After running Seven Mile Capital Partners, you’re leading a new seven-member Ardian team that’s investing in North American middle-market companies. What are the roots of SMCP?
In 2009, I took over as head of private equity and alternatives for Citi Holdings, the entity that Citi set up [to divest] non-core assets. I was overseeing the wind-down of a $6 billion portfolio of private equity assets. We sold a lot of the assets, and then in a final transaction for Citi in 2011 we spun out with the remaining assets to form Seven Mile Capital Partners. Ardian was the major investor in terms of buying up the private equity portfolio. We still have the initial portfolio we purchased from Citi and we’ve done some other transactions with backing from Ardian and other investors. We’re entirely direct investors. My partner, Kevin Kruse [now managing director at Ardian,] had joined Seven Mile after working at the industrial group at Warburg Pincus.
How do you avoid overpaying for deals?
We are selective. Everything we look at has a nice cash-flow profile, so we’re not distressed investors by any means. We look for good companies going through transitions. We love corporate carve-outs and we’re spending time on one now. We’re considering a couple of transactions of owner-operated businesses looking to bring in institutional capital for generational planning.
At Seven Mile, we bought Microporous LLC, a developer of high performance rubber and polyurethane separators, as a carveout from Polypore International. We also bought Huron Inc, a manufacturer of complex tubular assemblies for the automotive equipment market. We’re a control investor. We’re buying 100 percent. All of these companies are in the industrial and related business services sectors. It’s a very focused strategy. We look at companies from [$10 million to $50 million] of EBITDA but we spend about 90 percent of our time in the range of [$20 million to $35 million] of EBITDA.
What tools must all LPs build up before moving into direct investing?
This is a people business. There’s not a lot of magic to it. LPs have to first think closely about what they’re trying to achieve with a direct team. Any time you build up a direct team, you’re starting to get a concentration in your investments. You have to figure out how to incentivize the team and create long-term cohesiveness. LPs always like GP teams that have been together for a while when they invest in a fund. As they build their own teams, one thing they need to think about is how they replicate those long-term relationships internally.
Will we see more LPs setting up direct investment teams?
The larger institutions will always allocate some capital to do this. They’ll be smart to keep a nice portion of their assets in direct investments, but also with traditional funds that provide them with more flexibility without the regulatory compliance and back-office expenses of running their own direct-investing teams. For larger institutions, it may make sense. Ultimately the jury is still out on whether it works. The question is: Can LPs attract the best people or talent to be successful?
Any exit multiples that may have sparked Ardian’s interest to take your team in-house?
There’s no public information available on any of our exit multiples. Clearly, we’ve developed a relationship with the team at Ardian and we know each other well. We know our investment styles and have developed a good relationship. For us, this was an easy evolution that formalizes a relationship we’ve had for six years now.
Edited for clarity by Steve Gelsi
Photo of Vince Fandozzi courtesy of Ardian
Correction: This story has been updated to correct a dollar figure for the upper end of Ardian’s direct deal size for about 90 percent of its transactions. The correct figure is $35 million of EBITDA, not $25 million.