Small Is Beautiful

• The industry’s average equity contribution to leveraged buyouts ranged from 29 percent to 38 percent from 2006 through the third quarter of 2008. Conversely, equity accounted for a whopping 57 percent at Tonka Bay during 2006 through 2008.

• The industry’s senior debt for leveraged buyout loans to companies with less than $50 million of EBITDA (earnings before interest, taxes, depreciation and amortization) was four times EBITDA over the 11-quarter period ended last September 30. At Tonka Bay, it’s been two to one over that stretch. At some of the larger firms, it’s been as high as six to one.

On Cary Musech’s planet, small is beautiful. Typical investments range from $4 million to $10 million. Acquired companies have EBITDA of $2 million to $5 million. During a typical year, the firm looks at about 200 deals. A tenth of them merit a site visit. Tonka Bay bids on up to 15, and buys three to five.

So far, the firm has invested in 24 companies and exited from 12 of them. Its second fund holds nine companies, seven of them acquired since the start of 2007.

Minnesota Centric

Of the 12 firms remaining in its portfolio, seven are based in Minnesota, and two are in Iowa. Most are manufacturers, business service enterprises, or distributors. One familiar name is Chaska pickle processor M. A. Gedney Company. “All things being equal, we like to do business in our own backyard,” Musech says.

Tonka Bay shops for opportunities among thousands of small, privately held businesses. Scores of motivated sellers are out there, wanting to cash out. Tonka Bay is usually the first outside investor in its companies. It looks for professional management, good advisers, and focused strategies. Frequently, it buys companies without boards of directors, then assembles five- or six-member boards, with most of the directors coming from outside the company or from Tonka Bay.

Wells Fargo’s pension plan is Tonka Bay’s largest investor. Musech worked at Wells Fargo and U.S. Bancorp before launching Tonka Bay in 1998. He and Peter Kooman, who formerly managed money for the Cargill and MacMillan families, are the firm’s managing principals. Soderling, two other professionals, and an office manager round out Tonka Bay’s office.