Private Equity Case Study: Hammond, Kennedy, Whitney & Company

By Generational Equity

07/08/2015

Recently Hammond, Kennedy, Whitney & Company, Inc. (HKW) announced the sale of one of its holdings, Crane Rental Corporation (CRC), based in Orlando, FL. CRC is one of the largest and most prominent crane rental, hauling, and rigging companies in the United States. CRC had been a portfolio company of HKW since 2008, and Maxim Crane Works, a portfolio company of Platinum Equity, bought the crane company.

Several things caught my attention in the press release regarding this deal. First, CRC had been in the HKW portfolio of companies since 2008. If my math is correct, that is seven years. Many folks in the general public and even in the small business community have a very negative view of private equity firms, assuming they buy and break rather than buy and build based on press coverage. In reality the latter is much more common than the former.

In fact, according to their website, HKW:

…concentrates its investment efforts on private and public, small middle-market companies with low risk of technological obsolescence. HKW focuses on management buy-outs of companies which have revenues between $20 million and $200 million, are headquartered in North America and are established leaders in their respective niche markets. Platform transaction range $20 million to $200+ million (no minimum for add-on acquisitions).

I have highlighted the tail end of that paragraph to emphasize a point: HKW is similar to other private equity firms that specialize in the lower middle-market: Add-on transactions are typically quite small, much smaller than the initial platform acquisition. I point this out because according to their press release announcing this CRC transaction:

Since 1982, HKW has sponsored 48 platform transactions of lower middle-market companies throughout North America as well as 52 add-on acquisitions.

Let that sink in for a moment: HKW has closed more add-on transactions than platforms in the past 33 years.

Although this may surprise you, it is not unique among equity firms that specialize in investing in companies in the lower middle-market. In fact, based on our experience, firms in this niche are very active once they make the platform investment in an industry. They typically then acquire a number of much smaller companies and bolt them on to the platform, eventually creating a much larger entity.

Although HKW did not disclose the details of the original acquisition or the most recent transaction, it is safe to assume that CRC was a much larger entity than it was originally when it was acquired by Platinum via Maxim. In fact, according to the 2008 press release announcing the transaction:

HKW has made multiple investments in the equipment rental sector including the recent investments in NESCO and Airworx Construction Equipment and Supply.

Reading between the lines, it is clear that HKW invested in CRC as part of a much larger strategy that culminated in the eventual sale to Maxim. Again, according to the press release from 2008:

"One of the most appealing aspects of a partnership with HKW is their reputation for assisting strong companies with their next level of growth while allowing existing leadership to continue in current roles," said Alan Ashlock, (the second generation family owner of Crane Rental). "It was important for us to be able to continue delivering the same quality service along with maintaining our exemplary safety standards."

Ashlock observed that partnering with HKW will give Crane Rental the additional financial strength to aggressively fuel its growth and maintain its inventory of state-of-the-art equipment.

I have bolded a key segment of the paragraph above because it really outlines one of the key benefits of partnering with a middle-market private equity firm like HKW: the provision of capital beyond what current ownership has available. This allows existing owners to participate in the ongoing growth of the company post acquisition and achieve revenue and profit goals that most likely would have been unachievable under prior capital constraints.

Of course not every privately owned business will benefit from a relationship with a PE group as CRC did. As you can surmise, equity firms have specific attributes that they are looking for when pursuing an ongoing add-on growth strategy. Synergies between the platform company and its targets are key. These can include new end markets, a blue chip customer base, tenured, experienced employees, new product lines, etc.

The real issue for you will be first to determine if equity firms are even a potential target for you, AND once you determine that, you will need to figure out how to locate, contact, and negotiate with professional buyers associated with these firms. Fortunately we have an answer for you: Generational Equity provides a full spectrum of M&A services and we ensure that our clients are presented to appropriate buyers based on our research and analysis of your business.

Recommended reading: Selling Your Business – The Essential Guide

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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