PNC Equity Swings Three Recaps In One Company

Thanks to an amazingly lucky (or brilliantly calculated) set of macro-trends, PNC Equity has shaken three equity recaps out of one of its early portfolio companies, scoring a return greater than its initial investment before even thinking about its exit. PNC Equity bought Tangent Rail Corporation in 2005 out of its first fund raised independently of parent firm PNC. Since then, the PE arm has watched the rail industry take off as its customers consolidate.

The firm used five different lenders on the recap, a deal that wouldn’t have happened if it had started talks 30 days later, according to David Hillman of PNC Equity Partners. The full story, after the jump.

In its third dividend recap of portfolio company Tangent Rail Corporation, PNC Equity Partners has already earned back more than its initial investment in the railroad parts supplier. That dividend returns money to the Pittsburgh, Penn.-based firm’s first independent fund, PNC Equity Partners I. Prior efforts had been fully backed by the firm’s parent company, PNC.

Even though the firm pulled off a recap amidst burgeoning market turmoil, according to PNC Equity Partner David Hillman, “if it had been 30 days later, we wouldn’t have gotten it done.” Tangent Rail received senior debt from GE Antares Capital, GMAC Commerical Finance and Golub Capital. Babson Capital Management contributed subordinated debt.

No deal terms were disclosed, including PNC Equity’s initial investment. The firm’s standard equity check lies between $10 million and $30 million. PNC Equity identified the company as poised for growth in 2005, when it carved out and combined four subsidiaries of RailWorks to create Tangent Rail. The company’s revenues are greater than $100 million, Hillman said.

PNC Equity’s success with Tangent Rail to date has hinged partly on new growth for its customers, the major rail road operators like Union Pacific, Norfolk Southern, Burlington Northern Santa Fe and CSX. With rising gas prices, greater highway congestion and a truck driver shortage, the last decade has seen an increased reliance on rail to transport cargo. Rail cars carry more cargo per load while using less diesel fuel, Hillman explained. Likewise, the explosion of cheap imported goods, which arrive at ports in easily transportable containers, has allowed trains to haul more expensive wares. Before “containerization,” Hillman said. trains only carried cheap, bulky freight like grain.

The other factor in Tangent Rail’s growth is increased management incentive. PNC Equity gave the management team a significant equity stake in Tangent Rail, something they didn’t have under its previous parent. The firm also replaced Tangent Rail’s CFO and absorbed on its corporate development operations, which includes securing financing and evaluating add-on targets. Tangent Rail may participate in consolidation through add-on buys in the niche rail supply arena, although it’s a small market, Hillman said. Tangent Rail provides wooden crossties to railroad operators, many of which underwent a wave of consolidation in the last decade.

Even though PNC Equity has already recouped its investment, the firm won’t sell Tangent Rail soon given the dismal exit market. Hillman said eventually Tangent would make a strong secondary play for a buyout firm, since management has performed well under PNC Equity’s ownership, and the business has long term contracts, which provide high visibility on revenues.

Since its initial investment in Tangent Rail, PNC Equity has fully invested its first fund, worth $200 million, and raised a second. The firm has deployed around 30 percent on PNC Equity Partners II, a $275 million pool that closed in 2007.<–>