Patience isn’t just preached at Stonewood Capital Management Inc., a Pittsburgh private equity group that focuses on management-led buyouts of manufacturing, assembly and distribution companies. It’s practiced.
“We are much more buy-and-hold than the typical fund,” President Kenn Moritz says.
While PE investors today are less focused on exit and more focused on building value — at Stonewood, one of its eight to 10 portfolio companies could be held for more than 10 years or sold after three. It’s a flexible approach based on trying strategies until the promise of growth turns into a reality, Moritz says.
However, this patient approach can be tested when a partner needs liquidity.
Moritz, who has been with the firm since 2001, talks about the importance of staying flexible during dealmaking and why the fewer owners in a deal, the better.
Who do you partner with for deals?
Typically, we’re partnering with management. We’re not a 100 percent owner. Managers have stakes in the businesses. We also, on an ad-hoc basis, find partners that we think can add value to a transaction. We will partner with somebody who has a particular expertise in an industry, if they’re interested in a co-investment.
We have the advantage of being able to invest in the entire capital structure, so we provide flexible approaches for managers who are investing, with respect to their stakes and their upside potential, their incentives, because we can use sub-debt, as opposed to only equity.
What happens if your co-investors want faster results?
When we have partners, whether they’re limited partners or they’re investing pari-passu, we try to explain that we are very patient and we want to make sure that our general feelings along those lines are compatible.
Things change; we understand some people need liquidity, all of a sudden, that they didn’t expect to need. We try to deal with those issues as they come up. We can certainly figure out ways to get people liquid, even if we haven’t sold the company. We’re flexible in that approach as well.
When you go into a transaction you want to have good visibility into everybody’s expectations.
You focus on manufacturers. Any other buying strategies?
We have this unwritten rule: If there are three owners of the business, we stay away. In our experience, it is very difficult to get three co-equal owners to agree on anything, so you must tread with caution in these situations. One owner, perfect. Two owners, OK. Three owners, too many.
What memorable deals has Stonewood been involved in?
We’ve had a pretty long run. We sold Emglo Air Compressors some years ago to DeWalt (2001). We sold PCN Network just a year ago to First American Mortgage Services. We were involved in the sale of Rita’s Water Ice to Falconhead Capital (2011).
When selling to a strategic buyer, does the deal process change?
They’re all different. Issues come up. The parties are usually different. The personalities are different. The agendas are different. It’s just hard to generalize.
When we sell it to a strategic, you have a general concept that: OK, these guys are sophisticated. They know what to do. They don’t need financing. They have all the ducks in a row. They have these business development people that are going to descend upon us, do what they do, and it’s going to be 60 days, sign, close, boom — and that never happens.
What delays the process?
The why not is fill in the blank. Something will happen, you don’t know what. People aren’t as sophisticated as you thought they might be. You’ll have law firms that are trying to prove a point about something … The realities of the financial reporting cycles — when they want to get a deal done, when they don’t want to get a deal done, when they have to disclose it, when they don’t want to disclose it — all these things crop up along the way.
And when you’re selling to PE?
Everybody has a different way of doing a transaction. In my view, the hardest thing for a private equity group to find is the next really good transaction, the next company that’s a good investment.
The management aspect of what we do — the blocking and tackling, putting in procedures and workflows, getting the good managers and executing growth strategies — I’m not saying these things are easy to accomplish, all of them provide challenges, but you can control these things to some extent. With deals, it’s difficult to know when a good transaction will present itself — the timing is usually outside of your control.
To me, if you find a good company, you want to make sure that you get a deal done. You try to get that momentum toward a deal to happen by establishing relationships, by indicating that you’re a negotiator who does what they say they’re going to do, etc. You want to make sure that you can close and the fact that you can put everything else aside to get it done.
That’s my view. Other people don’t have that view. They want to negotiate, even letters of intent, to the point where they become tedious.
When a deal starts to derail, how do you get it back on track?
Our approach in negotiating is to be flexible, to understand people’s agendas and what drives their decisions and try to accommodate them to the extent we can. Not taking a position just for the sake of the position, but rather to think about how this all works together and whether we can stomach the risk that’s being foisted upon us or suggested that we take.
Some deals can be put back on track, and some deals, once they’re off the rails, they’re off the rails. You hope you don’t get there, but it happens with everybody.
The key is to know what you’re dealing with, because the worst thing is the waste of time. No one wants to do that, and if you really can’t see the end to a transaction because of whatever the particular issue is, it’s best to cut bait.