Over the course of six years, Blue Sage Capital worked tirelessly to turn its $8.9 million investment in Controlled Recovery Inc. (CRI) into a grand slam exit. The Austin-based private equity firm's work paid off-Blue Sage made 63 times its money on the original investment and achieved an internal rate of return (IRR) of 150 percent when it completely exited the investment in October 2012. At that point, Blue Sage sold the company, known as R360 Environmental Solutions Inc., to Waste Connection for a whopping $1.3 billion. However, the end result didn't happen overnight or come easily.
In 2006, Blue Sage bought CRI, which focuses primarily on disposing of oil-related solid waste generated from drilling activity in Western Texas.
"We didn't want to be directly in oil production because of its dependence on commodity pricing, but we liked the space in general, because we figured there would be more governmental regulation coming down the pike for the disposal of waste from drilling and exploration," says Peter Huff, a managing member with Blue Sage. "Additionally, we believed that both horizontal drilling and fracking would take off, as drillers increasingly worked the shale plays. This would create more waste."
At the time of the purchase, CRI had $5 million of Ebitda and a very shaky management team. Immediately after buying the company, Blue Sage started working with a new management team to transform the business.
As Blue Sage looked for ways to continue growing CRI, the firm tried to buy U.S. Liquids of Louisiana, a competitor in a different geography. Blue Sage's offer was rejected. A year and a half later, Paine & Partners had a letter of intent on U.S. Liquids but realized that buying it alone didn't make sense. "The potential new owners of U.S. Liquids needed multiple companies to put together to make the purchase make sense," recalls Huff. "They knew we had interest in the same space."
With that, in 2010, Blue Sage and Paine & Partners merged CRI and U.S. Liquids and bought California Petroleum, christening the combined company R360. At the same time, a third partner, Tinicum Capital, joined the investors. At this time, Blue Sage was able to take 7.7 times its investment out of CRI while reinvesting in R360. The deal grew the company to 26 facilities in five states.
In light of all of the oil and gas M&A deals that were taking place in 2012, the consortium decided it was time to explore its exit options. "R360 was generating substantial amounts of cash flow and was a good fit for the public market," says Huff. The sponsors signed on with Goldman Sachs (NYSE: GS) to run a dual-track process to pursue an initial public offering and potential buyers simultaneously. Waste Connection outbid three other parties and agreed to pay $1.3 billion in cash with no earn-out or escrow provisions. Blue Sage, along with others that invested in 2012, achieved an 8.3 times return on investment and an IRR of 150 percent.
"CRI provided more earnings for the combined company than any other," says Huff. "But all the companies together is what made the company strong enough to sell."