Even without a spike, rising interest rates will have a dampening effect on the prices private equity firms are able to pay for companies, says Erik Allen, a partner with Boulay, Heutmaker, Zibell & Company, PLLP, an accounting firm based in Minneapolis. That might make private equity firms less competitive with strategic buyers.
Still, Engler says, “I feel optimistic. As long as the
economy stays
on track, lenders stay in the game,
and
strategic
buyers don’t
bid
up
the multiples
too high, plenty of
private equity
deals
should get done in
2006.”
Hot Property
Minnetonka’s Tonka Bay Equity Partners is just one of the thriving local private equity firms.
Looking for a Minnesota example of the hot private equity market? Search no further than Minnetonka’s Tonka Bay Equity Partners, LLC.
Tonka Bay began investing in 1999, when the firm closed its $75 million first fund. It focuses on buying small companies—those with an EBITDA of $5 million or less—in niche manufacturing and business service. Then it provides capital and helps the acquired companies develop management teams and growth strategies. “We’ve helped companies cut expenses and control inventory,” says Cary Musech, Tonka Bay’s founder. “The whole strategy is to work with these small companies to increase their value, so they’re more attractive to both strategic and financial buyers when we go to exit.”
The company maximizes profit in part by making sure that is doesn’t pay too much for any acquisition, even in the face of higher prices across the overall mergers and acquisitions market. “We’ve been asked to pay higher prices, but on the deals we’ve closed, we’ve paid what we think are fair prices,” he says. “We’ve just had to work a little harder to find the deals.”
Tonka Bay buys mostly from private owners. Like other private equity companies, though, the firm is finding both strategic and financial buyers for the companies it sells. In the past, Tonka Bay might have sold more or less exclusively to strategic buyers. Instead, Musech says, other private equity funds bought five of the eight companies it has sold since 1999.
Tonka Bay has followed another trend by partnering with other private equity firms on some of its deals. When the company bought St. Paul’s Aero Systems Engineering in January 2006, for example, Indianapolis-based Centerfield Capital helped fund the deal. “The reason we brought in partners is that the deal required more capital than we wanted to put into one transaction,” Musech says.
It seems that those strategies have worked for the company. Tonka Bay’s first fund has a combined gross return on its investments of nearly 32 percent—a very healthy number that’s put Tonka Bay “in the top [25 percent] of private equity funds,” Musech says. That’s helped the firm fill its $125 million second fund, which closed in October 2005.
The effort was also aided by the stock market’s indifferent returns. Beyond that, fundraising is a matter of “timing and fit,” Musech says. A fund might be too big or small for a particular investor, a problem that Tonka Bay has sometimes had. “Look at the Mayo Foundation,” Musech says. “They love the space we’re in, our returns, and our team, but we’re just too small. They’ve got how many billion to invest, and they don’t want to be more than 10 percent of our fund.”
Tonka Bay eventually found the right investors, and Musech thinks that other private equity funds will this year, too. “I think that the funds looking for capital in 2006 will find it,” he says. “There will be some funds that did not perform, and there will be some weeding out.” And, Musech says, the performers won’t have trouble attracting new investors. “The funds that have performed will find the money,” he says. Look for Tonka Bay to find the money for a while to come. |
