KPS scores 10x in auto-parts exit

KPS Capital Partners has notched a 70% compounded IRR through its sale of HHI Group Holdings to American Securities.

KPS Capital Partners has exited its “win-win-win” investment in HHI Group Holdings, selling the automotive components manufacturer to American Securities for $750 million. 

The sale brings KPS’ total return on HHI to 10x, generating a 70 percent compounded internal rate of return over the seven-year life of the investment, according to a source with knowledge of the deal.  

KPS formed HHI in 2005 after securing several deeply distressed automotive component and manufacturing companies, many of which were acquired through bankruptcies. This allowed the firm, along with HHI chief executive officer George Thanopoulos, “to start with a blank slate”, KPS founder Michael Psaros told Private Equity International.

“We negotiated new contracts with all of our customers, we renegotiated with all of our vendors, we renegotiated with all of our capital lessors. We negotiated very, very transformative collective bargaining agreements with all of the unions at all of the plants,” he said. “It’s such a win-win-win … As a result of our investments, we saved over 3,000 premium US manufacturing jobs.”

In addition to renegotiating its contracts, the firm also oversaw a complete overhaul of the company’s operations – introducing automation and robotics to the manufacturing process.

The operational turnaround allowed KPS to monetise its investment through a series of recapitalisations, the latest of which took place in March. Four of the five companies that comprise HHI had been EBITDA negative at the time of its formation, Psaros said. Simply put, until the company’s performance improved, using debt to generate a return for investors wouldn’t have been an option. 

“100 percent of the value created …. Is attributable to hardcore manufacturing excellence,” he said. 

KPS was founded in 1997 by Psaros, David Shapiro and Eugene Keilin. The firm maintains offices in New York and Frankfurt, Germany and has approximately $2.7 billion in assets under management.