Good morning. Welcome again to the ACG third annual M&A conference. I am honored and delighted to have been asked to speak with you this morning. I have been asked to speak to my experiences over the past thirty years in the growth of the M&A and private capital community in Southeastern Michigan.
The experiences that I have had are just a small part of an overall effort that most of you have played a large role in. While I can only share with you some of my historical observations, this is meant to be a celebration of our collective success in building a significant industry under tough circumstances and against tall odds.
I must admit that I have enjoyed putting together some ancient and some not so ancient history and in re-establishing a dialogue with many of the earlier local participants of our professions. We will have an opportunity to hear from some of them over the course of the next half hour as well as a smattering of perspectives from the founders of organizations in our industry.
In so much as the opening comments from the past two years were from Lloyd Carr and Tom Izzo I thought I would keep with tradition and recount the story of A.J. Domzalski’s sports achievement as I find it somewhat applicable to how my career and our industry developed.
A few years ago I had the privilege to coach a boy’s 11 and 12 year old “house” hockey team. House hockey, unlike “travel” hockey is for players of all skill levels. A.J. Domzalski was the last kid drafted on our team. A.J. was just learning to skate. We had a great season and made it to the finals against the other best team in the league. We quickly found ourselves down 2–0. Mid-way through the game, one of our better players got a shot off on their goalie and while he made the lunging stop, the puck fell to the ice in front of a now empty net. Who was there to push it in the net? None other than A.J. Domzalski. Now A.J. had scored his first goal of his young career. Later in the game, now down 2-1, fate found young A.J. in the same situation where he scored again. With moments to play in the game, one of our kids was pulled down from behind on a breakaway. In house hockey, the coaches can select the player to take the penalty shot. We gathered the kids at the bench and the coaches huddled to consider which of our best players to select. As we did, a faint chant started amongst the kids: A.J., A.J., A.J. . . . While the chances of A.J. scoring the winning goal on a penalty shot against the best goalie in the league were slim, the kids had spoken. Reluctantly, A.J. skated to center ice, picked up the puck had headed for the goal. A.J. lost the puck twice on the way in and had to reach back for it. As he got to the goal, A.J. took a mighty shot and the goalie reacted swiftly sliding across the crease to make the save. But A.J. had missed the puck and there it sat directly under his stick. With the goalie now out of position, A.J. swept the puck into the net to win the game and complete his hat trick.
Similar to A.J.’s experience, the path I took into and through this profession was not preconceived but rather the result of fateful decisions and other people’s intervention.
My experiences start in 1978 with graduation from business school with an MBA. I went to graduate school right out of college – that was acceptable back then – principally, I convinced myself, because I was offered a teaching assistants position to pay my way and going back to school in the future would be costly and disruptive. Realistically, I could continue my juvenile ways and my father was condoning the practice by sending me some spending dough. School for me was always a chore and my end game was simply to get the degree. As I only had an end game, I used the rest of the game to further my “social” skills – and we all know there is plenty of that on university campuses and always has been. I developed a unique perspective which isn’t popular with academicians – the growth of a person and their perspective on life is uniquely fashioned during those years and more often than not it occurs outside of the classroom.
I got out of school in 1978 and feeling the tug of my roots headed back to Detroit to seek a job. For an MBA your basic choice back then was sales or finance and within finance, banking or accounting. In college I had tried my hand at encyclopedia sales and I wasn’t much with credits or debits so I interviewed with the banks in town. While I tried to get a job with the bigger banks, my academic performance wasn’t entirely in line with their expectations. At the time, I thought bigger was better – I was a little disappointed when my only offer came from a smaller bank with offices in Troy, Michigan by the name of Michigan National Bank of Detroit.
Wow was I wrong. In 1978, Michigan National Bank was to banking what rodeo is to dressage. It could have been described as growing almost out of control and therefore offered young professionals like me, John Donnelly and many others the opportunities to experience things that our peers wouldn’t experience until years later.
In five years at Michigan National, I got exposure to all areas of commercial lending from credit training to loan review to local and national lending. Almost everybody there was several years younger than their counterparts at the more conventional banks in town. By way of example, at 25 years old my Monday mornings found me on the 6am Pan Am flight to La Guardia. I spent the day on the 50th floor of the Manufacturers Hanover Bank tower in midtown. With me in those meetings were some of the biggest names in banking all of whom were gathered in an effort to help resolve what was then one of the largest and certainly the most publicized bankruptcy proceedings ever – that of Chrysler Corporation. What goes around comes around. Reminiscent of Chrysler and GM’s bankruptcies today the government was financing that bankruptcy as well.
The politics of commercial banking industry compensation didn’t make much sense to me and fortunately fate intervened. In 1982, Continental Illinois National Bank became insolvent over some $500 million in bad loan participations with Penn Square Bank in Oklahoma. While not as severe, Michigan National had Penn Square exposure and with it, all opportunities for advancement at Michigan National dried up.
In 1982, Savings and Loan Institutions were granted powers to do all forms commercial lending. There were two large S&L’s in Detroit: First Federal Savings and Loan in downtown Detroit and its slightly smaller competitor Standard Federal Savings and Loan in Troy – both multi-billion dollar organizations. I approached their CEO’s with the proposition of leading their new commercial lending efforts. Tom Ricketts at Standard Federal took the bait. Tom offered me $50,000, a car and a country club membership. I thought I had gone to hog heaven. I showed up for work the first day as the Senior Vice President and Head of Commercial Lending. What I hadn’t known and wasn’t advised of was that another somewhat more experienced gentleman showed up the same day with the same title. Apparently, Tom liked me but wasn’t sure this 29 year old kid should be solely responsible for his new commercial loan department. Lousy yes, but 50 grand was 50 grand – and the car was new.
My office was on an upper floor overlooking the parking lot. Executive parking was assigned based upon title. Tom Ricketts had the first spot; Gary Carley had the second and so on down the line. I was well down the line of company owned Caprice Classics. Now what turned out to be strange to me was that I could peer out my window at 5pm at the row of Caprice Classics and soon thereafter mine was the only car there. It turns out that grown men would sit by the windows waiting for Tom and Gary to leave for the day and within a couple of minutes they had all left. I couldn’t imagine living my life that way and I couldn’t get comfortable with my colleague who rightly or wrongly I considered a professional chaperone. Fate again had intervened.
I might have made my 6 month anniversary at Standard Federal except that John Donnelly called and suggested we meet downtown for lunch. John had just joined First of Michigan Corporation where he was effectively in charge of their investment banking practice. John was working with Charlie Rothstein who had been at First of Michigan since 1982. At lunch, John suggested I look at joining him. Not wanting John to know of my desperation, I asked the normal questions including what was the compensation package. He told me that I, like him, would have to take a 50% pay cut (in fact it wasn’t really a pay cut; it was a draw against my earnings). Married with a new mortgage, a new baby, a new country club and in need of a car, I took pause. Well, I had had it with commercial banking so I made the leap – after all, John had taken the risk and misery loves company.
In the 1980’s, First of Michigan Corporation was Michigan’s largest broker dealer with approximately 300 brokers in offices all over the state as well as on office in Chicago and one in New York City. While it was a full service broker, its principal business was selling municipal bonds to little old ladies. While the synergies weren’t that great for a couple of guys looking for corporate inroads, they did provide us with the platform for underwriting public offerings of debt and equity.
When John and I started in 1983, we had two metal desks, two telephones and one phone book which we shared - often not by choice as it came whistling across the room as a statement of one another’s displeasure. It was truly the wild, wild west. We made the rules up as we went.
In 1983, there were very few people in the M&A advisory business in Southeastern Michigan. As I recall, our local licensed competitors at the time were McDonald & Company, the Ohio Company, Coopers & Lybrand and Roney & Company. Including Charlie, John and I, there were eight of us in investment banking plus a couple of guys up on Gratiot Avenue by the name of Agley and Timmis looking to buy local companies. Without any formal training, this handful of local professionals was plying a trade they were just learning themselves against far more established professionals from the country’s money centers.
In 1983, practicing M&A was very different. We had pay phones instead of cell phones, typewriters instead of laptops, a black and white copy machine the size of a large school bus, and FedEx was still 15 years from its founding. An offering document was produced with scissors, correcting fluid and scotch tape.
This was the world of the Rat Pack. The Rat Pack is what I chose to call this gritty group of professionals who had a vision for what investment banking could be in this region and the economic rewards it could provide.
I have often said that our success in investment banking is analogous to standing on the right corner when the right bus came by. This isn’t meant to be self-deprecating but rather reflects dramatic changes in financial markets that occurred in the ensuing years. For example, in 1970 the average reported deal size was $10 million. By 1980 it was $50 million. By 1988 it was over $200 million.
As Wall Street bankers focused on the ever increasing high end of the market, room opened for regional players to fill a void focusing on smaller deals. In the mid 80’s, we were charging the “Lehman Formula” on M&A deals and delighted to make $150,000 per deal. That put our average deal size right around $5 million in consideration, well below the national average and while in Wall Street’s sweet spot just a few years earlier these deals no longer interested them.
With my move to First of Michigan I determined to finally give up cigarettes and soon thereafter under the tutelage of First of Michigan EVP and our mentor Fred Schroeder learned the merits of a good cigar. Now John and I worked in a small space and we were actively practicing our new cigar smoking skills daily. With Fred puffing away in his office just around the corner the air quality could best be categorized as not fit for human consumption. In 20/20 hindsight, all those deals we lost in the mid 80’s probably had less to do with our developing skill sets and more to do with our smelling like a horse’s ass.
When the markets closed everyone at First of Michigan went home except for those of us in the investment banking department. We stayed until we couldn’t get anybody on the phone. With our practice expanding to the west coast, that meant at least 8pm. While the day was reserved for prospecting and working on transactions under contract, the nights were spent preparing pitches and writing offering documents.
We traveled often. While today most of our travel is by plane and half of our travel is overseas, in the 1980’s most of our travel was by car in Michigan or on Republic Airlines in the continental US. Those were the days when we would leave for the airport 30 minutes before our flight and on the oft occasion we were late they would reposition the jet way and allow us to board. By 1986, we had our first cell phone - it was in a bag and was the size of a small carry-on. We were finally learning to use our first computers as First of Michigan was notoriously cheap when it came to “frivolous” expenditures.
In retrospect, First of Michigan was fertile ground and has spawned several investment banking startups. Jim Korth who went on to found J.W. Korth & Company preceded Charlie, John and me. As the industry and our business continued to grow, Charlie, John and I were joined by David Eberly as a summer intern. In 1985, we hired Jim Penman and Bill McKinley. Soon thereafter we were joined by Andre Augier. Today, there are at least four active financial advisory firms which were started and continue to be managed by these First of Michigan veterans. In 1988 Charlie and Dave got the ball rolling by founding GMA Capital which today is Beringea Capital.
In 1988, I was making more money than I could have imagined when I began in 1983. Nevertheless, I again felt that there were inequities in the compensation system. First of Michigan was sharing in a large percentage of our gross profits and, to my way of looking at it, provided less value. John Martin, their talented and tight fisted CEO, was adamant that his fee arrangement was a fair deal and an industry standard. Over our objections, he offered only one piece of advice again and again: if we could get a better deal elsewhere, we should take it. In April, I resigned.
While I was unhappy, I wasn’t a fool. John and I had a good client in those days by the name of Jerry Campbell of Republic Bank fame. We had done all of Republics capital raises and acquisitions. Jerry would often ask me why I didn’t start a company and do investment banking on my own. Having that type of support was comforting when you have just quit your job with a wife, three kids and plenty of expenses. I drove out of the Renaissance Center and called Jerry - proudly announcing I had left First of Michigan. His only response was “now what are you going to do.” Well my heart sank. I was hoping more for an “I’ve got some business for you” response. Well, there was no going back now.
I knew then and know now that you can’t ply this trade alone and I was blessed within 24 hours with a partner. Bill McKinley had signed on. Bill is the smartest guy I know and is a great partner. So as fast as my spirits had fallen, they were now buoyant. Andre Augier, wanting to know that we weren’t completely off our rockers took his measure and joined us a couple of months later. We started with two desks in a small office which we rented month to month on my credit card. The space was no bigger than a large closet. Bill wasn’t a cigar smoker but you wouldn’t have known it by the end of the day and his wife still doesn’t let me forget it. Now that’s a partner.
We didn’t sleep much at night as failure loomed large. About a month into our new venture, Jerry Campbell called with an opportunity. It was a sell-side mandate that saved our fledgling effort. We completed it and when we realized that there was no “house” with which we had to share the fee, our future was all but certain.
In 1989, we were looking to replace the small amount of proprietary business that a firm like First of Michigan provided its investment banking department. Proprietary business was becoming a meaningful component of what was by then a rapidly changing investment banking landscape. Seemingly, all of a sudden, the accounting firms were becoming major players in M&A. We choose to approach Gerry MacDonald and Mike Monahan the top two executives at Manufacturers Bank to determine whether or not they had an interest in “affiliating”. We spent months trying to structure a deal which ultimately didn’t formally happen, but in doing so, the relationships we built set the table for the future.
In the late 80’s and early 90’s, the institutionally sponsored committed private capital business was just emerging. Although there was no “committed” private capital in Michigan the prior few years had seen several firms get their footing here using “country club capital” or “pledged capital” as their resource. In addition to Agley and Timmis, there was Barry Shapiro, Al Koch, Tom Gaffney and Selwyn Isakow to name a few.
Up through 1990, a large portion of our business was with banks. With our expertise, we determined to get Michigan on the map and to launch a committed capital Bank Fund for the purpose of buying the undervalued securities of inefficiently traded banks. We were introduced to Neil Power and Amy Lazarus. They were the private placement team at Bankers Trust Company and, in general, if they took on your Fund deal, the money got raised. We found ourselves for the first time on the paying end of a retainer check and were ever so enthusiastic to write it. We went to market a month later with our “Intrastate Bank Fund” and had a day of great visits with several insurance companies in Hartford. Upon returning to my office, Neil Powell called to advise me that he and Amy were leaving Bankers Trust. Our hopes for a fund were dashed and Michigan still had no committed capital, but again the seeds were laid.
Through the early 1990’s, the investment banking business continued to grow in the Detroit market and new firms were being started. In 1993, Gerry Timmis who had returned from Goldman Sachs in NY to do a stint with W.Y.Campbell & Company started his now highly successful firm GC Timmis & Company. In 1994, Bud Aspatore, formerly President of Cross & Trecker Corporation, and Scott Eisenberg, who had been with Onset BIDCO, gave legs to Amherst Partners.
In 1995 Plante Moran’s P&M Corporate Finance became a meaningful competitor on the M&A front under the management of Phil Gilbert and Paul Flanagan.
During this time period, commercial banks were busy buying broker dealers. As is often the case in the commercial banking industry, it became almost a frenzy to find and acquire the right investment banking firm. Detroit Bank & Trust and Manufacturers Bank had merged into Comerica Bank in what many referred to as the red and blue transaction of 1992. Detroit Bank & Trust employees were red for the color of their Indian head logo and manufacturers Bank employees were blue for the color of their logo. The new Comerica bank had made overtures to Detroit based Roney & Company but had been unable to agree on a deal. In 1995, we recognized the opportunity to present W.Y.Campbell & Company’s credentials to Comerica. Our relationship with their blue team executives including Mike Monahan dating from 1989 gave us an entrée. This frenzy offered a chance to sell our business for more than we thought it was worth and Comerica had the deep pockets to fund a Michigan-based private capital effort.
We let Comerica get very pregnant on buying our firm before throwing out the requirement that they had to be the bell-cow investor with no ownership in a new untested Detroit-based committed capital fund.
We chose to present a subordinated debt fund as we felt it was closer to the banks psyche than private equity. We waited for them to object for all the logical reasons which included both our and their lack of successful experience in the space. To my surprise, they said yes.
To run the business, we recruited Scott Reilly formerly from Churchill Capital in Minneapolis. Scott was Churchill’s first investment officer and likely the country’s most experienced middle-market mezzanine lender. Scott was 32 at the time which is an indication of the relatively young age of private capital at that time. Getting Scott to relocate his family to Detroit was our next task. Fate had it that Scott and four other investment professionals from Churchill had just left to start a new mezzanine partnership which was controlled by Peter Siedler out of LA. The opportunity for Scott run his own show without three active partners and a left-coast owner was compelling but the deal wasn’t done until we convinced his then pregnant wife over a dinner carefully orchestrated to do just that.
We closed on our sale of W.Y. Campbell & Company to Comerica in June of 1995 and with their $25 million investment, Detroit-based Peninsula Capital Partners successfully launched its first fund at $53 million. I am proud to say that Peninsula and our other private equity affiliates today manage almost $2 billion of committed private capital for some of the world’s largest pension funds, Insurance Companies, and family offices.
During that same year, Jay Alix was partnering with Dan Lufkin and forming Questor Management Company as our first local turnaround fund.
At about that same time Peninsula and Questor were getting their start, credible statistics were published indicated that Michigan was ranked 48th amongst states in private capital under management. State government became aware of this embarrassing statistic and apparently determined to get involved. In 1996, Governor John Engler hired a consulting firm out of Boston to recommend an existing private equity firm that would be willing to relocate to Michigan in exchange for a sizeable commitment of funding. John twisted the arms of the Big Three, Dow and the State Pension Fund to establish a pot of money to entice them. They selected Wind Point Partners and committed approximately 50% of Wind Point Partners $215 million Fund III.
While these three fund initiatives may mark the beginning of committed private equity capital in Michigan, there were a number of early proponents whose efforts in bringing private capital to Michigan played a role in this region’s success.
In 1999 U.S. M&A deal volume suffered under the bursting “tech-bubble” but our local markets didn’t flinch showing steady growth through the downturn. Investment banking professional employment reached 84 full-time professionals and private capital stood at 69.
By 1999, our team at Peninsula had established a short but impressive track record in non-control private capital and we were ready to launch our own control private equity effort. With $15 million of backing from a wealthy Detroit area family, we set out to find an experienced professional to lead the effort. We found pay dirt with a young ambitious private equity professional from Chicago by the name of Brian Demkowicz. Again, with Brian our timing was right and with four kids under the age of four our toughest job was convincing his wife Connie. While we got that done, we have been wholly unsuccessful in convincing them to drop the Black Hawks in favor of the Red Wings. Huron I closed in 2000 with $65 million in commitments.
From the mid 90’s to 2000, the Michigan private capital community grew at its fastest rate. From 18 employees in 1994, there were almost 100 at the close of the decade. Another one of those firms is Strength Capital Partners under the leadership of Mark McCammon and Michael Bergeron.
Again in 2001 U.S. M&A volume declined as a result of September 11. Again, our markets showed resiliency and we added full-time employees to the industry. U.S. M&A volume picked up again in 2003 and the balance of our timeline is more recent history with which most of you are very familiar.
In 2006 we decided to raise an underperforming company fund and went to market with Superior Capital Partners. By now you may recognize the influence of local geography on the names of our funds. We were convinced that the heady markets of the past several years couldn’t last and we were in for a correction. The space fit well for us in that it wasn’t competitive with that of our other funds. Although we had correctly foreseen the turn in the markets, this fund turned out to be our most difficult and time consuming capital raise.
We were seeing the beginnings of “fatigue” amongst private capital investors. As the fastest growing asset class of all time, allocations were being strained and there was a great deal of un-invested capital on the sidelines. I think it is fair to say that when you run out of names for new funds, a cycle has run its course. Shouldn’t we have seen it coming with new fund names like Hunting Dog Capital, Monkey Sports Capital or Fluke Venture Partners?
In summary, as with young AJ Domzalski, fate and personal intervention often have as much to do with shaping careers and industries as any grand plan. From the Penn Square failure to Tom Ricketts surprise to John Donnelly coming along, to Bill McKinley signing on in 1988, to getting close with Manufacturers Bank in 1989, to Bankers Trust leaving us in the lurch in 1990, and so on and so on you get the point.
Regardless of the path each of you has taken, I want to say how proud I am of all of you for our collective contributions to the establishment of a credible and highly competitive private capital and deal making industry under extremely adverse circumstances. With skills honed on the toughest transactions you represent the best talent for middle-market transactions and that your skill sets are potable and you’ve proven it in industry after industry. I admonish those who send their investment dollars or professional fees to help pay New York, Connecticut or Illinois income taxes like it just ain’t so.
Fortunately, for each one of those decision makers, there are our real heroes who have helped shape our local industry and our collective quality of life. People who could have made the “easy” decision and gone to New York or another money-center to hire their professionals or invest their dollars but instead were willing to listen to the credentials of local professionals. All of you who have had any success in this industry know who these people are for you. For me, these are people like Fred Hubacker, who years ago as a finance executive at Chrysler hired our fledgling firm to sell their Sandusky Plastics business; John Plant at TRW for so often making the alternative choice and selecting local investment banking talent over the years; Paul Rice and Sam Valenti for their ability to calculate risk and invest with the new guys; and many others – too many to mention yet too few to ever go unappreciated.
I want us all to focus not on our immediate hardship but rather on the inevitability of our current situation and the opportunity it most certainly will afford us for a more soundly based and competitive economy in this region. I want to celebrate all of you, my fellow ACG’ers who have contributed to the last 25 years of exceptional growth and who, through this existing adversity, will be the ones to shape our successful future.
Thank you very much.
