BIG NAMES PUT BETS ON ICV CAPITAL

CalPERS, New York State Common among institutional investors in firm's first 2 funds

By Arleen Jacobius Pensions & Investments

Posted: June 11, 2007, 6:01 AM EST

NEW YORK - In the world of private equity, where it can take several funds to know whether a new firm will join the winner's circle, many large institutional investors are betting that ICV Capital Partners LLC is a front-runner.

Investors in ICV's first two funds include the $247.9 billion California Public Employees' Retirement System, $167.2 billion California State Teachers' Retirement System, $154.4 billion New York State Common Retirement Fund, $39.7 billion Teachers' Retirement System of the State of Illinois, $11.6 billion Public School Teachers' Pension & Retirement Fund of Chicago and the $4.5 billion Philadelphia Public Employees' Retirement System.

ICV executives say their unusual investment strategy and hands-on style are what is separating their firm from the pack. The buy-and-build strategy used by the buyout firm, which invests in small- to middle-market companies, is not all that unusual. What is different is that ICV uses less leverage; a larger percentage of ICV deals are in cash. Also, the minority-owned firm focuses on domestic businesses that are market leaders in inner cities; or that target ethnic or minority markets; or that are ethnic- or minority-owned.

"The strategy resonated with people. It's a unique strategy," said Willie E. Woods, ICV president.

Before the eight-year-old firm raised its first fund, Mr. Woods and co-founder and managing director Tarrus L. Richardson persuaded ICIC Enterprises and private equity firm American Securities Capital Partners LP to invest in ICV and its funds. ICIC and American Securities combined own a minority stake in ICV, which now has $440 million in committed capital.

Standard & Poor's leverage data reveal the average equity investment in a buyout deal is 30% to 35%, no matter the size of the deal, said Gary Robertson, senior vice president at Callan Associates Inc., San Francisco. Mr. Robertson was speaking about the broad market, not specifically about ICV.

Firms that use less leverage either focus on very high growth private equity strategies or do "rollups," buy the first company with low leverage then load up on leverage during a series of subsequent mergers, Mr. Robertson explained.

By contrast, equity comprises 40% to 50% of the capital structure in ICV deals. The remainder is financed by debt but ICV only uses senior bank debt, rather than less senior debt or riskier securitized debt, Mr. Woods said.

A hiccup could turn into a catastrophe for a highly leveraged smaller company, Mr. Woods explained.

Expensive debt

That is not to say the strategy is without risk. While Mr. Woods maintains there are more opportunities to have a greater impact on smaller companies, the small-cap to midcap buyout market is illiquid. That means debt is more expensive than in the bigger end of the market, he acknowledged.

What's more, like some other small- to midmarket buyout firms, ICV executives take pains to keep a company's chief executive officer rather than replace what is often the founder of the enterprise.

"In the small market the CEO is critical," Mr. Woods said. "The CEO is usually the top salesman, the figurehead, the spiritual leader. … If you fire the CEO, then five customers will leave."

Like other buyout firms that strive to keep CEOs of the companies they buy, ICV will add a professional management team including creating chief operating officer and chief financial officer positions.

"We keep the CEO but we still make changes to the management," Mr. Woods said. "You can't be everything."

Taking advantage of the tremendous amount of money rolling into private equity, the four companies that ICV has sold this far have been sold to other private equity firms, he said. In January, ICV and investment partner Palladium Equity Partners LLC sold Hilsinger Holdings to PNC Equity Partners after three years of ownership. While terms of the deal were not disclosed, the firm realized an internal rate of return of 30% on the transaction, Mr. Woods said. To get this type of results, ICV executives did not overpay for the firm and were able to increase cash flow by 30%, he added.

"You have to have valuation discipline. You can't have a follow-the-herd mentality," Mr. Woods said.

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