The relatively small presence of private equity firms in Orange County is seen as a virtue for some that find more room to work compared with major industry centers such as New York, Boston or San Francisco.
It’s a status that fits well with the historic entrepreneurial strengths of an area that counts significant industry centers ranging from surfwear to computer chips, medical devices and aerospace suppliers.
The varied business landscape has led to a mix of private equity firms founded and based here, as well as offices of others based outside the area.
A definitive measure of the private equity industry here is difficult, but anecdotal indicators point to a field of 10 or so firms with a presence here.
They combine for about $2 billion in funds invested by OC offices. The field ranges from newly launched firms to Westar Capital in Costa Mesa, which counts billionaire developer GeorgeArgyros as a founding partner.
“There are a lot of great companies here,” said Frank Do, general partner at the Irvine office of Boston-based Riverside Partners LLC. “But the number of intermediaries—investment banks and investment firms—is very small. That’s why I’m happy to be here rather than where it’s crowded.”
Riverside Partners opened its office here early this year. The company manages about $625 million between two funds.
The firm’s recent arrival is a sign of the times, according to Matthew Witte, founding partner of Newport Beach-based Marwit Investment Management LLC, among the first private equity firms here. The firm has $200 million in equity capital under management.
“Private equity as an asset class is fairly under-represented here,” Witte said. “But it’s gotten more recognition in the last 10 years.”
Private equity firms in OC primarily invest in companies in the lower-middle market, ranging roughly between $10 million and $200 million in annual revenue.
“The size of the funds here is an effect of the size of the companies here,” said Murray Rudin, managing director at Los Angeles-based Riordan, Lewis & Haden Equity Partners, which has an office in Irvine.
Riordan has about $400 million in committed capital under management and typically invests in companies with revenues between $20 million and $200 million.
“Private equity follows the nature of the businesses not only in size but also in sectors,” he said. “We mainly focus on business services, government services and healthcare.”
Riordan counts CyberCoders Inc., an Irvine-based recruiting firm that helps match employers with candidates, in its portfolio.
CyberCoders was No. 39 on the Business Journal’s list of fastest-growing private companies published in October.
The company saw $24 million in revenue in the 12 months through June, a 71% increase over two years.
More Jobs
Cybercoders also has grown its work force from 50 people to 180 since Riordan took a stake a couple of years ago, according to Chief Executive Heidi Golledge.
Rudin said a check at the midway point this year showed that companies in Riordan’s portfolio had combined for an increase of 1,700 employees since coming into the firm’s fold.
Other private equity firms here take a general approach.
“We’re agnostic in terms of industry,” said Dan Lubeck, managing director of Newport Beach-based Solis Capital Partners LLC.
Solis manages about $50 million in assets and invests in companies with about $15 million to $150 million in revenue.
Marwit also is “more of a generalist,” tapping into areas such as consumer products, healthcare services, business services and software, according to Witte.
“There are a lot of medical device companies in OC, and they tend to be earlier stage,” he said. “But we’re not venture capitalists, so we don’t do that.”
Marwit counts Promax Nutrition Corp., a Newport Beach-based developer and marketer of nutritional supplements and other bar products.
Promax is expected to see about $20 million in revenue by year-end, a 67% increase from the time Marwit acquired it, according to Witte.
Timing
Private equity firms typically hold an investment for about four to five years, although “nothing goes exactly like the model,” according to Riordan’s Rudin.
“We lost a year or two in the timing in the economic crisis,” he said. “Now it could be about five to seven years.”
Newport Beach-based private equity firm ClearLight Partners LLC recently exited Chicago-based Switchcraft Holdco Inc. after about six years.
Switchcraft is a manufacturer of electronic connectors and other applications in the electronics industry. It was sold to Hollywood, Fla.-based Heico Corp. Terms of its sale were not disclosed.
ClearLight counts a public company in Japan as its sole investor. The firm primarily invests in companies with $20 million to $250 million in revenue, according to Managing Partner Michael Kaye. It has about $600 million in committed capital across two funds.
The firm’s portfolio has investments throughout the U.S., including in New York, Ohio and Nevada.
“The market for the kinds of companies we invest in is a national market, but we definitely look at companies in our backyard,” Kaye said.
Evriholder Deal
A local company that recently caught ClearLight’s eye is Evriholder Products Inc., a household products manufacturer in Anaheim.
Evriholder’s annual revenue is above $50 million, according to Chief Executive Gary Seehoff. He said the company aims to double in size in the next three to five years.
Evriholder has warehouses in Anaheim and sales offices in other parts of the U.S. with about 100 employees nationally.
Geography can be a two-way street when it comes to private equity.
“Often times, we find that companies based here like to do business with firms based here,” Riverside Partner’s Do said.
Funding for private equity firms has slowed since the recession, but a turnaround is shaping up, according to William Simpson, a partner at the OC office of the international law firm Paul Hastings LLP and chair of the firm’s global private equity practice.
Marwit partner Witte agrees.
“The interest by investors in putting money into private equity has definitely slowed because of the concern of the economy—no question,” he said. “But there is still capital flowing in.”
Private equity firms across the board recognize the gap between the amount of money available in 2006 and 2007. Most are confident capital is increasing here and nationally.
The third quarter saw a slowdown after a strong first half of the year, according to PitchBook Data Inc., a Seattle-based independent research firm. Even so, the $31 billion in invested capital in the third quarter was about on pace for quarterly averages over the past three years.
There is currently an overhang of more than $400 billion in capital looking for investment opportunities, according to a recent report by Pitchbook. That sets the fourth quarter up for a “pickup in activity across the board,” the report said.
“There’s a thought out there that there is no capital for small companies,” said Gerik Degner, co-founding partner of Alpine Pacific Capital LLC, a recently launched private equity firm with offices in Newport Beach and in Seattle. “But that’s not the case—there is a lot of capital.”
Alpine focuses on acquisitions of companies in the West with revenue between $10 million and $100 million. It offers an example of how private equity firms find some elbow room in OC.
“We’re new, and there are a lot of opportunities in OC that we can tap into,” said Degner, a former managing director for Irvine-based Waveland Capital Partners LLC, a principal investment and portfolio management services firm.
“We’ve already made a jump into this economy,” Degner said, referring to Alpine’s debut investment, the acquisition of Bayfield, Colo.-based utility services company H2X LLC. H2X has about 30% of its business in California.
“It’s a company that we expect to grow and expand in OC,” Degner said. “We are going to probably bring a regional office here.”
Local Wealth
Alpine also has had early success in attracting high net-worth individuals here as investors, Degner said.
“We provide a catalyst and a forum for the tremendous wealth in OC to reinvest itself into companies in this area,” he said.
