December 15, 2014
Interviewed by: David Snow
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Why Chromaflo Chose Arsenal

Explore the relationship between private equity group Arsenal Capital Partners and its portfolio company, chemical and pigment dispersions supplier Chromaflo. Arsenal’s Tim Zappala, Chromaflo’s Scott Becker and RSM’s Mauro Bonugli discuss why Chromaflo chose Arsenal from the 20 private equity firms that wanted to invest in the company when it sought funding for expansion.

Explore the relationship between private equity group Arsenal Capital Partners and its portfolio company, chemical and pigment dispersions supplier Chromaflo. Arsenal’s Tim Zappala, Chromaflo’s Scott Becker and RSM’s Mauro Bonugli discuss why Chromaflo chose Arsenal from the 20 private equity firms that wanted to invest in the company when it sought funding for expansion.

Why Chromaflo Chose Arsenal
Anatomy of a PE deal

David Snow, Privcap: Today, we’re joined by Scott Becker of Chromaflo Technologies, Tim Zappala of Arsenal Capital Partners and Mauro Bonugli of RSM. Gentlemen, welcome to Privcap. Thanks for being here.

Unison: Thank you. Pleasure.

Snow: We are joined by a private equity GP, operating partner and the portfolio, the head of a portfolio company of Arsenal—

Tim Zappala, Arsenal Capital Partners: That’s right.

Snow: —as well as a private equity value-creation expert. This is great. We’re going to hear about the story of how Arsenal met and came up with a plan of value creation with Chromaflo, and also get some color commentary from Mauro. Why don’t we start, Tim, with an overview of how Arsenal has set up its operating function such that it’s able to actually improve or help improve the fortunes of the companies in which it invests?

Zappala: Okay. Arsenal actually has a fairly unique operating model. First, we’re focused in the lowermiddle market, so we’re typically dealing with small to mid-sized companies. We have practices in just two market areas: special chemicals and materials—which is a team that I co-lead—and healthcare. So our practice tends to be very deep and very technically oriented. In order to support and help mentor the companies in the lowermiddle market, they tend to be a bit smaller to mid-size. Also, we do a lot of carveouts from corporate parents. Those situations tend to be relatively complex; and therefore, our core team is all full-time industry professionals. In our case, our core specialty chemicals and materials team, as an example, is all full-time ex-industry professionals. So we have technical degrees, typically chemical engineering because of the specialty we focus on. Also, we’ve all run companies before—either companies or large divisions—and that allows us to be much more supportive as we develop the operating plans for these companies and help them develop their processes because our goal is to take smaller entities and then ultimately scale into bigger, larger operating platforms.

Snow: Very briefly, given that Chromaflo is in the chemical space, talk about your view of important trends or themes within that space before you even had the opportunity to invest in Chromaflo.

Zappala: We’ve done a large number of investments in what are called “formulated materials.” In the case of Chromaflo, they’re formulating color additives. That’s a critical, high-value ingredient that goes into coatings and paints, as well as thermal-set plastics. Our team’s technical knowledge was highly vested in these types of market areas and Chromaflo was a great fit.

Mauro Bonugli, RSM: Is that a kind of a team base? Did you guys follow as well, where you see more of the industry sector type of flow, and pick a team and then go out and invest in that?

Zappala: Yeah. No, it’s typically industry sector, so again, we particularly like formulated materials. They tend to have certain characteristics where they’re normally higher value-added in whatever market they’re going into and they normally are not a huge capital draw. So we don’t do commodities and we typically don’t build platforms that are directly interfacing with the consumer. We’re in the middle of the value chain and we like to build out platforms that fill that space.

Bonugli: Got it.

Scott Becker, Chromaflo Technologies: Interesting.

Snow: Scott, talk about your background, how it was that you came into contact with Arsenal and how the opportunity to partner with Arsenal seemed attractive.

Becker: Okay. I’ve been in the colorant and pigment industry for 34 years and I had a plan to expand the business I was running at the time to a global enterprise. I had found an opportunity within a large German company to carve out a piece of their business that would fit very well with ours, and at that point, I realized I needed to get some financial support to effect that transaction. I went through a process of going through 20 PE firms to find one that fit very well with us. And in that process, I came across Arsenal capital, met with them and felt that they were a very good fit for us. Because of their operations background and having run chemical companies, but also because they fit very well with us culturally.

Snow: Clearly, the capital itself was not the main consideration.

Becker: That’s correct. I mean, we had a number of companies that were willing to invest into the idea of creating a global platform. Arsenal seemed to be the best fit for us and they felt the same way.

Zappala: Yeah, that’s right.

Snow: Mauro, give a bit of perspective about private equity firms using operating partners to not simply take over or rather advise on the company once it’s already been acquired, but to actually evaluate opportunities to work with potential management even before the deal is done.

Bonugli: Yeah. That’s obviously becoming more and more common nowadays. And it’s interesting, if you take the case of Arsenal—most of the operating teams are fairly aligned with the strategy of the private equity fund.

Zappala: That’s right.

Bonugli: Right? So you look at Arsenal, for example, which is very focused in the few sectors. Therefore, they bring a lot of those resources that have expertise in those sectors. Older funds that are, let’s call them, more generalist tend to be more focused on some of the functional areas, right? And, pre-investment, they always get involved on the deals. Obviously, if you have the industry and the sector expertise, it brings a lot to the table in terms of understanding what are the risks and opportunities on that investment. But that’s a constant involvement we see every day because actually the outcome of that in a pre-investment analysis, a service always has to plan for the investment thesis. So it fits in very well.

Snow: Scott, there is a fairly complex series of transactions that gave rise to Chromaflo. Can you talk about how Arsenal was helpful in executing those transactions and what you found valuable in their skill set as you sought to build up the company?

Becker: In terms of the value Arsenal brought to the table, it was number one, having that chemical experience and understanding formulated products. The other thing they brought to the table was an exceptional skill in terms of integration, which was a critical aspect in our deal since we were merging two companies—a U.S. company and primarily European company that was a carveout of a large, multinational chemical company.

The other key aspect that Arsenal brought to the table was a real commitment to growth. From day one, they said, “We want to help you grow your business.” So we basically took a $60million company and, over a two-year period, grew it into a $400million company through Arsenal’s commitment to helping us grow, primarily through acquisition.

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