Exacting Standards Keep a Small Equity Firm in the Deals Race: Brockway Moran Counters Tight Credit With a Rein on Prices for Growth Companies

How does the small LBO player keep doing deals when it’s getting tougher to pry credit loose from increasingly flinty lenders? At Boca Raton, Fla.-based Brockway Moran & Partners the answer is don’t change what you were doing when borrowing seemed like a breeze. For Brockway Moran, which has carefully spaced its $200 million equity fund among 16 acquisitions or recapitalizations clustered around six platform companies since getting started in 1998, that means focusing on solid, mid-sized, “reasonably” priced bread-and-butter companies with strong prospects for growth. It was a good story for lenders in the palmier days and an even better story today, says Peter Brockway, one of the firm’s two principals. So, while many larger competitors are on the sidelines or pouring huge amounts of equity into their deals, Brockway Moran was in early March nearing completion on at least one other transaction, raising another fund, and keeping the equity strips on its structures in the 35% range. “To keep the returns going, you really have to make a significant difference with the company,” Brockway says. “You need to buy into the growth of the company. So, with every company we’ve gotten into one way or another, there’s a dramatic growth story there. Sometimes it’s the product, sometimes it’s the distribution, sometimes it’s the plants, sometimes it’s some fill-in acquisitions. But there is something that is going to drive that company to get growth well in excess of the economy.” Brockway Moran, he adds, doesn’t do a deal – priced on average between $75 million and $80 million – “where we can’t get at least 8% EBIT-DA growth,” exclusive of acquisitions. “A lot of that is organic, but it often means taking the company out of its mode – like expanding a plant or adding a product line,” Brockway states. “There are things you can do to supercharge it.” Probably the best known of Brockway Moran’s holdings is Gold’s Gym International Inc., the fitness chain that already had 500 gyms when the fund bought control of the company in 1999. But, Brockway noted, his firm is in a better position than the former owners to finance expansion in a market that still has room for considerable growth. While happy with the Gold’s investment, Brockway says it was a special opportunity for a fund that principally works in such manufacturing sectors as plastics, printed circuit boards, and aerospace products with firms that can benefit from a growth commitment. The other platform companies in the Brockway Moran portfolio include Norwesco Inc., in polyethylene tanks; Celeste Industries Corp., producer of specialty chemicals and airplane cabin service products; Integrated Aerospace Inc., maker of aerospace components; Dynamic Cooking Systems Inc., in barbecue grills, ranges, and other cooking equipment; and publicly traded TTM Technologies Inc., in printed circuit boards. Brockway is not sure whether other industries will be added, saying, “We focus on a platform that is a good company with a substantial management team. We’re opportunistic about getting into a new industry that meets our needs.” However, he states that there is no intention of going into higher reaches of technology that have tempted other financial buyers. “We like technology to be evolutionary, not revolutionary,” he says. “If we’re serving somebody in the high-tech area, we like to be something like the lower-tech component of it.” Printed circuit boards, for example, “have become more sophisticated, but the basic technology hasn’t changed.” Nor does Brockway Moran expect to do much with distressed companies, whose numbers may proliferate in the softer economy. “We wouldn’t buy fundamentally flawed companies,” Brockway says, although the firm might look at an over-leveraged business that has basically healthy operations and doesn’t need a shake-up in strategy. Brockway Moran’s timetable for exiting an investment is four to six years, because that much time is needed to make a “significant difference” in the company, Brockway notes. TTM, the only company taken public, produced a good return, but the preferred route is a sale to a strategic or financial buyer since few of the holdings have the size or cachet to catch public investors. TTM, which went public in September 2000 at $16 per share, represented a cost of $2.63 a share to the fund. “We virtually paid off the debt and paid back 42% on the original cost on our equity,” Brockway states. TTM shares recently sold in the 8 to 9 range on Nasdaq.