Five Questions with Adam Blumenthal, Managing Principal, Blue Wolf Capital

Blue Wolf Capital Partners, New York, this month announced the closing of its third fund at $300 million, earmarked for control-stake investments in companies experiencing complex challenges, such as troubled union relations, financial problems or operational weaknesses. Sister magazine Buyouts caught up with managing principal Adam Blumenthal for five quick questions.

How long did it take to raise your fund, and did you have help?  We began talking to our first potential LPs at the beginning of November. We had a first closing in April, and a final closing in mid-July. So nine months from start to finish. We worked with Stanwich Advisors LLC.

What is the mood among institutional investors right now?  I think institutional investors are looking for highly differentiated strategies. They are not optimistic about the ability of the public equity markets to deliver the kinds of returns over the next five years that they need. So they’re looking very much to direct their future investment dollars to differentiated strategies that are not tied to the general movement of the market.

What were some of the hardest questions you got on the road? The primary focus for our investors was on the fit between the team and the strategy. People came at that question in many different ways. They spent time not just with our partners but with the CEOs of our portfolio companies. One LP spent two to three hours interviewing every member of our team, discussing their history and motivations.

Where do you see the best opportunities for deals right now? The first two investments in the fund which we’ve already completed are both very exposed to housing and construction. One is a lumber mill. The other is an integrated specialty paper and lumber complex. We feel very good that we were able to get two deep-value investments that we’re excited about at the early stages of the fund and to get them at the right price point. We think the opportunity in housing and construction may be closing, because other people see the opportunity as well, so I’m not sure how many more deals we’ll be able to do. Another area we think has a lot of promise are investments tied to government spending in general and defense in particular. There’s going to be a lot of change in that market related to reductions in certain sectors of spending. There’s an opportunity to pick something up at a good price and use our skills to build the business. We also think disruption in the fast-growing health care market will give rise to investment opportunities in complicated situations. We made two investments in Fund II in companies that benefit from improving efficiencies for large hospitals and healthcare management companies. Providing just one service to hospitals extremely well and extremely efficiently is a tremendous opportunity, because of the ongoing pressure to reduce costs and improve quality. We believe that opportunity will go on for a long time and influence Fund III.

How much fuel do you see left in the housing market? We do see ongoing growth and a rebound. Certainly there will be some rough spots as interest rates rise. But nevertheless when you look at the underlying data on household formation and the housing stock you have to conclude that demand is going to continue to be very strong. Honestly we’re seeing that right now in our portfolio. We have investments in two companies that are tied to the Florida housing market. American Builders Supply is a roll-up of companies that distribute windows, doors and trusses to Florida builders. We began putting that together in 2010. The underlying level of growth in housing starts has driven phenomenal growth in that company.

This column first appear on the website of sister magazine Buyouts. Edited for clarity

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