Orange County could be prime pickings for private equity firms and investors.
With financing for billion-dollar deals harder to come by, robust markets with small and midsize companies, could see an increase in activity, said Loren Weber, a partner at O’Melveny & Myers LLP in Newport Beach.
“I see Orange County being a hot area for private equity as firms wait for the credit environment for the larger deals to sort itself out,” he said. “Traditionally, it has had a good diversity and depth of small companies that are attractive targets for private equity firms.”
A variety of factors from elections to good bargains could push more deals this year, according to James Wong, partner at the Los Angeles office of accounting firm Grant Thornton LLP.
“Some companies are consolidating or restructuring because of economic trends,” he said.
OC is an entrepreneurial area that has companies in a variety of industries, said Pierre LeComte, principal of TSG Consumer Partners, a San Francisco-based private equity firm.
“It’s a trend setting area with access to capital which makes it worthwhile for us to strike up dialogues with local companies that we can help take to the next level,” he said.
A slowing economy and wild financial markets have some investors sitting on the sidelines, according to Grant Thornton’s Wong. But others, such as LeComte, say the upcoming presidential election could bolster mergers and acquisitions.
“The presidential election will have a huge impact on mergers and acquisitions with firms wondering where the tax rates will end up,” he said.
More deals could come before a new president could hike the taxes paid on capital gains, he said.
“A lot of firms are worried that a hike in taxes will hinder investments,” LeComte said.
TSG is one of several private equity groups that have done business here.
The firm, which invests in beverages, food, personal care products and drug pet care companies, has a few local businesses under its wing. They include Anaheim-based frozen Mexican food maker Don Miguel Mexican Foods Inc., car products maker Meguiar’s Inc. in Irvine and Yard House Restaurants LLC, which owns and runs Yard House restaurants. The firm also acquired a stake in Irvine’s upscale hair care company PureOlogy Research LLC that later was sold to L’Oreal SA.
A key element to choosing a company to invest in: finding companies that are well managed.
“The key is to find a company that has a good management team in place that we feel we can build around and build up,” said Joseph Massoud, president of Compass Diversified Holdings, a publicly traded Connecticut-based trust with a recent market value of about $430 million. “You’ll find that firms like us stay away from the entrepreneurs that just want an exit.”
Compass, which began as a private equity firm, backed a management-led buyout of Anaheim coating manufacturer SDC Technologies Inc. in 2004. SDC counts sales of $25 million to $30 million making coatings used to protect glasses and windows on airplanes and military tanks.
SDC President William Gregg said the buyout by Compass helped the company double its yearly sales. Compass has helped fund the development of more products, which has allowed the company to tap different markets such as consumer electronics and sunglasses.
“It’s nice having the support,” Gregg said. “It helps companies of our size manage growth better.”
Benefits
Money is a big reason smaller companies decide to sell. Another factor is being able to work with experienced executives, according to Diane Ranger, founder and chief executive of Dana Point-based Colorescience.
Colorescience, which has estimated yearly sales of $40 million making mineral makeup, sold a majority stake to Irvine-based VMG Equity Partners last year.
Ranger said she views VMG as a learning tool. The firm was started by consumer product industry veterans including Robert Schult, former chief operating officer of Nestl & #233; USA Inc. and former managing director for food products at TSG Consumer Partners.
“Bringing in private equity doesn’t just bring in money, it brings in experience,” Ranger said. “Working with people that have been in the business for years has taken Colorescience to the next level. We can hire better staff and get help with branding and advertising.”
With VMG’s help, Colorescience now is targeting about $100 million in sales. The company had about $40 million in sales when it was acquired.
Colorescience targets its cosmetics to luxury hotels and spas, plastic surgeons and dermatologists. It recently beefed up its employee count to about 100 people, up from about 60.
“Before, I was working in the business but now I can actually run it without distractions,” Ranger said.
The payoff isn’t bad either, she said.
Eyed by Investors
Startups also are being eyed by venture capital and other individual investors, said William Jordan, chief executive of Sentinel Group, a Newport Beach-based financial advisory firm.
Such investments can be risky though, he said.
“The vast majority of starts up businesses don’t have returns,” Jordan said.
Venture capital investments in startups and smaller companies continue to trend upward, according to Marc Averitt, president of the Orange County Venture Group.
“People should realize that venture capital is a long-term asset class and that each fund typically has a 10 to 15 year lifespan and that the average time to an acquisition or IPO is just over six years,” he said.
Some local companies that have brought in investors include Santa Ana-based Urban Slabs and Irvine-based Eyes Cream Shades Inc.
Urban Slabs, which makes slabs out of concrete and recycled glass, brought in a group of investors at its early stages to help fund research and development, said Chief Executive John Collins.
The company, which was started last year, expects to hit $15 million in sales by selling its slabs to residential and commercial contractors, Collins said.
Eyes Cream Shades, a maker of sunglasses for kids, brought in investors last month to help fund the development of more products and marketing campaigns, according to founder Faith Smith.
The company is also using the expertise of its investors to help organize its finances, she said.
“They’re helping me with the financial parts. That will help grow Eyes Cream,” Smith said.
