A tasty proposition

If you’ve been to New York, or live in New England, chances are you’ve had a Tate’s cookie. Known for being thin but surprisingly soft and rich, Tate’s – which originate in Southampton – are something of a local cult. CEO Kathleen King has literally been making these gluten-free cookies since she was 11, which must make her one of the only people in the US to have maintained a winning career since middle school. So it was surprising when early last month, the company announced a majority investment from Ohio-based The Riverside Company.

It’s true that although it has a much-loved product, Tate’s was something of a hometown brand in the Northeast US. It hadn’t begun to distribute nationally on any grand scale, and seemed happy to be safely ensconced in the homes of Hampton’s tastemakers. But now, Riverside says that it plans to take Tate’s national.

And King is very much on board. Alan Peyrat, a partner at Riverside, told Private Equity International that King intends to continue her cookie-making career at Tate’s (now 44 years and counting), and still has substantial skin in the game alongside the Riverside investment.

“We literally think Tate’s is the best cookie on the market, hands down,” Peyrat says. “We did an extensive consumer study before the investment, and the data supports our conclusion.”

Riverside partnered with Golub Capital, Crescent Capital and Triangle Capital on the financing for the transaction. “The terms of this deal were very favourable, and we were able to bring in firms that we’ve partnered with extensively in the past,” he adds.

When asked why Riverside was a better partner than one of the many consumer brand strategic buyers in the market today, Peyrat points out that Tate’s is still a relatively small company – which may not be ready for the corporate ethos of a big strategic buyer. “What we have with Tate’s is basically an exposure problem. As a small business, they’ve been acting conservatively in terms of distribution, marketing, and even some new product ideas. Riverside is able to provide a different type of support than a strategic would as they build out these ideas. The company may well end up with a strategic ultimately, but there is still some growth that we can support before it’s ready.”

SEEDING THE MARKET

That view highlights an issue pertinent not just to Tate’s, but also to the broader cohort of not-quite-mid-market companies.

Riverside’s investment in Tate’s came from its third micro-cap fund, which closed in July on $350 million and focuses on control buyouts of small companies with up to $5 million of EBITDA. Peyrat explains that while the firm chose to invest from this micro-cap fund, the deal was at the upper end of its typical cheque size. In other words, this was an investment on the cusp of the mid-market, just like the company itself.

Riverside is one of a handful of mid-market private equity players that will go after these smaller companies, in addition to its focus on pure-play mid-market deals. It’s arguably a riskier strategy, since the chances of companies in the micro-cap space blowing up is generally higher. But as the mid-market becomes more competitive, firms that take the chance – and help to develop the next generation of mid-market champions – have the opportunity to realise some big wins.

LPs certainly seem to like the idea, anyway. Known investors in Fund III include BMO Harris Bank, Makena Capital, Partners Capital Investments, and State of Michigan Retirement Systems. And in addition to the $350 million of private capital, Riverside has also secured up to $150 million in additional backing from the Small Business Administration – meaning it now has up to $500 million of firepower available to do deals like this. By partnering with the SBA, the micro-cap line also qualifies as a Small Business Investment Company (SBIC), an interesting addition to the traditional fund structure, which can be advantageous to the small businesses the vehicle is targeting.

“The fundraising environment remains challenging, but we’ve been able to show a proven track record in this area, and have realised significant exits in previous vintages,” Riverside co-CEO Stewart Kohl told Private Equity International at the time of the close.

He has the numbers to back this up. Since launching its Micro-Cap fund line in 2005, Riverside has acquired 80 companies and exited 12. The latter in particular is a notable number, in light of the aforementioned blow-up risk in this space.

Riverside says it has no specific target in mind in terms of the number of investments it will make from Fund III – which according to Peyrat, is a very deliberate policy. “We aren’t focused on finding a specific number of companies for a given fund. We have the resources to focus on finding the right kind of deals, irrespective of what specific fund is involved.” It’s an approach that is replicated throughout Riverside’s origination process, and judging by the fact the firm recently secured its 100th exit, it seems to be bearing fruit. Certainly in the riskier micro-cap space, it can mean the difference between failure and success.

What’s more, by seeding the future mid-market with investments like Tate’s, Riverside is in the unusual position of being both an investor in and a catalyst of its core market.
But the best news of all – for Northeasterners, and soon, the rest of the US? Peyrat says they see “several new products in the Tate’s pipeline over the near term”.