Everything old is new again – at least that’s what Kaye Scholer investment funds Partner Thomas Stromberg (pictured) believes is the start of a new private equity trend.
“Cutting edge energy, financial services, healthcare and technology companies have been, and no doubt will continue to be, big draws for PE investors,” says Los Angeles-based Stromberg, who serves on the Board of Advisors of the Mezzanine Finance Symposium. “But private equity firms are again making significant investments in middle-market companies in more traditional sectors, such as industrials, manufacturing, even mainstream entertainments such as bowling alley chains.”
Stromberg, who works with several private equity firms, including Greyrock Capital, BG Capital, Endeavour Structured Equity and Mezzanine Fund and Prospect Capital, says that increasingly the deals for which his clients ask him to provide legal representation are in more “bread and butter” industries.
“These types of companies tend to be solidly-performing, often family-owned businesses that manufacture or sell products essential to keeping American companies running. Five years ago, these companies would have applied for a business loan to update their manufacturing facilities or launch a new product line from their local corporate bank, which would have been delighted to have made. But in the wake of the 2008 credit crises, traditional banks changed their business plans, making room for private equity firms and non-bank investors to take up the slack,” says Stromberg.
As an example, Stromberg points to the recent Reuters story stating that Bain Capital and the Carlyle Group are among three PE firms bidding to purchase auto parts supplier TI Automotive, which makes fuel tanks, braking and powertrain components for cars and trucks.
“Of the most recent PE matters I advised on, four were investments in industrials sector, including a tire treading company, a metal bending company, a paper products manufacturer, and a merger with a shipbuilding corporation. And just last week, I represented Endeavour Structured Equity and Mezzanine Fund on its USD11.3 million investment in Lucky Strike Entertainment, a Los Angeles-based company with more than 20 entertainment and bowling locations in the U.S. and Canada. These deals may not have the sex appeal of a clean tech, biotech, or new Internet entity, but they are for solid companies in areas which PE firms obviously expect will be of increasing demand,” Stromberg says.
Latest deal statistics substantiate Stromberg’s theory. According to a September 15, 2011 Preqin Global Private Equity Report, deal-flow activity in the industrials sector has increased since H1 2009. In particular, the second half of 2010 concluded with 347 announced deals at a total value of USD32.5 billion. This increase in the number of deals continued into the first half of 2011, with 351 deals announced for an aggregate USD31.7 billion. These 2011 industrial deals were broken down as follows: leveraged buy-outs (55%), add-on deals (31%), growth capital (9%) and public to private deals (5%).
As for what’s driving this trend, Stromberg says: “The continued uncertainty of the economy has made even those investors who thrive on high risk deals hold fairly tightly onto their checkbooks — in fact, private equity is perhaps the only area where there’s presently any money. For these firms the opportunities needn’t necessarily be new or innovative, just solid. These traditional industries continue to offer great deal value, which will always be attractive.”
