March 30, 2015
Interviewed by: David Snow
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Why Z Capital Acquired MSDP

Z Capital Partners added performance automotive-parts manufacturer MSDP Group to its portfolio in late 2013, and followed with an add-on acquisition of ACCEL Performance Group. Jim Zenni, Z Capital’s President and CEO, describes the two acquisitions and explains why they are looking at the performance automotive-parts sector.

Z Capital Partners added performance automotive-parts manufacturer MSDP Group to its portfolio in late 2013, and followed with an add-on acquisition of ACCEL Performance Group. Jim Zenni, Z Capital’s President and CEO, describes the two acquisitions and explains why they are looking at the performance automotive-parts sector.

Why Z Capital Acquired MSDP
With Jim Zenni of Z Capital Partners

David Snow, Privcap: We’re joined today by Jim Zenni of Z Capital Partners. Jim, welcome to Privcap. Thanks for being here. Your firm, Z Capital Partners, invested in a platform company called MSDP and apparently, that’s going quite well to date. You still own it. You’ve made at least one add-on acquisition. Why don’t you talk about what your thesis is for that investment? Maybe you can start with your view of the sector in which MSDP does business before you had the opportunity to acquire MSDP. What was your view on that sector and how did that inform your decision to make the acquisition?

Jim Zenni, Z Capital Partners: We’re trying to find good businesses that have good market share. And in the case of MSDP, this business was actually owned by two private equity firms prior to our involvement. The second private equity firm did an acquisition and it didn’t play out as planned; it was actually restructured by the lenders.

We bought all of the lender’s interest, both debt and equity, directly through our sourcing platform, if you will, a little over a year ago. We identified the company as having pretty significant potential in its sector, which I’ll define in a second. But more importantly, it was owned by a lender at the time and it had an interim management team, which is never optimal. Since we acquired the company, we brought in a great management team. We’ve optimized the business. We’ve actually grown the business quite nicely and increased margins. It was not so much a turnaround but more of an optimization.

The products the company makes sell into the hotrod enthusiast market. So if you own a 1975 Chevy Chevelle and you’re looking for the latest, greatest fuel injection system to put on your car, we have that market. It’s the MSD Atomic Fuel Injection System. It’s a market that’s growing. You have a lot of baby boomers who are buying cars that they know and love from their past life, so to speak. Most of the products are products that enhance or improve acceleration or fuel injection or ignition. Also, we make some niche products that go into racing and those kinds of things.

As we looked at the market initially, we identified numerous, potential add-on acquisitions, which is always a great thing to grow topline both organically and through acquisitions. That’s exactly what we’ve done. So it’s a great textbook case of how we acquired this business, the market we identified and the potential growth for it through acquisitions.

Than acquired a company called Excel. Excel makes similar products and their branded products are Mallory and Mr. Gasket, which are old-line automotive products. We acquired that company and we were able to take a significant amount of synergies out, cost synergies, in the acquisition. Not only that, [but] the products are very complementary pricewise, and they’re very complementary channel-wise, meaning that most of MSDP products are sold through distributors’ catalogs and online. And the Excel products were very much retail-oriented.

Snow: When you are confident that there are add-on acquisition opportunities for one of your platform acquisitions, do you set aside a certain amount of equity for those acquisitions? Or, is it a bit more opportunistic and you enjoy flexibility from your fund structure?

Zenni: You do always want to hold back a certain amount of dry powder for potential add-on acquisitions. In our case, our fund structure is that we’re actually allowed to do add-ons and draw capital beyond the investing period. But, in this particular case, the performance of the company has been such that we didn’t draw any new capital to fund it because we paid down so much debt through free cash flow from the initial acquisitions.

So from an LP standpoint, it’s great. We didn’t draw any more capital and we probably doubled the value of the business at the end of the day. But [to] answer your question: typically, we will hold capital for those kinds of opportunities.

Snow: One final follow-up question: what is most challenging about adding on a company and attempting to integrate the operations? The second part of that question is, does a lot of your deal flow come from busted roll-ups from other private equity firms that attempted to do exactly the kinds of add-ons that you want to do but were less successful?

Zenni: The integration is key when you acquire a company and that has to be mapped out. And it’s not so much [that] our operating partners are spending a decent amount of time, it’s [that] they’re almost full-time doing integration for us at various things. Because our initial plan is toexecute on a strategy.

We do see a lot of situations where whatever the original thesis was just didn’t play out for whatever reason. Sometimes it’s out of their control, but yeah, in some cases it’s a company that made some acquisitions maybe too quickly. [They] couldn’t integrate them and now you have a situation where you’ve got a company that has over capacity, cost structure is out of control and their balance sheet doesn’t work either. And a management team is probably not skilled to handle it.

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