Homegrown private equity

This isn’t ‘Toronto money’ — it’s your neighbours’ savings, investing in a prosperous Prairie manufacturing sector. 

By Joanne Paulson. 

Private equity has long been marred in mystery and misconception.

Once considered the ‘bank of last resort’ by many business owners, private equity firms were shunned as out-of-touch investors from far-off places, whose only mission was to strip cost and maximize shareholder returns.

For a growing number of Prairie manufacturers, however, that notion could not be further from reality.

Just ask Steven Hoffrogge, president and CEO of Crestline Coach. The Saskatoon-based ambulance and bus manufacturer underwent a private equity-backed management buyout in 2004 with the help of PFM Capital — located 250 kilometres south, in Regina. Since that acquisition, the two organizations have walked hand-in-hand through a top-down corporate transformation.

“This company is probably three times the size it was, in revenue, from when PFM first became involved,” says Hoffrogge. “We’ve gone from fewer than 75 employees to approaching 200 today. We have expanded our footprint as it relates to where our customers are located as well. We now have shipped to 32 countries around the globe, and our product line has expanded significantly.”

PFM currently manages seven unique funds, totalling more than $627 million in assets. These funds are not just earmarked for management buyouts, either. Manufacturers can also leverage private equity as a financing option to expand production, launch new products, or restructure operations.

“We raise the majority of our money from Saskatchewan and, in turn, invest that capital back into Saskatchewan companies,” says PFM CEO Randy Beattie. “Our genesis was looking at the strength of the Saskatchewan business community — manufacturing being a big part of that — and asking if these companies have adequate access to capital to help them grow.”

Twenty years ago, when PFM began managing private equity, the answer to that question was a resounding no.

“The banks provide a certain type of capital, and we work with those banks,” he explains. “On the balance sheet, they’re doing the term loans and operating lines of credit, lending against assets of the company. We’re more behind the company on the balance sheet — more of a partner with the owner.”

PFM raises capital through two primary sources. The SaskWorks Venture Fund, for instance, is offered to Saskatchewan residents who invest in it as an RRSP, and who are interested in supporting area businesses and the local economy. With 29,000 shareholders and $400 million in assets under management, the fund has swelled in popularity over its 16-year existence, due largely to performance as well as the 35 per cent tax credit it offers to investors.

The second capital stream focuses on institutions, such as credit unions and insurance companies, as well as high-net-worth individuals. Categorized as APEX Funds by PFM, these investments encompass a diversified portfolio rooted in several of the province’s core industries, including manufacturing, energy, real estate, and value-added agriculture.

“Because we’re in so many sectors, we’re spread virtually across the province — in manufacturing especially,” says Beattie. “That’s because a lot of the manufacturing facilities are dispersed geographically across Saskatchewan and aren’t in the major centres.”

Investments grow with funds

The size of PFM’s industrial and manufacturing investments has gradually increased over the years, alongside the funds under management.

According to Beattie, the firm generally targets transactions between $1 million and $30 million, although — in Saskatchewan — the “sweet spot” has hovered in the $4 million to $7 million range.

And not all the financing required necessarily has to come from PFM or any single source. Assume a manufacturer needs $10 million in financing. The bank might lend $4 million, PFM might lend $3 million in subordinated debt and $2 million in equity, and the company itself might put up $1 million.

“By using multiple sources of capital, we are able to create an ownership structure that works for us but also, and as importantly, a model that works for the owners of the company,” says Beattie. “We always want them to have some money in the company, because it’s important our interests are aligned; and certainly one way of making sure we are aligned is to all have money at risk inside the investment.”

Depending on the complexity of a deal, the process from idea to investment can range anywhere from four weeks up to six months. Once finalized, most investments remain in place for five to seven years before exit.

For PFM, after initial discussions with a potential investee, an internal analysis is performed, followed by the provision of a preliminary term sheet to outline the key details of the investment. After due diligence is completed, approval is sought and provided by the funds’ investment committees.

While PFM’s goal is to generate returns, it touts many other benefits to ‘homegrown’ private equity.

Understanding the market, notes Beattie, is critical to appreciating the business that has been built, the role it plays in the community, and the employees working there. Economic spin-offs, like job growth and supplier opportunities, are additional considerations.

“It’s part of making the company grow, and not just the infusion of equity capital into the business,” he says. “We’re active. We’re not a passive investor. We sit on the boards of these companies. We meet with them on a regular basis. But we aren’t involved in the day-to-day business side of things.”

This connection to the region is notably influential when it comes to management buyouts.

“It’s important for the sector and important for the province that we stay focused on assisting companies in the transition of ownership by financing management buyouts,” adds Beattie. “Typically, these businesses stay in Saskatchewan, which is not always the case if the buyer is from out-of-province.”

Crestline Coach has been one of those success stories. So, it’s not surprising that Hoffrogge has an extensive list of advantages to private equity.

“There are two consistent elements that aid one’s ability to drive growth, and enhance profitability or expansion,” he says. “One is access to capital and the second is access to talent — access to experience.

“Owner-operators and key executives in small- to medium-sized organizations are spending 90 to 100 per cent of their day driving the business; and yet, sometimes, the business needs additional expertise on the finance side of things. On the strategy side, private equity takes a seat on an advisory board, or at the board of directors table, whose number one job is to ensure solid strategy. As an executive, you have to be willing to embrace the insight that they have.”

Despite well-respected companies like Crestline Coach waving the banner, the preconception that private equity can’t thrive in a small market like Saskatchewan still lingers, says Beattie. Even five years ago, walking into a boardroom, it would not have been uncommon for him to hear, “Oh, that’s just a little Saskatchewan fund.”

Times have changed, but Beattie believes PFM and other private equity firms throughout the Prairies need to be more vocal about what they can offer.

“Our growth has been slow and steady, and that has probably helped people understand we are here to stay.”