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Private Equity Briefcase

By Kelly Holman, IDD Magazine

February 26, 2008

Middle Market Gets The Job Done Creatively

Private equity-fueled M&A activity showed little life in January. One month later, though, the buyout deal community seems to have awoken from a deal slumber much like zombies in the George Romero film Diary of the Dead. And true to their calling, private equity firms are taking contrarian positions through bets that aim to capitalize on the changing landscape for deals.

 

Word has it that the larger PE community is dealing with portfolio company oversight until the leverage loan market thaws. And, while there’s no disputing that buyout deal volume is way, way down, the truth couldn’t be further from the chatter as it relates to the middle market. Indeed, corporate divestitures and secondary buyouts are continuing to provide deal flow for many in the mid-market segment.

 

The sectors housing this activity vary widely. There are deals touching the consumer, such as Kohlberg & Co.'s acquisition of the former Nike hockey unit, Bauer, or LNK Partners' purchase of the Au Bon Pain bakery chain. There are investments overseas, including Veronis Suhler Stevenson's secondary deal to acquire UK exhibitor Clarion Events. And there are taking-private transactions, as evidenced by Imperium Partners' $58 million buyout of ESS Technology.

 

Perhaps, though, one of the more interesting deals recently involves Arsenal Capital Partners, and the firm's $30 million equity infusion into an online consumer lender called FirstAgain. The company, whose principal product is called the "AnyThing" loan, was founded in 2004 by two former Ford Motor Credit executives with $5 million in bootstrapped capital.

 

Isn’t it the consumer lending sector that’s at the crux of the nation’s economic problems? And why would any investor want be running into that market as opposed to scrambling as fast as they could away from it?

 

As it turns out, Arsenal’s investment is predicated on serving the borrowing needs of consumers with excellent credit ratings, defined by having five or more years of credit history and a good payment track record. Arsenal Capital's Carty Chock calls these borrowers the "superprime" segment of the market. While banks and thrifts often lump these customers in with their prime rate peers, Arsenal is aiming to capitalize on the fact that they're also a group that's very creditworthy and not nearly as likely to default.

 

The deal with FirstAgain illustrates that with a little creativity private equity firms can find interesting opportunities in niches that, despite appearing to be out of favor, offer places to put money to work. Buyout groups need to be disciplined investors, but they also didn’t raise money just to sit on the sidelines. It’s a good thing they’re not.

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Kelly Holman

Kelly Holman is the assistant managing editor at Investment Dealers' Digest, where he writes about private equity and leveraged finance. Prior to joining IDD, he reported on leveraged buyout transactions, private equity fundraising activity, corporate auctions, the middle market and credit markets as a senior writer for The Deal. Before joining The Deal in 2000, Holman was a reporter for PRWeek magazine, where he reported on financial services PR and investor relation activities, as well as international PR developments. He also assisted with Haymarket Media Group's US launch of the public relations trade magazine. Previous to PRWeek, Holman wrote about private equity for Private Equity Week and Buyouts and served as a contributor to IDD in the late 1990's. A Colorado transplant, Holman has called New York home for more than a decade. He received his B.A. in Mass Communications from the University of Colorado at Denver..

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