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2008 Newsletter
In the annals of financial market reporting, it is seldom recognized at the time but often chronicled in reflection when the most propitious moment arises in a turbulent market for successful investment strategies.
Will 2009 present such a moment in time? It might be wise to follow the sagacious words of Winston Churchill who once admonished that the further back that we look in time, the further forward that we can see. Thus, in review of 2008, we must bear in mind that the market performance in the second half of the year was largely the culmination of events that transpired in prior years. Extended leverage in the form of subprime mortgages, credit card debt, buyout loans without covenants and inflated equity prices all contributed to the ultimate market dislocation in the last eight months of 2008.
We believe that 2009 will present a challenging environment much as we experienced in the latter part of 2008. However, this period of market illiquidity and depressed earnings will present compelling opportunities for Private Equity Funds capable of exploiting the market anomalies.
Halyard has demonstrated the ability to make successful investments in troubled economic times in its past. Our industry expertise enables us to capitalize on the dislocation occurring in our investment sectors. We believe that a sector focused fund should reap benefits during periods such as these as Industry and Market knowledge provide unique insight in troubled time. Thus we enter 2009 as cautious but opportunistic in approaching investment opportunities in select industries. Halyard is excited at the prospect of exploiting such market anomalies.
Highlights of 2008:
2008 was an active year for Halyard Capital. Despite the turbulent market environment in 2008, we successfully concluded fundraising for Halyard Capital Fund II and invested Fund II capital in two new platform companies, HCPro, a healthcare information company, and NuLink, a cable/broadband company and completed add-on acquisitions for our portfolio companies. In addition, we invested a significant amount of time exploring new investment opportunities, focusing on long-term growth initiatives at our portfolio companies and further cultivating executive relationships and partnerships. Our investment activity in 2008 is described in further detail below.
Investment and Portfolio Activity in 2008:
HCPro (www.hcpro.com) is one of the largest providers of information, education and advisory products in the areas of compliance, regulation and management of the healthcare industry. Halyard, following an extensive 2-year search in the compliance and regulatory arena, acquired HCPro in February 2008. HCPro has since completed two follow-up acquisitions in the Occupational Safety & Health Administration and the Home Health and Hospice arenas. HCPro is well positioned to leverage its content creation model and to become the "trusted source" of compliance information throughout the healthcare industry by further expanding within the hospital and into other healthcare settings.
NuLink (www.nulinkdigital.com), acquired in April 2008, is a broadband cable company formed in partnership with John Brooks, an experienced, highly regarded cable executive. NuLink, previously owned by a municipal utility in Newnan, GA, has a state-of-the-art 750Mhz cable plant enabling it to pursue new revenue opportunities with minimal incremental capital expenditures. The company is well positioned for growth with the recent launch of voice and VOD products and enhanced marketing programs.
In addition, we completed follow-on acquisitions further enhancing value at our portfolio companies including Engauge (www.engauge.com)'s acquisition of Spunlogic, a digital marketing solutions company, and HCPro's acquisitions of Quality America and Beacon Health. We continue to identify attractive add-on acquisitions for our existing portfolio companies, in particular, EducationDynamics (www.educationdynamics.com) and Presidio (www.presidio.com)¸ as we believe our positioning as a strategic buyer in this market environment presents the most compelling investment opportunities. We are excited at the prospects of our most recent investments and we remain focused on allocating our time and resources to those activities that will create the most value for our investors.
Sectors of Interest:
We believe that the current market conditions have given rise to a unique time for prudent, yet opportunistic conduct. We have an expansive universe of opportunity in our targeted industries, including Media, Business Services, Education Services and Healthcare Information Services, which, combined represent nearly one-thirds of the nation's GDP. We particularly favor industries that possess unique offensive and defensive postures that will benefit from the stated agenda of the new Washington Administration. Education, Healthcare, IT Services and Broadband Infrastructure/Deployment are sectors that we strongly believe meet these criteria and in which we have deep expertise with two of our Fund II portfolio companies presently operating in these growth environment.
Strategies in a Turbulent Market
Market conditions in 2009 may well dictate that we utilize our resources in a more opportunistic fashion. Similar to the period extending from mid 2001-2003, we are likely to encounter investments that are the derivative of the challenging macro-economic climate. We are focused on four particular strategies:
Distressed Balance Sheets/Rescue Capital: The highly aggressive leverage markets of 2006 to early 2008 produced many companies in our sectors that are at risk of covenant default (or bankruptcy) and are likely to need new capital. One of our most successful deals in Fund I (TRANZACT) was the acquisition of a business out of bankruptcy that was a subsidiary of a larger business. We also believe modest amounts of "rescue capital" can be invested in structured transactions that will allow both governance rights and seniority in the balance sheet while generating equity-like returns. Our efforts in this arena are focused on aligning our industry expertise with our unique insight in evaluating distressed situations.
Distressed Public Market Valuations: The dramatic reversal in public market equity valuations that occurred in 2008 has had an even more draconian impact on the valuation of dozens of small to medium sized public companies in our sectors. In the near term, valuation opportunities in the public market may well be more attractive than those available in the private market. We have identified a number of candidates for potential going private transactions.
Growth Capital for Industry Leaders/Consolidators: While most good businesses are reluctant to sell in the current market, many are seeing the same opportunity to grow their business both organically and through acquisitions. We have significant experience in structuring partnerships with entrepreneurs and private business owners that allows us to provide both capital and expertise that will accelerate their growth plans.
Large Company Asset Dispositions: In this environment, larger companies are critically evaluating their assets and disposing of the weaker performing divisions and/or strategically irrelevant company assets. We believe that there will be opportunities to back talented executives in managed buyout situations that will provide a more effectively operated stand alone company. Our Fund I investment in NETGEAR fit this fact pattern and we successfully took the company public three years after buying the business from Nortel.
We look forward to a successful and rewarding 2009. We appreciate your support and partnership. As always, please feel free to contact a member of the Halyard Capital Team if you have would like further information.
Halyard Capital Team
Halyard Capital (www.halyard.com) is a private equity firm focused on investing in media, communications and business services companies. We specialize in middle-market leveraged buyouts, growth equity and structured equity investments.
600 Fifth Avenue, 17th Floor
New York, New York 10020
T: (212) 554-2121
F: (212) 554-2120
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