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Sun Capital targets Private Equity Rejects

by Josh Kosman,

Last month, Boca Raton, Fla.-based Sun acquired JTech Communications from Bain Capital, one of the buyout industry’s biggest firms. Bain had acquired JTech in 1995 but struggled to make a profit with the company, which manufactures on-site paging systems for restaurants.

For Sun, JTech represents just the type of company it is looking for: a niche-industry leader owned by a private equity firm but grappling with operational problems.

“There are many companies with strong franchise names that have the wrong management in place and are not performing particularly well,” said Rodger Krouse, a managing director at the firm.

With that in mind, Sun Capital plans to launch its first buyout fund later this year to snap up more companies like JTech, which is also based in Boca Raton. The group, which previously invested its own money or raised funds on an ad hoc basis, will set a target of $200 million, Krouse said.

The JTech deal will serve as a blueprint for other acquisitions. Sun Capital acquired a 26% stake from Bain Capital and a controlling interest in the company. It will install a new management team and work at taking operational costs out of the businesses it acquires.

As it did with JTech, the firm plans to leave the seller with a stake so it can profit, in part, from any turnaround. The group expects to typically pay between a five and six times Ebitda multiple for its investments, though Krouse declined to disclose the numbers for JTech.

Sun Capital believes more opportunities will soon present themselves, as firms that made roll-up investments in the mid-‘90s encounter problems as they execute consolidation strategies.

“In roll-ups, we often find there is too much overhead and significant management issues.” Krouse said. “We are looking for strong franchises that are undermanaged.”

Groups typically raise partnerships in which they have five years to manage companies before selling and returning capital to their limited partners. So many buyout firms now need to find exit strategies for some of the investments made in the mid ’90s roll-up boom, Krouse said.

Sun Capital has retained Chestnut Hill Partners to help develop contacts in the buyout community and to negotiate quiet deals. Chestnut Hill, based in New York, helps firms find deal flow but in this assignment is arranging exits.

“Partners at Chestnut Hill said 15 firms it works with have expressed interest in selling companies to Sun Capital, including BancBoston Capital, Jordan Cos., Madison Dearborn Partners and Sauders Karp & Megrue”, said Paul Schaye, a managing director at Chestnut Hill.

“It’s a natural progression of the food chain that this will happen,” he said.

To fund its turnaround investments, Sun Capital will present the case of Nailite International to potential investors. The firm bought the manufacturer of replica siding from Kleinwort Benson three years ago and has doubled sales, Krouse said.

To smooth operations, Sun Capital improved the delivery of products and responded more directly with customers. Nailite, based in Miami, then introduced a new product line, and customers reciprocated in kind.

Sun Capital, though, has made four turnaround investments so it has only a limited track record.

Two partners at Lehman Brothers Inc.-Marc Leder and Krouse-formed the group in 1995 with a strategy at the time of being a typical buyout investor.

“We got involved in situations that were more and more troublesome,” Krouse said, explaining the change in approach.