A Reborn HCI Equity Puts Pay-To-Play Past To Rest

Long before the pay-to-play scandals in present-day New York and New Mexico came a whopper of one more than a decade ago in the state of Connecticut.

Today a firm that took a glancing blow from that scandal is emerging with a new name, HCI Equity Partners; a fresh $200 million fund; and a strategy of buying and selling small but growing industrial products and services companies generating $20 million to $200 million in annual revenue.

The firm has also scored some recent exits. HCI Equity was expecting today to close the sale of its stake in Mistras Group Inc., whose products are used to test the integrity of tanks, pipes, valves and other industrial products. In March the firm sold its stake in Progressive Waste Solutions, which provides waste disposal services to both commercial and residential customers. Both companies are traded on the New York Stock Exchange.

A quick history lesson to demonstrate the challenges the firm overcame: In 1999 the disgraced ex-treasurer of Connecticut, Paul Silvester, pleaded guilty to racketeering charges for accepting payments—or directing payments to others—in return for making state pension-fund commitments to several investment firms. (Sound familiar?)

Among those implicated were Washington, D.C. buyout shop Thayer Capital Partners and its chairman, Frederic V. Malek, who had founded the firm in 1991. The SEC accused the firm and the founder of not disclosing a $374,500 payment to an associate of the treasurer while trying to secure a commitment to their fourth fund. In 2004, Thayer Capital and Malek, who had served in the Nixon administration and who has become a prominent fundraiser for Republican presidential candidates, agreed to pay a $250,000 fine to settle charges without admitting or denying wrongdoing.

Fast-forward to the present and the coming-out party of HCI Equity, whose team has made its mark generating value from the old Thayer Capital funds as well as making fresh investments under the moniker Thayer | Hidden Creek. The firm, with offices in Washington, Minneapolis and Chicago, is brimming over with operational talent: Eight of its 10 senior investment professionals have served as CEO, CFO or president of an industrial company.

According to Dan Dickinson, one of three managing partners, the firm closed what it calls HCI Equity Partners III LP at its hard cap of $200 million in September, within sight of the original $250 million target. (The firm considers its 1989 to 2003-era investments to be, in essence, Fund I, and those made from 2004 to 2008 to be Fund II.) The firm started marketing Fund III in early 2008, but ended up suspending fundraising for about year to sit out the financial crisis. Backers of Thayer | Hidden Creek included Boeing, Hamilton Lane Advisors and the Michigan Department of Treasury, according to Dow Jones.

Dickinson joined Thayer Capital in 2001 to help lead the transition from the first generation of leadership at the firm. Between the fallout from the Silvester scandal and some ill-considered technology and telecom investments, the firm had lost its momentum. Thayer Equity Investors IV LP punched in at $880 million, more than twice the size of its 1996 predecessor, according to Dow Jones. But the firm ended up securing only $218 million for the 2003 vintage fund.

Perhaps the most critical year for Thayer Capital was 2003, when it folded in an investment team from Hidden Creek Industries. The operating company had been investing money in industrial companies on behalf of Onex Corp. since 1989. Its co-founder, president and CEO, Scott Rued, became a managing partner at Thayer Capital, which changed its name to Thayer | Hidden Creek. Several professionals at HCI Equity still trace their roots to Hidden Creek Industries.

With the infusion of operational talent, the firm decided to focus primarily on industrial companies. Many of the early executives at Thayer Capital, such as former Chief Operating Officer Rick Rickertsen, moved on. Of the executives who worked at the firm during the 1990s, only Doug McCormick, a managing partner who joined in 1999, remains. Malek maintained an advisory role during recent years; however, with the rebranding to HCI Equity, Malek is withdrawing from all activities at the firm to focus on other business, political and philanthropic work.

Since then, the hands-on firm has performed well, according to Dickinson. Three of its companies have secured listings on the New York Stock Exchange in the last two years, and the firm has exited or agreed to exit two of those in the last few months. HCI Equity has so far made four investments from HCI Equity Partners III LP, including one in Herndon Products Inc., a St. Louis company that provides supply chain management and logistics services for defense contractors.

(David M. Toll is editor-in-charge of Buyouts Magazine. Any opinions expressed here are his own. Follow him on Twitter @davidmtoll. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.