The Riverside Co., one of the most active private equity firms in the middle market, has sold a minority stake in the firm to Parkwood LLC, a private trust company. Over the last few years, several middle-market private equity firms, including Littlejohn & Co. LLC and Vista Equity Partners, have brought aboard outside investors to grow.
Parkwood CEO Morton Mandel and Riverside co-CEO Stewart Kohl have known each other for more than 10 years, and Parkwood has been a limited partner in various Riverside funds for seven years. Mandel, a long-time business leader and philanthropist in the Cleveland area, approached Kohl about buying a stake in Riverside years ago.
“This relationship had been building,” says Bela Szigethy, co-CEO of Riverside. “Mort talked to us over 10 years ago. He was really ahead of his time. We weren’t considering this then, but as more and more general partners look for access to capital and the market becomes more competitive, we thought now was the right time to enter this type of relationship.”
“We do not want to spend the next 10 years building our next idea. This capital allows us to explore new opportunities and act quickly when appropriate,” he says.
Riverside intends to spend the capital from the deal on its new debt lending business, its deal businesses in Europe and Asia, and acquiring other private equity firms. “The most immediate opportunities in front of us are to build our credit platform,” says Szigethy. “Having said that I don't want to ignore that there are significant opportunities in Europe and Asia. Because those opportunities are right in front of us they may take precedence.”
Buying other private equity firms and folding them into the Riverside brand has been on Riverside’s radar for some time. “We have been approached about two dozen times by private equity firms from different countries or with different specializations who were looking to join up with a firm that has a strong brand, back office and origination function. Before, we were interested in this idea, but now with this capital I can see it becoming a reality,” says Szigethy.
Parkwood’s ownership in Riverside is less than 10 percent and is a non-voting stake. Riverside expects Parkwood to continue to invest as a limited partner in its funds, although that isn’t mandatory. “Fit is very important,” says Kohl. “The wrong partner can make one plus one equal less than two, while the right partner can make one plus one equal more than two. We hold Parkwood in the highest esteem. We are in tune with its mission, which is charitable. We are happy to make money to help Mort and his entity fulfill their philanthropic mission. Mort made his fortune from nothing more than the enormous human capital of Mort and his two brothers, and he does a lot of good with it. We are pleased to be partners.”
Mandel spent 36 years as the chairman of the Premier Industrial Corp., a leading distributor of industrial parts and electronic components.
While this is the first time Riverside has taken capital in exchange for a piece of its business, it may not be the last. However, there are no plans to sell more of Riverside. Szigethy and Stewart plan to remain co-CEOs and have no plans to stop running Riverside or to make personnel changes.
The Riverside-Parkwood deal comes at a time when it has become hard for private equity firms to achieve growth from margin pressure. Capital infusions help private equity firms grow more quickly than they could organically in today’s environment. Over the past two years, a number of private equity firms have taken this route. In 2015, Vista Equity Partners sold a less than 20 percent stake to a consortium led by Dyal Capital Partners--Neuberger Berman’s private equity group. In 2016, Dyal also made a minority investment in KPS Capital Partners. Both were non-voting ownership interests. In 2016, Littlejohn & Co. LLC sold a less than 10 percent stake of itself to Goldman Sachs Alternative Investments & Manager Selection Group. The Carlyle Group, the Blackstone Group, Providence Equity Partners and Lexington Partners have all sold minority interests to pensions, sovereign wealth funds and other investment companies.
“We are not the first to do this, and we won’t be the last,” says Szigethy. “It might be something we see more of going forward.”
Riverside is a global private equity firm focused on making control and non-control investments in growing businesses valued at up to $400 million. Since its founding in 1988, the firm, based in New York City and Cleveland, has invested in more than 460 transactions. The firm's international portfolio includes more than 80 companies. Riverside won Mergers & Acquisitions’ M&A Mid-Market Awards for Seller of the Year for 2014 and 2015, and Kohl and Szigethy won Dealmakers of the Year for 2013.