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Business Observer Friday, Nov. 5, 2004 17 years ago

Capital Hill

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Hyde Park Capitalis John Hill and partner fill an investment banking need of local businesses.

Capital Hill

Hyde Park Capitalis John Hill and partner fill an investment banking need of local businesses.

By Francis X. Gilpin

Associate Editor

This year, more than $20 billion is expected to be pumped into some 3,000 small businesses in America by private equity funds. iUnfortunately, right now, Florida captures around 1% of that,i says John H. Hill Jr.

Thatis one of the reasons why Hill and his partner, John M. McDonald III, founded Hyde Park Capital Partners LLC in 2000.

iFor Florida to be 6% or 7% of the population and be 1 to 1 1/2 of the dollars invested, weire not anywhere close to our share,i says Hill, managing director at Tampa-based Hyde Park Capital. iWhat weire really focused on is trying to help good Florida companies get connected with that capital so they can get the growth capital they need to grow their business.i

They seem to be getting pretty good at it.

For the three years ended May 31, Hill claims Hyde Park Capitalis broker-dealer subsidiary closed 10 private-placement or merger-and-acquisition transactions for Florida-based companies, more than any other investment bank. That excludes advisory consulting, fairness opinions and public offerings.

Among the Gulf Coast companies with which Hyde Park Capital has worked are software developers Decision Management International Inc. in Bradenton and Pilgrim Software Inc. in Tampa, Progressive Employer Services Inc. in Sarasota, and e-business facilitator In.vision Research Corp. in St. Petersburg.

iWeire pretty proud of what weive done so far,i says Hill. iThereis really not another firm in the state that has the experience level that we have. The closest would be Raymond James, where we came from.i

Hill and McDonald were managing directors at Raymond James & Associates Inc. Hill was in charge of the technology group and McDonald the health care/life sciences group in the investment banking department.

A third original Hyde Park Capital partner, Michael P. Siewruk, has since left the firm. Siewruk was chief executive of Internet startup Mediabrowser Inc., one of Hyde Park Capitalis first clients.

When Hill and McDonald organized Hyde Park Capital in 2000, they envisioned it as a venture fund for companies such as Mediabrowser. But the dotcom crash dictated a change in thinking.

Their experience with Mediabrowser, which went belly up, drove home the point. Siewruk lost more than $2 million when the Tampa company collapsed, according to U.S. Bankruptcy Court records. Hyde Park Capital was out a comparatively modest $64,881 in retainer fees and expenses, the records show. GCBR couldnit locate Siewruk for comment.

The reshaped concept for Hyde Park Capital was a boutique investment bank for mainly Florida entrepreneurs. Clients either need equity or debt financing from private markets to expand, or want to convert into cash all or part of their stake in a growing company.

Hill and McDonald are engineers by training. Hill, 43, holds an industrial engineering degree from Virginia Polytechnic Institute and State University. McDonald, also 43, received a mechanical engineering degree from Duke University.

iMost investment bankers come out of the Ivy League,i says Hill. iMaybe their dads were investment bankers. In my case and Johnis case, I donit think we probably knew about investment banking when we went to college.i

Both men worked at IBM Corp. before getting masteris degrees in business administration, Hill from the University of North Carolina at Chapel Hill and McDonald from the Wharton School at the University of Pennsylvania.

A college fraternity brother who worked at Morgan Stanley got Hill thinking about a career change.

iInvestment banking, if you have an engineering background, it does help you think about things more from an analytical point of view,i says Hill. iIn this business, the investment banking business, you see a lot of companies. You have to be able to understand a lot of different business models in a lot of different industries.i

Hill worked on Wall Street between graduate school and coming to Florida. After he got here, Hill helped Tampa Bay area companies such as Checkers Drive-In Restaurants Inc., Outback Steakhouse Inc. and Sykes Enterprises Inc. go public during nine years at Raymond James. But, as their 40th birthdays approached, Hill says he and McDonald wanted to strike out on their own.

iWeire very much like our clients. Weire entrepreneurs,i says Hill. iWe left a great company. Raymond James is a great company. We had excellent positions within the firm. But we just felt like we wanted to go out and create something on our own, kind of the spirit of America.i

Hill cleared his plate to devote full attention to Hyde Park Capital.

His 20-room Tarpon Springs mansion, along with about 40 adjacent house lots overlooking the Gulf of Mexico acquired as a personal investment, went up for quick auction.

The proceeds from the real estate sales were more than $3 million. His house alone, featuring a wine cellar that could hold in excess of 1,000 bottles, fetched close to $1 million.

iIt was a great house,i says Hill. iI sold my house because it helped bring people in to buy all the property. It was just a strategy.i

After the strategy at Hyde Park Capital shifted from venture funding, the partners sought out investors for companies that actually generated revenue and profit.

Hill and McDonald saw an opening for experienced Florida-based investment bankers like themselves who could guide up-and-coming local companies toward mostly out-of-state institutional or strategic buyers.

Institutional buyers in Hyde Park Capitalis niche are typically private-equity funds while strategic buyers tend to be in the same industry as the client and are seeking to gain market share through acquisition.

iThereis a lack of capital down here, particularly on the institutional investment side,i says Hill. iBut overall the state is undercapitalized.i

Sunshine State entrepreneurs find themselves on an uneven playing field. iEven if the guy in Florida has a better idea and better execution,i says Tate A. Garrett, senior vice president of Advantage Capital Partners in Tampa, ithe guy in California is going to get more money thrown at him.i

Yet due to its size, Florida is not an easy state to cover for an investment banker hunting for deals from an office in Atlanta or New York.

Hill says Hyde Park Capital enjoys good contacts in the local accounting and legal professions, where they get referrals.

iBecause theyire a small boutique, you deal with very experienced people youive worked with before and you know you can trust,i says David S. Felman, a securities lawyer at Hill, Ward & Henderson PA in Tampa.

Felman says Hill and McDonald understand the predilections of private-equity investors outside of the region. iItis hard for Florida companies to know all the funds,i says Felman. iThey might know the local funds. But they might not be familiar with whatis in Boston or Chicago or the Silicon Valley.i

Hill says Hyde Park Capital uses that knowledge to complete transactions. iWeire deal guys,i he says. iWeire not consultants. Weire not business plan writers.i

Most of the companies that engage them for M&A work have between $10 million and $200 million in annual revenue. Owners could be looking to monetize a piece of their company, perhaps to diversify their net worth as they become older and wealthier.

After studying a company and its financials, Hyde Park Capital makes a decision on whether to take on the potential client. iWe turn down most of the deals we see,i says Hill.

For the ones they agree to take on, the next question is: Financial buyer or strategic buyer?

iA strategic buyer will generally pay more because itis more valuable to them,i says Barry Alpert, a top investment banker at Raymond James.

Competitors are often better positioned to pay more, too.

iMost strategic buyers are publicly traded companies. They trade at higher multiples in the public markets than financial buyers would be able to pay in the private markets,i says Hill. iFinancial buyers, they donit have any synergies. They donit even have a management team. Theyire going to look to you to keep managing the company.i

It takes four to six months to close a deal from engagement letter to closing.

iYou have to know, for any particular deal, whois the right group or audience for that deal,i says Hill. iThatis part of what we figure out.i

As for financing growing businesses whose owners want to keep some control, Hyde Park Capital handles only private placements. Co-managing public offerings would mean taking on securities traders and researchers, which the seven-employee firm is avoiding for now.

iFor most banks, unless youire a bulge-bracket bank like a Morgan Stanley or a Merrill Lynch, research and trading are loss leaders for you. You lose money on them,i says Hill, especially with the regulatory walls that have been erected between banking and research.

Hill sees another opportunity for his firm in the realm of raising capital.

During the 1990s, Hill says initial public offerings brought in as little as $25 million, with the goal of a post-IPO market capitalization of $100 million to $150 million. In todayis more demanding IPO climate, he says, at least $75 million to $100 million has to be raised with a value target of between $300 million and $400 million.

iItis become a larger cap market,i he says.

Some institutional investors, however, like to get there another way.

iThey want to invest that $25 million privately into a company, get it to where itis worth $200 million or $300 million, so then they can help take it public at that point,i says Hill.

Hyde Park Capital scours Florida for companies in need of anywhere from $10 million to $50 million to continue expanding on the way to possibly going public.

iThose are the guys that we focus on,i says Hill. iSo our challenge is to find companies that are big enough, and are in this void, that we can help get funded.i

Itis not easy, which is why Hyde Park Capital passes on so many propositions.

iWe see a lot of emerging company, early-stage venture stuff. A lot of it looks interesting and theyire good ideas,i says Hill. iBut thereis just not a lot of early-stage capital down in the Southeast. Itis really hard to get early-stage capital to come to Florida to fund transactions.i

Thatis because early-stage venture capitalists, clustered around Boston, San Francisco and a few other northern cities, prefer investing close to home because of the vigilance required for a fledgling enterprise.

Frank Grywalski, chairman and CEO of Decision Management International, came to Bradenton from the Boston area. iUp there, thereis tons of capital,i says Grywalski. iIf youire looking around the South, you have to go up to places like Atlanta.i

But Grywalski says itis getting easier for thriving but capital-starved Florida businesses, thanks to facilitators such as Hyde Park Capital and Startup Florida, a Sarasota mentor for tech entrepreneurs.

iWeire still behind the Bostons and the Silicon Valleys. But thatis understandable. We just got started,i says Grywalski. iYouive got to build your own. You canit expect many to move down here.i

Does Hill have any wisdom for established business owners who wish to start cashing out or are willing give up a piece of their company for expansion capital?

iThe best time to go to the market to sell is when youire doing well,i he says. iYouire going to sell from strength as opposed to weakness.i

Self-serving though it may sound, Hill says prospective sellers should consider hiring somebody like him, even though it costs up to 5% of the take.

iMore often than not, thatis going to be a good investment for them,i Hill says. iTheyire going to get that back, either through more money they get in the deal or through protection in regards to price and terms.i

Business owners who save a 5% fee on a $20 million deal when their investment banker could have gotten them $30 million end up $8.5 million poorer, before capital-gain taxes.

iThis is a very inefficient market,i says Hill. iWe see a huge range of pricing on deals.i

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