GP Profile: GTCR Golder Rauner Tees Up The Deals
buyoutsnews.com
By Bernard Vaughan
BuyoutsNews
17 August, 2009
GTCR Golder Rauner, the Chicago buyout shop, is prepping to ramp up its signature consolidation strategy, having created four new platforms this year alone. The pressure now is on to complete acquisitions for these shell companies with little help from a frail financing market.
It is a challenge embraced by GTCR executives, who employ a growth equity-buyout hybrid strategy that leaves them room to do all-equity transactions but that, in some respects, is riskier than a traditional buyout strategy.
Among the new platforms that GTCR, about halfway through investing its vintage 2006 ninth fund of $2.7 billion, has created this year are Actient Pharmaceuticals LLC, a Deerfield, Ill.-based company to which the firm in March committed up to $200 million to buy specialty pharmaceutical companies and products. Others include Six3 Systems Inc., a company GTCR helped form in June to buy up businesses in the national security and defense intelligence industries, and which has already agreed to acquire Harding Security Associates Inc., and ReSurge Ltd, a company to which the firm committed $150 million in June to buy, sell and lease libraries of three-dimensional seismic data that energy companies use to explore for oil. Last month the firm also announced it was backing Palladium Financial Holdings, a company created to buy businesses that deal with consumer credit, payments and rewards programs, to the tune of $200 million.
Aside from its traditional consolidations, the firm this June also took a minority stake in Ironshore Inc. leading a $300 million investment in the Bermuda-based property casualty insurance company.
Meantime, GTCR completed two add-on acquisitions this year. In April, Boomerang Media, which buys entertainment copyrights, bought the principal U.K. and U.S. trading subsidiaries of Entertainment Rights, a company that owns the rights to such franchises as Casper the Friendly Ghost and The Lone Ranger. And last month Graceway Pharmaceuticals purchased the commercial rights of three compounds that treat oily skin and acne from Pfizer.
GTCR also logged a successful exit this year, selling OVATION Pharmaceuticals in March for a 6x return on its equity after a seven-year holding period.
It's all part of the firm's effort to build on a track record that's been remarkably consistent over the years. The firm's fourth fund, vintage 1993, and fifth fund, vintage 1996, generated IRRs of 24.94 percent and 11.34 percent, respectively, as of Sept. 30, 2008 for the California State Teachers’ Retirement System, which doesn’t provide investment multiples. Fund VII, vintage 2000, has generated a 23.4 percent IRR and investment multiple of 2.34x for backer Washington State Investment Board as of Dec. 31, 2008, while Fund VIII, vintage 2003, has generated a 32.8 percent IRR and returned 1.76x invested capital. The firm’s gross IRR since its inception is 35.7 percent, according to David Donnini, a GTCR principal.
The Strategy
GTCR's bread-and-butter strategy centers on consolidation.
After researching a fast-growing sector for anywhere from two to six years, GTCR teams up with an executive—one it has worked with before, more often than not—to create a platform shell company to go out and buy companies in that industry. Over the last decade, 70 percent of the firm’s investments involved follow-on acquisitions.
The firm’s specialty sectors include business services and outsourcing, consumer products, financial services, health care, technology, and transaction processing. Executives especially favor industries that they feel are difficult to understand. “We want our partners to truly be insiders in domains they’re responsible for,” said Phil Canfield, a principal at GTCR. “When you’re getting calls from guys running businesses, you find yourself in a position to see opportunities long before they’re being written about in industry trade rags.”
GTCR’s pre-investment research, while time consuming, often pays off when it comes to auctions. James Schroder, a partner at investment bank Arma Partners, said Canfield and Vice President Mark Anderson were the only bidders on Sorenson Communications to notice that the company was carrying at full cost certain expenses that could be claimed as capital expenses on its balance sheet. This allowed GTCR to see more profit potential and to place a higher value on the Salt Lake City-based provider of communication services for the deaf community, which it bought in November 2005.
“If I have a very good deal that I think could be a great opportunity, they’ll absolutely see it,” said Schroder, who also advised IQNavigator in its June 2008 sale to GTCR. “If they see something they like they will just go after it, and it generally turns out to be a win-win for both parties.”
John Morris, a managing director at fund-of-funds manager HarbourVest Partners, pointed out the firm's habit of starting platforms from scratch in fast-growing markets and observed, “They’re really a bit of a hybrid between venture capital and buyouts.”
Indeed, there appears to be an element of venture-like risk and return to the strategy. Rather than a single established company, GTCR is essentially placing its bets on industry trends, which sometimes don’t evolve according to plans. One banker told Buyouts that his firm, which has on occasion lost money financing GTCR deals, is especially cautious when evaluating the shop's deals. “They have on the aggregate very strong returns, but they tend to have some volatility,” said the banker. “They feel they find the best in breed with management and they have no problem being fairly aggressive with what they take on with that manager.”
That said, GTCR's Canfield believes that growth investing, if done right, isn’t any more riskier than straight buyout investing. He noted that most losses occurring in the private equity industry today concern traditional buyouts weighed down with debt. Canfield estimated that GTCR achieves its goal of making 2.5x on each investment more than two-thirds of the time. “In the current environment, I can’t think of another private equity portfolio that’s performing as well ours,” he said.
According to Donnini, revenue and net profit at GTCR’s 25 portfolio companies rose, in the aggregate, about 10 percent in the fourth quarter, in the heart of the recession. Bruce Rauner, chairman, told delegates at the Buyouts Chicago conference in June that four or five portfolio companies were “really struggling,” with earnings and revenues down and possibly facing restructuring, according to the Chicago Tribune. At least one company, food decoration equipment maker Wilton Products Inc, has been publicly flirting with bankruptcy.
Executives point out that they were able to return much more money than they invested during the buyout boom years. From 2004 through 2007, the firm invested $2.5 billion while returning 3x that amount—$7.5 billion—to its investors. This, executives said, translates to a smaller, relatively healthy portfolio. “We’re a lot less bogged down than our peers with large portfolios, and I think that frees us up to think creatively and think more about investing,” said Craig Bondy, a GTCR principal.
Executives at GTCR are currently scouting deals in health care services, managed care, pharmaceuticals and medical products; as well as in seismic information for energy companies; national security and defense intelligence; technology and information services; and credit card processing.
Fresh underwriting of new capital structures is still rare, but the firm sees plenty of opportunities that don’t require new capital structures or where they can employ reasonable amounts of senior and mezzanine debt. Executives are also seeking deals where they can re-structure existing financing agreements. For example, when Boomerang Media in April bought the U.K. and U.S. trading subsidiaries of Entertainment Rights, GTCR arranged for the company’s existing lender, Lloyds TSB, to finance 50 percent of the $99 million purchase price.
GTCR also sees opportunities to invest in companies it previously looked at but passed on because the prices were too high, and good businesses that need capital to fund acquisitions or de-leverage. The firm plans to raise a 10th fund in mid to late-2010. “Our view is that right now is a much better time to be a buyer than a seller,” Canfield said.
By Bernard Vaughan
Snapshot
Firm: GTCR Golder Rauner
Headquarters: Chicago
History: Founded as Golder Thoma & Co. by Carl Thoma and the late Stanley Golder in 1980. Became Golder Thoma & Cressey in 1984 with the addition of Bryan Cressey, and, with the elevation of Bruce Rauner to partner it became Golder Thoma Cressey Rauner. In 1998, Cressey and Thoma split to start Thoma Cressey Equity Partners, and Golder and Rauner started GTCR Golder Rauner.
Strategy: Buyouts and buy-and-build in sectors such as business services and outsourcing, consumer products, financial services, health care, technology, and transaction processing. Typically invests between $30 million and $250 million per transaction.
Number of Investment Pros: 41
Key Professionals: Bruce Rauner, chairman (transitioning to an advisory role in next fund); and Principals Craig Bondy, Phil Canfield, David Donnini, Joe Nolan and Collin Roche. |
