HGGC is looking for more deals in the public market after the firm completed its third take-private in a two-year stretch.
The firm closed its acquisition of publicly listed Monotype Imaging Holdings in October. The $825 million take-private of the typeface developer, which owns rights to popular fonts such as Times New Roman and Helvetica, is an example of a company that fits HGGC take-private criteria.
Digital tech disrupted the business of design, and Monotype, which is more than 100 years old, has shifted from primarily serving a small group of printer manufacturers to helping thousands of businesses and millions of creative professionals, said Rich Lawson, CEO and co-founder of HGGC.
“There is a myriad of middle market opportunities … They are thinly traded, not followed, and are businesses that are undergoing digital transformation,” Lawson told Buyouts in a recent interview. “And there is a big opportunity to create value for [PE] investors.”
HGGC is focusing on middle-market companies between $1 billion and $2 billion in size, Lawson said.
Mid-market publicly traded companies have become especially attractive acquisition targets in the competitive and pricey PE environment, Lawson said. With so much capital being raised and so many deals being sold and marketed, the PE environment has become “overheated,” he said.
Often, firms pre-empt auction processes and spend less time on deals that are not immediately actionable, which makes the public market more compelling for some investors, Lawson explained.
“While take-privates are not new, what’s new is how much money is flowing into the private markets, how many new funds are being raised, how many LPs are co-investing—there is just a lot of deal activity,” Lawson said.
Monotype’s acquisition followed HGGC’s take-privates of RPX, a patent risk and discovery management company, in June 2018; and Nutraceutical, a manufacturer and distributor of vitamins and health supplements, in August 2017.
HGGC bought small public stakes in some of these companies over a year in advance of the acquisitions, Lawson said. By taking a small position and becoming a shareholder, HGGC created a partnership-like relationship with the company’s management and built trust with the CEOs, before the business even decided to pursue a sale, he said.
“We are an alignment shareholder with skin in the game, and this builds a level of comfort and trust in the company, which is a lot more effective. We help [the company] to work through things and, perhaps, down the line we can escalate to a take-private transaction,” Lawson said.
While HGGC usually makes control investments, the firm doesn’t want to acquire 100 percent of a company, according to Lawson. On average, across $22 billion of HGGC’s invested capital, 30 percent of the sellers have reinvested their capital, Lawson told Buyouts.
Smaller public companies may find going private compelling as a way to focus on longer-term growth and escape the cost and scrutiny of public market regulations.
“If you are a small mid-cap company there is little to no sell side… You are dealing with small-cap institutional investors that are trading in and out, your cap structure has to be transparent, and you have to deal with quarterly earnings,” he said.
Despite take-private transactions being more complex and usually more time consuming, such deals are likely to become more popular amid growing competition for private assets, Lawson said.
“Public markets have an enormous number of opportunities due to the fact that no one is looking at these businesses,” Lawson said. “If there are 20 of those deals in the [private] market at any given moment, why would the opportunity cost of taking time and doing work, be greater?”
Action Item: Contact Rich Lawson at 650-321-4910.