Big trouble in little market

A recipe for a first-time distressed fund operating on the smaller end of the middle market: a strong team, plenty of deal flow and evidence of true operating wherewithal. Having raised a $280 million fund, New York's Monomoy Capital Partners is finding this formula to be quite popular.

Monomoy Capital Partners' self-proclaimed ?Summer of Love? for its portfolio companies did not go as planned. During the namesake summer of 1967, young people relocated to San Francisco and celebrated peace, love and understanding. During the summer of 2007, the New York-based Monomoy team had intended to drop out of the deal race and tune in to its portfolio of nine companies, in the process reallocating resources to improving operations and preparing some for near term exits.

Some of this operational love did in fact occur, including a stint in Kentucky to learn about Japanese manufacturing techniques. But at the tail end of the summer, Monomoy found itself deluged with new investment opportunities: the firm currently has three deals in the pipeline. It was the time of the season for equity deployment.

?We could've invested our entire fund by next summer,? says Monomoy founding partner Stephen Presser, in an interview with PEI Manager last month. ?We deliberately decided to slow down the pace a little. Instinctively, we worried whether we would miss some significant opportunities by investing more quickly, so, beginning in May of this year, we raised our internal writing standards.?

The firm is now seeing north of 30 potential transactions a month ? a big portion of them credit-driven ? from 20 deals per month before. But Monomoy only wants to acquire very good companies in need of improvement ? companies like Kurz-Kasch, which has a 80 percent market share in its product niche and has huge growth potential, but requires financial and operational restructuring.

?Our hypothesis when we started two and a half years ago was that there were a lot of opportunities in the smaller end of the middle market and there wasn't a lot of supply of capital willing to take on those transactions that require a turnaround skill set,? says cofounding partner Daniel Collin. ?I think it's safe to say we've underestimated the demand for capital in this part of the market.?

With the amount of opportunities it is seeing, Monomoy is raising the bar for potential acquisitions ? and for the firm itself. This summer it tweaked its financial model ? it now looks for 4x return on capital, up from 3.5x before. The firm says it will have invested $100 million of its fund by the third quarter of 2007, and anticipates that the fund will be fully invested by the end of 2008. The firm has also sought to fine-tune the way it manages its voluminous deal flow.

Already, Monomoy's ability to execute transactions impresses one of its investors, who describes the team as ?strong? and says it has ?guts.? ?I would be surprised if they don't produce an 8x return,? says the investor.

Not bad for a team who not too long ago started with ?nothing but an idea.? Presser, Collin and Justin Hillenbrand left New York-based KPS Special Situations Fund (now KPS Capital) in January 2005; the fourth founding partner, Philip Von Burg, joined two months later. The firm's inaugural fund, which was 50 percent oversubscribed, closed on $280 million in January of this year and drew about 30 percent of commitments from LPs outside North America.

Monomoy Capital Partners

Founded: Total employees:
March 2005 14
Offce: Fund:
New York Monomoy Capital Partners, LP ($280 million; 2007)
Key personnel: Type of investments:
Stephen Presser, founding partner Control in distressed companies with annual revenues between
Daniel Collin, founding partner $20-$200 million that require operational or fnancial restructuring
Justin Hillenbrand, founding partner selected investors:
Philip Von Burg, founding partner JPMorgan asset Management, Drum Capital Management,
Richard Fish, operating partner Bear Stearns asset Management, Oppenheimer & Co,
Daniel Kreilein, operating partner St Paul-Travelers, Morgan Creek Capital, Horizon 21
John Stewart, operating partner
andrea Cipriani, chief fnancial offcer strategic relationships:
Kirkland & Ellis, aubridge Partners

Love of labor
To be able to do the kind of restructurings the firm specializes in often puts them at the table with unions and in front of bankruptcy courts. Only 12 percent of the American workforce is unionized, but in the mature manufacturing segment Monomoy operates in, the proportion is higher ? which can lead to some contentious situations.

Such was the case in the acquisition of Anchor Hocking, which required negotiations with at least seven labor unions and restructuring of three major contracts. Eichhorn says the partners of Monomoy negotiated with the unions directly and came to a resolution even before receiving bankruptcy court approval for the deal.

?Monomoy asked for the opportunity to speak to the unions directly, and literally, within a couple of weeks reached an understanding understanding with the unions,? recounts Eichhorn. ?They moved to revise the Lancaster contract to improve the competitiveness of the business and substantially lower operating costs. They replaced a defined benefit plan with a defined contribution plan. They implemented a lower cost retiree health plan incorporating a VEBA trust in lieu of the existing retiree health plan.?

Incidentally, the same discussions to incorporate a VEBA trust into retiree insurance plans is taking place in the auto industry restructuring in Detroit. Over 90 percent of union associations at Anchor Hocking voted in favor of Monomoy's plan.

By doing more work early on, Collin says: ?Anchor was substantially cash flow positive from the day we closed the transaction.?

There is another element that may help explain the firm's success with unions: Presser, the ace up Monomoy's sleeve. Presser is a former partner at union-side labor law firm Cohen, Weiss and Simon and has worked on the restructurings in the North American airline and steel industries. ?If a transaction involves a labor negotiation, that's too much fun. I'm not going to let a lawyer do that. Are you kidding me?? he asks in mock disbelief. ?I do that,? he says, thumping his chest.

?Our luxury or curse is that the majority of the collective bargaining agreements in companies we buy are written by Stephen,? jokes Collin.

No task too small
There is fluidity in Presser and Collin's interaction as they take turns yielding the floor and listening attentively to one another. Of the two, Presser comes off as being the proud elder, praising Collin's eloquence, while Collin, though younger, appears more serious.

Presser eagerly regales to PEI Manager of tales of his colleagues. ?Dan is a softball star,? says Presser. ?He plays in a competitive softball league. It's a big problem: we end up having to schedule meetings around the softball games.?

The good-natured ribbing extends to the absent partners. Hillenbrand collects mid-century geometric abstract art; ?Not your everyday collection. He likes shapes,? says Presser dryly. Von Burg is an extreme cyclist who, at the end of the biannual 750-mile Paris-Brest-Paris race, has to wear a contraption to support his neck. In a show of support, Monomoy created cycling jerseys for the entire firm: black, stretchy, and emblazoned with the names of all the portfolio companies it owns, bar the latest, Transeo, which the firm aquired in mid-August. Monomoy's logo, a lighthouse, stands alone on the front.

Presser himself is an avid fisherman who casts off the coast of the Monomoy Islands in Massachusetts ? which is how the firm got its name. His two hobbies, he declares, are his daughter and his son, who are ?the greatest children in the history of the world.?

The spirit of camaraderie turns serious when the two discuss work. ?No task is too small for anyone in this office. We do more work up front, we manage expectations and we exceed them,? says Collin.

Presser chimes in: ?No one works harder, no one cares more? The reason the four of us decided to create Monomoy is because we work well together. If we compete on anything, we compete on who can add the most value.?

Building the firm was an 18-month process, during which it invested in a proper back office. The first hire was a chief financial officer, Andrea Cipriani, who, like them, is from KPS. Next came investment professionals, analysts and a controller. Everyone at the firm, including operating partners, is given carried interest in the fund.

Unusually for any private equity firm, Monomoy has built three platforms to monitor the firm's activities, from the initial call about a potentioal acquisition through an exit: these systems can be accessed remotely by the partners, who are often traveling. ?Deal Tracker? tracks deal flow, ?Data Room? houses all documents from investment memos the team writes on portfolio companies to financial and legal information, and ?Quick Look? is a monitoring tool from which monthly statements of the portfolio companies are produced.

?Unexpectedly, our internal data room turned out to be an interesting fundraising tool too,? says Presser. ?You can see in real time how our investments are built: literally, seeing how the sausage is made. Some of our LPs want, and we give them, access to our data room. We're building our investment thesis on this database. If a portfolio company had a bad quarter, our LPs can go back to our investment memo. It's an interesting disciplinary mechanism for us.?

Deals before fund
As a first time fund with a track record that belonged to another firm, and with a small fundraising target to boot, the odds seemed to be stacked against the firm with the unusual name when it went on the fundraising trail.

?We took a bit of an interesting viewpoint in our fundraising: we turned it around. We started doing transactions first then raise the fund later,? says Collin. By putting their money where their mouths were and building the track record while pitching to investors, Monomoy had six companies to its name by the time the fund closed; the companies were later sold to the fund at cost. ?That was the thing I think helped drive our fundraising process the most,? adds Collin.

With MVision, a placement agent, Monomoy focused on LPs that would be committed to the firm's investment goals for the long haul. This meant turning away investors who are subject to changes in public policy, for example, and accessing endowments and foundations through fund of funds.

?We made a conscious decision not to raise $500 million,? says Presser. ?The main focus of the firm is to raise a series of smaller funds over the next 15 to 20 years. We're not doing that to be clever. We're doing that to implement and discipline our investment thesis: $280 million is the right-sized fund for the smaller end of the middle market. Until we convince ourselves we're wrong about the smaller end of the middle market, and that the better opportunities are not out there, we're going to raise the same-sized fund.?

Presser adds: ?Most of our investors think we will raise a much larger second fund. But we're going to prove them wrong.?

?We've been successful in turning around the companies we buy. We want to know whether we're sustaining that improvement and how much value we're actually creating. We continue to look for the link between acquiring companies that we know we can improve, actually improving them and making that improvement permanent. Lean manufacturing is one way of thinking about that value chain.?

The partners are also contemplating establishing complementary funds to take advantage of ancillary investment opportunities that come with the acquisitions it makes. One consideration is a real estate fund, another is a hedge fund. ?Once you own a large enough portfolio, you see more than you expect about a particular industrial sector. For example, we think we see as much as anyone in the world about movements in sugar pricing. We want to capture some of that value as well,? says Presser.

Next summer could be a very different one for Monomoy Capital Partners. If the partners' predictions are right, there will be no summer of love for the foreseeable future. There will, however, be plenty of companies to be rescued and more funds to be raised.