June 24, 2013
Interviewed by: David Snow
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How PE & Manufacturing Companies Build Success

Panelists discuss investments that illustrate how private equity plays a direct role in building value for American manufacturers. This is the fourth and final installment of Privcap’s series on The New U.S. Manufacturing Opportunity.

Panelists discuss investments that illustrate how private equity plays a direct role in building value for American manufacturers. This is the fourth and final installment of Privcap’s series on The New U.S. Manufacturing Opportunity.

PE and Manufacturing Entrepreneurs Partner For Success The New US Manufacturing Opportunity

Snow: We are joined today by Don Charlton of Argosy Private Equity, Anand Philip of Castle Harlan and Steve Menaker of RSM. Gentlemen, welcome to Privcap today. Thanks for being here.

We’re talking about the private equity opportunity in manufacturing. It’s a space and it’s a big part of the U.S economy that has changed dramatically as a result of changes all over the world. All of you are active in the private equity space for manufacturing, so I’m fascinated to hear your stories. You know, it’s one thing to talk at a high level about trends and things like that. I’d like to actually hear some anecdotes about private equity playing a role in manufacturing companies really making a difference and building value.

Steve, you have a lot of clients in this space. And I wonder if any stories or investments stand out as being very illustrative of private equity’s important role in manufacturing.

Menaker:       One of the things we talked about is the resources that they bring. And so an example is a client of mine, family owned-business, second generation. They’ve been doing very well but it was potentially a time for a liquid opportunity to monetize the assets that the family had built. Private equity stepped in, thought that there were more opportunities. And at the time, about 85% of the revenues were generated in the U.S. to U.S. related companies.

But the real opportunities for the company lay outside the U.S. And so as a result of the discipline they brought to the business planning process after the transaction, they have now invested in a director of international sales in two different countries. They have revamped internally their selling process. They’ve also invested in an IT program as well as a CFO to bring in line the costing system. And as a result, this past fiscal year, they had converted almost 70% of the revenues to international related revenues which is tapping into the market that they needed to.

So I think it’s a real good demonstration of the discipline and the effort that it caused and the resources really that were needed because it was an investment. There had been dollars, the EBITDA didn’t grow as fast as it did in this year. But the investors knew that that’s what it was going to take to ultimately create some value.

Snow: Why do you think the family never was more ambitious in seeking to grow their international sales while they were the owners of the company?

Menaker:      I think it’s really because they didn’t know how. You’re successful, you do what you do. The company and the owners had enough money. It wasn’t about taking it to the next level. But they’d never had that experience. And I think that’s a challenge a lot of manufacturers may face of that closely held business just doesn’t know how to do it, and they don’t know where to go to get those resources. And ultimately we’ve seen clearly examples where private equity can bring the knowhow and the resources to do that.

Charlton: Now did the family stay involved with the business going forward?

Menaker: So the son who was second generation, was the president has stayed involved, but he is now working at a level where he has to be much more accountable than he ever did. So I think time will tell whether that continues and his interest continues in the business. But clearly he knew the business. But they had some key people that we spoke about earlier, some key people in management that understood that business.

Snow: Anand, you recently – or Castle Harlan recently did a deal that nicely illustrates sort of the resources that your firm and other private equity firms can bring to the manufacturing portfolio company. Can you give us a recap of that?

Philip: Sure. So a few years ago we bought a large complex steel casting company called Americast Technologies. Average part produces over 10,000 pounds with the largest parts produced being over 60,000 pounds and larger than the size of this table. We bought Americast from a distressed fund, which had purchased the company, the parent company of Americast out of bankruptcy.

When we got them to the investment, we saw an opportunity to be able to grow the company in certain higher margin and growth sectors such as energy and mining. And we completed very quickly two add on acquisitions which more than doubled our market share in those categories.

We also sold a non-core iron foundry because Americast was principally focused on specialty steel, high alloy materials and we didn’t want management to be distracted by an iron foundry. In addition, we more than doubled the capital expenditure the company was spending relative to what it used to spend before we got into the investment. And part of what we spent that cap ex on was green-fielding a site in China in a special economic zone over there where we got sort of incentives to go over there.

But we did this because we wanted to be able to follow and stay close to our customers, very blue chip, large multinational customers who were moving their businesses to some extent internationally because they saw a lot of growth over there. And they were more excited about suppliers who could be closer to them and their own end customers.

We also did it for defensive reasons because on the lower end of our market, on the machining and finishing side, we wanted to be able to compete with Chinese manufacturers where we saw them able to do a much more effective job than they were on a more specialty side of the business.

So that’s an example of us getting involved with the manufacturing company and being able to bring about the types of change and take a company which was U.S. and Canada focused to an entirely global perspective.

Charlton:     What would you say the one key thing your private equity firm did that the other firm didn’t? Was it just more the global nature or the global focus?

Philip: So the other firm I would say fixed the balance sheet. The balance sheet was broken at the time they acquired the company. But there wasn’t a focus on growth because when a company is at the wrong part of its cycle, you’re generally  trying to  stem the bleeding.  And we  like to acquire companies and focus them when they’re on the growth part of their curve.

So that’s part of the reason why we spent a lot more cap ex than what they did previously, and a big part of the reason why we wanted to take them internationally, because global businesses in manufacturing are able to compete much more effectively than purely local businesses unless there’s something very specific to the business that allows it to stay local.

So in an entirely different example, we’ve got a company in the plastic packaging space where it does rigid plastic packaging containers. Now that’s an industry, if you think about it logically, you cannot ship a blown bottle very far because you’re effectively shipping air. And so as a result, you end up competing with people who are within a 200 to 500 mile radius of where you are.

So not only do you not have to compete with China, you don’t even have to compete with the guy sitting on the other side of the country from you. Now that is a business that can very effectively compete locally and regionally. But many other portions of manufacturing cannot do that and so that’s a part of what we did in this particular example and brought to the business.

Menaker: What was the biggest challenge in that transaction as you look back at it?

Philip: Where we had one manufacturing plant blow up where a third party truck that was delivering fuel came in and had an explosion. That was one of our – may have been our highest margin plants at the time. But we had business interruption insurance. We moved some of the manufacturing at that point to another facility and paid the shipping charges to our customers that we otherwise wouldn’t have had to pay.

In another instance, we had the state in – where one of our plants was located claim eminent domain through the location of the plant where they wanted to build a road literally going right through the plant. Then we had two conversations with them and get them to move off of their position and build a road a little bit off to the side. But there’s a number of unforeseen events maybe a little bit more on the steel than you typically have, certainly more than we typically see in our investments.

But part of the value we’re adding is being able to go in, implement the

100 day plan, implement the two to three year growth plan, but in addition, deal with these types of unforeseen events.

Snow: Don, can you share any stories of, you know, your firm really making a difference in the fortunes of a manufacturing company you’ve invested in?

Charlton: Yeah, a very similar story, not a deal I worked on but one of my partners who’s also an operating partner at our firm, a company that was called CRS Reprocessing which is a company that has a proprietary service and technology to reprocess slurry that’s used in the cutting of solar wafers in the solar manufacturing industry.

So this was a company that was spun out of BP. And it’s one where it was just kind of cut loose, and we had to take everything over, you know, day one, meaning go buy servers, get email and up and running, get databases up and running. So it was kind of a clean cut. We had a hiccup with that right off the bat, and then one of our – my partner ran in and he was the CEO for a year of that company. But what they did then is, you know, recruited in a world-class management team.

We built out both a U.S. and European management team followed by an Asian management team. And then the company really just followed the growth of solar manufacturing. So it has plants in China, Korea, the Philippines, Germany, France and Spain. And our firm connected with the right advisors and the right, you know, attorneys to set up these entities in all these different countries.

I mean you can imagine the diversity of the regulations in all those countries I just mentioned. But that’s where the company needed to be to grow. We also brought in an outside marketing firm who helped bring international expertise to their collateral, making sure that it was multilingual, make sure it was multicultural and sensitive to each of those countries.

So it’s really having access to the right types of people. And not all those people are in our firm. But you know, we’re connected, you know, similar as you said. We have a network of people that we count on to bring to the table to get the right answers to help the company grow.

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