When Baltimore-based ABS Capital Partners invested in Sterling's NeuStar Inc. in 2001, it didn't even announce the deal.
Maybe it was fear of derision. At the time, investors were in full retreat from the telecommunications services sector. Coughing up expansion capital for a company that maintained phone-number registries for telecom carriers wasn't exactly in fashion.
Four years later, NeuStar has turned out to be one of the most successful local private equity investments in recent years. ABS invested about $15 million in the company, according to my calculations. When NeuStar went public in June, ABS sold $36 million worth of stock.
And last week NeuStar registered to sell 1 million more ABS-owned shares in a secondary offering that at the stock's current price will add $30 million to ABS's coffers. So that $15 million investment will have resulted in a cash return of about $66 million, more than four times ABS's initial investment in four years.
And ABS will still own 725,000 shares after the secondary offering.
Also last week, ABS laid the ground for another investment exit when Liquidity Services Inc., a District-based online seller of surplus inventory, registered to go public, hoping to raise up to $86.3 million. ABS is the only private equity investor in Liquidity Services. It bought about 3.3 million shares in a recapitalization of the company in September 2004, for $20 million. The registration statement filed by Liquidity doesn't assign a value to the company, but if Liquidity goes public at $9 a share, for example, ABS's stake would be worth $29.7 million. Securities and Exchange Commission documents do not disclose how many, if any, shares ABS will sell in the IPO. [Related article, this page.]
ABS officials would not comment on either the NeuStar or Liquidity investments, or on returns from any of its investments. But general partner Phillip A. Clough agreed to speak generally about the firm's strategy.
Clough said ABS "is in the business of identifying the next new thing" or, more precisely, what next new thing is going to catch fire in the equity markets. While ABS invests in traditional venture-financed businesses -- telecommunications, software, health care, business services, online media -- it doesn't provide early funding like traditional venture firms. ABS invests in companies after they have gone through at least one venture funding, but aren't yet big enough to consider public stock offerings or a purchase by another company.
"We're not early-stage investors," Clough said. "By the time we come in the company has already gotten past the technology risk. So our companies are in an expansion stage. They've already got the business model right, the management right and the strategy right. We provide the capital to get them to the next level."
ABS's investing includes a range of deals, from whole-company buyouts to minority-stake equity financings. Its typical investment ranges from $10 million to $40 million, and most of its companies have annual revenue of $20 million to $100 million.
About a third of ABS's most recent fund, $450 million raised in 2000, is invested in the mid-Atlantic region, Clough said. Other local investments, past and present, include Cyveillance Inc. of Arlington, Dulles-based modular office provider Resun Leasing Inc., District-based InPhonic Inc. and OTG Software Inc. of Rockville. Most of its investments, though, are in New England or California.
The "next new thing" strategy that Clough talks about mirrors closely the approach that was employed by the venerated, now-defunct investment banking house Alex. Brown & Sons, the Baltimore firm that in the 1980s and 1990s was a major backer of growth companies and in its day was the biggest underwriter of initial stock offerings. That's natural: Most of ABS's 22 partners and employees are refugees from Alex. Brown, which is now part of Deutsche Bank. And ABS, which stands for the old firm's name, was started as the merchant banking division of Alex. Brown. It was spun out of the company in 1995. It was led then, and now, by Donald B. Hebb Jr., the former chief executive of Alex. Brown.
Its roster of partners expanded in recent years as it brought on more executives with business operating experience, such as Richard A. Kay, a special partner who was founder of OTG, and Ralph S. Terkowitz, a former chief technology officer of The Washington Post Co. who is working on new-media deals for ABS.
ABS has raised four funds since the early 1990s and now manages about $1.5 billion. Its investors include pension funds, financial institutions, endowments and wealthy individuals. ABS's most recent fund had an internal rate of return of 16.5 percent as of June 30, according to the California Public Employees' Retirement System, which committed $75 million to the fund in 2000. The average return for all private equity funds into which Calpers put money in 2000 is about 3.4 percent.
Clough said ABS sometimes works alone on deals but often partners with other private equity shops. It has done a number of co-investment deals with New York's Warburg Pincus LLC, which was the lead investor in NeuStar and financed the management-led buyout that created NeuStar in 1998 when it was spun out of Lockheed Martin Corp. Clough said ABS's other semi-regular deal partners include Boston's TA Associates Inc. and Silicon Valley's Greylock Partners.
It's a good time for ABS's investing strategy, Clough said. Growing private companies are staying private longer, both because the IPO market has been less welcoming since 2000 and because the costs of being a public company are higher than ever.
"A company has to be larger and more valuable to realistically go public," he said. "Before 2000, there was less need for capital like ours because a company could do an IPO to raise growth capital."
Clough said that while venture investing all but dried up in 2001 and 2002, ABS's investing, like all expansion financing, increased. "We made a conscious decision to stay in the market," he said.
Which was lucky for NeuStar, and lucky for ABS.
Good Start for Under Armour
Speaking of private-equity-backed companies going public, Baltimore athletic apparel maker Under Armour Inc. completed its IPO on Friday, selling stock worth $157 million at $13 a share.
When it began trading Friday morning, Under Amour's shares rocketed to $31 a share before closing at $25.30, making it one of the most successful first days for a stock this year. In recent weeks, as demand for the new stock grew, Under Armour's investment bankers at Goldman Sachs & Co. boosted the total shares offered in the deal as well as the price, from the $7.50-to-$ 9.50 a share range, then to $10 to $12, and finally to $13.
San Francisco's Rosewood Capital Associates LP, the only institutional investor in Under Armour, received about $12 million in IPO proceeds and still owns a substantial stake.
Another local company, Global Secure Corp., was set to go public last Monday but yanked the deal at the last minute. In written statements, the company and Sky Capital LLC, the New York private equity group that backed Global Secure, said the decision not to go through with the IPO was "due to market conditions." The company's SEC registration is still active, so there's still an outside chance that Global Secure could go public later this year.
But don't bet on it. Demand for stock in the District-based company, which sells products and services in the homeland security market, was clearly not that strong. The company originally filed to raise up to $82 million, offering 8.25 million shares at $8 to $10 a share. But on Nov. 10, it reduced the price to $6.50 a share.
It probably didn't help that Mine Safety Appliances Co. of Pittsburgh, which sells many of the same public safety products as Global Secure, reported Nov. 3 that its third-quarter revenue declined. The company attributed the drop to "delays in government funding to U.S. fire departments." Like Global Secure, MSA sells breathing apparatus and other gear to fire departments and other public safety agencies.
Terence O'Hara's e-mail address is firstname.lastname@example.org.