Despite the pall that hangs over private equity, there’s still life in the marketplace as some transactions get done. They target growing firms with low levels of debt. And they’re willing in invest in a tough environment.

Take the example of Consolidated Fastrate, a 43-year-old logistics and trucking firm. It was recently acquired by Fenway Partners, a $2 billion middle market private equity firm based in New York that runs three institutional funds.

Consolidated Fastrate had $225 million in revenue, earnings before interest, taxes, depreciation and amortization of 7% and no bank debt, explains Ron Tepper, the company’s executive chairman. In 2006, his senior managers, meeting to consider the company’s future, devised a growth plan.

“We can be a billion-dollar company in five years,” Tepper recalls. The idea was to break the company into four divisions, adding acquisitions to organic growth to create four $250-million companies, all with EBITDA in the 7% to 9% range.

As an incentive, Tepper offered his managers 25% of EBITDA for the year if they reached that goal in year five. Tepper’s task was to find the money to make acquisitions, and to find the acquisitions. Tepper made his remarks earlier this month at a symposium on private equity jointly sponsored by the Canadian Institute of Chartered Business Valuators, the Canadian Venture Capital Association, the Canadian chapter of Financial Executives International and the Toronto CFA Society.

But prices were high. The first company Tepper looked at had $40 million in revenue with $3 million to $4 million in EBITDA. The owner wanted roughly $25 million, a multiple of 7 to 8 times those earnings. What contributed to that was the frenzy to convert companies to income trusts, which were fetching multiples of 9 or 10 times EBITDA. And Tepper’s own company was approached about an income trust conversion.

The turning point came when Tepper realized that he already had two companies under Fastrate’s umbrella with profiles similar to the company he was thinking of buying. “I started thinking we own two companies within our group and the two companies essentially did what this guy’s company did, and the two companies essentially did $40 million of business and they essentially made the same EBITDA, as he did. So, I was saying to myself, would I pay $25 million for my two companies and I know them, I’ve operated them, and the answer to me was clearly no,” he recalls, concluding, “We’re not going to get to a $1 billion company through acquisition, and very little by organic growth.”

A coincidental meeting to compare notes with an American company that ran a business similar to that of one of Fastrate’s subsidiaries pointed Tepper in a different direction.

One of Fenway’s, John Q. Anderson, said to Tepper, “What’s it going to take? We need a portfolio company in Canada that we can build upon.”

The deal was completed in November 2007. “We were a very healthy company financially,” says Tepper, “in no need of selling and no desire to sell. So I was able to sit back and say, ‘here’s my price.'”

But, he adds, “it was critical that we had a private equity company that understood our business. They’re very active in our industry in the United States. They’ve been very successful in building up and selling over a period of time.”

Mark Kramer, executive vice-president at Fenway, acknowledges that the deal was done on Fastrate’s terms. Fastrate is part of a fund Fenway runs that is focused on consumer businesses. Fenway has made 30 acquisitions, of which 28 “were situations like Fastrate, where we had the opportunity to buy the business from the founder or the founding family or the key entrepreneur.”

In the process Tepper was made executive chairman and a new CEO brought in. Although Fenway is now the majority shareholder — Tepper retains a stake, Kramer says “We don’t try to operate this company by holding the high card. We try to do it in collaborative fashion because we to capture the expertise and the relationships and the information to expand this business over time.”

Of course, in challenging times, that’s a necessity. As Tepper points out, trucking is a barometer of the economy. Still, Kramer says, “we haven’t put too much leverage on this company.” In part, that stems from philosophical reasons. To expand a company will require more resources in the future. And transportation is cyclical.

Still, there is some leverage. Fenway works with GE Antares Capital. Managing Director Dan Glickman notes that the firm focuses on the middle market, on private equity firms with $500 million to $3 billion under management.

An index of how far the leveraged loan market has fallen is provided by trading prices on the secondary market. For more than a decade, leveraged loans were “viewed somewhat like a money market fund,” Glickman says, and traded at 100 cents on the dollar. Starting in June 2007, they plunged to 60 cents as banks pulled out, hedge funds were forced to redeem, and pension funds and insurance companies liquidated. Today the loans are trading at 72 cents.

Debt issuance fell too, from $500 billion in 2007 to $159 billion in 2008. And loan ratios narrowed. At the peak of the market, loans were almost 5 times EBITDA; now they’re 3.8 times EBITDA total. That’s quite a change in a short period, a few years ago, “we were getting the terms handed to us as funds said, ‘take it or leave it’,” reflects Glickman, though he thinks the current terms, 9.5% interest on a solid company, are an overreaction.

The current scarcity of debt points to another aspect of Fenway’s process. “We typically don’t invest in turnaround situations,” says Kramer. It targets the top three growth companies in a given niche. At the same time, “if it’s purely writing a cheque and providing capital, sorry, it’s not for us.”


Filed by Scot Blythe,, is the sister site to, focusing on the needs of the financial advisor serving the retail investor.

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