April 28, 2021
From its early days in the 2000s, OpenGate Capital LLC’s practice of carving out businesses and helping them stand on their own has set it apart.
While the Los Angeles-based firm also pursues other types of deals such as buyouts and turnarounds, it’s been quickening its pace of carve-outs as the universe of companies looking to shed underperforming assets expands.
“Following the slowdown in M&A activity in the first half of 2020 driven by the pandemic, deal flow from the global corporate community has increased significantly.” OpenGate CEO Andrew Nikou told The Deal.
OpenGate now finds itself in the middle of a particularly active stretch of dealmaking that emphasizes its core practice.
In April, it completed the platform acquisition of Kongsberg Precision Cutting Systems from seller Esko-Graphics BVBA.
It’s also buying the amphoteric surfactant business unit of Solvay SA, as well as two business units from TransDigm Group Inc. (TDG) called ScioTeq and Treality Simulation Visual Systems.
Additional OpenGate carve-outs include Duraco Specialty Tapes LLC, which the firm acquired in 2019 for $77 million from Essentra plc, as well as Sargent & Greenleaf Inc., a 2019 carve-out of Stanley Black & Decker Inc. (SWK).
Duraco and Sargent & Greenleaf both illustrate OpenGate’s focus on lower middle-market investments in industrials, technology, consumer and business services, Nikou said.
A source familiar with the deals said the firm sourced both Duraco Specialty Tapes and Sargent & Greanleaf through its proprietary development efforts. The firm leverages ties to sales processes run by banks, as well as more selective processes run by corporate parents on their own. OpenGate’s playbook includes adding high quality management, investing in neglected product lines, growing commercial capabilities and moving into adjacent markets.
To be sure, carving out companies takes time, said Nikou, who founded OpenGate in 2005 after working at Platinum Equity LLC.
“It typically takes a year to stand up a business and divorce itself from corporate shared services, putting in place the optimal treasury functions, legal structures, IT, finance, etc. — it goes on and on,” he said. “It’s fairly complex, but in return you find yourself in a position to enter on attractive terms and immediately create value.”
OpenGate Capital’s carve-out practice goes back to the roots of the firm in 2005, when few PE shops were squarely focused on acquiring neglected or orphaned divisions of larger corporations, and even fewer firms were doing Cross Border, Corporate Carve-Outs.
In 2007, OpenGate completed its first carve-out with the purchase of French semiconductor business Ommic SA from Royal Philips Electronics NV. It sold the business to Egalux SA Luxembourg in 2008, and the firm has maintained a Paris office.
OpenGate generated headlines in 2008 when it paid $1 to buy TV Guide from Macrovision Solutions Corp., now renamed as Rovi Cop. OpenGate drew a $9.5 million loan from Rovi to fund changes at the company and assumed liabilities.
“That was an iconic brand within American pop culture,” Nikou said. “We call it an old-school OpenGate deal. In a sense, we got paid to take it and we used that capital and cash to restructure, grow and reinvent the brand.”
Fast forward to 2021, and OpenGate has now made eight investments — including five carve-outs — out of its second flagship fund, OpenGate Capital Partners II & II-A LP. OpenGate continues to target investments in companies with revenue up to $1 billion.
OpenGate has been working to get companies up and running more quickly as they get carved out. The idea is to use data to help CEOs of portfolio companies with $100 million to $300 million of revenue more closely track supply chain, product sales by geography, and price per tonnage, for example, Nikou said. The process mixes data science, machine learning, analytics and information management.
“These are 100-year-old companies that have been underinvested by their corporate parent, and that need that tech fusion to become competitive,” Nikou said.