Having led MidOcean Partners from its days as a private equity division of Deutsche Bank, through independence and several economic cycles, CEO Ted Virtue has a deep understanding of trends in the middle-market and how to unlock the value of businesses.
Virtue discusses why he likes the sub-$500 million deal space, why he believes the 2013 M&A market will be very active, why his firm likes “under-levered” and under-globalized brands, and the operating function at MidOcean.
Privcap: Please give an overview of MidOcean Partners
Ted Virtue, MidOcean: Well, MidOcean is a US mid-market buyout fund. We look for companies that are at high growth sectors around four industries that we follow-- media, consumer, industrial services, and business services. So we're a classic mid-market buyout fund, and we've added a couple of other strategies around our private equity business, including credit funds today and a long/short equity fund.
Privcap: Why does your firm focus on the size of the deal that it does?
Virtue: We think the real efficiency in the mid-market is probably, as a spread today as any, is sub $500 million of enterprise value. It's where there's inefficient capital, there's not as many high-quality management teams, and there's inefficient processes to buy those. So we like that smaller end of what people call mid-market, and where we can buy companies typically between $10 and $50 million of EBITDA.
Privcap: What are your predictions for the 2013 US middle market?
Virtue: I think it's going to be a pretty active time. There's a burgeoning amount of new capital coming into the marketplace, both on the credit side and for M&A deals. I think once we get some more certainly post-election here about the physical cliff issues and others, I think we'll see a more vibrant M&A marketplace for mid-market deals as families look to exit their businesses, as a lot of buyout firms need to sell their businesses. Between financial buyers, corporations sitting with unprecedented amounts of cap-liquidity on their balance sheets, and international buyers now coming into the mid-market space, I think 2013 is going to be a very active M&A market.
Privcap: How does your firm help portfolio companies unlock value of their brands?
Virtue: I'd say we do try to find great brands and great services that we think are under levered in the marketplace, and try and globalize that as the world globalizes. Oftentimes, the companies we buy are small, family-run businesses that just don't have the resources. What we're bringing at MidOcean that I think is different than a lot of mid-market funds is we're bringing in guys who have run Fortune 400 businesses. We bring in talent that they wouldn't have access to.
So when we bought Jenny Craig, we're bringing a guy like Rick Braddock, who was the president of Citibank. He ran priceline.com. He is a world-class executive. To go in and help leverage this incredible brand that had been under leveraged from our perspective, and we were able to bring enormous growth in and leverage to that brand by the quality management teams we can bring into them that have done it on a much bigger scale.
Privcap: How has MidOcean structured its operating function?
Virtue: Since day one when we were part of Deutsche Bank, we've had this as an integrated model. Our partners are part of our firm. We have today 35 operating partners in our firm, so probably the largest group of real operating executives that any mid-market fund, maybe even large fund, has today. They voted our deals. They're in it, involved in our diligence, and they go run our businesses.
So we're very proactive. We're not just a hired gun kind of firm. As we look at a thematic and then we use them to help identify the opportunity, identify the company, and then go run the business for us to create value. So it's a very proactive process to try and identify the right theme with the right manager, and try and really go on usually a two or three-year process to find the right company to do that.
Privcap: Do LPs understand and appreciate the uniqueness of your operating model?
Virtue: I think they understand that. It's been part of our DNA for the last 12 years, so this is how we do deals. The reason we win a Jenny Craig or a Freshpet is not because a guy like me shows up with a pinstripe suit. It's because we bring operational talent that they couldn't get on their own.
Oftentimes the sellers of our businesses are also part owners of our business, so they roll in with us, and they see the intellectual capital that we bring is differentiated from anyone else the business. Which is why we're able to get these deals away from auction processes, because they're not buying into our capital. They're buying into our strategy and our intellectual capital.
Privcap: What makes you bullish about the mid-market opportunity?
Virtue: I'd reiterate that the mid-market space is really bifurcating again. I mean, the spreads on pricing right now, between smaller companies and larger companies, is people are so preoccupied with liquidity. And so, smaller companies that have less access capital are trading at lower multiples than in terms of spread than they've probably been since the '80s, and I think it's a great advertising for mid-market funds. And if we're able to grow these companies in scale from a $300 or $400 million business to a $700 or $800 million business, there's just a natural arbitrage that people will pay, as you can get more liquid capital and get a large company with lots of cash that will want to buy that size company.