Interview: Paul Petersen, Principal at Wind Point Partners (Mid-Market Private Equity)
Paul Peterson is currently a Principal at Wind Point Partners with an investment focus in Engineered Industrial Products, Chemicals/Plastics and Building Products. Paul has worked on numerous leveraged buyouts and currently is the lead investor and sits on the board of directors of Citadel Plastics. Wind Point Partners is a Private Equity investment firm that acquires middle market businesses with growth potential and a clear path to value creation. Wind Point manages $2B in commitments and has invested in more than 80 companies since 1984. I am very appreciative of Paul taking time out of his day to discuss mid-market Private Equity.
(PP): It is slower as it would be in the wider market. Through Q3 things were holding up with the broad based decline hitting in Q4 carrying over into Q1 of this year which along with liquidity issues has really stunted transaction volume. There are some exceptions in health care, food or education which are fairly recession resistant. The problem affecting Private Equity in particular was the use of peak leverage in 2006-2008 where some of those deals started to unwind within a few bad quarters due to the leverage multiples being too far out of balance. We started to see companies worth less than the debt on their balance sheet. Interestingly enough, the mid-market, in most cases, was not able to really push the extreme leverage multiples as much with the banks and benefitted from that fact now that we have hit this downturn.
How do you create deals in this economy?
(PP): To generate deals in this environment, you will need a strategic angle or existing platform where you own a company that can support complimentary acquisitions. This is where having a deep network in a segment of a market gives you the edge into what are now tight processes because sellers are not widely sending out books to 100 PE firms like they could have done in the boom time. Before, you could get away with a broadcast sale since there was a higher chance of the deal getting done. Now, sellers don’t want a high profile process and having increased risk of the deal falling apart. A failed deal creates stress on the employees, suppliers and customers at a time when bad news is not welcome in the market. With these sorts of obstacles, mid-market private equity is at a slight disadvantage just from the sheer number of connections needed to drive volumes, so you need to be smart in your network building. You also need to be a credible buyer with a firm view on your financing to be a player.
How has this market affected the assets available for purchase? Would you expect to find better quality deals now?
(PP): That is a tricky question to answer. There is still quality in the market from some firms that simply need cash for corporate orphans or owners needing to exit. The flip side is that you are more likely to find bad or lower quality assets on the market at this time. The reason for this is that a seller will not get a premium sale price in this current environment so why would they sell their prime asset? There is actually a backlog of sellers in the mid-market who are waiting since the multiples are so low and the uncertainty of deal closing is so high. It tells you something when Bankers, who earn their money on transaction fees, are advising their clients not to sell in many instances.
How has the lending environment been for supporting new acquisitions?
(PP): It is hard to draw generalizations for all banks, but many banks are not providing leveraged lending, others simply don’t exist any longer and most are very reluctant to underwrite or finance “storied” credits. We are no longer seeing banks taking the risk as the single provider of funds or holding a large portion of the transaction financing. This adds complexity to the process as you need to coordinate terms across all the lenders which create a “Least Common Denominator” effect where if I have to change terms with one bank, I need to change terms with all banks in the consortium. You try to minimize this upfront, but sometimes it is unavoidable. It is just a more time consuming process to coordinate.
[For more on the lending climate http://blogs.wsj.com/privateequity/2009/04/03/1q-lbos-buyers-and-sellers-but-no-lenders/ ]
What sort of creativity have you seen in regards to new financing options?
(PP): I have really not seen many new structures out there. We talked earlier about all equity options, but you are really limited there to rare circumstances where you have a low purchase price with an extremely high growth potential. Our firm also does not make investments in PIPEs [ed note- Private Investment in Public Equity] since we would not have significant ownership control. Really, any sort of minority investment or financing structure would really need to be examined closely because you really need that control to ensure that you meet your investment goals. One area that many see some creativity would be with earn out structures due to tighter financing.
[Click here for mid-market earn out definition http://orioncg.wordpress.com/2008/03/15/part-ii-how-an-earn-out-works-and-the-advantages-and-disadvantages-of-using-an-earn-out/]
