Scenic City firm builds bridges to institutionals

AFTER 22 years in operation, Chattanooga-based's River Associates has secured its first institutional partners, completing a $222 million private-equity fundraise in "a very competitive environment."

The new River VI fund is already putting money to work. River is in early discussions with one West Tennessee company about a possible controlling investment, said Mark Jones, a River partner.

News of River's institutional-investor breakthrough comes just as the U.S. economy is regaining traction, prompting many Recession-weary management teams to sort-out their futures.

The soul-searching is underway among owners of businesses that fall in River's "sweet spot," which includes niche manufacturing, business service, industrial service, high margin distribution and "non-faddish" retail businesses, the company says.

Companies in the U.S. and Canada that are considering management-led buyouts, family-succession transactions, divestitures or recapitalizations are welcome to reach-out to River to discuss the possibility of River taking a controlling stake in the company, Jones said. River says it "will generally avoid" investing in businesses that have significant regulatory overhang, as well as high-technology companies and those centered on commodities or natural resources.

To buy control, River will invest in platform companies that can be grown organically and via M&A, and which have sales north of $10 million, gross margin 20 percent or better, and adjusted EBITDA of $3MM-$10MM, the company says. Bolt-on buys to complement platforms can carry much smaller numbers, Jones confirmed.

River VI is likely to invest in "8 to 12" platform companies during its lifecycle, and it is likely to make scores of bolt-on buys of smaller companies to help its platform companies grow, said Mark Jones, a partner in River Associates.

Younger and smaller Tennessee companies that are not candidates to become River platform companies could qualify as bolt-on's for River's growing portfolio of companies. That portfolio presently includes nine companies, five of which have already been funded via roughly $50MM from River VI.

River's overall multi-fund portfolio currently holds nine companies, none of which is based in Tennessee, Jones confirmed. The absence of in-state companies in River's portfolio is "total happenstance," he said, adding that the fund is "absolutely" interested in Tennessee businesses. It has previously exited some Tennessee companies and has helped portfolio companies based elsewhere to buy bolt-on Tennessee businesses, he noted. A partial list of its exits is here.

Mark Jones

After two decades of zero institutional investors in River's first five funds, it has "about 10" institutionals in its new River VI, all from outside Tennessee, Jones told VNC, declining to identify the investors.

Raising River VI took about 18 months, he said. Particularly with "hundreds" of funds currently raising capital, the institutional investors' due-diligence processes are extensive, he explained. Investment officers want to see fund-managers' track records and look for evidence that a firm's strategy is consistently applied across portfolios, he added. The fund-VI institutionals include insurance companies, pension funds, funds-of-funds and endowments, River said in a press release yesterday.

Via its six funds, River has thus far supported investment in 71 transactions involving businesses in Tennessee and 19 other states, said Jones. River Associates' prior River V fund recruited $110 million; River's prior funds have mainly relied on investments by "family offices" that manage family wealth. River partners select the firm's buys ultimately by consensus, Jones noted.

Nashville-based Mountain Group Capital operates in a manner akin to River Associates prior "family office"-oriented model, making long-hold growth capital investments in companies that typically retain their prior management; but, MGC has branched out in recent years to sponsor a TNInvestco startup fund and other funds. Meanwhile, Nashville's Council Capital, which also sponsors a TNInvestco, focuses on larger growth-capital opportunities.

The five companies funded thus far by River VI are National Deli (Florida, deli meats), KK Precision (Ontario; complex components for gas turbines), Omega Environmental Technologies (Texas; aftermarket automotive truck and off-road air conditioning parts); Industrial Magnetics (Michigan; permanent and electromagnets); and, TrueNet (Florida, comm network infrastructure), Jones confirmed.

The firm "absolutely" contemplates raising funds VII and VIII, but is not likely to put much thought into such things "for three or four years," Jones said when asked. VNC