Huron Capital's Flex Fund courts owners who want growth but also control
Huron Capital, Michigan's most active private equity firm, recently raised the $141 million Huron Flex Equity Fund, its first fund for making non-control investments. Middle-market PE firms have shown increasing interest in taking minority stakes in portfolio companies. In 2017, the Riverside Co. closed the $418 million Riverside Strategic Capital Fund (RSCF), which is aimed at benefiting business owners and entrepreneurs who need capital for acquisition financing, liquidity events, organic growth initiatives and recapitalizations but do not want to sell a controlling stake. Huron enjoyed a stellar 2017, completing 21 transactions, including three exits, earning Mergers & Acquisitions’ M&A Mid-Market Award for 2017 Seller of the Year. We asked Huron managing partner Brian Demkowicz (pictured) about the new fund and the thinking behind it.
How is Flex Equity Fund different from other Huron Capital funds?
The Huron Flex Fund is our sixth fund and represents the inaugural expansion of Huron Capital’s well-established investment platform that has served the broader lower middle market for almost 20 years. Whereas our flagship funds focus on control investments, our Flex Fund seeks to make non-control investments to provide customized and flexible solutions to help business owners accomplish a variety of growth and liquidity objectives. Through our dedicated deal sourcing program we experienced increasing demand for this type of solution and we decided to leverage our strong capabilities in the lower middle market by expanding into this adjacent and complementary strategy. Our dedicated Flex Fund team, Doug Sutton and Charlie Sheridan, has a successful 20-year history of making non-control investments. The expansion demonstrates our focus on remaining a strategic solution provider to our limited partners and working with them to identify attractive entry points in the lower middle market
What types of companies will you be backing with this fund?
Through the Huron platform, our goal is to leverage our buy-and-build strategy in partnership with seasoned executives to improve and grow our businesses through strategic initiatives, operational improvements and add-on acquisitions throughout the lower middle market. We typically focus on companies having up to $200 million in revenue in the business services, specialty industrials and consumer sectors that can benefit from our operational approach to creating value. The Flex Fund will focus on the same types of companies in the same sectors where we’ve historically been successful.
Talk about the "buy-and-build strategy" with the Flex Fund?
We are taking the same buy-and-build approach with the Flex Fund. We work closely with the business owner/management team to implement improvements and accelerate growth through add-ons and revenue initiatives. We offer a great solution for those owners seeking a value-added partner for growth but are not yet ready for a control transaction.
What investments have you made any investments already from the fund?
We have already closed two investments in the Flex Fund, with Stay Online based in North Carolina and B&B Roadway Security Solutions based in Texas. Stay Online is a manufacturer of high-end, specialty cables used primarily in data centers and B&B is a provider of perimeter access and security solutions. Both companies were right in our strike zone, and in each case we partnered with the management team and shareholders to provide capital and operational resources to facilitate growth.
How will the companies use this capital?
As with our other funds, the Huron Flex Fund draws from Huron’s strengths as a value-added partner, using our broad operational, financial and strategic resources to help businesses improve and accelerate growth. Our capital is typically used to facilitate business expansions, strategic add-ons, balance sheet enhancements and shareholder repurchases. Our Flex Fund focuses on providing non-control solutions that allow some or all of the existing shareholder group to retain its controlling interest.
Why are more PE firms expanding into minority stake investments?
There is growing demand for this type of capital solution, and PE firms are looking to capitalize on this trend. The PE industry is incredibly competitive and firms are looking for ways to leverage their brands and capabilities to expand into adjacent strategies to grow and diversify their firms. For Huron Capital, the expansion allowed us to continue growing our firm while remaining focused on the lower middle market.