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Q&A with Marc Leder: Has The Sun Returned?

Sun Capital Partners, a distressed buyer with roughly $8 billion of equity capital under management, suffered setbacks during 2008 to 2009 when several of its portfolio companies filed for bankruptcy. One year later, Sun Capital is apparently back. Marc Leder, Sun Capital’s co-CEO, recently spoke by phone with peHUB.

How have things changed for Sun this year compared to 2009?

I don’t think we’ve ever been doing better. In terms of portfolio performance, our deal pipeline and exits, I don’t think everything has been as good as it is today. We’ve completed 15 to 20 deals so far this year and we’re expecting to complete 30 by the end of 2010.

How many your portfolio companies have filed for bankruptcy?
I don’t think we’ve had a single one in the last year. Don’t know about last year [in 2009]. Three we put into bankruptcy ourselves. We already owned them and used the bankruptcy process to eliminate certain problems. We have no companies still in bankruptcy. We haven’t had a bankruptcy or a problem for over a year.

We own over 80 companies right now. That’s more than a typical private equity firm. If you look at other firms, they have more bankruptcies as a percentage of their portfolio than we do. We had a few during a short period of time and we got a bunch of press on it.

Do you expect any more bankruptcies this year?

No, we don’t expect any this year. Our portfolio is extraordinarily healthy. We don’t have a single company that is facing a significant liquidity, covenant or a refinancing risk. Obviously, there could be a double dip recession, or an industry vertical could go into a bad cycle. But our portfolio is extraordinarily healthy.

You laid off some people in 2009. Where does Sun Capital’s headcount stand now?
We peaked at 198 people at the end 2008. We cut about one-fourth of our staff in the first half of 2009. Over last year we’re steadily adding people back to our team. We have 150 people right now

The layoffs were in two categories. We did have a hedge fund or a hybrid fund, which we terminated last June. A number of layoffs were people who bought and sold public securities [for that fund]. Another chunk of layoffs came from our two deal offices in Tokyo and Shanghai. We terminated our Tokyo and Shanghai offices.

You’re hiring now?
We’ll probably end up adding 10 people this year. We have people starting every quarter. Pretty much we’re hiring in all our offices. We’re hiring at the associate level because we have traditional pyramid [structure]. We’re also hiring for some specific positions. We added a capital markets VP in Europe.

You reduced your last fund, Sun Capital V, by $1 billion to $5 billion. In retrospect, did you cut it deep enough given the current deal activity or too much?
We think it was properly sized at $6 billion and properly sized when we took it down to $5 billion to accommodate our LPs. It gives us adequate capital to invest through the end of our investment period, which is April 2013. We have $3.2 billion capital available [from fund V] and three years to invest in new platforms. And then another six years to invest in add-on acquisitions and growth and other initiatives.

Have the credit markets improved?
Since the end of 2009, the credit markets in U.S. have improved, but the credit markets in Europe have not. I think you’re right that they have gotten worse.

Is it true you won’t buy a company for more than four times EBITDA?

Well, we paid six times EBITDA for Timothy’s Coffees in 2008. We buy a lot of heavily distressed companies. We are a value buyer. We’re not going to be the “spike bid” and we won’t pay 10-12 times EBITDA for a healthy, well run business. But the reason we complete a lot of transactions is we are offering a fair value for a troubled business.