Examples of Multiple Arbitrage in Private Equity

One of the most exciting aspects of transacting in the lower middle market is the potential for multiple arbitrage. As a business scales above $10 million of EBTIDA the universe of potential buyers expands and debt financing terms improve. This combination of variables frequently means that the market will offer a greater multiple of earnings (frequently EBITDA) to acquire the business. If the business simultaneously happens to be growing at an accelerated pace, the results can be extraordinary.

Multiple Arbitrage

Examples of Multiple Arbitrage:

Cortec Group and Yeti

A prominent example that comes to mind is that of Yeti Coolers. The Cortec Group acquired Yeti in June of 2012. Per their announcement, at the time of the acquisition, Cortec was focused on businesses with $30M to $300M of revenue. [1] This revenue range is generally thought of as the lower-middle-market to middle-market of private equity. Even as valuations keep climbing, it is uncommon to see multiples of earnings before interest taxes depreciation and amortization (EBITDA) in excess of 10.0x in this revenue range (edit: I originally wrote this article . (As an aside, valuation is often expressed as a multiple of EBITDA. If a company has $10M of EBITDA and is valued at 10.0x EBITDA, it follows that the company is valued at $100M.)

Cortec Group got involved as the founders of Yeti struggled to keep up with demand. Per an article in Inc. magazine:

By 2011, with sales outstripping manufacturing capacity, Ryan and Roy knew they had a 100-pound fish on a 10-pound line, and that their dream of a modest lifestyle business was actually too small. They also knew they needed help to figure it out. In 2012, they sold a majority position to Cortec Group, a private equity firm that brought operational experience, though not necessarily outdoor experience, to the table. “I’m one of the worst fishermen in history,” says Dave Schnadig, Cortec Group’s managing partner. But Cortec had previously owned a rotational molder and thought it could help Yeti address its supply chain issues. Yeti contracted with rotomold manufacturing plants in the Midwest, in addition to the plant in Asia. It’s a rare case of reshoring, but it has helped speed delivery and lets Yeti control the manufacturing process. [2]

Cortec acquired approximately 2/3 of the business for $67 million. What is truly astounding about this story is that it was set to IPO at a $5 billion dollar valuation in 2016, which per a WSJ article implied an outstanding multiple of EBITDA:

A $5 billion valuation would put Yeti at a steep 36 times its 2015 earnings before interest, taxes, depreciation and amortization of $137 million.

If all goes as hoped, Cortec Group, with just 20 employees in Midtown Manhattan, could make a profit on paper of about $3.3 billion in the coming initial public offering of Yeti Holdings Inc., according to people familiar with the matter. [3]

Cortec didn’t take Yeti public until October 29 of 2018, and while it was not quite as fantastic as the WSJ article projected, the returns were still fantastic. In June of 2020 Cortec Co-President and YETI Board of Directors Chair David Schnadig announced the outcome in a press release:

“Driven by our beliefs in the team and the YETI brand, we would have preferred to retain our YETI ownership for many more years. However, we are in the business of returning money to our investors in a reasonable timeframe. In this case, we’re proud of the fact that we generated greater than 25 times invested capital on a gross basis for our limited partners and returned them more than 20 times their original investment on a net basis.” [4]

This is every private equity professional’s dream.

Blue Sage Capital and R360 Environmental Solutions

Another example that comes to mind is an investment made by Blue Sage Capital. Per the press release:

Over the course of six years, Blue Sage Capital worked tirelessly to turn its $8.9 million investment in Controlled Recovery Inc. (CRI) into a grand slam exit.The Austin-based private equity firm’s work paid off – Blue Sage made 63 times its money on the original investment and achieved an internal rate of return (IRR) of 150 percent when it completely exited the investment in October 2012. At that point, Blue Sage sold the company, known as R360 Environmental Solutions Inc., to Waste Connection for a whopping $1.3 billion. [5]

Syntegra Capital and Moleskine

Finally, while the numbers are not as impressive, because it is a brand I am quite fond of, I thought I would include Moleskine’s story:

Syntegra Capital bought a majority stake in Milan-based Moleskine in 2006, investing €17 million. It will earn a total of €323 million ($363 million), or 19 times as much when the sale of its remaining stake is completed.

The 2006 purchase of Moleskine was a bet that people would keep buying notebooks in an increasingly digital world. The company’s focus on design and its creation of a brand associated with artists and writers won loyal customers, said Mr. Ariello, who is also chairman of Moleskine.

Syntegra Capital installed a new chief executive at Moleskine— Arrigo Berni—a former executive at luxury Italian jewelry maker Bulgari. He increased Moleskine’s employees from 20 to about 450 as sales expanded almost 10 times over a decade to €128.2 million in 2015. Net profit increased 64.1% to €27.1 million in 2015 compared with the previous year. [6]

It is incredibly difficult to predict which businesses will provide the growth necessary to achieve multiple arbitrage mirroring the examples above. Such outcomes are largely the product of luck. After all, if the market believed a company could easily achieve the growth required, the acquisition multiple at the time of investment would grow to match these expectations and make a strong exit more difficult.

[1] Cortec Group

[2] How Two Brothers Turned a $300 Cooler Into a $450 Million Cult Brand (URL no longer available)

[3] Yeti: How a $67 Million Investment Became a $3.3 Billion Windfall

[4] Cortec Announces Successful Exit of Virtually All of Its Ownership in YETI

[5] SELLER OF THE YEAR Blue Sage Capital (URL no longer available)

[6] Moleskine Turns Paper Into Big Profit for Private-Equity Owner