4 New Buyers Aiming at the Lower Middle Market

One of the perks of running a network for the lower middle market is we constantly get to meet new players on the scene. In this piece we wanted to highlight four new buyers: one committed capital fund, one search fund, and two independent sponsors.

Arteryx

Arteryx Capital Partners is a new Utah-based $20 million fund founded created by Kevin Williams, who fomerly served as an officer in the Navy SEAL Teams. Kevin cut his teeth on the buyside with former middle-market PE shop Chicago Growth Partners (CGP). The key lessons he learned at CGP included the premium on confirming “fit” between the financial sponsor and management teams during the investment screening and selection process. The complete alignment of incentives and values proved the common denominator in every successful partnership. With Arteryx Capital, Kevin is targeting smaller companies operating in the lower middle market that likely require increased engagement and resources from the financial sponsor. The firm’s goal is to partner with stable companies and build teams that promote diversity of thought but subscribe to one value system and one mission.

Kevin also brings some valuable lessons from the SEAL Teams to his role as an investor. “What you learn most is how to read people, leverage their strengths, and position them so they can achieve their greatest impact. SEALs are required to think, act, and decide while navigating extreme circumstances. There are few professional environments better suited to teach risk management.”

Arteryx is an industry generalist, but they are particularly attracted to business and consumer services, specialty electronics, and aerospace, defense and government.  They seek companies in the $1M to $5M EBITDA range and prefer a majority stake. Given the size of the fund, Arteryx has also cultivated a network of co-investment partners which enable the firm to execute larger deals.”

Southwood Investment Partners

Southwood Investment Partners is a search fund started by Atlanta-based husband and wife team Drew and Kristen Shambarger. They started their hunt a few months ago, looking at companies across the mid-Atlantic and South. Drew was a middle market banker for years, while Kristen’s background is in education. Their capital comes from previous relationships, many of whom have been entrepreneurs themselves in a variety of industries.

Southwood is attracted to family-run companies in business services, manufacturing/distribution, healthcare, education, or technology services with slow and steady growth. Strong culture is really important to them. They’re targeting EBITDA from $500,000 to $3 million, with $1 million the most likely target, while revenue goals are industry-specific.

The Shambargers have only been searching for a few months now, but they’ve already gotten down the line on a few deals. They recently were under LOI on one deal, but couldn’t reach mutual ground on price. Overall, they’ve been pleasantly surprised how many opportunities have come at them, and have had to quickly build up a process for evaluating them. “When we did our first project on Axial, I expected we would just see a few opportunities, but it was more like opening the floodgates,” says Kristen.

Southwood recognizes their unique value-add and hopes to find the right opportunity to take advantage of that. “We’re not a family office with $150 million to put to work over the next 18 months,” says Drew. “But we’ll come in, immerse ourselves, and really focus on preserving what is best about the business. Investing in the culture of a company is a top priority for us.”

Pegasus Industries

Pegasus Industries is a newly formed investment firm based in Houston. “We’re looking a little lower than most typical independent sponsors,” says founder Robert Graham, who most recently worked at the Houston-based private equity firm The Sterling Group. “We’re right on the edge of the search fund space, but have a broader mandate.”

Pegasus is targeting deals between $1 million and $5 million EBITDA in the B2B services, manufacturing, and distribution spaces. The firm also has some theses in niche industries such as industrial and hydraulic hose distribution, heavy equipment repair, and maintenance and inspection. “We thought it was going to take us months to develop our pipeline. I was surprised at how many really attractive industry niches there are out there, and how much opportunity for capital there is.”

Robert expects his fund to be operationally involved in whatever businesses they acquire. “We’re open to situations where the CEO is staying on and there’s a talented management team in space, where we can step into support, but we’re also open to cases where the CEO is stepping down.” In that case Graham would likely step in as temporary CEO for a year or two while they conducted a search.

Carwik Capital

New Massachusetts-based independent sponsor Carwik Capital brings together Mike Slowik and Mike Carpenter, both former operators of chemical and metal manufacturing companies. Slowik and Carpenter plan to put their own capital to work through Carwik, complemented by debt and equity partners.

“We want to get our hands dirty,” says Carpenter. Both partners are mid-career professionals and eager to have hands-on involvement in companies, whether that means jumping in to replace a retiring CEO or complementing an existing CEO on customer acquisition and growth. The duo is looking at manufacturing companies in the $1 million to $2.5 million EBITDA range, with a specific interest in chemicals, specialty polymers/coatings, chemical equipment, and metals value chain.

Their operational experience means they can immediately spot red flags on a deal. “We recently went into a site visit and saw tons of issues from an operational and compliance perspective. Having that experience really helps with due diligence and knowing which questions to ask,” says Carpenter. “One of my business professors, Scott Meadow at Cornell, always said, ‘I go kicking and screaming into deals to make sure I stay disciplined and go in eyes wide open.’”

The partners are confident they’ll find a deal that fits their thesis, but that doesn’t mean the market is without challenges. “We recently got outbid on one deal we were excited about. Now our focus is on deal sourcing and trying to find something at a good price,” says Slowik. “We have to get creative about finding proprietary deal flow.”