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Private Equity Firms Build Businesses

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NoWise Co., a maker of freeze-dried and dehydrated food founded less than four years ago, has seen sales skyrocket. But its owner had greater aspirations for growth and knew he needed more capital investment and professional expertise to get there.

So, in October, Brian Neville sold a majority interest in the Salt Lake City company to Trivest Partners, a Coral Gables-based private equity firm, to help steer its future course.

"The reason for the partnership with Trivest was to continue on that rocket ship and go to levels we couldn't go to on our own," said Neville, who continues to run the business as chief executive.

Often operating behind the scenes, private equity is a major source of capital for many private companies.

Choosing companies that have potential for growth, private equity firms generally buy a controlling interest, then work with management to improve the company's performance and boost its value, with a goal to eventually sell the business a few years later, often to another private equity firm or to a larger company in the same field.

Private equity's investment in established businesses differs from venture capital, which helps get a new company off the ground.

Some private equity firms focus only on healthy companies, while others choose distressed businesses they can turn around.

Yet whether it is revamping strategy, injecting new managerial expertise, improving sales and marketing, boosting production, distribution, systems or technology, streamlining costs or making add-on acquisitions, the private equity firm's ultimate goal is to guide the business toward higher revenue and profits.

"Strengthening companies is the cornerstone of the private equity business," said Noah Theran, spokesman for the Private Equity Growth Capital Council (PEGCC), a trade and lobbying group based in Washington, D.C. "And they do this by investing much more than capital. They bring fresh thinking and operational expertise to build stronger companies that are better able to compete in the global marketplace for the long term."

However, critics of the industry say that private equity's investment strategy, which typically includes piling on debt, can lead to severe cost cuts and job losses.

Regardless, private equity touches the lives of many in South Florida. You may work for or shop at a company that a private equity firm controls, or your pension fund may invest in a private equity fund.

In fact, public and private pension funds are among the largest investors in private equity funds, making up 43 percent of all private equity investment, according to the PEGCC.

The Florida retirement system, for past and current state employees, for example, has invested $5.6 billion in private equity. And the City of Miami Firefighters' and Police Officers' Retirement Trust has invested $31.3 million in private equity, the PEGCC said.

Trivest's latest fund, which closed a month ago, is among the private equity funds in which Florida's retirees have placed their money.

"We've invested in 11 private equity firms that invest in Florida -- that is our mandate in the Florida Growth Fund," said Greg Baty, principal with Hamilton Lane, which manages the Florida Growth Fund, a private equity fund whose primary investor is the pension fund for the state of Florida. Typically, private equity investments range from $5 million to $15 million, Baty said.

While private equity firms do not disclose their returns on investment, industry observers say that in general, returns to investors of private equity funds surpass returns from the public markets. Minimum investments are usually $1 million.

Nationwide, there are more than 2,600 private equity firms, and they have a total of $2.9 trillion in assets under management, according to Pitchbook, a Seattle-based research firm. Firms' investments peaked in 2007, dropped during the recession, began to rise again in 2011, but have slowed again so far this year, PEGCC figures show.

There are 15,300 companies nationwide that are backed by private equity investment, including 826 in Florida, the lobbying organization said.

Last year, private equity firms invested $144 billion in U.S.-based companies, including $7.6 billion in businesses based in Florida, Theran said.

While huge, multi-billion dollar firms like the Blackstone Group, Kohlberg Kravis Roberts, the Carlyle Group and Bain Capital are perhaps best known, many smaller private equity firms are scattered across the nation.

Florida has 96 private equity firms, and several are based in Miami-Dade and Broward counties. Among them are the state's largest, H.I.G. Capital; and Trivest Partners, which was the first to open in the Southeastern U.S. Two relative newcomers are Pine Tree Equity Partners and Boyne Capital, both founded six years ago.

"Miami is a real success story in private equity," said Derek McDowell, managing partner of Boyne Capital, who previously worked for H.I.G. Capital and Trivest. "If you went back 25 years ago, there was only one firm here, Trivest. Since then, the growth and creation of H.I.G., Sun, Brockway, Boyne and Pine Tree, it's really grown as a community." Sun Capital Partners and Brockway Moran & Partners are both based in Boca Raton.

And despite a still shaky economy, the local private equity firms are on the hunt for investments.

Joshua Kaye, U.S. co-chair of the healthcare sector at the global law firm DLA Piper, which represents some of the local private equity firms, said that overall, private equity players are more active now than they were during the past year or two.

"Now we're seeing that having the cash available but not having dispensed it, there's a strong desire to seek investment opportunities," he said.

As potential investments, South Florida businesses remain attractive to private equity funds because of the region's role as the gateway to Latin America, said Jackie Hodes, a partner in the corporate securities group at DLA Piper in Miami. Both she and Kaye say healthcare, energy, education and real estate are areas that are hot right for private equity investment.

However, selling out to a private equity firm has both advantages and disadvantages, said Thomas Tew, a senior partner at Tew Cardenas in Miami, who often advises business clients. Sometimes relinquishing control can run counter to the entrepreneurial business founder's spirit.

"As an advantage, they've got the money, they are usually very bright and focused, they know the business segment and they have done their homework," Tew said of private equity firms. "The question is: Does their growth and exit strategy match yours?

"You are taking in an intelligent partner who brings a lot to the table. But you have to make sure those objectives are the same."

TRIVEST PARTNERS

Trivest Partners, which was founded in 1981 in Chicago and moved to Miami in 1985, is the oldest private equity firm in the Southeast.

At the end of September, it closed on its fifth private equity fund, totaling $415 million -- far surpassing its initial target of $325 million. The fund's investors include a mix of university endowments, corporate and public pensions, insurance companies, wealthy families and individuals, including Trivest's partners.

"Our money is right alongside our investors', said Trivest Managing Partner Troy Templeton.

Trivest focuses solely on healthy businesses owned by founders and families in the United States and Canada.

"What we're trying to do is accelerate the growth of a company, we're not trying to turn it around," Templeton said.

About half of the companies it invests in are based in the Southeast, with about half of those in Florida. Most of the businesses have $20 million to $200 million in revenue, "and have hit a ceiling and need a partner to get to the next level," Templeton said.

Typically, Trivest takes a controlling stake, with the founder retaining a minority interest, averaging 10 percent to 20 percent, said Trivest Partner Jamie Elias. Trivest usually holds a company for about five years, then sells it.

Focusing on business services, consumer products, manufacturing and distribution companies, Trivest has made 185 deals over the years, including add-on acquisitions, with a total value of more than $4.5 billion.

The firm, which currently owns 11 companies, helps the businesses with strategies for the Internet and e-commerce, and product development and expansion, as well as making acquisitions, Templeton said.

Besides historical success, the firm looks for companies that have the ability to be a top performer in their industry, with good growth potential and a good management team.

"They may be obscure, but what they do is important," Templeton said.

Among the companies in which Trivest has invested is Banana Boat, the maker of sun protection and after-sun products, which it took from No. 6 in market share to No. 2, tripling its revenues in three years to $60 million, before selling it to Playtex in 1992. Among others, are AeroBed, Polk Audio, ATX Networks and Twin-Star International.

Mark Asofsky founded Twin-Star International 16 1/2 years ago and sold a majority stake in the Delray Beach company to Trivest in 2007. Since then, revenues for the designer and manufacturer of home furnishing products, including electric fireplaces, have jumped from about $80 million to a projected $235 million this year.

"We didn't have as much structure in place as we needed, and Trivest did a great job of balancing our entrepreneurial spirit by putting in some structure and controls that allowed us to manage the business better, especially as we grew," said Asofsky, 46, who is now co-chairman. Trivest brought in a new chief executive three months ago to lead the company. Asofsky said he is taking more time to focus on his family and foundation.

Trivest, which considers itself a "kinder, gentler" private equity firm, gets most of its referrals through a network of 10,000 business brokers in the United States and Canada, Elias said.

Getting three to five referrals a day, Trivest gets introduced to about 800 companies a year. It takes a hard look at 150, and closes on five. If the deal was referred by a broker, the broker gets a commission of 1 percent of the purchase price, plus $100,000 and a Mercedes S-Class car.

"Our business is very different," Templeton said. "All the companies are privately owned, so finding opportunities is harder."

H.I.G. CAPITAL

When co-founders Tony Tamer, a former partner at Bain & Co., and Sami Mnaymneh founded H.I.G. Capital in Miami in 1993, they raised $75 million for the firm's first leveraged buyout fund.

Today, the firm has more than $10 billion in assets under management, and is the largest private equity firm in Florida, and one of the nation's largest private equity firms exclusively serving the middle market, said Executive Managing Director Doug Berman. The middle market is typically defined as deals valued between $50 million and $500 million.

H.I.G. has grown from seven employees when Berman joined in 1996, to more than 200 investment professionals. During the same time, it has opened offices in Atlanta, New York, Boston, Chicago, San Francisco and Dallas, as well as London, Paris, Hamburg, Madrid and Rio de Janeiro.

H.I.G. has four leveraged buyout funds and more are planned for the future, said Berman, who is responsible for the U.S. leveraged buyout business.

"Our goal is to be the premier alternative asset manager to the middle market," he said. "That means, not only do we have the [leveraged buyout] fund, but seven or eight different funds."

The funds include a $500 million Growth Equity fund that provides capital to smaller businesses with growth potential; H.I.G. Bio Ventures, a $200 million life sciences fund; Bayside, a debt fund totaling $5 billion in assets that makes loans and buys debt; H.I.G. Realty Partners, a real estate fund that invests primarily in multifamily residential buildings and commercial real estate; and a $900 million European fund, which invests in leveraged buyouts in Europe.

H.I.G. has invested in more than 200 companies and remains the controlling shareholder in more than 70, which have combined revenue of more than $9 billion, Berman said. Within the past two weeks, for example, the private equity firm sold Texas Honing, an oilfield equipment business, to publicly traded Precision Castparts Corp., after doubling both its revenues and earnings in five years, Berman said.

To find its investments, H.I.G. looks at thousands of companies a year and makes onsite visits at hundreds of companies, which is unusually high, he said. On average each year, across its funds, H.I.G. invests in about 25 businesses.

"When we are looking at companies, high-quality management teams -- management teams that have both skill and integrity, is first and foremost," Berman said.

What sets H.I.G. apart, Berman said, is that the majority of its professionals have consulting or operating backgrounds from working in managerial positions in corporate America, instead of having investment banking backgrounds. So they work daily with the companies H.I.G. invests in, helping enter new markets, expand product lines, win new customers or find better suppliers.

H.I.G. often also enhances the management team by hiring CEOs, CFOs, or heads of sales and marketing.

"So we work to supplement the management teams when appropriate to really give these companies the best possible opportunity to succeed," Berman said. "At the end of the day, that is how we make money, by growing businesses. We're not expert cost cutters. We are looking for companies with outstanding growth prospects, defensible market positions and high-quality management teams, and we help them achieve success."

Take Fort Lauderdale-based cargo carrier Amerijet , which H.I.G. bought out of bankruptcy in partnership with the company's management team, in 2001. At that time, Amerijet had $60 million in revenue. It is projected to reach nearly $200 million in revenue this year, and is profitable, Berman said. And the company has doubled its employees to about 400.

PINE TREE EQUITY PARTNERS

Founded six years ago in Miami by Managing Partner Jeff Settembrino, Pine Tree Equity Partners has launched two $50 million funds, and is now launching a third, $100 million fund, that it hopes to close early next year with commitments from its previous fund investors. The investors are wealthy families from outside the United States, mostly in Latin America, Settembrino said. Pine Tree's management team of six invests alongside, and as a whole, ranks as the single largest investor, he said.

Pine Tree focuses on companies with less than $50 million in revenue, with histories of revenue growth and profitability.

"We only invest in small cap companies where we are the first institutional investor, alongside the founding entrepreneur," said Settembrino, 38. "We take small businesses that have been around 20 years but only generate $20 million of revenue, and we work with the founding entrepreneur to invest equity and grow his already successful business more than he can do on his own, and take an entrepreneurial success story and transition it into an institutional business positioned for greater growth."

In the past six years, Pine Tree has made more than 20 investments nationwide, in such sectors as business services, consumer services and financial services.

Pine Tree looks at 750 investment opportunities a year and invests in two or three. The private equity firm generally holds six or seven companies in its portfolio at any time, said Settembrino, who previously worked at Trivest and has been in the industry for 17 years.

"We don't invest in a business unless the owner is a growing part of the business -- some sell us the majority, some a minority," he said. "They are looking for a partnership to grow their business more quickly than they can on their own."

Consider Celtic Capital, a Los Angeles-based financial services company in which Pine Tree invested in 2008 and sold this past April. In that span, the company's assets tripled, its net income grew almost 10 times, and the business generated 4.5 times return on invested capital, Settembrino said.

Pine Tree leaves running the day-to-day operations to the chief executive, but takes an active role on the board, adds management depth below the CEO, improves financial reporting, finds cost savings and operational efficiencies, and makes add-on acquisitions.

On Oct. 18, Pine Tree sold Hi-Tech Testing, a non-destructive testing company that uses radiography to test the integrity of welds in pipelines, tanks and vessels. When the private equity firm invested in the Longview, Texas company two years ago, it had $4 million in profits. Today it has $17 million in profits, after bringing in additional management and making two complementary acquisitions, Settembrino said. The sale netted 12.7 times return on invested capital.

"The key for us is we don't compete with great funds out there like Trivest, H.I.G., Brockway Moran or Sun Capital," he said. "We stay in our great niche and create great value for founding owners who otherwise get turned down because they are too small."

BOYNE CAPITAL

Boyne Capital is another relatively new entrant on the Miami private equity scene, founded six years ago by Managing Partner Derek McDowell, who worked for both H.I.G. Capital and Trivest, and who has nearly 20 years of experience in the industry.

"We are a group that invests in the lower middle market, businesses that are family owned or corporate spinoffs, with less than $100 million in revenue," McDowell said of his firm of eight people. "We try to find great businesses at good prices."

Boyne looks for companies that have "an enduring reason for existence," he said, and for which the demand for the company will be the same or greater five years from today. Yet the companies may be experiencing difficulties.

"We think there are examples of very good businesses with very bad balance sheets or very good businesses in very bad circumstances," McDowell said.

An example would be Miami Lakes-based Catalina Lighting, a public company whose revenues dropped from more than $400 million to $40 million in the depths of the recession, when Boyne bought it out of bankruptcy in 2010.

The company had great customer relationships, but mounds of debt, McDowell said.

"So we put fresh capital in, helped it come out of bankruptcy and turned it around," he said.

Today, the company, renamed Evolution Lighting, is healthy, with about $80 million in revenue and growing, McDowell said.

Boyne Capital invests in businesses throughout the United States and Canada, generally taking a majority interest by either investing in equity or buying the debt, and is open to all industries, he said. In the six years since its founding, it has made nine investments, and holds seven today.

"If one is comfortable with the business model, the products, the industry, it really starts and ends with the management team," he said. "So our goal is to support the management team," with planning or systems, or by bolstering management with sales and marketing executives or a chief financial officer.

The private equity firm manages about $100 million in capital, through a series of funds. The investments are all from high net worth individuals, mostly based in the United States, McDowell said.

"The idea was to be able to focus on smaller transactions," he said. "As an investor you can have a more significant or larger impact on the improvement of a company's operating performance and a company's management team, and ultimately, return on investment, by focusing on smaller companies."



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