The alternative-investment firm buys up small companies as private-equity firms do, but it shuns the often steep debt that buyout shops use to fund acquisitions.
In broad strokes, Tide Rock Holdings looks like a private-equity firm: It scans the horizon, scooping up small businesses. But it has one stark difference: It uses no debt, allowing its portfolio companies to operate unfettered by loan-servicing burdens and the pressure of higher interest rates.
Tide Rock operates as a holding company that periodically sells stakes in the firm to investors to raise capital for new deals. It has invested nearly $500 million across more than 30 businesses and has about 100 investors, said Chief Executive Ryan Peddycord, who started Tide Rock in 2013. Having previously run private equity-backed businesses, he set out to pursue a similar strategy with Tide Rock—but not entirely. The firm acts as a fundless investor, raising capital only as needed, on a deal-by-deal basis.
Though it shuns leveraged buyouts, the companies Tide Rock owns sometimes use revolving credit lines from banks, Peddycord said. Operating with relatively low levels of debt frees up a larger share of cash to be distributed to Tide Rock’s investors, he said.
“What I felt in private equity is that it can be too based on equity appreciation, but that’s not the only way to make money in a company,” he said.
“If we just take leverage out of the equation, it opens up all the doors for us to be able to make quarterly distributions and also preserves more capital.”
Tide Rock’s dividend payments to investors during the year-period through last June ranged from roughly 13% of their investments to as much as nearly double, with earlier backers getting the bigger payouts, according to Peddycord.
Tide Rock focuses its investments on established businesses with steady cash flow and loyal customers in areas like manufacturing, business services, logistics and food, Peddycord said.
“We want companies that have been around for a long time,” he said. “We’re not looking for the next startup.”
Not loading a business down with debt can also shield it from downturns and periods when credit gets more expensive, Peddycord said, pointing to the swift rise in interest rates since early 2022, which depressed deal activity and hobbled debt-laden companies.
Lofty rates and inflation put companies under strain over the past year. In 2023, bankruptcy filings by U.S. private equity- and venture capital-backed companies nearly tripled to 104 from 38 in 2022, reaching the highest annual total on record, according to data provider S&P Global Market Intelligence. The 174% jump far exceeded the 73% increase in bankruptcies across U.S. companies.
Operating as a holding company also spares Tide Rock the distraction of having to raise new funds periodically as most private-equity managers do, said Brett Hillard, chief investment officer at GLASfunds. The Cleveland-based firm provides systems that enable investment advisers to offer alternative-asset strategies to qualified clients.
Fundless strategies “can be valuable because my team and the adviser firms don’t have to underwrite a new fund and re-educate our client base every three to five years as well,” he said.
Another difference between Tide Rock and private-equity fund managers: The firm itself covers salaries and operating expenses rather than charging investors a management fee based on a percentage of committed capital. Such fees often exceed the asset manager’s cost of running the business, Hillard said. “We don’t get anything just for managing the dollars,” Peddycord underlined. “We only benefit as a manager as we’re making profit distributions.”
That’s not to say the Tide Rock model doesn’t have limitations.
For one, the firm’s focus on small businesses can make it unsuitable for large institutional investors looking to write big checks, Peddycord said.
Another knot is that new backers have to set a value on all of Tide Rock’s portfolio companies in order to come up with a fair price for a stake in the holding company, Hillard said. For investors in new private-equity funds, the question doesn’t arise.
“With a holding company, one thing you just need to be cognizant of is the valuation,” he said. “Holding companies need to make sure that they’re appropriately valuing their equity so that [stake] buyers and sellers are receiving a fair price.”
Still, some investment firms with similar models have expanded enough to attract large investors. For example, sustainable infrastructure-focused Generate Capital raised $1.5 billion in January from investors including pension managers such as the California State Teachers’ Retirement System and AustralianSuper, bringing the total raised in its 10-year history to more than $10 billion.
It is too early to tell whether the holding model can become a significant alternative to private equity, Hillard said. New money managers may just find it easier to raise a fund, while investors can be reluctant to commit to something less common, like a holding strategy, he said.
“Unfortunately for capital allocators, failing unconventionally can be worse than failing conventionally,” he said.
Write to Luis Garcia at luis.garcia@wsj.com
Source: The Wall Street Journal
