Holding On to Family Ties

How one family business forged an unusual partnership with a private-equity firm.
Alix StuartJanuary 31, 2012

Crane & Co. knows money. The 210-year-old company is the maker of U.S. currency paper; it derives even more revenue from selling currency products to international governments than to the United States. But when the family-owned business was looking for some liquidity a few years ago, how to obtain it was anything but straightforward.

“We interviewed a lot of [family] shareholders about their goals and met with many, many” potential financial partners, says Crane chairman Charles Kittredge, a sixth-generation family member and CEO at the time. The result: a somewhat unusual long-term partnership with a private-equity firm. That sounds like an oxymoron, but the arrangement has worked out well for the growing company.

In the past, family businesses that wanted to retain control had few options for outside capital beyond bank loans. As banks continue to keep a tight rein on lending, however, “new approaches to financing are emerging,” says Joe Schmieder, senior consultant with the Family Business Consulting Group. For one, private-equity firms focusing on small and midsize family businesses are forming, and they are willing to take minority positions, he says. Large investment-banking institutions, including Goldman Sachs, are following suit.

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A Demand for Liquidity
Crane’s longevity was one of the driving forces behind the nature of the transaction. As one of the few family-owned companies to make it past the fifth generation, it now counts about 100 shareholders, most of whom are sixth-, seventh-, or even eighth-generation descendants of founder Zenas Crane. The distance from the founder means that “the family effect is quite strong, but it’s not the same as a few generations ago,” Kittredge says. Only about five family members now work for the 1,500-plus employee global firm, and most live nowhere near company headquarters in Dalton, Massachusetts.

The search for outside capital, then, was catalyzed by “a growing demand for liquidity from certain segments of shareholders,” and resulting squabbles over how much should be reinvested in the business versus given back to shareholders through dividends and other means. “It seemed to me the best way [to resolve] it was to let people sell shares if they wanted to,” says Kittredge.

The company considered a range of standard options, including bank debt and setting up an employee share ownership plan that would allow employees to buy out the family over time, says Kittredge, but none made sense. “It seemed there was a greater demand for liquidity than the company could fulfill by borrowing and still allow for growth,” he recalls. (In the end, only one family sold all of its shares; most simply sold a portion, keeping the number of family shareholders the same.)

That led to a deal with New York–based private-equity firm Lindsay Goldberg, which specializes in such deals. (Its website bills it as seeking to become “long-term partners with family business owners, management teams, and exceptional CEOs who have as their goal significant long-term growth in their enterprise”; deals listed on the site show both minority investments and full buyouts.) “Lots of people wanted to buy the whole thing, or do a typical private-equity deal, coming in and four years later selling out, but we rejected those,” says Kittredge. “We found a partner willing to do a long-term deal and take a minority position”: long term, in this case, is 15 years. As part of the deal, Lindsay Goldberg’s two principals have seats on the board.

Kittredge says the company considered trying to partner with a family office, as well, but chose not to pursue that option on the assumption that a more-involved investor could add some value. “We felt very safe with this investor, since part of what it brings to the table is a lot of horsepower and analytics, which can help a lot when we’re looking at new opportunities and acquisitions,” he adds.

Having sophisticated private-equity partners was also useful when Crane sought bank debt for an acquisition that occurred within months of the initial deal. Overall, the investment has “sharpened us as a management team,” Kittredge adds, including the hiring of a CFO, K.C. Ashok, in 2008, shortly before the equity transaction closed.

Ashok has been busy since joining Crane & Co. The company now spans the globe, both in its sales and sourcing. It is also leaning heavily on its non-paper materials segment for new growth. “We are looking at technology as a vehicle to grow,” says Ashok, referring to the company’s plans to extend the microoptic security features now embedded in U.S. currency into new applications for other markets. (A little-known fact is that the company’s “nonwovens” division is already making products as far-ranging as aircraft parts, surfboards, and lithium batteries.)

“We have made a lot of changes,” Ashok says of the past four years, including a significant restructuring, a switch from regional auditors to PricewaterhouseCoopers, the addition of outside directors, and new reporting mechanisms to satisfy the breadth of shareholders. “Slowly, the company is becoming a professionally managed company,” rather than a pure-play family business, he says.

Tapping Other Families
Private equity is not the only way to go. Family wealth management offices are also a new potential partner for family businesses, as the offices look to cut out the middleman and invest directly. “Over the last two or three years we’ve seen single-family offices increasingly interested in making investments in family-owned companies,” says Francois de Visscher, who has advised family businesses on equity capital raising and debt financing for the past two decades. For one, “they’re shying away from investing in private equity and instead making direct investments,” he says, particularly in businesses with values similar to their own.

Plus, “from a family-business perspective, you couldn’t dream of a better investor than a single-family office,” de Visscher says. Such investors will wait 10 to 15 years for a return, and they tend to impose minimal control. One $45 million deal de Visscher brokered last year between a family office and a family-owned industrial company involved a term sheet that was a short one-and-a-half pages long. The family office took only two out of five board seats, with no mention of an exit plan, despite the fact that 40% of the company was in play.

A Replicable Template?
So how likely is it that another family business in a situation similar to Crane & Co.’s would find success with a PE firm? “It all depends on where the business is in the maturation process,” says Kittredge. “For us, it’s worked out really well.” (Crane may have been exceptionally well prepared for the transition because it has a long history of outside leadership. Two CEOs before Kittredge were non–family members, and he recently turned the reins over to a third nonfamily CEO, Stephen DeFalco.)

And while the clock is ticking, faintly — the contract on the private-equity investment runs out in about 11 years — Kittredge is hardly concerned. “As the business grows there are lots of options to raise capital,” to create the necessary liquidity, or induce new partners to come in, he says. “I don’t feel like there will be an explosion when the clock ticks down to zero.”