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Get In On Some Private Equity Action With Compass Diversified Trust
By Michael Brush
Exclusively for InvestorIdeas.com
March 10, 2007
It’s hard to swing a cat on Wall Street these days with hitting someone who is yammering on about private equity, liquidity and buyouts.
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All for good reason. Thanks to low interest rates, a solid economy, and companies with strong earnings but cautious spending habits, there is a lot of money sloshing around in the system. Much of it is getting put to use by private equity firms from the big players like Blackstone Group on down to the smaller shops and hedge funds.
The problem for many people is that unless you are wealthy enough to get access to these kinds of investment opportunities (you often need to be a “qualified investor” with big income), you’re missing out on the trend.
Now, the problem’s solved -- thanks to insiders at Compass Diversified Trust (CODI). The company is a kind of private equity shop that came public a year ago. Earlier this week, insiders purchased over $2 million worth of stock on a secondary offering.
That’s a compelling amount of buying -- especially because it included purchases by chief executive Joseph Massoud and finance chief James Bottiglieri. They bought $400,000 and $96,000 worth. Chairman C. Sean Day purchased $1.6 million worth of stock.
Compass Diversified Trust offers a way to get exposure to the robust growth at the myriad of small companies that make up the back bone of the North American economy. These small companies are normally held by families or private equity shops – so it’s not easy to get exposure.
Besides the appreciation that the insiders see ahead for Compass Diversified Trust shares, you can also expect to get regular quarterly payouts. That’s your take from the businesses that Compass helps to grow. At the current stock price, Compass quarterly payouts add up to a dividend yield of 7.4%.
The game plan
Compass Diversified Trust likes to take a controlling interest in businesses in North America. The company typically looks for:
- Stable cash flow of between $5 million and $40 million a year
- Strong management teams
- Moats that protect against competition
- Sectors with expected long-term growth
- Assurances that new technology won’t pose a threat
Potential targets can be anything from corporate spin-offs and family-owned businesses, to management buy-outs, roll-ups, reorganizations, bankruptcy sales and sales by financial backers.
Track record
Is Compass any good? It seems like it, at least judging by evidence offered by the company.
- The four businesses that Compass bought around the time of its May 2006 initial public offering (IPO) saw 2006 income increase by 21.6% over the year before.
- The company’s quarterly distribution has increased by 14.3% since the May IPO, to 30 cents a share from 26.25 cents. At the end of the year Compass had a healthy distribution coverage ratio of 1.7. (This is the estimated cash flow available for distribution divided by total distributions.)
- Compass booked a $35.9 million gain on the January sale of its Crosman recreational air gun business, which went for $143 million.
The current line up
If you buy shares of Compass Diversified right now, here’s what you get in the way of exposure to small, private companies.
- You’ll get a piece of a Colorado-based circuit board maker called Advanced Circuits.
- There’s a North Carolina company called Aeroglide that makes industrial drying and cooling equipment.
- Compass also has a California company called Anodyne Medical Device that makes support systems used in hospitals and nursing homes to prevent pressure wounds.
- There’s a temporary staffing services company called CBS Personnel Holdings, in Cincinnati, Ohio.
- Compass has a promotion and marketing company called Halo Branded Solutions in Sterling, Illinois.
- And there’s another California company that makes systems used to apply coatings in the high-end eyewear, aerospace, automotive and industrial markets. This company is called Silvue Technologies.
But you’re also getting the benefit from any future acquisitions. One thing that helps here is that Compass handles its own financing. This can entice sellers, since third-party lenders aren’t in the mix laying down ground rules. Compass also takes a long-term approach in developing the businesses – something it can do since these are private companies without shareholders clamoring for good quarterly results. This probably leads to better business planning.
Risks
One thing I don’t like about this set up is that virtually all of the companies in the portfolio are in businesses that depend heavily on strong economic growth to do well. They’re all pretty economically sensitive, except the hospital equipment company. So a downturn could hurt performance just about across the board.
Compass says it goes in with a long-term view, so it can stick it out without having to sell holdings off cheap if the business cycle turns down.
Another potential problem is that with so much other private equity money driving the hunt for bargains, those bargains may actually be hard to find.
The bottom line : Insiders at Compass don’t seem to think either of these things will cause problems, judging by their buying. So I think this stock offers a good way to get some exposure to trend in making money through private equity investments.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/.
InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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