Canadian firm Lynx Equity set a lofty goal this year: making 50% of its portfolio U.S. companies.
Brad Nathan , founder and president of Lynx, started the firm in Toronto in 2007 and, over the years, built a portfolio of 24 Canadian companies before looking to expand into the U.S.
“We have access to a market in the U.S. that is 10 times the size of Canada’s,” Mr. Nathan said.
In January, Lynx formed Succession Capital, a subsidiary in La Jolla, Calif., and added U.S.-based partners Brandon Laughridge and Nathaniel Broughton. Despite the geographic deviations, the partners in Toronto and La Jolla work on deals on both sides of the border. Currently, the two groups aim to back an average of 10 deals annually and expect to close 14 to 20 next year, said Mr. Nathan.
“The majority of our portfolio businesses either sell to or buy from the U.S. But our financial statements are in Canadian dollars, so the more we invest in the U.S. itself, the more it’ll be an internal hedge for our currency,” said Mr. Nathan.
Investing in U.S. companies can hedge costs because Lynx is exposed to U.S. currency when its portfolio companies buy from the U.S. or China and the purchases are in U.S. dollars. The firm generates 20% of its revenue from the U.S., which creates a natural partial hedge, said Mr. Nathan. “If the U.S. dollar goes up, then our costs go up in Canadian dollars, but so do our revenues in the U.S., and thereby we get the reward on the upside,” said Mr. Nathan. “This works in the reverse as well.”
JewelPop Inc . is a Dartmouth, Nova Scotia, designer, importer and distributor of jewelry that Lynx acquired in 2013. The company sees a majority of its sales in the U.S.
Mr. Nathan also pointed to easier access to banking and financing in the U.S., because “Canadian banks are much more conservative.”
The two firms have announced seven acquisitions this year, including five U.S. companies Succession acquired and two Lynx bought. Both firms are generalists, although many of Succession’s portfolio companies are either consumer- focused or are distributors or wholesalers. This summer alone, Succession acquired two jewelry companies.
Copyright 2014 Dow Jones and Company, Inc. Copying and redistribution prohibited without permission of the publisher.
There is little change in strategy once the target becomes a portfolio company of either Lynx or Succession. If the company is being sold due to the owner retiring, Lynx will structure the deal to keep the current management in place for at least a year to smoothly transition the business, said Mr. Nathan. “Once the acquisition was completed, my day- to-day schedule before and my day-to-day after stayed exactly the same,” said Mario Zelaya, managing director of Majestic Media Ltd., which was acquired by Lynx in October 2013. “They have an interesting model – they’re not the type to buy a company, hold it for a certain amount of years and then sell it.”
Although Mr. Zelaya, who is in his 30s, didn’t have plans to retire, he said that he sold his company Majestic because he wanted to focus more on other aspects of the business without being its owner. He also has started working with Lynx to find deals in digital marketing as synergistic opportunities.
In both Canada and the U.S., Lynx continues to see plenty of deal flow from founders that do want to retire and are looking to pass the company to a buyer willing to keep their legacy intact. “There’s a lot of opportunity with baby boomers aging out of the market. We’re in a good position,” said Mr. Broughton.
Founded in 2007 by Brad Nathan , Lynx targets lower midmarket investments of $2 million to $8 million in stable companies that are privately or family owned, and usually with an owner who intends to retire in the near future. Its U.S. subsidiary, Succession Capital, focuses on the same size companies in the U.S.
Lynx funds its deals by issuing high-yield debt. Investors enter into loan agreements of one to five years; and the loans pay monthly interest to the lenders when they enter into their agreement, according to the firm’s website.
Select U.S. Deals
Bumkins Finer Baby Products Inc ., H.J. Sherman Co. and Floor Solutions LLC
Originally published September 25, 2014, by Lillian Rizzo