For wealthy families, direct investment approach can be on the money
Many are bypassing private equity firms by buying or investing in companies via their own entities
By MICHELLE PARK LAZETTE
4:30 am, November 17, 2013
They could have taken the private equity route. However, a number of wealthy families and private equity executives are putting their money to work by buying and investing in companies not through private equity or venture capital funds, but directly through entities of their own.
Among the so-called direct investors on the prowl for the right opportunities are two prominent families in Northeast Ohio: Monte Ahuja's family through its MURA Holdings LLC in Beachwood, and Joe Kanfer's family through KBZ Partners out of Akron.
Mr. Ahuja founded Transtar Industries, a worldwide distributor of transmission parts that he sold in 2005, and Mr. Kanfer is chairman and CEO of Gojo Industries Inc., which was founded by his aunt and uncle and is a producer and marketer of skin health and hygiene products, including Purell hand sanitizer.
They are not alone, according to Floyd A. Trouten, managing director of the Cleveland office of accounting firm SS&G Inc.
“What I see right now are a lot of family offices, wealthy individuals saying, "You know what, I really don't need all of the accoutrements of a private equity firm. I can do this myself,'” Mr. Trouten said. “It's more of a trend now.”
Mr. Trouten said the direct approach spares investors the fees they'd pay a private equity firm for investing their money and managing those investments.
“I think a lot of the limited partners who used to be in these funds aren't really happy with the fees they pay and they're trying to find ways to enhance their return,” Mr. Trouten said.
Many of the region's direct investors say they have become do-it-yourselfers for the flexibility. They say they aren't beholden to the time constraints of private equity funds, which often look to exit investments after five or so years, and thus can remain invested in whichever companies they choose for indefinite periods of time.
“You can have more patience,” said Jonathan Ives, managing director for Fifth Third Securities, the securities and investment banking arm of Fifth Third Bank. “It allows you as an investor to avoid pressure to put capital out during peak periods when ... deals are more expensive.”
Mr. Ives is one of several professional services providers in Northeast Ohio who say they're advising more direct investors.
“They're in our office, introducing themselves,” said Dominic M. Brault, a managing director with Carleton McKenna & Co., a boutique investment bank in Cleveland. “They're out shopping.
“You've got fixed-income rates of return that are really low, and the stock market is kind of a guessing game,” Mr. Brault said. “So if you're looking for return, a great way to do it is by buying a private company, and if you do it directly, you bypass (others') fees. If you're sitting on a pile of money, you have options.”
All in the family
Although MURA Holdings has existed since 2009, its search for investments took off when Neil Sethi — Mr. Ahuja's son-in-law — joined in August, Mr. Sethi said. His full-time job is seeking opportunities to invest in companies — particularly in niche manufacturing, value-added distribution and technology — with revenues of up to $100 million.
“This is a piece of our alternative investment strategy,” Mr. Sethi said.
Mr. Sethi expects MURA Holdings to close on two to three minority investments by year-end, and he aims to find the company's first majority transaction by the end of 2014. That investment likely will result in Mr. Sethi operating the target company, he said.
The Kanfer family's KBZ Partners has more of a singular focus. It issued a news release last June announcing it wants to buy a single Northeast Ohio-based industrial manufacturing or service business with annual revenues of $15 million to $35 million.
The plan is for KBZ partners Todd Bendis, a seasoned industrial executive, and Don Zigdon, an experienced operations specialist, to run the business, and “there are no plans to integrate an acquired company with Gojo,” according to the release.
“We've found out that we really like investing in businesses that we can feel, touch, understand, get to know,” said Marcella Kanfer Rolnick, also a KBZ partner and vice chairwoman of Gojo Industries.
While KBZ's investment wouldn't be the Kanfer family's first direct investing, as it has invested in a technology incubator in Israel, “this is the first time that we are going after an established business that actually has a commercialization track record,” Ms. Kanfer Rolnick.
“With the market being where it's at, we felt that prices wouldn't be overly inflated,” she said.
KBZ Partners has no specified hold period in mind for the investment it intends to make.
“Private equity normally has a relatively short fuse,” Joe Kanfer said. “We are looking for something where we can build long-term value.”
Also among those forming their own investment vehicles are executives who've left private equity firms; they include Steven Ross, who formed Squire Ridge Co. LLC after leaving MCM Capital Partners in Beachwood in June. Squire Ridge is in the final stages of closing a deal where it is partnering with a private equity firm to acquire a Midwest specialty plastics company with revenues north of $25 million, he said.
But, unlike the entities formed by the Ahuja and Kanfer families, Squire Ridge is a “quasi-private equity firm” in that its money comes from Mr. Ross and from high-net-worth individuals who aren't looking for returns in a finite period of time, he said.
Mr. Ross said Squire Ridge's model is similar to that of Hunter Valley Co., which closed a deal last March with another family's investment company to acquire Euclid-based Radix Enterprises, which makes electrical wire and cable for high-temperature use. Hunter Valley also was formed by a former private equity executive, Owen Colligan, who left Rockwood Equity Partners LLC in 2012.
Squire Ridge is seeking to invest in companies that are within a short flight from Cleveland, are involved in niche manufacturing or value-added distribution, and have annual revenues of $10 million to $50 million.
“We're talking about deals that fall within the bandwidth of many of the other private equity groups in Cleveland,” Mr. Ross acknowledged.
The increase in people seeking to invest directly in businesses means more competition for private equity funds as both chase what SS&G's Mr. Trouten called “a relatively finite amount of opportunities.”
And, given the lack of urgency felt by many direct investors to sell off the investments they've made, their proliferation could mean fewer opportunities down the road for private equity funds, Mr. Trouten said.
But, the rising number of direct investors in this region should mean greater availability of capital and more buyers for businesses, local executives say.
“It's giving them (business owners) an alternative to traditional private equity,” Squire Ridge's Mr. Ross said. “I think that's a good thing because if you're a seller and you're interested in getting liquidity but you're not interested in going through this process again in five or six years, I think (entities) like Squire Ridge ... provide you a good alternative.”
For the love of doing
The direct investors who spoke with Crain's say they don't intend to have an adversarial relationship with private equity and other institutionalized investment funds. Many of them are investing, or would invest, along with them.
“It's great to have co-investors,” Ms. Kanfer Rolnick said of the direct investment KBZ Partners seeks to make. “It reduces the risk, and it brings more strength to the table.”
Investing directly in companies certainly carries more risk, local advisers said.
“If you're buying in a PE (private equity) fund, they may have 10 investments in a portfolio,” SS&G's Mr. Trouten said. “If you're doing direct investments yourself, you may only be getting into three or four. You have more potential risk. But also with that risk is a greater chance of a better reward.”
John LeMay says he's aware of some people who've set up their own entities for direct investing only to have them not perform well.
“Some have had a loss or a bad experience and said, "This is not something we should be doing directly,'” said Mr. LeMay, a partner with Cleveland private equity firm Blue Point Capital Partners.
However, he noted, “On balance, the trend is more toward getting into it (direct investing) than getting out of it.”
Those behind MURA Holdings say the main driver for them in pursuing direct investments is their interest in running businesses.
“Given the fact that Monte (Ahuja) is an entrepreneur (who's) been extremely successful (and) I myself have enjoyed and really love being part of operating companies ... it's out of sheer interest and enjoyment” that they are in the market, Mr. Sethi said.