Corporate America: Give us your misfits, mavericks and castaways. Buyout firm Stolberg, Meehan & Scano welcomes them with open arms.
SMS dubs its buyout strategy M&M, an acronym for misfits and mavericks. Men who have been fired in disputes about corporate strategy; women who have hit the glass ceiling; or business and product lines that large companies no longer want all qualify for SMS' financial backing.
"We are often viewed as the garbage collectors of the Fortune 500," said Matthew Meehan, a partner. "We take the corporate castaways: the businesses that fall between the cracks of corporate America."
These companies are unattractive to venture capitalists because they aren't growing fast enough and they are too small for many of today's mammoth buyout funds, said Ted Stolberg, founding partner.
The fund recently closed its second partnership, raising $100 million from investors, including the endowments for Yale and Harvard and the pension fund for Warner-Lambert. Yale is a repeat investor with the general partner.
SMS' investments range from $1 million to $33 million in majority and minority positions in companies that produce such products as potato chips, body bags, sidewalk chalk, yogurt and church envelopes.
However, SMS doesn't take any warm body that comes along.
The key element in the selection process is the people with whom SMS partners, Mr. Meehan said.
"It's tricky finding good people," he said.
"Sometimes it takes six to seven meetings. They have to be the same person at home that they are at work."
To get to know them, SMS partners meet with potential M&Ms and their spouses socially; and even go so far as to live with them, Mr. Meehan claims.
"It's a person bet," he said about SMS' investments. "These companies are often small. We are restarting them. We can't afford to make an error in judgment or on the people."
The SMS partners purposely limited the fund's size to $100 million although it had commitments that would have given it $200 million, Mr. Meehan said. "We believe alternative capital isn't alternative capital anymore. So much money has been raised. It's just an enormous amount of money.
"(LBO partnerships) are becoming money managers, asset collectors who get fees."
The result of all this activity that is investor portfolios are beginning to look alike as the big partnerships chase the same or similar deals, Mr. Meehan said.
"That is not us," he said. "We have gone down market where the sweet spots are today. To survive in the long run, you have to find the sweet spots. What we do isn't for everybody."
He declined to discuss the internal rate of return on some of the firm's earlier deals.
"Our internal rate of return target is at least 25%, net, net, net," he said. "The true test is the same group of investors put up again, and we brought in Harvard University."
A tough time
to invest in Asia
It is the worst of times for private equity general partners raising money to invest in Asian companies. It is the best of times for those who closed their funds as the economic crisis hit that part of the world.
Walden International Investment Group fits into the latter category. It recently closed its $328 million Pacven Walden Ventures IV fund, which will invest primarily in information technology companies in Taiwan, Singapore, Indonesia, Australia and the Philippines.
The economic crisis and the drop in Asia's public equity markets present a buying opportunity for private equity investors in the region, said Lip-Bu Tan, chairman of WIIG.
"Companies are now having cash-flow problems," Mr. Tan said from his San Francisco office. "Banks are reluctant to lend so entrepreneurs are turning to private equity.
"Our deal flow has increased tremendously. And valuations are substantially down.
"It is a difficult time to raise money, but it is a good time for investing."
The limited partners of Pacven IV called Mr. Tan during the fund-raising process, which coincided with Asia's economic meltdown, to get his thoughts about the crisis.
Following Mr. Tan's assessment, the IBM pension fund and the Harvard University endowment wanted to increase their commitments because "they saw the opportunity," he said.
"(The limited partners) also felt it was a good time to go in if the financial infrastructure wasn't damaged, if there wasn't overcapacity and if there are profitable companies with cash flow problems.
"Sophisticated investors know this is a good time to invest."
Other investors hoping Mr. Tan is correct include the university endowments of Stanford, Northwestern, the University of Michigan and the Massachusetts Institute of Technology; the Ford and Kauffman Foundation and Howard Hughes Medical Institute; and the pension funds of AT&T and Bell Atlantic.
Pacven IV will also be characterized by a cross-border investment strategy. "In this fund, our group will be taking on new challenges in cross continent international venture investments," Mr. Tan said.
The economic crisis has made it apparent that a new Asian economic order is rising in which the region's markets are correlated.
The economic behavior of South East Asia and Greater China reflects a convergence of similar economies, creating de facto economic blocks, states the Asia Pacific Private Equity Bulletin.
"Investors can no longer focus on political and economic factors of their investment destinations alone, but must broaden their assessment parameters to neighboring companies," the bulletin states.
"The interdependence between Thailand, Philippines, Malaysia and Indonesia has never been more apparent. These four countries' current account bore negative numbers ranging from 3.6% of gross domestic product in Indonesia to 8% in Thailand."
The crash of Asia's stock markets has eroded and extracted capital from its markets, but private equity capital is poised to fill the gap.
"With $3.2 billion channeled into the industry this year and more expected, private equity capital will be courted by enterprises in the face of tight credit and high interest rates," states the bulletin.
"At this first phase of diagnosis, private equity's ordeal is quite different from its public counterpart and there appears to be much room for optimism."
