In a crowded private equity field, one of Cleveland’s younger firms is standing out as one of the market’s most active new funds.
A willingness to move fast when a good deal is spotted is not just crucial in today’s competitive environment, said Align Capital Partners managing partner Chris Jones, but it’s a big part of what’s spurring their deal activity.
But that velocity doesn’t mean they’re being any less diligent in vetting an investment.
“You need to have a clearly articulated investment strategy and angle to add value to a business post-deal close,” Jones said. “You need to know exactly what you’re looking for and move quickly and aggressively to have that opportunity. That’s how we’ve been able to do five deals in 15 months. You have to be quick to say yes and go all in to win.”
Align formed in spring 2016 with a trio of principals who splintered off from The Riverside Co., a global PE firm with co-headquarters in Cleveland.
The following September, the lower middle market buyout firm closed its first fund at $325 million, 30% higher than its $250 million target. A strong fundraising environment — which is contributing to a buildup of dry powder in the PE world — certainly helped, as did the network and track record of Jones’ fellow founding members and managing partners Steve Dyke and Rob Langley.
Since closing its first fund, Align has completed six deals, comprising five platform investments and one add-on. And the pipeline today is looking pretty full.
According to PitchBook, which tracks info on M&A deals, private equity and venture capital, Align had the fifth-largest fund to close in 2016 across the PE sector.
Those with larger funds in their class were CenterGate Capital (a $350 million fund in Austin, Texas), Gemspring Capital (a $350 million fund in Westport, Conn.), CenterOak Partners (a $420 million fund in Dallas) and Gamut Capital Management (a $1 billion fund in New York City).
All of those have been active, but they haven’t achieved a pace for deals like Align has.
Align focuses on niche businesses in the lower middle market, particularly specialty manufacturing, distribution and business services companies.
According to PitchBook, lower middle market deals reflect transactions with prices between $25 million and $100 million.
Coincidentally, PitchBook’s 3Q 2017 US PE Middle Market report found that while 2016 set a record in terms of lower middle market PE activity, the $15.1 billion invested through 531 deals in those companies through the third quarter of 2017 was putting the industry on track for its slowest year since 2011 in that particular bucket. The report cites rising price multiples — the media valuation multiple in U.S. M&A deals reached 10.3x in 2017, according to PitchBook, and Jones declined to share what his average price multiples have looked like — as one factor for that.
It also postulates that many of the best lower middle market companies have been rolled up as add-ons to larger platforms, especially by big PE firms working downstream in search of smaller, valuable businesses.
Meanwhile, other buyout funds have continued to splinter off from larger ones, with most saying they are looking at deals in the lower middle market as competition for M&A stays hot. In the Northeast Ohio region alone, Watervale Equity Partners, MavenHill Capital and The Inkwell Group all formed in 2017 with an investment approach along those lines.
Working with smaller companies is vastly different from doing the same with smaller ones, Jones said, adding “it’s not as easy as everyone thinks.” That may be one reason why other firms comparable to Align haven’t closed a similar frequency of deals.
Jones doesn’t see the pool of targets getting much shallower, though, despite the increasing number of feelers digging through the M&A market.
Those rising prices are bringing more businesses into the market that may have been reluctant to sell in the past.
Jones said Align prides itself on providing resources to companies post-deal close. While a promise to support a business through an investment is a best practice in the M&A world, Jones said it’s something he emphasizes when approaching deals with target companies. And he believes that’s been key in securing partnerships.
One of their most recent deals involved the acquisition of Lewellyn Technology in December from a fellow Cleveland private equity firm, Evolution Capital Partners. It’s not terribly common to see firms in the same market work on a deal like that together directly through an investment bank.
The Align team has grown fast, too, in support of their investment thesis. The firm now numbers a dozen people, and Jones said he’s already in the process of hiring two more.
The team will continue to expand as needed as Align continues to aggressively seek out deals. The only thing that might evolve a bit this year is the deal mix.
“Each company has an acquisition strategy,” he said. “I don’t expect us to have four more platforms, but we may close several add-ons. We will continue to be an acquirer. It’ll just be a little different mix of platforms and add-ons now that we’re managing a large portfolio.”