GRAND RAPIDS — After leaving their positions at Blackford Capital earlier this year, Jeff Helminski and Jack Kolodny have launched their own private equity firm with a goal to fill a gap in the market.
Grand Rapids-based Auxo Investment Partners, which officially launches today, plans to capitalize on two major challenges that exist in the private equity world: a lack of transparency between the firms and their investors, and a gap in the options for businesses choosing between family offices and traditional private equity funds.
“I think what we’ve developed is pretty innovative in the world of private equity,” Helminski told MiBiz. “Our philosophy at Auxo was really born out of observations we had that were occurring broadly in the alternative investment industry. We saw a growing dissatisfaction between investors and managers of investments.”
While investors typically have a high degree of knowledge of what’s transpiring within the companies they’ve invested, traditional private equity firms often draw criticism from partners for not offering enough transparency in their own operations.
Investors often are not privy to how much each managing partner is earning, how the overall firm is performing, and other details like expenses, Helminski said.
To combat this, investors in Auxo’s portfolio companies will also invest in the firm itself and share in the firm’s earnings. Investors will also have access to all of Auxo’s financials, including management compensation.
“A lot of people we’ve heard from, there’s this trend that’s moving toward a direction where investors are looking for more transparency in what’s going on,” Helminski said.
In addition to Helminski and Kolodny, Fred Tedori, a private equity investor who had worked with the pair on previous deals, will serve as the third managing partner.
Mark Murray, the vice chairman of Walker-based retailer Meijer Inc., will serve as a senior adviser to Auxo, according to the firm.
Auxo plans to target North American middle-market companies in manufacturing, industrial, “value-added distribution,” business services and other industries with earnings before interest, taxes, depreciation and amortization (EBITDA) between $1.5 million and $15 million.
The firm intends to raise roughly $50 million in equity, allowing it to acquire 10 to 15 companies over the next five years. To date, the partners have raised about half of their intended target.
FILLING A NEED
In addition to serving investors through increased transparency, Auxo also hopes to cater to companies looking to preserve their legacy by striking a middle road between traditional private equity firms and family offices.
Many owners looking to transition out of their businesses avoid private equity firms because of their short investment horizons and high degrees of leverage, which often results in companies relocating, shedding employees or shutting down altogether.
On the other hand, family offices offer longer investment horizons but often lack the professional expertise to grow and expand businesses.
Instead, Auxo will focus on longer-term investments — stretching from a minimum of five years to decades, Helminski said.
“There’s not much left in the middle,” he said. “We think we can bring to the market a solution that has that professional expertise in terms of helping these companies grow, but because of who our capital sources are and our aligned relationships with them, we can take a long-term perspective … which feels more like a family office.”
Auxo plans to use its relationships and the expertise of its managing advisers to “roll up (their) sleeves)” and bring the necessary talent and processes to the organization, Kolodny said.
“Oftentimes, you have a founder who has worked for one or two generations and built up a company from something very small to something that’s a terrific part of their legacy,” Kolodny said. “But at the end of the day, a lot of that stuff is still in their head. Their concern is if they leave or retire, there would be significant negative impact on the company. Part of what we ultimately specialize in bringing value is putting in place the infrastructure … to allow them to feel comfortable stepping back over time.”
Gary Lewis, a managing partner at Birmingham-based advisory firm Amherst Partners LLC, sees Auxo’s new model as a “really interesting idea,” especially given many sellers’ desire for longer investment horizons.
“I think where Jeff is trying to drive at is approaching it with a Midwest culture and a grassroots-type of value-added partner,” Lewis said. “We do a lot of capital raising and M&A advising, and to the extent that our clients are going through decision making, quantitative dynamics matter, but it’s the qualitative partnerships and fit and feel that always plays.”
While Auxo has only just started raising capital and shopping for deals, it’s already fielded “a tremendous amount” of inquiries from companies interested in the firm’s model, Helminski said.
“Frankly, what we’re experiencing right now is more deals than we can handle,” he said.
Auxo currently has several deals in the pipeline that it’s working to develop.
However, Auxo’s positivity regarding deal flow comes as overall private equity deal volume continues to decline.
The number of transactions conducted each quarter has fallen steadily from 1,024 deals in the fourth quarter of 2014 to 662 deals in the third quarter of 2016, according to the latest data available from PitchBook.
Additionally, overall deal value has plateaued as buyers are willing to pay more for quality deals that can withstand global turmoil and are “recession proof,” according to the study. Deal value reached $171 billion in the third quarter of 2016, compared to the $190 billion in deals conducted in the same period a year ago.
Despite declining deal volume and increased competition from private equity firms and other investors, Auxo believes its model will carve a niche for the firm.
“There’s a lot of capital out there chasing deals,” Kolodny said. “Folks talk about it being a good time to be a seller because there is so much competition. That said, I think we do have a very unique approach and a message that, for the right sellers, resonates a lot.”
Editor’s note: This story has been changed from its original version to note that Auxo plans to raise $50 million in equity, rather than a combination of debt and equity.