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How Do Private Equity Firms Add Value?

By Generational Equity

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On July 7 Clearview Capital announced that it sold one if its holdings, the QualSpec Group, to Team, Inc. According to the press release:

After a very productive nearly seven-year run during which revenue and EBITDA more than tripled, the QualSpec Group ("QualSpec") has been sold by Clearview Capital Fund II, LP ("Fund II") to Team, Inc. (NYSE: TISI) for $255 million cash plus the potential for an additional payment of up to $10 million based on the achievement of certain financial targets for the 2015 calendar year.

What caught my eye was the fact that during the seven-year time frame that Clearview participated in the ownership of the company, revenue AND earnings both tripled. This tells us two things: Clearview and company management were very effective in growing the business and, most likely, a number of “add-ons” were acquired throughout the years to expand this holding.

I did a little research and found out that both assumptions were true. In October of 2008 Clearview made an initial investment in a company called All Tech Inspection, Inc., which provided inspection services through trained and certified personnel. This company provided the “platform” that Clearview would grow into The QualSpec Group. According to the information released at the time found on Cap IQ:

Clearview Capital, LLC, through its fund Clearview Capital Fund II, LP, along with the management of All Tech acquired All Tech Inspection on October 29, 2008. The current management of All Tech would maintain a substantial equity stake in All Tech and would also retain day-to-day management control and have operational autonomy.

This is what is typically termed a “partial sale” or recap. Under this deal structure, ownership is retained post sale and is provided capital, marketing, and sales knowhow; managerial guidance; and in some cases personnel to help the business reach new heights. All Tech became the platform company that additional acquisitions would be bolted on to. In fact, during the subsequent seven years two additional acquisitions were made which lead to the forming of The QualSpec Group. According to Cap IQ:

October 2009 - Clearview Capital Fund II, L.P., managed by Clearview Capital, LLC, along with the management acquired Iesco, Inc., in a management buyout and recapitalization transaction on October 8, 2009. The financial terms of the transaction were not disclosed. Brian Shannon will continue as President and Chief Executive Officer of IESCO as will all current management and employees.

April 2011 - IESCO, Inc., in conjunction with management of TC Inspection, Inc., and Hawk Rope Access Services, Inc., acquired TC Inspection, Inc., and Hawk Rope Access Services, Inc., on April 1, 2011.

IESCO of Torrance, CA, is the largest independent provider of inspection and non-destructive testing services to the energy sector in California. TC Hawk represents one of the largest independent providers of inspection and non-destructive testing services to the energy sector in Northern California. You can see that these additional acquisitions funded by Clearview were extremely synergistic with the platform company and were merged together to create a leading player in the inspection/testing industry.

According to Paul Caliento, partner of Clearview Capital:

"QualSpec's management, led by CEO Declan Rushe and CFO Clarke Coccari, did a tremendous job building the company over the past several years. The sale of the company to Team is really the best of all worlds since it represents another successful exit for us while joining the company and its talented management team with the perfect strategic partner."

A Win-Win Scenario

The reason I am highlighting this transaction is that it is a classic example of how equity firms that focus on the lower middle-market tend to operate. They look for solid companies in fragmented industries that have opportunity to grow but need capital and marketing/sales/financial muscle to help them get there. Far too often business owners ignore equity firms when considering their exit strategies. The scenario outlined in this article is a clear case where existing owners and leaders at the equity firm combine to create something new and exciting.

What is really interesting is that this is not an isolated scenario for Clearview. In fact, according thepress release, Clearview Capital's other holdings include:

Look at that list! Odds are good that each of these platforms is actively looking for synergistic add-ons to supplement their operations. As you can tell from the QualSpec transaction, Clearview is successful in creating tremendous value not only for their investors but also for existing ownership and management of their holdings.

Private equity firms invest in a good portion of our clients. We have been very successful throughout the years in helping our clients that fit with the partial sale scenario achieve their financial dreams. Here are a couple of examples:

Naturally, not every business (nor every business owner) is an ideal fit for a partial sale. A good number of entrepreneurs come to us and say, Look, I am burned out, tired, and just ready to move on. In those cases, an outright sale is a better scenario. However, what we see time and time again is that as owners go through our process, their desired goals often change as they begin to understand the benefits of selling a majority of the company now, retaining a portion, and staying on board for a few years. When that happens, we shift gears and focus on buyers/investors like Clearview.

To learn more about equity firms like Clearview, I suggest attending a Generational Equity M&A seminar. Not only will you gain a renewed appreciation of the various types of owners now active, but you will also be able to meet with our team one-on-one and discuss your specific needs. To learn more, visit our website, provide us with your contact information and we will be in touch.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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