Group, LLC, InvestmentBank.com or its affiliates.
Can you please provide a brief history of your firm? Its founders?
We been around for 31 years. We were founded by Frank N. Linsalata back in 1984 as he exited out of Midland Ross Corporation, a conglomerate based in Cleveland, OH. He started with a pledge fund, but since then we have enjoyed six committed institutional capital funds. We are currently investing LinCap Fund VI, with $427 million in committed capital. Today the firm is run by Eric Bacon and Steve Perry as co-presidents, each having worked with Frank for over 25 years; Frank Linsalata remains as Chairman and Founder.
Tell us about your typical deal? Size? Industry? Geographic locale? Can you please provide an example?
The last several Funds have been in that $350-$425MM range, which supports the deal sizes and structures that we feel most comfortable with. We look for EBITDA between $7 and $20MM, although that has trended down as valuations have gone up. Our roots are manufacturing/industrial/distribution, but over the 30 years we have found success in multiple industries: building products, food, consumer, apparel, healthcare, automotive aftermarket and business services. We continue to invest across the United States. Our most recent investment is Randy’s Worldwide Automotive based in Everett, WA. RWA is a leader in traction control products in the automotive aftermarket.
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?
Our investors expect us to be the control investor. Generally that means majority ownership, although in larger deals we have accomplished that control through our co-investors while we held less than 50% of the equity. Management is ALWAYS the key to value. It is great when management is in place, but we also see where we have been helpful with succession that was never established and in building capabilities with skills from the outside to complement existing management. We have been particularly successful in working with Founder families as their first exposure to private equity.
What makes you different than other private equity firms? How does your differentiation make you a better buyer in a crowded market?
It is getting harder and harder to differentiate. Early on we felt we brought unique operating capabilities to our investments, as each of our senior principals brought significant operating experience to the table. Today, with the emergence of Operating Partners (which we also employ), such skills are less differentiating. We see the future to be based on deep industry focus and expertise that allows us to a) better evaluate the opportunity (i.e., feel OK paying more) and b) create more value during our ownership. We are building our teams around sectors where we have proven success and the network of industry contacts to tap: while still being developed, these sectors will include building products, automotive aftermarket, business and healthcare services, food, and consumer.
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?
In this market, we feel we have to see a pathway to win the deal (and want to win the deal) in order to work it hard. With the money and time being invested even before going exclusive, we have to be mindful of just chasing every deal. So, we have to feel like we have an angle or edge in winning, usually because the specific situation lines up particularly well with our industry experience and/or the management dynamic (e.g., succession). As for “mistakes,” I often implore Sellers to really think about what they want and to communicate those wants. We are in the business of meeting Sellers’needs; if we don’t do that best, we lose and the better buyer wins—that’s appropriate. But it’s a “mistake” when the Seller isn’t honest with his needs; I’ve seen them assure us they are leaving—and then they don’t; and I’ve seen them tell us they are staying—and don’t. Either way leads to angst and challenges which I believe can be avoided with more introspection on the part of some Sellers.
What added value do you bring to the process? How can you further assist sellers in preparing them to be ready for exit?
I believe that most management teams learn a lot as they go through the process. Inevitably there a multiple groups of suitors asking insightful and different questions about the company’s business. This is because each group brings its own experiences and concerns to the table. The best investment banks try their best to surface these issues prior to taking the company to market; the management team (and Sellers) should welcome such challenging to not only prepare the company for the examination but in some cases to stimulate management to refine or change a component of their strategy. Unfortunately, we’ve seen several examples where the process surfaced the opportunities to be enjoyed by going forward differently, and the Seller decided to take the company off the market to capture that opportunity for his own account.
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?
Investment horizons vary, but generally I would say ours have gone a bit longer. It just takes longer to generate real dollar (not IRR) returns. We model 5 and 7 year hold periods. We have held as little as 18 months or 2 years, where a strategic buyer simply comes in and says they have to have the company. We have also held 15-17 years where a deal proved cyclical and likely went through pretty significant transformation before we were able to create a successful exit. Generally we just don’t give up.
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.
Again, there really isn’t a “typical” deal. We’ve had long processes where the Seller simply needed more time to get committed to a sale, and we played in very pressurized auction processes where the investment bank is trying to complete a process of first teaser to close in under, say, 120 days. For the latter to work for us, the company needs to be well prepared with a very robust data room available early on in the process—and there need to be no or few issues to derail the story.
Tell us something interesting about your fund, its founders or managers that is typically not widespread knowledge.
I like to reminisce that I was Frank’s first hire as he formed his first committed capital fund, LinCap I, in 1990. I’m the only professional that he (we) have hired without some prior relationship (perhaps he learned an important lesson!). The fund size was $13MM—and we didn’t see how we would ever get it invested!