One in 16 Billboard Insider readers have used money from an equity fund to grow their out of home company. Today we interview Jim Matalone, the owner of Mad Dog Consulting about the pros and cons of using equity fund money to grow an out of home company.
You used an equity fund when you acquired, ran and sold Ashby St Outdoor. Can you give us the details?
Yes. After leaving NextMedia Outdoor as President, I was looking to start a small outdoor company that I could scale into a larger one. My experience and skill set was in building and expanding existing outdoor platforms into larger ones. To start something worthwhile I knew I would need a significant amount of capital to begin. While I had prior experience with equity funds (private equity), I found that it was difficult to get an equity commitment before I had secured significant assets or a company to buy. Of course, potential sellers wanted to know if I had sufficient money to buy them before they would waste their time with me. Classic “chicken or egg” story.
Fortunately, after months (and a lot of stress) of going between equity firms and potential sellers, I was able to both secure a sizeable platform to buy and found the perfect equity firm (Tinicum, Inc) to fund it. Tinicum agreed to commit an initial $50mm in equity which I felt would give me roughly $100mm (factoring in a reasonable debt capacity) in potential purchasing power or capital expansion. Also, in addition to being a firm with deep pockets, they were structured somewhat differently. Tinicum typically took longer term time horizons than most firms who usually have a targeted 5-year exit on their investments. Having a longer investment horizon gave us more time for finding potential acquisitions and expanding performance on the existing assets. Also, timing was also good in that they had been exploring the outdoor space for over four years but had not found the right deal to pull the trigger on.
Our partnership (Tinicum & I) worked as perfectly as I could have hoped for. Their capital and financial expertise gave me the opportunity to build through expansion and acquisitions a company that eventually had close to $10 million in annual EBITDA. After just over 8 years of operation and considering multiple offers, we successfully sold our company to Lamar.
What are the advantages of using an equity fund to grow an out of home company.
The obvious advantage is that you have access to a large amount of capital enabling you to explore any and all opportunities to expand and grow. And while you may need to put in a relatively small equity investment, you have the opportunity to grow your personal fortunes providing primarily your time and expertise.
Secondly, if you partner with a good firm, you will be provided with their financial expertise assisting you in evaluating all expansion opportunities. A good PE (private equity) firm will find the right balance of equity & financing to safely maximize their ROI’s and management’s (your) equity value.
What are the disadvantages of using an equity fund to grow an out of home company.
The biggest disadvantage is control. When you work with a PE firm(s), you are almost always partnering with a group or groups that will have voting control of your company. Unless they are investing a minority stake which usually only happens if you already have a significantly sized company and looking for a partial equity exit.
Also, PE firms are usually targeting somewhere in the 15-20+% annual IRR range for their investors. That is not an easy task for an existing outdoor platform. That equates to high expectations (and pressure) for the operator.
Because the PE firm will be in control, it’s important to thoroughly understand the firm. This includes their current fund size, single investment minimums and limits, management equity share structure, and current & historical portfolio companies. It’s also important to understand their investment philosophy and how your company would fit in that philosophy. You should also talk to current and former CEOs of their portfolio companies to clearly understand how they operate as a partner. Some firms are more hands off, and you may only communicate with them once a quarter or so. Other firms are more involved and you will be speaking with them often (once per week). In my experience, the firms with more communication requirements were also the ones that provided more support (financial guidance, evaluating opportunities, etc).
Bottom line, PE firms can be a great way to build a sizable outdoor company as long as you find a firm whose goals and operating philosophies are aligned with yours.
You can contact Jim Matalone at Mad Dog Outdoor Consulting at jmatalone@maddogoutdoor.com, 941-350-6529.
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