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Private Equity Fuels Growth of Small Calif. Firms

Halex Corp. is a world leader in manufacturing the lengths of nail-studded plywood that hold wall-to-wall carpeting to the floor. What is helping to hold Halex itself together, meanwhile, is private equity capital.

The Pomona company recently received $33 million in such financing from investment firms in Bethesda, Md., and Chicago in a deal brokered by Barrington Associates of Los Angeles. The money will enable Halex’s entrepreneurial owners to expand their line with other products.

For the record:

12:00 a.m. Dec. 13, 2002 For The Record
Los Angeles Times Friday December 13, 2002 Home Edition Main News Part A Page 2 National Desk 5 inches; 213 words Type of Material: Correction
Private equity firm -- In James Flanigan’s Business column of Nov. 20 on companies in private equity financing, Centre Partners Management was incorrectly called Center Partners.

It may be tough for companies to sell shares in the public market or secure big bank loans these days, but private equity is pouring across California.

In the last 12 months, according to Barrington, some 2,000 private equity transactions involving nearly $95 billion have been executed by California financiers and others for the small- to medium-sized firms that are the heartbeat of the state’s economy. Some of these investments are as tiny as $5 million to $10 million.

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The less-glamorous cousins of high-tech venture capitalists, players in the private equity market tend to invest in companies that make and sell more mundane items. In L.A., they have quietly filled the void left by the collapse of earlier forms of financing, from junk bonds to initial stock offerings.

Purveyors of private equity form “a stealth industry in Los Angeles,” says Michael Tennenbaum, who raised $900 million last summer from investors in Asia, Europe and the U.S.

Water Pik Technologies Inc., the Newport Beach-based maker of electric toothbrushes, shower heads and swimming pool cleaning products, needed to raise capital quickly three years ago when it was spun off from Allegheny Technologies Inc. So it tapped Tennenbaum & Co., which invested $20 million for a 20% stake.

When Tom Peterson, the inventor of urethane wheels for in-line skates and the founder of Cypress-based Bravo Sports, wanted to cash out in the late 1990s, he turned to private equity capital from Los Angeles’ Center Partners, which bought his firm for more than $20 million and then financed its expansion. Bravo Sports, with more than $40 million in annual sales, now manufactures apparel and skateboards and other equipment in Italy and Thailand, as well as in Orange County.

Private equity also finances mergers and acquisitions among smaller businesses, allowing them to be assembled into sizable companies better able to compete nationally and globally.

For example, Aurora Capital Partners, a Los Angeles firm led by former Assistant Treasury Secretary Gerald Parsky, has put together a highly competitive entrant in the packaging industry called Impaxx Inc. In eight years, Vernon-based Impaxx has acquired 11 other companies and now boasts more than $200 million in annual sales and 1,100 employees.

Aurora Capital also has put together United Plastics Group Inc., which has 14 molding plants worldwide, including a major facility in Anaheim.

Fittingly, Southern California pioneered private equity when Leonard I. Green, who died last month, opened Leonard Green & Partners in Los Angeles in 1969. Over the decades, the firm has backed everything from Thrifty Drug to El Segundo-based Big 5 Sporting Goods Corp. to San Diego-based Petco Animal Supplies Inc.

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And it is going stronger than ever. Four years ago, the Green firm raised $1.2 billion from pension funds, banks and insurance companies to invest in small- to medium-sized companies. This year, it has been pulling together a similar fund, and by all accounts the response has been even greater, adding up to almost $2 billion.

New York, Chicago and San Francisco still have bigger

investment firms and bigger deals, mostly because of the relatively small size of companies in this region.

But Southern California is gaining -- and it’s no mystery why. The Southland is particularly rich in start-ups and family firms. It also has 750,000 companies owned by new immigrants and ethnic minorities, more than anyplace else in the U.S.

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“There’s more action” than ever before, says Alex Cappello of Cappello Capital, a Santa Monica investment firm. “Money is flowing.”

What investors are looking for is simple: fat returns -- as much as 30% annually, compounded over a five- to seven-year period. And why can such profits be expected from smallish companies making and selling perfectly banal products?

Because new equity financing “unleashes possibilities that may not be pursued as aggressively by the founding family owners,” explains investment banker James Freedman, managing partner of Barrington

Associates. “It enables companies to grow.”

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In an economy like Southern California’s, which is constantly changing and expanding with new people and new businesses, private equity is the fuel powering things forward. Tennenbaum, a former Bear Stearns investment banker, rightly calls the environment “yeasty.”

The dough, in other words, is rising.

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James Flanigan can be reached at jim.flanigan@la times.com.

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