The Succession Fund: private equity financing for succession transactions, management buyouts, and shareholders looking for partial liquidity or wanting to “take chips off the table

Market calls for innovation in Private Equity

Market calls for innovation in Private Equity

This article originally appeared in The Financial Post on October 6, 2008 as written by Karen Mazurkewich.

The year-to-date global buyout activity is dismal--down 74% from a year ago to hit the US$180-billion mark--according to Thomson Reuters. With credit pools dried up, the "debt party" is over, says one Canadian private-equity player. To be sure, Canadian private equity is a kinder, gentler, less-leveraged version of U. S. private equity. But while Canadian firms are not as stressed as their U. S. cousins, many of the local players have hunkered down to take care of the companies in their portfolios --companies that were purchased with cheap debt. Few have jumped to buy in recent months, even though valuations are dropping. When it comes to private equity, the operative word is "creativity." There are some companies offering some innovative strategies in today's challenging market.

The Succession Fund: This new fund steps in when one or more minority shareholders of small or medium sized companies want to take some chips off the table, or their partners don't want to sell.

How is this different from traditional private equity deals?

"Historically, private equity investors usually look to invest in the balance sheet of the operating company, whereas we look to buy shares from the selling shareholder in a fundamentally sound firm," says managing partner Larry Klar. The fund's potential partners are debt adverse, want modest growth, and are eager to reinvest in capital equipment and keep employees, says Mr. Klar. The Succession Fund is a different kind of buyout fund. It simply uses equity to buy out shareholders. "For the most part, the company doesn't need an investment from us," he adds.

Players: Larry Klar joined Argosy Partners in 2006 to set up this fund. Argosy is also a general partner of The Shotgun Fund, a unique private equity fund that makes investments in private companies experiencing shareholder conflict. (It will purchase shares from departing shareholders when the "shotgun" clause or buy-sell agreement has been triggered.) The Succession Fund completed its first deal in January 2008. The parameters of the fund are to own not less than 35% of the business. In addition: "We won't do a deal unless the management team owns over 50% of the business," says Mr. Klar. This aligns interests and ensures that everyone has significant skin in the game, according to Mr. Klar.

Tim Mitchell, founder and president of Westmount Storefront Systems Ltd. in Kitchener, Ont., was ready to take on a professional investor. The company installs architectural glass windows, and assembles and installs aluminum curtain-wall framing for large commercial spaces. Company revenues are $20-million per year.

The deal: Mr. Mitchell had already brought in an outside general manager, Rino Messore, to bring a deeper management bench strength to facilitate growth. Mr. Mitchell did not have a natural successor, so estate planning was essential. It's not unusual for founders to try and fatten their company's for eventual sale. Mr. Mitchell's lawyer, David Fedy of Wildeboer Dellelce in Kitchener, heard of The Succession Fund's style and arranged an introduction. "When the Succession Fund meets with owners, most of them are beginning to think about these issues and know it's prudent to address them," says Mr. Klar. "We helped Tim Mitchell take some of his chips off the table and became a significant minority equity investor in Westmount." This ensures that companies like Westmount don't have to sell the entire business prematurely or incur additional debt. Representatives of The Succession Fund will join the board of directors.


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When owner-managers want some cash out

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Argosy Partners Brochure: The Succession Fund, Bridge Fund, and Shotgun Fund