Sentinel invests in eight specific sectors. Are there any that look predominantly attractive today?
We have been particularly active in the last year in the industrial sector. When you look at the history of post-recession recovery in this country, most of the recessions that we’ve been in, the recovery has been fuelled by rebounding consumer confidence. This particular recession has been quite different. Many industrial businesses have optimised their cost structures and balance sheets, and have made enormous amounts of money in the aftermath of this recession, and they are leading the recovery.
We’ve said to ourselves, “Let’s look for some industrial manufacturing businesses because they seem to be roaring ahead out of this recession.” Three of the four deals that we’ve done since August of last year have been with industrial manufacturing businesses. However, many people are catching on to this, and prices have escalated big time.
Sentinel IV was twice the size of Sentinel III and Sentinel III was twice the size of Sentinel II. Has doubling the size of funds changed anything with regards to your strategy?
Yes and no. If we were to do exactly the same strategy as Fund III in Fund IV, we would have to invest in 30 companies, and we don’t have the ability to find 30 new platform deals in a five-year span with the team we have. With earlier funds, when we found a platform deal, we generally took a large bet on the company in relation to the size of the fund. So we might put in 10 percent to 15 percent of the fund’s capital in a deal and end up with six or seven deals in the fund. Once we had done that, the strategies of those companies became quite conservative because we knew we didn’t have a lot of dry powder to add to that company.
What we have been doing and what we will continue to do with our current fund is in line with our historic strategy, but we are now including an additional element to the strategy: add follow-on capital to the portfolio company to pursue a more aggressive strategy for that company. For example, we own a company called Southern California Pizza and it owns all of the Pizza Huts in the greater Los Angeles market. When we started, we bought 130 Pizza Huts. A year later, we bought another 110, so we almost doubled the size of the business. So the add-on acquisition was almost a like-sized acquisition to the platform acquisition.
How have you found the exit environment for Sentinel III?
The exit environment is good. Last year, we sold two businesses from Sentinel III. Sentinel III is a 2005 vintage fund and there were 15 companies in total in that fund. Five have been fully exited. Ten remain active, so we are in the harvest mode in that fund. I think that between this year and next year, of the 10, I expect us to exit the majority of them. Sentinel IV is now two years old, and we’re about 34 percent deployed, so we’ve still got a long way to go.