Riverside Co., a global private equity firm founded and co-headquartered in Cleveland, has sold a minority stake in its business to fellow Cleveland investment firm Parkwood LLC.
Parkwood's non-voting stake amounts to about 10 percent of the company, according to Riverside, which has plastics holdings. Terms of the deal, which marks the first investment of its sort in the firm itself, were not disclosed. An employee option plan has also been established to retain and reward employees, according to Riverside.
Parkwood has been a longtime-backer of Riverside funds. Morton Mandel, Parkwood chairman and CEO, has been a mentor of Riverside founding member and co-CEO Stewart Kohl for the past 15 years, Kohl said, adding that he has "drank up" Mandel's wisdom and applied it to running Riverside.
The investment marked an opportunity for Mandel and Parkwood to serve not just as a limited partner in deals, but as a partner in the firm itself.
"As we watched this emerging trend in our industry and we thought about how were going to make Riverside agile and more successful in the next 30 years," said Kohl alongside co-CEO Béla Szigethy, "it made sense to us to think about Parkwood becoming an investor in Riverside itself."
"Parkwood is an excellent cultural fit," Szigethy added. "Their one of our most supportive investors, and one that really gets us."
"Parkwood prides itself on working with great people, adhering to rigorous processes and focusing on cultural fit," said Mandel in a statement. "We have been a significant private equity investor for over 40 years including with many marquee firms. Partnering with Riverside in this way is a perfect fit for our strategy and culture."
No money comes off the table with the firm investment, Szigethy said. The cash investment at the management level will be used to grow existing initiatives, including control equity funds, minority investment funds and some credit-related funds, all of which have room to grow — and the injection of cash lets Riverside further invest in its own funds as they grow, which has been a trend in private equity as fundraising has been so strong.
"Historically, we have invested up to 5% as the general partner in funds, but that's drifted down some as fund sizes increase," Kohl said. "Having some capital of this sort of the management company level lets us do that.
Having additional capital at the ready to pump into funds is also good for turning a profit faster, Kohl explained.
In 28 years, Riverside has launched 21 vintages across different initiatives. A typical cycle for the firm is to launch and run an initial fund at a deficit at the management level, then move carried interest into the second fund, which is where "we'd perhaps break even," Kohl said. By fund three, the firm itself is starting to make a profit — and that's been a 10 to 12 year process.
"As the PE industry's momentum and pace have picked up, it's important for Riverside to be able to do that cycle more quickly," Kohl said. "This allows us to launch fund one at a larger scale, break even in fund one and hit profitability by fund two. Shortening that cycle is important to us."
"These are good things when you think about what Riverside is going to look like 10, 20 or more years from now," Szigethy said.
Riverside, co-headquartered in Cleveland and New York, buys control and non-control stakes in businesses valued up to $400 million, having invested in more than 460 transactions since its inception. Their current portfolio includes about 80 companies, including plastics companies. The firm is the industry's 147th largest private equity firm, according to the PEI 300, with a five-year fundraising total of $2.37 million.