Money trail-Doing Well, Doing Good, Staying Local-July 2011
Scan the roster of Minnesota-based venture capital and private equity firms, and you’ll notice that whether they’re eclectic or they’re focused on a few industry sectors, virtually all have set their investment sights across the country.
Then there’s Granite Equity Partners.
One of the distinguishing characteristics of this $80 million, St. Cloud–based private equity firm is its fiercely local approach to investing. Since launching in 2002, Granite Equity has drawn on local investors and built a portfolio of companies in Minnesota and surrounding states “within drive time of our offices,” as the company’s Web site declares.
Central Minnesota’s fertile landscape is not solely a patchwork of family farms, like those on which two Granite Equity cofounders, Rick Bauerly and Patrick Edeburn, grew up. They know that rural communities also are home to successful entrepreneurs and business owners with capital, as well as family owned and closely held businesses seeking investors.
Bauerly and Edeburn also understand how capital can be used successfully. Before starting Granite Equity, Bauerly had helped integrate several acquisitions for his family’s construction business and started his own management consulting firm, Venture Allies. Edeburn, Bauerly’s classmate from the Harvard Business School and a former colleague at Deloitte & Touche, was working as director of corporate accounts at Medtronic and previously had been a venture manager.
Those combined experiences led to a eureka moment for Bauerly: to form the first private equity firm located in, and serving, outstate Minnesota. Bauerly and Edeburn then recruited Art Monaghan, who had become the youngest principal in the history of Minneapolis-based Norwest Equity Partners (and who has farm roots in Iowa).
Despite the pedigrees, small-business background, investment experience, and local roots, they still had one important lesson to learn. “We [erroneously] started with a traditional private equity approach,” Edeburn recalls. The trio sought investors for limited partnerships to buy and sell companies.
As they talked with potential investors and portfolio companies, “we found something missing in our value proposition,” Edeburn says. Potential investors were “interested in owning great companies in a great place to live,” while business owners would ask, “We like you guys and like what you stand for, but when are you going to sell us?”
Such conversations led Granite Equity’s partners to pursue a course that’s different from most other Midwestern funds. It serves investors who are interested in both long-term capital appreciation and the “desire to have community impact,” Edeburn says. Matching that dual motivation, Granite Equity seeks investments with business owners “looking to remain involved in their company while taking some risk off, [and] protecting their legacy in the community.” As a result, he adds, many sellers will take an equity position in a partnership or a seller’s note, rather than just taking cash.
Unlike most private equity firms, which tend to buy a company, slash costs, and flip it for a fast return, Edeburn says, Granite Equity tries to balance the needs of employees, shareholders, vendors, and the community—“to serve a mission beyond just a return on investment.”
Granite’s investment companies typically range from $10 million to $50 million in revenue, generating $1 million to $7 million in earnings before interest, taxes, depreciation, and amortization. Investments ranging in size from $3 million to $7 million across a portfolio of more than a dozen companies have averaged “well above” a 15 percent internal rate of return, Edeburn says. Granite has, at times, paid special dividends to investors by recapitalizing portfolio companies. “If you’re successful with a company, they usually generate some earnings, cash flow, and additional debt capacity,” Edeburn says.
Granite’s buy-and-hold approach is not sacrosanct, however. “We typically sell for a different dynamic than strictly to monetize a deal,” Edeburn says, pointing out that the firm has sold a portfolio company when a new owner is a better strategic fit.
Kathy Gaalswyk, president of the Initiative Foundation, a Little Falls–based regional economic development organization, says that “the caliber of [Granite Equity’s] due diligence, analysis, and engagement is not typically what you find in rural areas.” The foundation has been a lender and grant maker to several companies that Granite later invested in, according to Randy Olson, the foundation’s vice president for economic opportunity. In 2005, it participated in Granite Equity’s investment in Sartell-based valve manufacturer DeZurik. The foundation followed that two years later with a $500,000 investment in Granite Funds.
The firm’s narrow geographic focus is balanced by a portfolio invested in a wide range of industries, including precision manufacturing, medical devices, supply chain, defense and aerospace, building products, agricultural products, and heavy equipment. “We’re more interested in the company and competitive advantage than any particular industry,” Edeburn says.
Granite Equity’s focus allows it to leverage its investor networks for investment ideas and executive talent. Last December, for instance, Granite took a majority stake in Chaska-based Aeration Industries International, a family-owned water treatment equipment manufacturer. While family members retained executive positions and an ownership stake, Granite also put the CEO of portfolio company DeZurik on Aeration’s board.
Granite’s tight-knit network also served it well during the recent financial turmoil. Edeburn recounts that his firm was midstream on due diligence with Geotek, a Minnesota manufacturer of reinforced fiberglass, when the economy slid into a “deepening recession and financial crisis” in 2008, threatening the deal. “Fortunately, our lending partners stood by us,” he says.
Granite used the recession to get the portfolio “shipshape,” Edeburn says. One company had its credit pulled; another went in for major restructuring. “We spent 2009 working on our portfolio companies, as opposed to seeking another investment,” he adds.
Brad Allen (email@example.com) is a Twin Cities business writer and communications consultant.