Texas is a deal hot spot, which has spurred national law firms to move into the state and poach lawyers from more home-grown firms in recent years. Out-of-state private equity firms are setting up shop in Texas as well.
One is Los Angeles-based Skyview Capital, which opened an office in Dallas in October. Skyview was founded in 2005 by Alex Soltani, a former business development executive at multi-billion-dollar private equity firm Platinum Equity.
Leading Skyview’s Dallas office is Darryl Smith, who came in as president of global portfolio operations and sits on the firm’s investment committee. Smith previously was VP of operations at Platinum, where he most notably worked on the carve-out and turnaround of $1.5 billion European logistics company Hays Logistics.
Smith also was a managing partner at Frisco-based CrimStone Partners, which focuses on investments in middle market manufacturing and business services companies. He also has led several Texas companies, including Fort Worth-based Waples Precision Manufacturing, Garland-based Cimcon Finishing and Dallas-based Premier Logitech, where he increased the company’s revenues 10-fold.
Leadership came naturally to him: The U.S. Naval Academy graduate was a captain in the U.S. Marines and saw combat during Desert Storm. He recently spoke with The Texas Lawbook’s Claire Poole about why his private equity firm opened a Texas outpost and what opportunities he expects to see.
Q: So why did the firm open a Dallas office?
A: A large part is because they hired me. We also have another professional here, Shrikar Kasturi in Plano, who is our M&A guy. Alex [Soltani] realized that there are a lot of Fortune 500 companies in Dallas – like 50 – and we do carve-outs. So we decided to put out a flag here.
Q: So what’s your game plan?
A: Our long-term plan is to get some business development folks to work with local companies, private equity firms and banks to tap into the market and find more opportunities.
Q: What’s your personal mandate?
A: I have lived here for 16 years, so I know a lot of people in the business community. I plan to leverage those relationships to create opportunities, both in targets and within our portfolio so we can grow them, including doing bolt-on acquisitions and looking for new customers.
Q: What Texas companies are in Skyview’s portfolio currently?
A: We had a couple that were sold and something we bought from Nokia [the WiMax infrastructure business that became NewNet]. We’re looking at some things and we’re close to some things. Our latest acquisition, Continuum [which included some call center units belonging to Conduent Inc.], has an operation in Richardson, which put us back into Dallas. There’s at least one other deal that will probably get signed and close in the next month.
Q: What opportunities do you see in the Texas market?
A: Name a big company – AT&T and Dell, and we like technology and telecom – and if those companies are looking to spin out divisions – they always are – all kinds of things happen. They may be moving into other technologies and markets and decide their legacy businesses don’t fit, so they spin them out. Some are doing mergers and have to let some things go to satisfy the regulatory agencies. What we haven’t really done is target oil and gas. That’s not a part of our strategy. If you look at our portfolio, they’ve been technology and telecom businesses. We’re starting to look at manufacturing businesses and there are a number of them in Dallas.
Q: What’s going on in those industries now that are creating those opportunities?
A: They’re changing their models. AT&T has bought some assets that are outside what they were doing 10 years. There’s opportunity to look at spinouts there. It takes time, everything is timing. More broadly, we’re seeing companies do mergers, and with those mergers, they are spinning out assets that aren’t core and don’t fit with what they’re trying to buy and exploit.
Our firm has been fairly opportunistic: We are mainly focused on developing relationships with corporate development folks to understand their challenges and provide service. They may need a private equity investor that moves quickly. Carve-outs are unique: They don’t have back office, IT and finance, and we can provide those things. Many other private equity firms can’t. We’re able to talk to these corporate development folks and investment bankers to provide the ability to make these entities standalone.
Q. Who are some of your competitors?
A. Open Gate has a similar model. So does Platinum, which is much larger than us, and Marlin Equity. With the acquisition of Continuum, we’re going upmarket.
Q. Do you invest out of funds?
A: We don’t go out and raise funds, but we have access to capital. It’s not a problem. Financing has been secured for Continuum.
Q. Which law firms do you use on deals? Anyone in Texas?
A: You’d have to ask our general counsel [Jim Hall]. He has relationships with a couple of firms he uses. But we’re always interested in developing relationships, particularly ones that can be symbiotic, where we can get access to deals.
Q: What skills have you brought to the job that you picked up in the Marines?
A: The obvious stuff: Leadership, ability to make decisions, organizational skills. It taught me how to make decisions with limited information. We don’t always have all the information when doing deals. Also the work ethic: You have to be willing to put your head down and work hard to make these things happen. What I learned in the Marine Corp was that everything doesn’t always go your way, that there will be setbacks, but you just keep going. If you have the right team, you can be successful.
Q: So what are some of your duties?
A: I’m involved in some deal origination; I formally get involved when a deal is first presented to the investment committee. We meet weekly, we screen deals and we have a first-pass criteria. I will often work with our business development guys to help them understand what additional information we need to improve our optics and determine why this deal works for us. I also go to management presentations to understand what we’re buying, ask questions and represent Skyview, so the sellers and their intermediates understand our model.
Q: What if the deal moves forward?
A: I’m not as involved in diligence but I make sure we’re staffed appropriately and provide feedback to team. I help with negotiations and work through deal points. I want to make sure I understand it. It’s so important that we are clear as to why we’re buying the business and have a plan to transition that business. We have to have our arms around the customers and employees and the business model and do everything we can to create value. We’re not just buying a business, but setting up a strategy and management team and we let them run the business. We also introduce them to prospective customers.
Q. Do you keep management in place?
A. We like to keep people in place if they can function in the marketplace. Sometimes the seller might have an in-house interim general manager or CEO, sometimes not. Running a standalone business can be different than running a division within a corporation. You have a lot of support to help you out, but you have a lot of bureacracy as well. Some managers want the opportunity to run a standalone business when they’re freed up to go for it, while others aren’t comfortable but they’re coachable. I believe that if that person wants to make that transition, we can get them there.
Q. So what’s the average size of your portfolio companies?
A. Continuum was on the high end, with $500 million in sales, 16,000 employees, 33 facilities and 12 countries, but we’re able to manage. Could we do others? I think so. And it’s not just revenues, it’s operations on two continents and the number of employees. Fifty-million dollars to $400 million is consistent with what we’ve done in the past.
Q. So do you think you’ll do some hiring in Dallas?
A. We may hire next year. We’re still understanding the Dallas market and developing relationships. It’s going to take some time. Everyone realizes that a lot of California-based companies are moving to Texas – Toyota moved from Torrance to Plano – and middle market companies are moving here, too. There’s a lot of activity and movement in the market and you can’t do everything by phone. It’s good to have people in the market and attending events and rubbing elbows with these folks. A lot of sellers are curious about how the firm works and how we’re going to treat their customers and their employees.