Canadian private equity firm Alaris Royalty Corp invested in three companies. It made a US$10.5 million follow-on investment in Seattle, Washington’s Unify Consulting; a US$6 million new investment in New York City’s Stride Consulting; and a US$1 million follow-on investment in Timonium, Maryland’s Planet Fitness Growth Partners. Alaris also generated US$91.3 million in gross proceeds from its exit from Dallas, Texas’s Sales Benchmark Index.
CALGARY, Jan. 7, 2020 /CNW/ – Alaris Royalty Corp. (“Alaris” or the “Corporation”) (TSX: AD) is pleased to provide a corporate update today. (All figures listed in this press release are in US dollars unless otherwise noted)
Alaris made three investments in the fourth quarter of 2019: (i) a $10.5 million follow-on contribution (the “Unify Follow-On”) into an existing partner, Unify Consulting LLC (“Unify”); (ii) a $6.0 million contribution (the “Stride Contribution”) into a new partner, Stride Consulting LLC (“Stride”); and (iii) a $1.0 million follow-on contribution (the “PFGP Follow-On”) in to Planet Fitness Growth Partners, LLC (“PFGP”), which was part of a previous commitment of capital of up to $8.0 million (the remaining $7.0 million is expected to be contributed throughout 2020). Alaris is also announcing today the redemption of all of the units (the “SBI Units”) in Sales Benchmark Index LLC (“SBI”) for total gross proceeds of $91.3 million (the “SBI Gross Proceeds”). Lastly, Alaris continues to work on the anticipated redemption (the “Sandbox Redemption”) of Alaris’ units and repayment of debt held in Sandbox Acquisitions, LLC (“Sandbox”).
“With the investments Alaris made in Q4 2019, gross capital deployment for the year ended at approximately CAD$194.0 million, a record for the company. Given the robust deployment landscape that we continue to see, we are pleased to have also realized such a significant return on the redemption of our units in SBI. Alaris has a strong balance sheet, which now includes over CAD$215.0 million of undrawn capacity on its credit facility to fund capital deployment opportunities in 2020,” said Steve King, President and CEO, Alaris Royalty Corp.
Follow-on Investment – Unify
In addition to the $10.5 million Unify Follow-On, the transaction also included an exchange (the “Unit Exchange”) of Alaris’ existing preferred units in Unify, which were valued at $14.5 million (original cost of $12.5 million). As a result of the Unify Follow-On and Unit Exchange (collectively the “Unify Investment”) Alaris received new units in Unify worth a total of $25.0 million. To date, Alaris has generated an IRR of 20% on its investment in Unify. The Unify Investment closed on December 17, 2019.
The Unify Investment will result in an annualized distribution to Alaris of $3.3 million (the “Unify Distribution”). The Unify Distribution will have a payment in kind (“PIK”) feature, pursuant to which Unify can elect to PIK up to 2.0% of Alaris’ invested capital and any such PIK’d amounts will accrue at the rate equal to the current yield of the Unify Distribution. Commencing on January 1, 2021, the Unify Distribution will be adjusted annually based on the percentage change in net revenue year over year subject to a collar of 5%. The proceeds from the Unify Investment were used to achieve capital goals for Unify equity holders and to fund future growth as the company continues growing in new markets. Over the past three years Unify has expanded its operations from offices in Seattle to now also include offices in San Francisco, San Jose and Sioux Falls as well as three new markets expected to open in the next 18 months.
Based on Alaris’ review of Unify’s internal pro forma financial results for the most recent trailing twelve-month period in 2019, Unify would have an Earnings Coverage Ratio between 1.2x to 1.5x, after giving effect to the Unify Investment, other changes to Unify’s capital structure as well as unfinanced growth capital expenditures.
“We’re delighted to be furthering our relationship with one of our top performing partners and helping Unify and its equity holders with their objectives,” said Gregg Delcourt, Senior Vice President, Alaris.
“Alaris has been the perfect non-controlling capital partner to allow Unify to focus on our consultants and our culture and do what is right for our clients long-term. Alaris understands and respects our values and we are extremely grateful for the continued confidence in our mission,” said Darren Alger, President and Chief Executive Officer, Unify.
Unify is a locally based management consulting firm that offers Data Driven, People Powered solutions. Unify works with a blend of Fortune 500 companies across a diverse set of industries in Seattle and the Bay Area with a new office expected to open in Chicago the first half of 2020. Comprised of over 400 experienced consultants, Unify provides solutions across four service lines: Business Agility, Data Driven Insights, Customer Experience, and Technology Enablement.
New Investment – Stride
Alaris made the $6.0 million Stride Contribution in exchange for preferred units in Stride (the “Stride Units”). The Stride Units will result in an annualized cash distribution to Alaris of $840 thousand (the “Stride Distribution”). Commencing on January 1, 2021, the Stride Distribution will be adjusted annually based on the percentage change in gross revenue year over year subject to a collar of 6%. In addition to the Stride Contribution, Alaris has committed to contributing, at the option of Stride, an additional $4.0 million (the
“Additional Stride Contribution”), subject to Alaris conducting confirmatory due diligence and Stride achieving certain financial targets. The proceeds from the Stride Contribution were used for growth and partial liquidity to existing Stride equity holders. The Stride Contribution closed on November 7, 2019.
Based on Alaris’ review of Stride’s internal pro forma financial results for the most recent trailing twelve-month period in 2019, management of Alaris believes that Stride would have an Earnings Coverage Ratio between 1.5x to 2.0x, after giving effect to the Stride Contribution, other changes to Stride’s capital structure and the Stride Distribution payable to Alaris.
Headquartered in New York City, Stride is a leading Agile software development consultancy comprised of developers, product managers, coaches, and designers, empowering technology teams to implement industry best practices, build better software, and scale efficiently and successfully. Founded in 2014 by Debbie Madden, Stride has helped hundreds of technology teams, including companies such as NBC Universal, Sony, Casper, Saks Fifth Avenue, Clear, among many others, deliver transformative results. Stride ranked on the Inc 5000 list of Fastest Growing Companies for the past two years, and in 2019 was recognized as the Fastest Growing Women-Owned Business in New York by the Women Presidents’ Organization.
“We are excited to partner with Stride. Debbie has passionately built an impressive company around the high-quality people at Stride and we are delighted to assist them as they build their future,” said Mr. Delcourt.
“I am delighted to partner with Alaris, with the number of options in the market we are very fortunate to be partnering with a group that allows us to maintain our culture and the majority of upside in future growth. Stride is built off its tremendous workforce, therefore finding a financial partner that keeps our innovative culture and entrepreneurial DNA was essential to Stride. At Stride, we have worked very hard to create the leading Agile software development consultancy in New York City and look forward to continuing to provide our clients with significant and permanent improvements in their software development capabilities,” said Debbie Madden, Founder and CEO Stride Consulting.
SBI has entered into a purchase and sale agreement with a third party (the “Third Party”), pursuant to which the Third Party acquired SBI (the “SBI Sale”). The SBI Sale closed on January 7, 2020 and resulted in the redemption (the “SBI Redemption”) of all of Alaris’ SBI Units and Alaris receiving the $91.3 million SBI Gross Proceeds.
The SBI Gross Proceeds consisted of the following: (i) $84.3 million for the SBI Units, which represents a premium of $9.2 million over Alaris’ original cost of $75.0 million and a $1.2 million gain over the current book value of the SBI Units and (ii) $7.0 million (the “Make Whole Distributions”) for distributions owed up to the third anniversary date of Alaris’ initial investment, which is August 31, 2020. As per the agreements between SBI and Alaris, if a sale of SBI was to occur within the first three years after the first investment by Alaris, all distributions owed up to the end of the three-year period would be paid on closing of the SBI Sale. Alaris achieved a total return of approximately 50% and an IRR of approximately 22% by collecting over $32.8 million of distributions from SBI (including the Make Whole Distributions) as well as $94.3 million of redemption proceeds since its first investment in SBI in August 2017 (a partial redemption of $10.0 million of SBI Units took place in May 2019).
“The owners of SBI were wonderful partners and we wish them the best in the future,” said Mr. King.
After today’s announcements, Alaris will have approximately CAD$165.0 million drawn on its senior credit facility (the “Facility”) and CAD$215.0 million available for investment purposes (CAD$165.0 million available under the Facility and CAD$50.0 million available on the accordion feature) while the total senior debt to EBITDA on a proforma basis is approximately 1.60x. Alaris estimates its run rate payout ratio to be under 90% following today’s announcements and the expected Sandbox Redemption.
ABOUT THE CORPORATION:
Alaris provides alternative financing to private companies (“Partners”) in exchange for distributions with the principal objective of generating stable and predictable cash flows for dividend payments to its shareholders. Distributions from the Partners are adjusted each year based on the percentage change of a “top line” financial performance measure such as gross margin and same-store sales and rank in priority to the owners’ common equity position.