Investors Who Love Manufacturing

Wilbur L. Ross is probably the most-publicized of the people who are now pouring substantial amounts of money into manufacturing. His nearly two-year-old International Steel Group purchased the steel-making assets of LTV Corp. in April 2002, the Riverdale, Ill., compact strip production facility of Acme Steel in October 2002, and the assets of Bethlehem Steel Corp. in May 2003. But Ross, chairman and CEO of New York-based WL Ross & Co. LLC and chief investment officer of the WLR Recovery Fund, is by no means the only investor committing serious money to manufacturing. Some, such as David F. D'Addario, profess to really like -- even love -- manufacturing and are putting money where their passion is. Although a bit bleary-eyed after spending some of the midnight shift with production workers at Wise Alloys in Muscle Shoals, Ala., D'Addario, chairman of Wise Metals Group, and chairman and CEO of privately held D'Addario Industries in Bridgeport, Conn., enthuses about manufacturing in America. "We love manufacturing and think it's a great place to be," states D'Addario, who in November 2001 became the majority owner of Wise Alloys, the third-largest U.S. producer of aluminum sheet for beverage and food cans. "I remain convinced that domestic manufacturing is attractive and can be financially rewarding," states Richard A. Harmon, founder and principal of the Harmon Group, a St. Louis-based investment and investment banking firm whose primary holdings and deals have been with mid-market manufacturing companies in such industries as industrial controls, precision metal components and packaging. Yet this might not seem to be a great time for venture capitalists, bankers and hundreds of private equity firms to be putting money into manufacturing. The 2001 U.S. economic downturn was more of a depression than a recession for manufacturing, and during the past three years about 2.8 million U.S. manufacturing jobs have disappeared, many of them never to return. Overcapacity still plagues several industries, and only in the past few months has customer demand started to rise. What's more, although generally not an accurate picture, U.S. manufacturing retains a rusty and grimy public image. "We're contrarians by nature," laughs Robert Finkel, founder and president of Prism Capital, a Chicago-based firm that focuses on investing in manufacturing, technology and service companies that possess market-proven products and strong entrepreneurial management. He and his colleagues believe this is a good time for them to be making investments in manufacturing. "The economic recession has done a fair amount of due diligence for us already. So we're looking to back the winners and survivors," states Finkel. "Whether you make big things in the U.S. to sell to consumers or you make little things in China to sell to U.S. consumers, there will always be a place for [manufacturing]," insists Mark A. Ryle, a principal at Draupnir LLC, a Chicago-based private equity firm with 99% of its portfolio invested in manufacturing. Draupnir has bought 35 companies during the last 15 years. Differing Strategies Although Ross may be the best-known among current investors in manufacturing, his bring-companies-back-from-bankruptcy strategic model isn't the norm. Indeed, Ryle and his colleagues at Draupnir won't invest in what Ryle dubs "broken" companies. "We buy things that work," he stresses. "We're not doctors, and we're not priests. No fixing and no last rites," he quips. "We're parents. We like to nurture." The companies it chooses to nurture typically have $40 million to $100 million in sales, make relatively low-cost ($4 to $50) products from metal or resin and are located in the U.S., the UK or Mexico. Prism Capital is another firm investing in companies that don't break the $100 million mark. "We're looking to dominate smaller ponds," says Finkel, the firm's president. Prism's equity investments include West Virginia's Penn-Wheeling Closure LLC, which makes metal jar lids, and $18 million Banner Service Corp., a Carol Stream, Ill., supplier of precision-ground and polished metal bar. "Opportunistically speaking, [these days Prism is investing in] manufacturing [and] industrial companies that have EBITDA [earnings before interest, taxes, depreciation and amortization] margins north of 10%, that perhaps can't access as much bank debt as they'd like and that may have the opportunity to expand their plants or buy a weakened competitor," says Finkel. Like Draupnir and Prism, Littlejohn & Co. LLC, a Greenwich, Conn.-based private equity firm, doesn't do startups. But unlike Draupnir and Prism, it invests in larger businesses, those with revenues of at least $100 million. "Anything smaller than that tends to be very brittle. If anyone makes a mistake, you have a problem," contends Angus Littlejohn, the firm's chairman and CEO. His firm, which he describes as "firstly" financial investors and "secondarily" operational management experts, has bought family companies and invested in spin-offs, Among the latter, is Eliokem, a specialty chemical company, formed in late-2001 out of Goodyear Tire & Rubber Co.'s former European chemicals business and its U.S. specialty chemicals business. France-based Eliokem, with production facilities in Akron, Ohio, and Le Havre specializes in synthetic polymers, specialty chemicals, and resins, and has annual revenues of about $120 million. By the end of this year, Littlejohn expects to purchase GE Superabrasives, a supplier of manufactured diamond, cubic boron nitride and polycrystalline products, which GE says doesn't fit its long-term plan. "Given its reputation for product quality and customer service, combined with a leading position in research and development, we are confident we can create long-term value and profitably grow the business," says Angus Littlejohn. The venture capitalists that Array Financial Services talks to want manufacturers to have stable revenues generally of $10 million or more, EBITDA margins of 5% to 10% and "some tech flair," relates Timothy Rodman, a co-founder and vice president at the Pembroke, Mass. firm. "They like to see manufacturing firms that have a stable flow of revenues for old-line customers, but they would also like to see some advanced technology that they have been developing in-house and will offer the investment group a much stronger growth potential." Example: a wired industrial process controls producer that's starting to bring wireless technology to market. Since it opened its doors in 1984, Boston-based Summit Partners, has invested in rapid-growth, later-stage, profitable, generally private companies. About 60% of its portfolio is in manufacturing companies, broadly defined to include software. "We do not invest in startups, nor are we a firm that invests in troubled assets," states managing partner Joseph Trustey. "We invest in healthy assets, with very strong management teams -- companies that sort of follow the Jack Welch GE model of being No. 1 or No. 2 in their industry [but] companies that probably haven't raised capital before," he explains. Generally that means Summit stays away from day-to-day operations but is very active with the board of directors, advising on such things as strategic and financial issues. Summit seeks to make good companies better (and, of course, earn a return on its investment in the process). An example is Keystone RV Co., now a subsidiary of Thor Industries Inc. Summit had a minority investment in Keystone between February 1999 and November 2001 as founder, president and CEO Cole Davis sought to grow revenues and market share in the intensely competitive recreational vehicle industry. "Our value came in helping him think through recruitment of senior managers, helping him think through incentive plans for his employees, helping him think through capitalizing the company, and helping him think about liquidity -- whether he should go public or sell the business or what," says Trustey. "I have a different view than the typical private equity fund or venture capitalist," explains the Harmon Group's Harmon. "Their business model usually involves a fairly 'hands-off' approach, unless things start to go downhill. On the other hand, my approach focuses on taking a very hands-on role in finance and operations until all of the operating metrics are tracking as they should," he states. "I look for companies that are not performing up to potential, industries with consolidation opportunities and businesses that could grow with additional investment and outside perspective." No Thanks To Flips However, Harmon says he is not looking for a quick buck, the so-called financial flip. "I think manufacturing flips are probably not good for anybody. . . . While change can be hurried along, in order to keep the process under control, change has to be well-managed," he insists. D'Addario concurs. He says of his investment in Wise Alloys, "This is not a passing interest of mine. . . .I am not looking to run away from the business or the industry." Currently, investors in manufacturing companies expect to hold positions from three to five to as many as seven or eight years. And some talk really long term. "We would be tickled to death if we held things for 30 [years]," says Prism's Ryle. "We're trying to make money on the operations, not on the flip."