LMM Deal Digest: May 2023
At the beginning of October, HKW, a middle-market private equity firm focused on growth-oriented companies, closed on HKW Capital Partners V, L.P. with total commitments of $365 million. Launched in September 2017, HKW V exceeded its original $350 million target.
As with its predecessor funds, HKW V will focus on investments in middle-market growth companies with a target EBITDA of $5 million to $30 million. HKW will seek to invest in growth-oriented companies in the United States and Canada, targeting small-to mid-size companies in the business services and health & wellness sectors.
HKW V is the successor fund to HKW IV, a $319 million private equity fund that began investing in 2012.
Middle Market Review sat down with Jim Snyder, a partner with HKW, and Ted Kramer, president and CEO of HKW, to talk about fundraising and the deal sourcing environment.
Kramer: We were founded in 1903 as an investment bank until 1982 when they did its first change of control transaction in the automotive industry. Our thesis is to find deals in the smaller end of the middle market. Most of the companies we deal with are taking first time institutional capital.
We are looking for companies in health and wellness and business services. We were generalists, but when we were generalists we would find thousands of opportunities in our EBITDA ranges. Some sectors naturally started getting higher on our radar screen and we started to lean in to those sectors for Fund IV. We will continue to invest in those sectors for Fund V.
Snyder: We kicked off in 2017. We got off to a quick start and were able to keep assembling investors and we are happy to end up with $365 million. We have a nice combination of existing and new investors, including institutional investors, insurance companies, state pension plans, family offices, high net worth individuals, and foundations and endowments. They are primarily U.S.-based.We are happy with the makeup of our investor base. Fundraising in never easy, but we exceeded our target and we are happy.
Kramer: It’s very competitive as investors get more granular with angles and uniqueness. You have to be to transform most businesses and make a lot of operational improvements. Today, we have an exit committee. It allows us to take a proactive approach to divesting our transactions. Right after we buy a company, we do a complete underwriting and talk about when we will sell the business. We have metrics around when is the opportune time to sell the company. We looked at the first 36 months of ownership and realized that’s when we made most of our changes so what the trajectory after 36 months? What is the risk of holding it longer? We have spent a lot of time looking at this.
Where we invest, there are constantly new investors, independent sponsors, and family offices looking at the same opportunities so we really have to have our ducks in a row.
Kramer: We have dedicated sourcing professionals. I have lived on the road for 46 weeks of the year, three days a week. We have two full-time deal sourcing professionals and I am also on the road. It’s a real effort and a key differentiator. We have created genuine relationships with intermediaries. Not so much the big ones, but the regional intermediaries. We care deeply about these relationships and when we exit a company we don’t want it to impact our integrity or keep us from seeing the next opportunity. It is an area where private equity can use technology to help, but the human relationships mean a lot.
Kramer: We have completed five deals in fund five—GCR, Certified Tracking Solutions, Indigo Wild, Urban Armor Gear, and Fresh Direct Produce. Fresh Direct Produce is the most recent and is located in Canada. About 30 percent of our investments are in Canada. Fresh Direct Produce is fresh produce and distribute and wanted to expand its footprint. We have done two acquisitions already to expand the company’s footprint. We also bought Islands West Manufacturing, a wholesaler of produce, processed fruit, dried spices, and vegetables located in Victoria, Canada. Our next phase with that business is expanding its footprint in the Toronto area.