Pools of Money

We hear the term “private equity” tossed around every day in business. The Bloomberg ticker tells us about the giants that often go by initials like KKR and 3G. They have enormous pools of cash available for a juicy investment. Insurance companies, foundations and wealthy private investors fund these guys (they are usually guys) looking for the next big score, in which a small stash of cash is augmented by container loads of borrowed money. The drill is usually to fancy-up the books by firing a bunch of people, curtail capital investment, roll up some similar businesses for supposed economies of scale, and then go public or sell out to another entity with similar plans.

I was intrigued last week by a public relations release (I get a dozen of them every day) that mentioned a longtime machinery business friend, David Muslin, being involved in a private equity deal. His firm was buying out a 50-person cold heading shop in Bristol, Wisconsin, called Anderson Products. I called David hoping he would give me some insights into how private equity deals work in the world of medium-sized contract machining shops of the kind I deal with every day.

David has been in the used machinery business for 40 years, working for Sidney Lieberstein at Perfection Machinery in Elk Grove Village, Illinois, then buying out Sidney with Pat Angus, then gravitating to the auction business and starting PPL Auction in 2007 with Joel Bersh. Dealing with distressed companies ultimately led him to the lending and investing business in Big Shoulders Capital.

To Muslin, some companies have the potential for investment and others are better off dead than alive, with their physical assets worth more than a failing business. As an auctioneer those are most of what he sees every day, but sometimes a deal comes along with a big upside with an infusion of fresh money and new energy. In the case of Anderson Products in Wisconsin, the company had been sold a few years ago when a private equity group took over Rockford Products, a struggling fastener company in Rockford, Illinois, and then bought out successful Anderson Products, trying to bring in some earnings and professionalism. It went the other way with the top folks at Anderson quitting and the whole Rockford project falling apart.

Muslin and his associates at Big Shoulders thought that with Tim Cash, who had run Anderson when it was successful, willing to come back with a “piece of the action” he could obtain financing for the 50-person shop. Big Shoulders would end up with a share of the company and if things went well Muslin would own a big chunk of a valuable asset. If it did not work out his auction firm would sell the assets and they would have a chance to get out whole.

David told me he owns a very successful aluminum extrusion business in Florida, and a steel business in Harvey, Illinois, among several operating companies that Big Shoulders has invested in.

He believes the key to all of the deals he looks at is attracting the right talent to run the business. As in every enterprise, things go wrong very often. Manufacturing is extremely competitive. He says that for every five deals a private equity firm does, one is an outright failure, two struggle to break even, and if you are very skillful and probably lucky, two are winners.

Over the years I have known a lot of machinery dealers and auctioneers who have moved into investing in operating businesses. Some have hit the jackpot, but most of the companies have ended up being liquidated because the everyday management and the passion of the owner operator was hard to replace. But there is a strong swing today toward private equity and sometimes its wayward cousin “pirate equity,” buying small and medium-sized businesses in North America. There is plenty of risk money out there. Interest rates are historically low and manufacturing seems to have stabilized after the China tsunami ended. A lot of money from foreign countries is hunting for a home here, both in real estate and business investment.

I wish David Muslin good luck in this venture. Investing in hammered down businesses is a tough game, but what isn’t?

Question: If you could get the money, what type of business would you start?