Equity partner targeting payments space

Clairvest Group, a Canadian provider of equity financing, is looking for investment opportunities in the payments space after a series of successful funding ventures in other industries since its founding in 1987.

Clairvest's portfolio companies have included financial services, business services, information technology, contract manufacturing, gaming, health and medical, and waste management companies, among others. It has over 800 million Canadian dollars (CA$800 million) of equity capital under management.

Lately, Clairvest has been eyeing the payments industry for potential partners. "There are definitely a number of different verticals that we would look to invest in, in the industry," said Ryan Feldman, an Associate at Clairvest. "Those verticals include the ISOs and processors of the world, gateways, electronic bill presentment and payment companies, software companies, as well as integrated payment solution companies."

Feldman and Mitch Green, a Principal at Clairvest, are "domain experts" on the payments industry, having researched the trends occurring that could signal a sector ripe for investment opportunities. (To be considered a domain expert at Clairvest, an investment professional must dedicate at least 30 percent of his or her time to that area for at least a year.)

Green joined Clairvest in 2002 and provides domain research and investment origination, structuring and execution for the company. He worked previously in leveraged finance for BNP Capital Markets and in corporate finance for Bank of America Corp.

Feldman joined Clairvest in 2008 and participates in all areas of the investment process. Prior to joining Clairvest, he worked at Deloitte & Touche Corporate Finance Canada Inc. There he advised clients on acquisitions, divestitures and financing mandates across various industry sectors.

Feldman and Green reach out to potential client companies within the domains they've researched, but they also receive queries from companies interested in taking on an equity partner.

"Our mission is to 'know and be known' in our chosen domains, the payments industry being one of them," Feldman said. "Sometimes we'll meet a company through our outbound efforts, build a relationship over several years and ultimately receive an 'inbound' call from the CEO to evaluate an equity investment."

Finding the right partner

Clairvest targets fragmented industries on the cusp or in the midst of consolidation. Within those industries, it searches for mid-market companies that boast a personally invested management team, robust internal returns on capital, a wide customer base, strong customer relationships and recurring revenues.

Green said a good Clairvest investment would be "us putting money ... behind an owner/operator to give them the capital required to make acquisitions that can result in increased market share and new products and services on the revenue side, and then on the cost side, reduced overhead."

Companies targeted by Clairvest earn between $10 million and $100 million per year, which usually means the businesses have achieved a certain level of maturity and stability, but still demonstrate an "entrepreneurial flair."

Finding companies with such a flair is an important and continuing theme for Clairvest. "The company was founded by successful Canadian entrepreneurs, so we have that in our DNA," Feldman noted. "We were founded by entrepreneurs for entrepreneurs."

Green defined an entrepreneurial owner/operator as "someone who is focused on organic growth, creating shareholder value and not just the status quo." He added that "entrepreneurial" means you are "willing to wear a bunch of hats, do what it takes to get it done."

Clairvest looks for an "alignment of interests," including a shared vision for the company's future. "We don't just want to be money for the company to grow; we want to make sure that we both believe in the same growth initiatives for the company," Feldman said.

An alignment of interests also relates to having the same core values, Feldman added. "We believe in passion, working hard, having a lot of experience in the industry and just ensuring that you are making sound decisions," he said.

Offering assistance beyond cash

Clairvest invests between $15 million and $50 million in each portfolio company, depending on the size of the company and its goals and tactics for growth.

"Doubling, or tripling the size of a company, in our view, is a great success," Green said. "We pride ourselves on being realistic in our expectations. We're not just selling pipedreams. We're trying to find that perfect balance between good, aggressive growth, and risk tolerance."

In addition to an influx of cash, Clairvest noted that it brings to the table extensive experience gained through more than 180 acquisitions on behalf of its portfolio companies. "We've realized synergies from strategic acquisitions, grown revenues, expanded market share and ultimately sold those companies for a much higher valuation than we paid, creating value for our partners and Clairvest as well," Feldman said.

In return for an investment, Clairvest reported that it acquires an ownership position ranging from 20 to 80 percent, but it doesn't want to take over the day-to-day operations of a business or make drastic changes in its leadership.

"We don't buy and take control," Feldman said. "We are investing in the current management team. We typically wouldn't make the initial investment in the company if we planned on letting people go."

Instead, Clairvest consults with the management team on growth strategies. "If they are looking to enter new markets, make an acquisition or broaden their employee base because they want to build a new product in their IT group, for example, we can help them analyze these new projects and new markets and come to a point of view on whether or not they should proceed," Feldman said.

If needed, however, Clairvest advisors do not hesitate to roll up their sleeves and "make sure that the actual blocking and tackling gets done to make sure the growth strategy is effective," Green said.

He also pointed out that industries experiencing consolidation - the merging of many smaller companies with singular products and services into larger, more comprehensive solution providers - draw the interest of equity companies who see the return on investment possibilities inherent in helping some of the "best of breed" smaller companies navigate their way through the process and become bigger companies with bigger profits.

Prospects in payments

The payments industry has experienced considerable consolidation already, and Green expects it to continue. "We see the convergence of the traditional merchant acquiring organization with technology-driven service models to create very powerful growth engines going forward," he noted. "And those are the folks who are going to win.

"The opportunity is that there are thousands of these players - some have technology, some have great tactical expertise to their sales organizations - and they are going to need to partner up, whether that is informal, through channel partnerships, more formal through joint ventures or, preferably for Clairvest, to create, through acquisition, payment hubs that can offer multiple services to their customers."

At present, Clairvest has only one payment vendor in its portfolio, a Canadian electronic and print bill presentment and payment company called Kubra Data Transfer.

Since its affiliation with and a CA$13 million investment from Clairvest in 2006, the company has fared well, tripling its size by acquiring two other companies and attracting some high-profile customers, according to Feldman.

"The thesis behind the acquisition was really twofold," Feldman said. "One was cross selling the customers of the acquired companies. The acquired companies were solely focused on print, and Kubra felt they could offer [their customers] the electronic service, and that has gone quite successfully.

"These acquisitions also provided synergies by bringing some of the print business in-house to their current printing facilities." Mark Visic, Senior Vice President, Business Development at Kubra, acknowledged that Clairvest has been extremely helpful on a strategic level in accomplishing the acquisitions.

In describing Clairvest, he said, "They've been very good partners. They've got confidence and trust in our management team and our leadership, and having partners that are trustworthy is a positive in this space."

Given Kubra's success and the trends Green and Feldman are witnessing in the payments space, they are looking forward to connecting with promising players in the industry. "We're basically putting together a strategic map of where we see convergence happening in this industry," Green said. "We have that map underway [so we] can connect those dots and hopefully be an equity sponsor to a leading platform in the space."

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