Could Sun Capital be on a roll, after two years of absorbing body blows? I’m not ready to pronounce a turnaround quite yet, but the Boca Raton, Fla.-based firm has scored two impressive exits in the past month and written up its portfolio. It’s even ready to do new deals.
Sun began brightening in October, when it reported modest write-ups for the first half of 2009. Across its portfolio, the firm’s holdings increased in value by 3%, including an 8% write-up for its latest fund. That’s hopeful, although needs to be kept in the context of that last fund being held at 60% of its value at year-end 2008.
That same month, Sun Capital earned back a little respect from investors by allowing them to decrease their commitments to its $6 billion fifth fund. The firm offered to cut commitments by $1 billion, allowing investors to decrease their stakes each by 16.7% and up to 33%, depending on how many chose to do so. That news was welcome to investors and a breath of fresh air to those that felt the firm was deaf to their concerns.
And that was before the firm sold off two investments, earning itself some respectable returns. On November 13, Sun announced the sale of Timothy’s Coffees of the World to Green Mountain Coffee Roasters, Inc. for $157 million. Sun purchased the specialty coffee supplier for $19.9 million in equity, and the sale represents a 5.25x cash-on-cash return and 186% IRR for the firm’s fifth fund, Sun Capital Partners V.
Last week, Sun closed its sale of K.K. Tarami, a Japanese maker of fruit gelatin products. The firm’s fourth fund earned 16.4x its money with a gross IRR of 216%, based on a 2007 investment of $3 million (Sun’s first and last deal in Japan).
In both instances, the firm stressed new product innovation as one of the drivers of profitability and growth. In the case of Tarami, the company was unprofitable at the time of purchase. Through increasing productivity, introducing products and improving material sourcing, the company’s sales increased by 40% and Ebitda increased by 246%.
Now, after extensive cost cutting-$1.3 billion in operating costs since Q4 of last year-Sun Capital’s companies may be poised to exit as the market comes back. Meanwhile, the firm is about to ramp up as a buyer, increasing its deal flow after doing less deals than its usual 20-30 in 2009. The firm plans to increase its deal activity next year, possibly to 2008 levels, when it did 23 deals. Sun Capital was much less active in 2009. The company purchased The Specialized Packaging Group through its paper mill company PaperWorks Industries, and Lang Holdings alongside Catterton Partners out of bankruptcy. It also re-invested in Big 10 Tire and Fluid Routing, two companies it owned which went bankrupt. The firm purchased the assets of Vatter GmbH, a Garman hosiery company and supplier to its portfolio Nur Die Group.
Scott Edwards, a principal with Sun Capital, said the firm does not believe the best time for distressed investing has passed.
“The best returns come not from investing early but more in the middle to end of the cycle,” he said, pointing out that it has become easier in recent months to value and understand what it takes to turn a company around.
The firm’s outlook is positive, Edwards said. “I feel a lot better today than I did back in February of this year,” he said. He listed four reasons for that sentiment:
- Sun Capital’s fund values are up year to date, as described above.
- The Ebitda of Sun Capital’s companies is up. “We’ve seen it take off in Q3,” he said, which is a testament that the actions the firm took after Q4 of last year to enhance profitability have worked.
- The health of the firm’s portfolio is healthier “by every single metric.” That includes everything from liquidity and covenants to operating statistics, he said.
- The firm has been able to return money to investors.
That doesn’t mean Sun Capital is ready to put the tough times behind it and move forward footloose and fancy free. The firm is concerned about unemployment numbers, as well as underemployment, which is as high as 17%, Edwards said. “That needs to get solved in order for us to see a real rebound,” he said.
It also still has to deal with the past two years of missteps, including 16 portfolio company bankruptcies, multiple rounds of layoffs, quite a few resignations and even its founding partner’s family drama. Moreover, its largest investment, Kellwood, was able to push back its debt maturities until 2014 with a bond exchange, but remained valued in Sun Capital’s portfolio at zero as of October.
So, muted fanfare for now, but that’s a vast improvement from where things had been heading.