Graham Partners Plumbs for Deals Where Change Is Impacting Markets

As the private equity universe has evolved over the last decade, many financial buyers have honed their investment strategies to specialize in specific industries or markets. But few are as laser-like in focus as Wayne, Pa.-based Graham Partners, which hitches its acquisitions to major changeovers in industrial and manufacturing sectors and the growth that can be captured from being in the right place during a transition. Graham Partners, says principal Christopher Lawler, buys middle-market businesses, up to $500 million in sales, that “are benefiting from some kind of raw materials conversion or product substitution or technical change within their industry niches that will give rise to a growth trajectory that exceeds the overall market.” Good marketing drives growth Lawler cites the example of portfolio company Eldorado Stone, a manufacturer of stone veneer sidings for commercial and residential buildings, which is gaining increased acceptability because it costs less than natural stone, matches up well on durability, and can be engineered to look like the real thing. The manufactured stone market, currently about $350 million in sales a year, is growing at 15% annually. “Our company is growing better than that by virtue of a good marketing strategy and a good product,” he says. “And it’s facing off against an overall $8 billion siding market that is growing at only 3% to 5% a year.” HB&G Building Products, which produces building columns from polymer and fiberglass as an alternative to wood, also fits the prototypical Graham target because of the capacity for expanding product lines. “When we looked at HB&G, we not only saw columns,” Lawler says, “but we also saw decking, railings, and exterior trim converting to polymer-based compositions and away from wood and natural materials.” A unique operating strategy If the strategy is unique, so is the structure that spawned it. Graham Partners is one of the few leveraged buyers that is directly affiliated with an industrial operating business – in its case, privately owned Graham Group, a complex of plastic packaging, plastics machinery, and aluminum windows companies based in York, Pa. The investment approach, Lawler points out, grew from Graham Packaging’s leadership in converting several markets to plastic containers, such as motor oil from composite cans, detergents from cardboard, and beverages from glass, cardboard, and metal. Although the Graham Partners team independently seeks out promising targets in the middle market or fields prospects offered by intermediaries familiar with its tough criteria, the investment unit can call on Graham Group for a wide variety of expert help. That can include everything from purchasing of plastic resins to cut costs to “shop-floor” assistance in manufacturing and choosing the right machinery. Lawler figures that gives Graham an edge both post-acquisition and in persuading entrepreneurs to sell because “we can demonstrate that we know a lot about your business and we have very specific thoughts on how we can grow your business.” Graham’s mid-market targets, Lawler points out, while “leading the charge” on some type of conversion, have reached the stage where they could use some additional help to keep growing and supporting high returns on capital. Besides injecting fresh capital and transferring know-how from Graham Group, the firm’s personnel will help create a formalized strategic plan and expand management to recognize the increased size and sophistication of the business. Thus far, Graham Partners, which reached for third-party capital for the first time in its 15-year history by a raising a fund in 1999 and 2000, has gone mainly into plastics and building materials. Other portfolio companies include National Diversified Sales, in plastic irrigation and drainage products; Western Industries, which makes plastic and metal parts for home and outdoor products, appliances, and agricultural and construction equipment; and its latest acquisition, Nailite Industries, in molded polypropylene siding. However, Lawler says that’s only for openers. Graham ultimately will look at any industry where change is driven by products that are easier to install, cost less to make and install, and don’t stint on aesthetics. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com