Orange County’s private equity scene covers a wide range of industries and market segments, a reflection of the diversity in characteristics and specialties of the investment firms here.
OC is home to several private equity funds, which buy ownership stakes in privately held companies and assist them with improving financial results and prospects for a future sale or initial public offering.
They are backers of a varied swath of business sectors, from a science-kit supplier to a weight-loss program provider and software companies.
Arriving at a hard number of private equity firms in OC is difficult, but records of recent deals, along with anecdotal accounts, point to at least eight with active operations.
Windjammer Capital Investors in Newport Beach is one of the long-standing local firms. It started in 1990 as part of Pacific Life Insurance Co. and has since raised more than $2 billion in investment capital. It’s currently working through its $726 million Fund IV. The firm typically looks for companies with $8 million to $50 million in EBITDA, or earnings before interest, taxes, depreciation and amortization.
Potential targets also “should have several key characteristics to meet our investment criteria, [including] high market shares and barriers to entry, sticky relationships with customers … and opportunities to grow the business with (the) help of the partners at Windjammer,” Robert Bartholomew, founder and a managing principal, wrote in an email.
He established the firm as an investment unit of Newport Beach-based insurance company Pacific Life called Pacific Mezzanine Investors. The unit spun out in 1999 and changed its name to Windjammer.
The firm is now headed by Managing Principal Costa Littas, who’s based in its Waltham, Mass., office, though Bartholomew continues to play an active role on its committees.
Windjammer’s latest investments include the acquisition of Flinn Scientific Inc. in Batavia, Ill., from Flinn’s founding family. Flinn provides science-oriented educational products, such as packaged chemicals and solutions, lab equipment and activity kits, to the K-12 and higher-education markets.
Bartholomew said there’s more to private equity investing than writing checks.
“There is an extensive amount of ‘heavy lifting’ that goes on with the companies once we invest, with a focus on growth, both domestically and internationally,” he said. “Windjammer has developed a large group of operating partners and industry experts from well-regarded global leaders that can help tailor programs for individual company needs and to join the board of directors. By providing this tailor made assistance to our management teams, we help to accelerate their learning curve.”
Value of Governance
Portfolio companies can gain substantial value from the investor’s involvement in governance, said Michael Kaye, founder and managing partner of ClearLight Partners LLC in Newport Beach.
ClearLight, which was formed in 2000, typically invests in companies with $5 million to $15 million in EBITDA.
“The size of companies that we invest in, usually they can use a lot of help in setting strategy, building out the management team, helping bring in key resources,” Kaye said, adding that his experience in operating businesses comes in handy.
Kaye got involved in private equity after starting a career as an attorney at Gibson Dunn & Crutcher LLP in Los Angeles, where he represented Tokyo-based global security company Secom Co. in its 1982 acquisition of Westec Security Group in Newport Beach.
Shortly after, he took a leave of absence from the law firm to study in Tokyo and came back to OC in 1985 when Secom founder Makoto Iida asked him to run Westec on Secom’s behalf.
Kaye spent the following 15 years helping grow Westec to about $250 million and 4,000 employees. He also led the company through various acquisitions and divestitures, and after selling all the parts, decided to form a private equity firm.
“Private equity was not really well known at the time, but that’s what we had just done,” Kaye said. “I proposed to Iida and Secom, ‘How about we take the proceeds of $300 million and start a fund?’ ”
ClearLight has since been supported by Secom alone, a unique relationship that affords Kaye flexibility “to spend very little time on fundraising … and to focus more on finding good investments and growing them.”
Among ClearLight’s recent transactions is its sale of Apple & Eve LLC, a Port Washington, N.Y.-based juice company it held for eight years, to Canadian beverage company Lassonde Industries Inc.
Plentiful Opportunities
Riordan, Lewis & Haden Equity Partners, which is based in Los Angeles and has an office in Irvine, also has had a few significant exits recently, including the sale of Cymetrix Corp. last year to Chicago-based Navigant Consulting, a publicly traded company with about $674 million in market capitalization. RLH also sold Secure Mission Solutions in Reston, Va., to Pasadena-based engineering services business Parsons Corp. last year.
RLH manages about $700 million in assets and typically invests in companies with $5 million to $20 million in EBITDA.
“We recently invested in a fast-growing IT consulting business called Inspirage, [which provides] customized implementations of specialized supply chain management software,” said Murray Rudin, managing director of the firm’s OC office.
He said investment opportunities abound in “businesses that are substantially outperforming national averages in both revenue growth and earnings growth … despite the slow and erratic growth in the U.S. economy as a whole.”
Rudin added that the firm’s position in Irvine allows it to take advantage of the culture, talent pool and lifestyle afforded by Orange County.
New Firm in Town
A newcomer recently entered the OC private equity scene: L Squared Capital Partners.
The firm has brought “some heft” to the turf with a sizable capital base from several ultra high-net-worth family offices across the U.S., said Rob Healy, cofounder and a managing partner.
The California native previously cofounded and worked at Chicago Growth Partners, or CGP. He started L Squared with Jeff Farrero, who worked for a dozen years at CGP and currently serves as a managing partner of L Squared.
Healy will soon transition back to California, where L Squared has set up in Newport Beach. There’s also an office in Chicago.
“Technically, we still manage all of our old portfolio companies from CGP,” Healy said. “But for all new deals, for new business, it’s coming through L Squared. [The proportion of CGP companies] will shrink over time as CGP is not raising a new fund.”
The firm completed its first deal late last year when it invested in Bethesda, Md.-based Teaching Strategies LLC, a provider of early-childhood education curricula and other resources.
L Squared gets all its investment capital from wealthy families, which “makes us a little different,” Healy said. It currently has eight families as backers.
The Crown family is one, Healy said.
The family fortune was built through the late Henry Crown’s building supplies company, Material Service Corp. in Chicago, which merged with General Dynamics in 1959. The family has about $7.3 billion in net worth, according to an estimate by Forbes, which ranks the family on its various lists of billionaires and wealthiest clans. The family has stakes in the Chicago Bulls and the New York Yankees and is also part owner of Rockefeller Center.
L Squared’s investing approach is “tailored specifically to family offices,” Healy said.
“Prior to fundraising, we considered all of the typical terms and conditions for a standard private equity firm, and then we modified them for a more optimal solution for family offices,” he said.
“And we’re dealing directly with the families. That’s the unique thing about it. We’re in direct conversations with the family members that have had the success, which we really like because then we can bring their entrepreneurial talent and skills and business-building experience to bear to help with our companies.”
Setting up in Orange County means being in the middle of “a huge business market,” Healy said. “OC is a great business environment with many high-growth companies. … There is a little less competition down here than maybe obviously in Chicago or San Francisco. But it’s full of businesses here wherever you go. We do think eventually that will lead to opportunities.”
Lower Middle Market
Solis Capital Partners LP has closed a few OC deals recently. The Newport Beach-based firm focuses on relatively small investment opportunities, and that’s the market it wants to stay in, said founder and Managing Director Dan Lubeck.
“We are disciplined in staying in the lower middle market,” he said, referring to a segment of companies with $15 million to $100 million in revenue.
“The biggest fund we will raise is maybe $200 million. The lower middle market is a specialty in and of itself. The underwriting process is geared toward that segment. Maybe the company doesn’t have reviewed financials; maybe they don’t have as deep a bench as the bigger companies. How you interact with the leadership is critical to whether you get that deal or not.”
Solis has been investing from its second fund, Solis II, a $61 million fund closed in 2013. This year’s investments include a stake in Santa Ana-based ML Kishigo Manufacturing Co., which makes industrial safety garments, including jackets and vests, and an investment in Costa Mesa-based Lindora Inc., a weight-loss management program provider.
Solis Capital didn’t disclose the amount of investment or the percentage of ownership interest on the deals. Its typical investment ranges from $2 million to $20 million.
“Making the investment is the easy part,” Lubeck said. “Then you have to grow these companies. Taking it and making it grow and helping the leaders evolve—that’s the fun, and that’s the challenge. That’s why we love the lower middle market. That’s a dynamic place. Some may be old in years but young in maturity and potential. My passion is helping realize the potential of these businesses. It’s not for someone who wants to sit behind a computer and do analytics all day.”
Solis’ investment in Lindora was a joint effort with another investment firm, Innovate Partners LLC, which has an office in Irvine and New York City.
Principal and Managing Partner Robert Allison said the firm doesn’t fall neatly into either private equity or venture capital but is an “operationally oriented venture capital fund” that focuses on supporting entrepreneurs and “emerging” businesses with prospects for current and long-term growth and exit options.
Allison founded the firm in 1995 and has led it through various investments and exits, including the sale of in-ear monitor developer Ultimate Ears to Logitech International SA in 2008.
Allison said Innovate aims to accelerate its portfolio companies’ growth, including by housing them and providing development and administrative support. A current list of portfolio companies includes workout coaching application developer Pear Sports LLC, which operates from Innovate’s OC office, and I Am Athlete LLC in Santa Monica, which provides software support for race registration and management.
