Issue 135 | May 2015 | privateequityinternational.com
THE PEI 300
The ups, the downs,
the ins, the outs
TRIED AND TESTED
Norwest’s DeVries is in it for
the long haul
SECONDARIES
Has the easy money
been made?
BILLION DOLLAR BABY
First Reserve’s pioneering JV
with Mexico’s energy giant
PLUS:
Doughty Hanson scraps Fund VI;
PE and the UK General Election;
MassPRIM’s overhaul; SWIB
revamps private equity plan;
Has Africa come of age?;
and more…
…our companies
have more than
doubled in size and
profitability during our hold
period; you can’t get that
with bolt-ons or levering
up a company
PRIVATELY SPEAKING
Pioneers and playmakers
Norwest Equity Partners
has just closed its largest
fund to date, on a strategy
a half century in the
making. Managing partner
Tim DeVries explains to
Bailey McCann why it’s all
about staying the course
and why organic growth
works best
Ask anyone to name the world’s major private equity hotspots, and you’re likely to
get answers like NewYork or London – but
probably not Minneapolis. Yet one firm –
Norwest Equity Partners – has been in the
private equity game longer than the Carlyles and the Blackstones of this world. In
fact, Norwest has a 20 year head start on
both of them, and Tim DeVries, the current managing general partner at Norwest,
has a career that spans the entire length of
time that these big name firms have been in
business. For all the LPs tracking the firms
with the highest profiles and biggest funds,
it might be worthwhile to shift focus away
from Midtown Manhattan and take a look at
what’s happening in the Twin Cities. Perhaps
the real oracles of the future might well hail
from places like Omaha and Minneapolis.
THE BACK STORY
PHOTOGRAPHY BY: ANNA BOTZ
In 1958, the US passed the Small Business
Investment Act, allowing for the creation
of professionally managed investment
companies, or SBICs as they were called.
Three years after that law was passed,
Norwest Growth Fund launched, acting
as the first version of what has now grown
over a half century into Norwest Equity
Partners. Since its launch in 1961, Norwest and its principals have been key drivers in the development of SBICs and the
private equity industry. Norwest Growth
Fund was one of the founding members
of the National Venture Capital Association (NVCA) and the National Association
of Small Business Investment Companies
(NASBIC).
Norwest’s first president, Thomas
M. Crosby, came from the family which
founded arguably Minneapolis’s most
famous export outside of Prince, General
Mills, the creator of the Pillsbury doughboy. In 1961, Norwest’s first capital raise
launched the firm with $2.5 million worth
of equity. Early investments from that fund
included EMC Corp and Dairy Queen.
Standing in stark contrast to the buy-andflip mentality of a number of private equity
firms today, Norwest invested in EMC ››
PRIVATELY SPEAKING
›› Corp in 1961 and held it for 35 years
before divesting. Similarly Dairy Queen
was acquired in 1963, and held until it
went public. International Dairy Queen,
as it became known, was later acquired by
Warren Buffet’s Berkshire Hathaway.
1981
Joined Citibank
1989
Moved to the
Churchill Companies
1991
Began investing
in real estate
1998
Joined Norwest
COMPUTER PIONEERS
As one of the first venture capital firms,
Norwest was very actively involved in the
early years of the computing industry,
making an investment in National Computer Systems in 1965. Most US school
children will know National Computer
Systems for the optical scan forms that
are used by the SAT, ACT, and range of
other standardised tests created throughout their school years. But the company
was also a strong performer in Norwest’s
early portfolio. Cray Research, another
pioneer of supercomputing, also saw an
investment from Norwest in 1974 while
two years later the firm invested in Network
Systems, the company that developed highspeed data transmission, the backbone of
today’s internet.
In the 1980s, Norwest established one of
the first buyout teams, which began making
its own investments in addition to the small
business and venture deals through which
the company had made its name. In 1989,
Norwest raised a $200 million fund – at the
time the largest ever in Minnesota – and a
strong showing even by today’s standards
for small-ticket deals.
PHASE TWO
DeVries joined the firm in 1998, after a
career that had started at Citibank in 1981,
and also included a stint at the Churchill Companies and in real estate investing.
During his time at Norwest he has played a
key role in seeing the firm through its growing presence within middle-market private
equity. Even as the company has grown –
closing $2.4 billion equity and mezzanine
vehicles in April this year – DeVries tells
Private Equity International that the key to
26
private equity international
may 2 015
PRIVATELY SPEAKING
I’ve been
around for a
long time and
prices are as high as
I’ve ever seen
longevity and success is not to be taken in
by the investment fads of the moment, but
instead to buy and hold, and build companies organically. It is a mantra which could
have come directly from Berkshire Hathaway’s Warren Buffet.
In keeping with Minneapolis’ position
close to the heart of the prairies of the
US mid-west, two toy tractors on his desk
highlight the company’s long track record
of agriculture investing.The long-term buy
and hold strategy has helped Norwest raise
larger funds in each cycle, and find companies that are both local and further afield,
many of which grow into household names.
For the latest close, the firm raised
$1.6 billion for Norwest Equity Partners
X and $800 million for Norwest Mezzanine Partners IV.The mezzanine funds will
be managed by NEP’s affiliated mezzanine
investment firm, Norwest Mezzanine Partners. The vehicles are substantially larger
than their predecessors, which closed on
$1.2 billion and $750 million respectively,
in 2008. Since its inception, the firm has
raised more than $7.1 billion.
Having one of the longest track records
in the industry has clearly been useful when
the firm has been looking to raise funds.
“Our last fundraise was pretty smooth
sailing,” DeVries says. “We’ve had a really
nice run over the last several years, we’ve
performed pretty well. If you’ve got a good
thing going it’s easier to raise the money.”
m ay 2015 One high-profile example of how this
has worked recently involves Norwest’s
investment in Life Time Fitness in the
1990s. Life Time was founded in 1992 in
Brooklyn Park, Minnesota. The company
saw its first investment from Norwest in
1996. Norwest has always maintained a
focus on local companies and at the time,
Life Time Fitness had just two health clubs
in the Twin Cities. Norwest led three
rounds of private financing, and took the
company public in 2004. In March, in a
club deal led by private-equity firms TPG
and Leonard Green & Partners, the now
national company was taken private again
in a $2.8 billion transaction – one of the
largest leveraged buyouts so far this year.
RISING TIDE
The high price tag for Life Time Fitness
isn’t just indicative of a high-performing
company, it also underlines a growing trend
within private equity. Prices are high across
a range of sectors, and private equity firms
have had to respond. DeVries notes that this
is at least part of the reason for the latest
vehicle being the largest to date.
“One of the reasons for a larger fund is
that over the last several years we’ve come
across great companies in industries we
know well and some of those companies
have just been a little too large for us. The
larger fund will give us the ability to take
advantage of those situations.”
NEP typically invests $50-200 million,
and the mezzanine arm specialises in private equity sponsored transactions worth
$20-75 million in junior capital investments, with a generalist focus similar to
NEP.
DeVries is quick to point out however,
that even though bigger-ticket companies
may be on the docket now, the middle
market is still a core focus for the firm.
“The other thing we’re doing is keeping our minimum investment the same.
We’re just choosing to widen our range of
opportunities. There are a lot of things ››
private equity international
27
PRIVATELY SPEAKING
$1.6bn
money raised for Norwest Equity
Partners X
$800m
money raised by Norwest Mezzanine
Partners IV
$2.5m
Norwest’s first capital raise in 1961
35
the number of years that EMC Corp
was owned by Norwest following its
1961 acquisition
1998
the year DeVries joined the firm
28
private equity international
›› we can do well in terms of geographical expertise and industries within the US.
But we need to stay flexible, we need to be
adaptable to the reality of today.”
“I’ve been around for a long time and
prices are as high as I’ve ever seen. Things
are incredibly expensive. Our strategy is to
find businesses that we can grow organically. We aren’t acquisitive. Most small to
medium-sized companies do one thing
really well, they have a great product or
service but they miss out on marketing, or
on distribution, or they don’t have a clue
as to how to get into a contiguous market.
We can bring that expertise to bear. If you
look over the NEP portfolio of the last 30
years, our companies have more than doubled in size and profitability during our hold
period; you can’t get that with bolt-ons or
levering up a company.”
PLAN OF ATTACK
He explains that any company that is part of
the portfolio goes through a strategic planning process with the management team
and is set a series of priorities to attack in
a specific order. “It sounds simple, but you’d
be surprised how many businesses aren’t
doing this as well as they could be. We’ve
spent hours with industrial psychologists,
and world class HR people, working with
CEOs on issues like building out management teams and that makes a huge difference. You might have a company that can
play football but they’re doing it with a team
of 6 and not the full team of 11.”
As a generalist firm, DeVries notes
that this process works for a whole host
of the industries they invest in, including
agriculture, distribution, business services,
consumer, health and technology.
may 2 015
PRIVATELY SPEAKING
“I’m not an old operations guy. I’ve grown
up in this business. We’ve become hybrids
between financing and operations.We aren’t
out to operate companies on a day to day
basis. We’re setting up the roadmap of how
to succeed and the companies are doing it.
If you find the gems out there and help them
fix the two or three things they’re doing
wrong, you can double the size of company if
you get all of those things working together.”
The viewpoint is hard to deny, with
a host of blue-chip brands on the roster
of investments, like Life Time Fitness and
Rosetta Stone among others.
Those past investments often serve as the
roadmap for the next phase of the portfolio’s strategy. Norwest’s recent investments
in Movati Athletic and The Edge Fitness
Clubs highlight this strategy. Movati is an
Ontario-based chain of health clubs aimed at
the upmarket consumer.The Edge, another
fitness club chain based in Connecticut, targets the value-oriented set. “We’re excited
about expanding both of those businesses. I
think one of the key things we learned with
our investment in Life Time is that you have
to focus on the clientele of these businesses.
Health clubs are almost like automobiles in
a way, with Life Time being the Mercedes –
they’re doing very well at targeting that type
of consumer. There’s also room for the Chevy
like we see with The Edge, or an Audi like
Movati. You have to focus on who is coming
through the door, and what they want.”
LOOKING AHEAD
Fresh off a new fundraise, DeVries is excited
about new firms in the portfolio like eyebobs, a local Minneapolis company that sells
eyewear online. The company emerged as a
boutique eyeware company for people who
weren’t finding affordable and stylish options.
“The founders of that company are a husband
and wife team that have done a great job, but
don’t have a broad set of experience dealing
with issues like finding retailers or finding
specialty optical channels. So we’re excited
to partner with them and bring in that
m ay 2015 We aren’t out
to operate
companies on
a day to day basis. We’re
setting up the roadmap of
how to succeed and the
companies are doing it
expertise. We have friends in our network
that I think are going to be really effective in
helping eyebobs mature as a company.”
DeVries notes that he could see the
company expand into retailers or even opticians with the right resources. “The quality
of the product is as good as anything you’re
going to find at the optician.”
Norwest itself also plans to use the near
term to grow, and has announced the addition of Jack Dempsey and Sean Stevens to
its strategy and mezzanine teams respectively. Dempsey has been a senior advisor
to the company since 2011, and Stevens
comes to the firm from KKR.
“Just like we expect our companies to
grow and get better, we’re striving to add
to our own capabilities,” DeVries says.
“We’ve been around for 54 for years, and
we’re going to stay the course. We’ve got a
proven strategy. That doesn’t mean we aren’t
evolving, but we are pushing for continuous improvement. We’re always looking for
ways to do a better job. We’re a generalist
firm but we have core focus areas. We are a
national practice, but geography is important
to us; it’s really nice to play home games. You
don’t win them all, but having a geography
where we are the oldest and largest firm is
an advantageous position for us.” n
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