Media's makeover artists

Just over a year after spinning out from the Bank of Montreal, Halyard Capital is faring well by reinventing media, advertising and business services assets for the internet age.

These days, Halyard Capital is playing the contrarian. The firm is buying up companies in the oft-stigmatized sectors of publishing, broadcasting, and even print newspapers. However, bucking conventional wisdom appears to be paying off for Halyard ? the New York-based firm has generated some impressive returns since striking out on its own last year.

Halyard was originally formed in 2000 as a $450 million fund under the control of Bank of Montreal's investment banking division, BMO Nesbitt Burns. The fund was to be an expansion of BMO's merchant banking activity in media, telecom and internet industries within the US. Of the total capital in the fund, $300 million was marked for direct investments, and $150 million was set aside to invest in other fund managers.

BMO recruited the Halyard Capital Fund's management team from the US media and telecommunications division of CIBC World Markets, the investment banking subsidiary of the Canadian Imperial Bank of Commerce. BMO recruited seven professionals from CIBC to launch the Halyard Fund, including current Halyard partners Bob Nolan, Bruce Eatroff and Christopher Ruth, as well as principals Timothy Brown and Rene Benedetto. All but Benedetto worked at UBS Securities before joining CIBC, and Nolan and Eatroff both spent time at Goldman Sachs as well.

BMO originally wanted a team to run a New York-based media and communications investment banking practice. But the Halyard team suggested that BMO follow another course.

?We suggested that they would be better served as a middle market bank to think in terms of a traditional merchant bank structure,? Nolan recalls. ?That meant introducing principal risk alongside their agency business ?

BMO did just that, taking an interest in both the general partnership and the limited partnership of the fund. The relationship continued until early 2006, when the team decided to strike out on their own ahead of raising their second fund.

?From the outset we talked about our desire to raise outside capital for the second fund,? Nolan says. ?And what you find is when you speak with institutional limited partners, they would prefer that you not have close ties with a given institution if you're going to raise outside capital. The theoretical concern is that you're always at risk of that institution applying undue influence: putting pressure on us to use them as a preferred vendor, or to invest in a company because it's a customer of the bank.?

Halyard Capital

Founded: Key Personnel:
2000 Robert B. Nolan, Jr., co-founder and managing partner
Bruce A. Eatroff, co-founder and partner
Office: Joseph Bondarenko, vice president of finance
New York; Greenwich (Connecticut)
Funds Raised:
Sector Focus: Halyard Capital Fund I, 2000, $340M
Media, communications, business services Halyard Capital Fund II, 2007, $400M target
Total Employees (front and back office): Legal Counsel:
16 Paul, Weiss, Rifkind, Wharton & Garrison LLP
Types of Investments:
Middle-market buyouts and growth equity investments
generally between $15 million and $40 million in equity
Notable Exits:
TRANZACT May 2003 Marketing services Nov 2007/Sale 12x
NETGEAR Sep 2000 Communications July 2003/March 2004 3.8x
IPO/Secondary offering
Inner City Media Dec 2000 Broadcasting August 2004/Recapitalization 2.5x
Notable Investments:
Education Dynamics May 2005 Education services Combination of Educational Directories
Unlimited,, GoalQuest and
WorldClass Strategy
impreMedia July 2003 Ethnic media Largest Hispanic news and information business
Engauge Feb 2007 Marketing services Next-generation agency model
HCPro March 2008 Information services Compliance and regulatory information for
the hospital market

Small is efficient
Halyard's entire investment team meets every week to discuss everything in the pipeline as well as the state of current portfolio companies and results. Individual deal teams meet anywhere from once a month to once a day depending on the stage of the investment they're working on. But in general, communication is easy to manage at Halyard, which has just one office and 12 team members.

?We can get our team together at the drop of a hat if something important happens, if a timely opportunity needs to be reacted to,? says Eatroff. ?At most we get it done sometime in the next 24 hours.?

Although certain members of the team have areas of expertise, there are no specialists. There are enough analogies between the sectors Halyard focuses on that everyone on the team can work on any deal. Halyard likes different partners and principles to work together on different deals, to get a good mixture among the group.

The five former CEOs on Halyard's industry advisory board are also very involved in the management of portfolio companies. In putting together the board, Halyard deliberately selected members who wanted to play an active role in the firm's business. When the team was looking at fund managers to invest with at BMO, Nolan recalls that he would often see certain big industry names listed on the advisory boards of multiple funds.

?The notion of having a name that might be known in a given industry but was going to be completely diluted in terms of their contribution to that fund was meaningless,? Nolan says. ?We wanted people who could be active day-to-day on our behalf and take a real interest in our success.?

To achieve that, Halyard lets advisory board members invest in the fund, and sit on the boards of portfolio companies. The board members serve as a source of operational expertise, complementing the financial backgrounds of the Halyard team. Their backgrounds are impressive: board member Peter Derow was president of both Newsweek Inc and CBS Publishing Group, Russ Pillar was chief executive officer of Virgin Entertainment Group and Viacom Interactive Ventures.

Recruiting hit-makers
Another function the advisory board serves is to introduce Halyard to talented executives. Monitoring and recruiting executives is an important part of Halyard's investment strategy, and the firm devotes considerable time and resources to it. The firm tracks around 800 executives across all of its targeted industry subsectors in a database. Even if Halyard doesn't have a specific project in mind for an executive they meet at the moment, they could in the future, so the investment team makes an effort to maintain relationships across years.

Sourcing executives is a wholly different process from sourcing deals. It requires spending time at industry conferences, talking to recruiters who are specialists in certain industries, and of course talking to other executives. Of the 800 names in the database, Halyard has a subset of about 50 that it tries to maintain regular communications with.

The payoffs are worth the work. Halyard has placed 11 of these executives in senior management or board positions across its portfolio companies to date, and the firm says around 45 percent of Fund I's committed capital was sourced through its executive network. The firm also cross-pollinates executives to boards of other portfolio companies to share best practices.

?We're not operators by background, so we think it's critical ? particularly for the size of the companies that we're investing in ? to have really experienced operating talent, in particular people who are aligned economically with us,? Eatroff says. ?So we're really focused on people who are interested in capital appreciation, people who would like to make money alongside our investment as opposed to trying to draw a salary.?

The model deal
Frankly, Eatroff adds, the firm gets the best ideas and transaction flow from these executives. Perhaps the best example of this approach is the story of TRANZACT, one of the more spectacular success stories in Halyard's history. Halyard's investment in TRANZACT could be a book some day, Eatroff jokes.

In 2000 Halyard met the Marc Byron and David Graf, who at the time were running a promising direct marketing company called Paradigm Direct. Halyard actually made an offer for the company, but Byron and Graf ended up selling to a higher bidder who was willing to pay more than $200 million to acquire the Paradigm in early 2001. That bidder was Mosaic Group, a publicly traded Canadian marking services roll-up. But BMO was a lender to Mosaic, and Halyard made an effort to stay in touch.

?When you meet smart people, and you think they're forward thinking, you develop a relationship with them,? Eatroff says.

Soon after the deal Mosaic began making too many acquisitions and ultimately overreached, filing for bankruptcy at the end of 2002. From this, Byron and Graff had the opportunity to buy back their business, but they needed a partner. Seeing their chance, Halyard stepped up in May 2003 and bought the business out of bankruptcy for $6 million. Halyard and the management team also committed a total of $10 million to the business up front.

The business had previously focused on wireless. The premise of the business was that the company would send marketing materials directly to potential customers ? through mail, by phone or by email ? on behalf of big clients like Alltel. If interested, the customer would then sign up for wireless service through Paradigm Direct, which would then send the customer's information to Alltel. Paradigm would be paid at a flat rate for each customer delivered.

As TRANZACT, the company diversified away toward financial services, credit cards, insurers and mortgagers. The company grew dramatically, and was profitable from 2004 on. Last year the company has $21 million in earnings before interest, taxes, depreciation and amortization. In October, Halyard sold TRANZACT to another middle market private equity firm, Veronis Suhler Stevenson, for $185 million, earning a 12x return on its initial investment.

Tomorrow is now
The TRANZACT investment was premised on a macroeconomic belief that Halyard has held since its inception; dollars are shifting away from traditional media and advertising, and toward the internet. Finding ways to create new channels of information as the traditional ones break down and figuring out how to monetize those channels will keep Halyard busy for years to come.

?As an investor, this is the kind of market you hope for,? Nolan says. ?You want a disrupted industry, because that's when the greatest values are created. You're going to find companies that are struggling for one reason or another, or you're going to find the company that provides the solution for the disrupted industry. This should be an excellent investing environment for Halyard.?