Five Questions with Tony Lee, co-founder of One Rock Capital Partners

One Rock Capital, a spinout of Ripplewood Holdings formed in 2010, has been busy this quarter. The firm, which has $1.4 billion in capital, announced three deals in 2019, two of which are complex corporate carveouts. Tony Lee, who co-founded the firm with Scott Spielvogel, spoke to Buyouts about deal sourcing, valuations and opportunities in less glamorous market segments.

Where does One Rock spend most of its time looking for deals?

From the industry standpoint, we continue to focus on areas where we’ve spent most of our careers: chemicals, process industries, industrial manufacturing, business and environmental services. From a style standpoint, we continue to focus on complex situations, misunderstood companies and industries, under-optimized companies, corporate carveouts. These opportunities are less straight-forward and require a ton of work and take a ton of time to execute. [This is] an opportunity to generate a very attractive return in any deal environment.

How intense is competition for deals in this market?

We don’t feel like there is a growing number of competitors looking into this space. And we are comfortable with that. It seems like everyone these days is focusing a lot more time and attention on technology, software, fintech and things of this nature. Industrial sectors may not be as glamorous …but they are massive with tens of thousands of opportunities. There is a misperception of slower-growth assets being less poised for value creation. Priced right and executed well, industrial sector buyouts have every bit the return profile as higher-growth sectors.  

How would you characterize valuations in those sectors?

It’s been an extremely expensive environment for a number of years. The reason we are focusing on “messier” deals is because we can buy those companies at more attractive multiples. Since inception, One Rock has paid a weighted average Ebitda multiple of ~6.5x, which has not been an easy thing to do over the past few years. The firm is operating at a much higher speed to source more opportunities in order to be able to adhere to the firm’s valuation discipline.

What do you like about corporate carveouts?

We just see a lot more of these opportunities. It seems that there are many reasons driving those carveouts: large corporate mergers requiring the divestiture of assets for anti-trust reasons, shedding of non-core businesses and shareholder activism. Nexeo Plastics and Process Solutions were both carveouts that are being divested for one or more of these factors, [and as] we look at our pipeline we see a lot more opportunities in carve-outs too.

Tell me about your recent deals that represent One Rock’s strategy

We are closed on Nexeo Plastics on March 29 and plan to close Process Solutions at the end of April/early May. Nexeo Plastics and Process Solutions share a bunch of similarities and represent classic One Rock investments. They are industry leaders in terms of market share, both represent very complex corporate carveouts. The other similarity is both companies are extremely improvable, because they have a history of operating in a constrained environment: they were not afforded the time and the resources to realize their full potential.

We are working on the execution and extraction of setting up those businesses as standalones. And we are able to do that because we have a number of operating partners that are full time [with us] and exclusive and they’ve come from the industry. We do have the in-house resources to help in the establishment of the stand-alone entities from these carveouts.

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