Lbo Signposts: The Lure of Middle-Market Rewards Helps Create New Buyout Shops

Fifteen years after helping launch Bain Capital Inc., Geoffrey S. Rehnert has left the Boston-based buyout firm to strike out on his own. Running his own firm, the newly formed The Audax Group, Rehnert says, gives him the chance to concentrate on his first love in the private equity field – buyouts and investments in mid-sized businesses. The decision is based on a combination of personal preference and hard-edged business sense. A major catalyst in the shift, Rehnert disclosed, was the apparent move by Bain Capital to graduate to larger deals from its traditional emphasis on mid-sized transactions. “A majority of my colleagues at Bain Capital wanted to go into the large-cap segment of the marketplace,” he said. “I believe that is a fundamentally different business and that the mid-market is a different business system. The mid-market is much more relationship-intensive. There is a different model for how you find deals, close deals, and work with companies once you own them.” Emphasis on the mid-market also is good business, according to Rehnert. “There are still opportunities to generate higher rates of return in the mid-market than in the large-cap end of the market,” he said. Since Rehnert and Audax co-founder Mark Wolpow left Bain on amicable terms last July, they have moved swiftly to develop their new venture, which also is headquartered in Boston. Their first buyout fund, totaling $500 million, was closed in mid-November. Two other former Bain dealmakers, John Maki and Jack O’Malley, have come aboard as managing directors and other transaction veterans are being hired. Rehnert said Audax even is close to signing up some deals. “We will focus on growth capital and mid-market buyouts,” he said. Otherwise, there are no limits on the industries or markets Audax will plumb for deals, and the firm’s portfolio will constitute “a group of investments diversified among industries,” Rehnert said. Nevertheless, he pointed out that some of the newcomers do enjoy specific industry expertise in such fields as health care, manufacturing, and life sciences. Rehnert noted that his and Wolpow’s experience involved more than 160 investment decisions and service on more than 40 corporate boards that encompassed a “pretty wide range of companies.” Also figuring in the decision to set up a new shop was the leave of absence by Bain Capital head Mitt Romney to run the 2002 Winter Olympics in Salt Lake City. That would have meant more administrative responsibilities for Rehnert, who gets his biggest kicks from doing deals and working with portfolio companies to increase value. “I was given the opportunity to go into the mid-market and build our own firm,” he said. “The entrepreneurial urge was just too strong.” GGW Seeking Targets That Need Help Another newcomer to the buyout front is Chicago-based GGW Mana-gement Partners, which appears ready to assume somewhat more risk in its choice of small and mid-cap targets than most debt-supported financial buyers. GGW is backed by three well-established investment organizations – Madison Dearborn Partners, Willis Stein & Partners, and Pritzker Organization – that will supply support and capital to finance deals. Primary focus will be on companies valued at more than $100 million in consumer products, information technology, financial and professional services, and manufacturing. But GGW’s wish list also extends to businesses in need of a good shake-up to increase value or even survive. That could include “sound businesses suffering poor valuation” in public markets, firms in rapidly consolidating industries, companies with “excess or poorly utilized capital,” and operations with “untapped business opportunities.” John R. Walter, longtime corporate executive and one of the founding principals of GGW, said, “We believe great opportunities to realize above-market returns today are to be found in small- to medium-cap companies experiencing or about to experience transition, companies facing strategic challenges, or underperforming companies.” Walter, chairman of Manpower Inc., is former president of AT&T Corp. and former CEO of R.R. Donnelley & Sons Inc. GGW’s top ranks also include Jeffrey A. Golman, formerly with Lazard Freres and Salomon Brothers, and J. Douglas Gray, whose resume includes the CEO’s spot at CSC Index as well as hitches with A.T. Kearney Inc. and Morgan Stanley & Co. In Gray’s words, “GGW is filling a need.” “Where many traditional investment firms may see too much management risk, we see opportunity,” he said.