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New private equity firm focuses on management buyouts

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At a time when the economy is in bad shape and venture capital is as scarce as hens’ teeth, a local banker and an industrialist have joined forces to start a new fund, one designed for managers who want to buy out the owners of manufacturing-related companies.

NorthSpring Capital Partners, a private equity firm, was started recently by Sol Algranti, a long-time industrialist who has run plastics moulding and other companies the region, and Brian Hunter, who retired from Roynat Capital, the business investment arm of ScotiaBank Group, where he did debt and equity financing for small and medium sized businesses.

In forming NorthSpring, Algranti and Hunter, along with two other partners, Alby Algranti and David Shekhter, are doing what few venture capitalists are willing to do – take a chance on investing in small and medium sized companies that do manufacturing, processing and wholesale distribution.

“We are unique,” Algranti says.

While there are venture capital companies that are interested in technology startups, “they don’t want to do what we do,” Hunter adds. Also, big Toronto-based venture capital firms are not interested in doing deals under $1 million, because there isn’t enough money in that for them, they say.

NorthSpring can do smaller deals because its overhead costs are low, Hunter says. At the moment, it is operating out of the offices of Northbridge Consulting in Cambridge, which is owned by Algranti.

Algranti, a mechanical engineer, also is the chief executive officer of the Algranti Group of Companies, a group of vertically integrated companies involved in plastics manufacturing, retail distribution and product sourcing.

The partners say they started the private equity firm because there aren’t many financing options available in situations where the owner of a small or medium sized manufacturing business wants to sell, preferably to the local management team, but the managers don’t have enough cash to buy it.

“So they would have to rely on neighbors, friends and other angel capital,” Hunter says. “We want to be a step up from that.”

The deals NorthSpring will finance will mostly be in the $250,000 to $1 million range and might involve the vice-president or other senior managers of the company being sold. “Typically, they are great operators and they know how to run the business, but they don’t have the cash to purchase it. So, they might mortgage the house and put in $200,000 but there is still a gap in the financing,” Hunter says.

NorthSpring only is interested in bridging the gap if the managers are willing to put significant “skin in the game,” meaning they will put their own cash on the line, Hunter says. “We want their commitment and something that is substantial from them, so that we know that they will be there in the tough times.”

Press Release, December 2009
Peter Lee, Record Staff

“In situations like that, we will come in, and help them structure the deal and buy out the owners. Then at some point in a few years, they will buy us out,” he says.

Algranti says NorthSpring’s goal is to help these companies prosper so that the managers who are buying in can own their businesses 100 per cent, ideally within five years. “Our goal is not to be there for the long term,” he says. “We want to help the company financially and with our manufacturing expertise and our consulting businesses, so that they can add value and prosper.”

Algranti says there are many situations where an owner wants to sell, but he can’t because no one has the cash. “In many of those instances, those businesses just disappear,” he says.

Hunter adds that selling the company to the existing management team is better for the company; customers and suppliers will be more trusting of the existing management as opposed to outsiders.

The deals can be structured so that the owner can stay in a minority role or consulting role as the company is transitioned into the hands of the managers who are buying it out, Hunter says.

Right now, NorthSpring isn’t looking to bring in other investors outside of its four existing partners. But if it becomes successful, there may be further fundraising with selected people invited to participate, Hunter says.

The relationship between Hunter and Algranti goes back to the late 1980s when Hunter helped Algranti get financing together for one of his businesses, and later do deals for other businesses.

With Algranti’s decades of expertise in the manufacturing sector and Hunter’s long experience in financing, the duo realized they could form a dynamic partnership in a new private equity firm, one that would not just provide the money but also help companies prosper and stay in this part of Ontario.

“With the people that we are dealing with, this might be their first deal. So we can help them through that process,” Hunter says.

Hunter says companies often become more dynamic when the owners are able to sell to managers who are passionate about the business. “Often, what happens in mature companies is that the owner doesn’t want to take the risks anymore, so maybe he passes on opportunities he could take, but maybe the manager underneath him is really wanting to continue to grow,” he says. “So it is good for the economy when this happens.”

By Rose Simone, Kitchener Record Staff.