Graham Partners

What began with a design-engineering firm in a central Pennsylvania farmhouse basement more than 50 years ago has led to tremendous growth and opportunity in industrial and manufacturing-related sectors. Graham Partners is one of several entities that have come into being as a result.

Located in suburban Philadelphia, Graham Partners is a private investment firm, which manages approximately $1.6 billion in equity capital, primarily for major university endowments, charitable foundations and public pension funds. Its focus is the acquisition of – and investment in – high-growth, middle market consumer and industrial manufacturing-related companies, the vast majority of which are privately held companies. The objective is to professionalize the acquired companies while enhancing their growth potential.

“We manage a series of private investment funds, which primarily invest in middle market businesses in the manufacturing arena,” Managing Principal Steve Graham explains. “The businesses we target are typically the beneficiaries of some sort of fundamental product substitution or raw materials conversion trend within their industry niches. They also generally have a sustainable leg up on the competition because of their manufacturing know-how and ability to manufacture products at high volumes and at a high quality level on timeframes that are difficult for others to replicate.”

Entrepreneurial Spirit

Graham Partners may have been founded in 1988, but it has a much longer legacy thanks to the evolution of The Graham Group. An alliance of independently owned and operated industrial and investment management businesses, The Graham Group in turn owes its existence to the entrepreneurial success of its founder, Donald C. Graham.

It all dates back to the 1960 founding of a design-engineering firm and subsequent growth that spawned The Graham Group’s three legacy industrial businesses: Graham Packaging, Graham Engineering and Graham Architectural.

“My father started what is today The Graham Group, and he was almost operating like a venture capital company, experimenting with different types of businesses and industries,” Graham says. “He was involved in everything from the window business to all sorts of machinery plays, and the packaging operation turned out to be the biggest of the businesses.”

Graham Packaging is the leading custom rigid plastic container manufacturer in the world, generating sales revenue of nearly $3 billion per year. It provides services to an array of consumer packaged goods companies in various markets, including the automotive, household chemical and food and beverage sectors. The company is actually no longer a part of The Graham Group. The Blackstone Group acquired a majority stake in Graham Packaging in 1998, while the Graham family retained a minority ownership position in the company until it was sold to Reynolds Group in 2011.

The other two legacy businesses, Graham Engineering and Graham Architectural, are still part of The Graham Group. Graham Engineering’s specialty is manufacturing and selling high-speed plastics processing machinery, used mostly in the packaging industry. Graham Engineering has built a reputation for innovation when it comes to building fast and efficient machinery lines for extrusion blow molding of plastic containers and blow molding machinery for industrial and recreational plastics products.

As for Graham Architectural, it has carved out a niche in North America for the manufacturing of aluminum and fiberglass architectural windows. Its products are used in commercial buildings, schools, colleges and universities, hotels, hospitals and high-rise condos.

Other parts of The Graham Group include Graham Capital, Inverness Graham and Striker Partners, all of which manage pools of capital independent from Graham Partners. Graham Capital directs and manages the Graham family’s marketable securities, real estate, and alternative investment portfolios. It has approximately $1.25 billion in equity under management and oversees active and passive direct investments in operating businesses, while providing operational support to portfolio companies.

Inverness Graham is a lower-middle market private equity firm. The company looks to acquire high-growth, innovative manufacturing and service companies which have between $3 million and $10 million of EBITDA. It manages more than $250 million in committed capital.

Striker Partners is a privately held investment firm, and its focus is on making control equity investments in profitable growth businesses. The firm looks to create partnerships with owner-operators while providing capital and strategic resources that can ultimately seize growth opportunities, such as strategic acquisitions.

One common attribute that each member of The Graham Group alliance shares is a desire for operational innovation. This philosophy dates back to Graham’s original legacy businesses, which grew because they strived to exist as manufacturing companies that sustained industry-leading engineering capabilities, manufacturing expertise and strong internal financial controls. From there, the companies were able to make technological advancements and develop and commercialize new manufacturing techniques.

Another long-standing Graham commitment is focused on environmental sustainability. All pieces of the Graham Group operate with a belief that companies and individuals should look to be a pioneering force in the development of solutions to environmental issues. Graham’s legacy businesses were pioneers in the recycling of rigid plastic bottles, manufacturing billions of bottles per year made of recycled materials from Graham’s recycling operation, as well as in the production of thermally insulated windows for energy conservation.

Investing in Growth

As for Graham Partners, the firm has closed several billion dollars in acquisitions, joint ventures, financings and divestitures over the last two-plus decades. It also gets closely involved in the operations of the industrial and manufacturing-related companies in which it invests. Like the other pieces of The Graham Group, Graham Partners can take advantage of the group’s extensive operating resources and industrial expertise.

“We’ve essentially carried on the same tradition of the original Graham businesses, which were extremely well run and had tight strategic planning processes, and great financial and manufacturing controls,” Graham says. “At Graham Partners, we’ve tried to build those characteristics into the companies we have acquired.”

Graham Partners has invested the capital it manages primarily in private companies serving end markets that include everything from plastics packaging, aerospace, water management, electronics, building products and pharmaceutical equipment to mining equipment and technology, specialty glass and transportation equipment and technology.

The organization’s ability to find the right acquisitions and create close partnerships with management teams and owner/operators comes down to its financial and operating resources. Graham Partners has significant access to capital and works to build long-term relationships with various customers, suppliers, industry stakeholders and investors, which helps in the pursuit of investment opportunities.

The firm operates under the tenets of an investment strategy that has consistently focused on acquiring and building growth-oriented industrial and manufacturing-related companies with revenues of between $30 million and $500 million. For Graham Partners to be interested in an acquisition opportunity, a company must possess high organic growth characteristics, create significant barriers to entry for competition, demonstrate strong returns on invested capital, and preferably share a common end-market or manufacturing process with the legacy industrial businesses of The Graham Group or previous Graham Partners investments.

This means that Graham Partners is looking to invest in companies that would benefit from raw materials, technology or product substitution conversions. The companies must have significant competitive advantages, such as proprietary manufacturing technologies or process capabilities. They must generate very high returns on investments in fixed assets and working capital, and they must be in a position to take advantage of the heritage, resources and contacts of The Graham Group.

“To some degree, we are investing in businesses that are subject to cycles, and that is an overarching issue that we have to be conscious of,” Graham says. “We have to be aware of how cycle issues will impact an investment outcome throughout the holding period. We also spend a fair amount of time throughout the diligence process and much more after acquisition with management teams, and there is a natural transition that takes place as we work with the acquired company to create a business that is stronger and more profitable, diversified and strategically focused.”

Today, there are more than a dozen companies in Graham Partners’ investment portfolio. Some of these additions have been made recently, such as last year’s acquisition of SP Industries. A leading designer and manufacturer of medical equipment and components used in pharmaceutical development and production, SP was acquired because it produces industry-leading technologies and equipment and has developed a solid reputation based on the solutions it provides to the biopharmaceutical industry.

Other acquisitions made in 2011 include Chelsea Building Products and Mitten Inc., Mitten is a leading Canadian-based manufacturer and distributor of vinyl siding, vinyl siding accessories and other exterior building products. Chelsea is a leading manufacturer of vinyl lineals and accessories for the window and door fabrication market. It also makes specialty cellular PVC moldings and exterior wall cladding.

But not all acquisitions are made as platform acquisitions by the Graham Partners funds. Instead, some are made directly by its portfolio companies in the form of add-on acquisitions. In 2008, Graham Partners partnered with Inverness Graham Investments to acquire B&B Electronics, a provider of wireless connectivity and communications solutions and technical support. In 2011, B&B acquired Quatech Inc., which is a device networking and connectivity solutions provider. Then, early in 2012, B&B acquired Conel s.r.o., a Czech Republic-based manufacturer of wireless communications routers, gateways and devices, primarily for the European market.

A further example came in January 2012 when another Graham Partners portfolio company, Infiltrator Systems Inc., acquired the assets of the septic chamber business of Advanced Drainage Systems Inc. Infiltrator produces innovative septic system products for the residential wastewater industry, many of which it manufactures from recycled plastics materials. Much like B&B’s add-on acquisitions, Infiltrator’s recent add-on expanded its product offerings and strengthened its internal capabilities.

Sometimes, however, it is time to sell. Graham Partners has sold several portfolio companies over the years. Most recently, Graham Partners sold Schneller, which it had acquired in June 2007, to TransDigm Group. The transaction closed in August 2011. Schneller designs and manufactures highly engineered laminates, thermoplastics and non-textile flooring for aerospace customers. Graham Partners sold Schneller for $289 million, which delivered a 3.4-time gross multiple on its investment.

“You can’t really schedule opportunity, and a company may be ready for exit at any given point in time during a holding period,” Graham says. “But when we buy a business, we have set an objective for the holding period where we essentially look to double or triple the value of the equity we initially invested. Not all investments work out that way, but that is the range we target when we invest. We constantly monitor the value of our investments and begin staging for exit when we think the time is right.”

Looking ahead, Graham Partners will remain extremely focused on the companies already in its portfolio while also looking for new acquisitions opportunities. Graham feels the economy is moving into a recovery cycle that should continue to gather steam over the next few years, and he says Graham Partners is committed to support the growth of the businesses in its portfolio during the recovery.

“We will be as aggressive as possible with product development and other growth initiatives we can undertake with our portfolio companies,” he says. “We expect to ride a bit of an upswing for the next few years and will prepare a number of our companies for exit. As for new acquisitions, we will continue to be extremely aggressive about finding businesses that are in business segments that we feel are poised for growth.”