Atlantic Street Earns 7.7x Return on its “Painful and Bittersweet” First Exit

Atlantic Street Capital Management today announced the sale of Fleetgistics, an Orlando-based delivery services company, to Harbour Group, a St. Louis private equity firm. The sale, previously reported by peHUB, earned Atlantic Street a 7.7x return and 156.4% IRR on its initial $10.4 million equity investment. Lazard Middle Market and BB&T Capital markets advised the sell side.

The deal marks Atlantic Street’s first exit from a $45 million fund backed solely by Morgan Stanley Alternative Investments. According to Buyouts magazine, the firm is planning to raise a $100 million follow-up fund.

I spoke with Partner Peter Shabecoff on the thesis behind the roll-up, how a $10 million company became a national leader, and why the sale was “painful and bittersweet.

peHUB: So you made 7.7 times your money on a $10 million equity investment. What was the total deal value here? Is it safe to say more than $70 million?

Peter Shabecoff: We aren’t disclosing the total deal value but its safe to say it the value exceeded $70 million.

What made this company attractive?

Our first investment was in Ace Expediters, which was a small and entrepreneurial business. There was not a lot of infrastructure, no IT, sales systems, or finance capabilities, but the fundamental underlying operation was really attractive. It was a high quality same-day logistics for auto suppliers, which highly value-added to customers who really needed it. It also fed into a larger trend of outsourcing, allowing their customers to move products more efficiently with less capital cost. We saw that, and added an IT component to that could be valuable to a number of segments. It was an undeveloped market with no real sophisticated competitors.

So the company is national?

Yes operates in 30 states. Everywhere east of the rockies.

And it has no competition?

The only scale company that’s at all similar is called Dynamics, it’s a public company. But in terms of the company’s core segments of medical service provides, pharmacies and auto parts retailers, Fleetgistics is definitely the market leader.

What did you do to improve the company besides acquiring Network Express, Inc. and Express Courier Systems, Inc.?

We are a very, very hands-on, operationally intensive firm. That’s our MO. During the initial acquisition, we recruited a senior management team and helped work with them to set the strategy. We worked with them to develop an IT platform and sales strategy.

Do you see more opportunities for acquisitions in this area? Or is the company set for more organic growth?

I’m sure Harbour (Group) is looking at both. It’s still a highly fragmented industry. There’s a lot of white space for growth and through add-ons.

So why did you decide to exit now if there’s so much growth left?

It was a really difficult decision for us to sell. And a painful and bittersweet one. But, we are a small first-time fund with limited capital available and we’d taken it as far as we could.

So this is your first exit?

Yes. We were formed in 2006. We made this investment in June 2007 and its our first exit.

Where were you before Atlantic Street?

I was a partner at North Castle Partners.

Should we expect other exits from Atlantic Street?

No, there’s nothing in the pipeline. We have two other portfolio companies, and one is a recent acquisition. (EZE Trucking, a specialty freight logistics company acquired in 2009, and Double B Foods, a specialty food manufacturer acquired in 2006)

So Morgan Stanley Alternative Investments if your sole investor. In future funds will you seek commitments from new investors?

Yes absolutely.

How deployed is your first fund?

It’s almost fully deployed.

Can we expect you’ll be entering the market with the next fund some time this year?

My lawyers would yell at me if I commented on fundraising.

Previously:

Fleetgistics In Talks To Switch Sponsors