In the winter of 2009, Ron Clarke, the ebullient chairman and chief executive of FleetCor, a global provider of fuel cards and workforce payment products to businesses, believed he had found an amazing investment opportunity.
Summit’s “associate model” is a system of directly sourcing potential investments and, according to firm executives, is a major reason Summit has been successful for as long as it has. It’s the key to the firm’s philosophy of finding strong and growing businesses, run by quality managers.
A good example of this approach comes from France. Summit successfully imported its direct sourcing model to Europe after opening its London office in 2001. The firm populates the office with investment professionals that speak the languages of the various countries in the region, which allows them to develop relationships with local entrepreneurs.
This sourcing model helps to set Summit apart from its competition, which sure is fierce and growing. Many firms, including some that have traditionally targeted larger buyouts, have increased their focus on the mid-market, which seems to have become the strategy du jour for many LPs in the wake of the financial crisis. One example is mega-firm TPG, which is raising its second growth equity fund, targeting $2 billion. The firm’s debut growth fund is a relatively good performer and marketing for the second vehicle has been robust, sources have said in past interviews. That certainly poses a challenge to long-time operators in the space like Summit, who have previously enjoyed a somewhat less crowded market.
But with its extensive database, and its associates working tirelessly to build relationships with promising entrepreneurs, Summit would seem to have a better chance than most of retainining its pre-eminence. And if its recent run of fundraising success is any indication, LPs are certainly fully on board with the Summit way of viewing the world.
Box: Well in credit
Summit Partners has raised “subordinated debt funds” since 1994. Capital from these vehicles – raised mostly, but not entirely, from limited partners who also commit to the firm’s growth equity funds – is used to finance Summit’s own deals.
The firm saw an opportunity a few years ago to move more into the credit space, providing capital only to companies with whom the firm’s equity funds did not work. So Summit imported a team from Guggenheim Partners and started to refine its strategy.
In July, the firm closed its debut credit fund on $520 million, well above its $200 million target. This included commitments from new investors, who were looking for a different strategy from the firm’s equity products.
The credit fund invests using the same philosophy as any of the firm’s other vehicles, using the direct sourcing system to find quality companies – sometimes with bad balance sheets – and build relationships with management over time.
“For the right company, not big enough to do a syndicated loan deal or a high yield bond offering, but which has credit needs, historically, we didn’t have something for them unless they were raising equity with mezzanine debt,” according to Tom Roberts, a managing director at Summit who, along with Todd Hearle and Jamie Freeland, leads the credit strategy. “Now we have a fund where we can address those needs directly, and the demand for that type of credit is really fantastic these days.”
For the right company, not big enough to do a syndicated loan deal or a high yield bond offering, but which has credit needs, historically, we didn't have something for them unless they were raising equity with mezzanine debt.
“Those banks have been under such capital pressure for the last three or four years; they will make loans to companies that are $10 million, $20 million, $30 million in EBITDA, but not very often and not very aggressively,” Roberts says. “We’re hoping to fill that need.”
Summit made its first deal from the credit fund last year, investing an undisclosed amount in a Nashville, Tennessee-based company called Covenant Surgical. Covenant develops and acquires surgical centers for a variety of outpatient procedures, like colonoscopies.
Inevitably, Summit became aware of Covenant through its direct sourcing system. A firm associate was at a healthcare trade show and discovered Covenant, which had only recently launched and was beginning to develop its relationships with target acquisitions.
Through this meeting, Summit started to track Covenant almost since its founding. The company raised some equity, took out a credit line from a local bank and started to grow through acquisitions.
After a few years, Covenant identified a deal that would grow its business by 50 percent, but couldn’t get financing from its local bank. “They didn’t want to raise equity because they thought that would be too expensive. They wanted to stretch to get this deal done, get it integrated, show a little better story and then go raise equity,” Roberts says.
Summit liked the company and understood its plan, so decided to invest. Covenant closed on the acquisition, and then another one in its pipeline, which allowed the company to refinance its senior debt. Having used all its senior and second lien debt, the company is now actively looking to raise equity and further expand.
“We understood their needs, the deal fit perfectly for us, it was space and a firm we knew very well, we had great contacts from doing our due diligence and it turned into our first deal,” Roberts says.
While this deal was proprietary, Roberts says, “I don’t know if the majority of our deals will be that way. But it’ll be the plurality, and it very well might be the majority. A big part of our deals have come and will come from exactly that: just tracking a company with a good set of managers and being there with one product or the other depending on their needs.”