REEVE BYRON WAUD: HIS NICHE IS SMALL-TIME CAPITAL

May 24, 1999 @ 12:01 am

By Steven R. Strahler

He's a great-great-grandson of the meatpacker Gustavus Swift. That's on his mother's side. On his father's side, he can claim Northern Trust Co. founder Byron L. Smith as a great-great-grandfather.

Even so, Reeve Waud -- Reeve Byron Waud -- decided to scramble for a living. "Nobody told me I couldn't work," says the 35-year-old.

And work he has, at the venture capital business. His Lake Forest, Ill.-based Waud Capital Partners LLC recently closed on a $100 million private equity partnership to invest in small-company acquisitions and restructurings.

Oddly, the figure is significant for its size -- its relatively small size, that is -- as more-established buyout firms, in a cash-flush economy, move upmarket. For example, Madison Dearborn Partners Inc. closed in March on a $2.2-billion buyout fund, the Chicago's biggest ever.

While $100 million used to mean something, it still does in a changed context. Now, it means there's opportunity for upstarts like Mr. Waud -- and for established venture capitalists who want to continue to participate in the smaller end of the market. Several big-name Chicagoans, including the president of Madison Dearborn and the vice chairman of the Pritzker Organization, have invested in Mr. Waud's fund.

Waud Capital's first (and so far only) deal involves a Michigan-based publisher of church bulletins with less than $10 million in annual revenues. The owner turned down one higher and several identical offers, says Parish Publications LLC president Michael Obrzut, because of Waud Capital's commitment to expand, not flip, the 70-year-old company.

Says Paul Oliver, an executive vice-president who heads the Midwest Mezzanine Fund of ABN Amro Inc., the Chicago-based investment banking arm of the Dutch bank: "Our strategy, Reeve's as well, is to find the little gems that the big guys aren't fighting over." Mr. Oliver's firm sublet office space to fledgling Waud Capital.

serious names

Investors in Waud Capital's fund include John A. Canning Jr., Madison Dearborn's president; J. Ira Harris, a storied investment banker and vice-chairman of the Pritzker Organization; and Bryan C. Cressey, co-founder of the pioneering venture capital firm Golder Thoma Cressey Rauner Inc.

The veteran venture capitalists see Waud Capital as a means of keeping their hand in a market they've been forced to abandon as their own deals get bigger. Someone in Mr. Harris' position also can spot buyout candidates for referral to Waud Capital.

The name investors have encouraged prominent associates to join, while institutions such as the University of Chicago Hospitals also are on board as investors.

"It's kind of a Chicago Club group," says Mr. Canning.

Indeed, the firm's blue bloods encompass other investing Wauds, including Mr. Waud's father, Ron, until this month mayor of suburban Lake Forest. Peter Keehn, 33, son of Silas Keehn, ex-president of the Federal Reserve Bank of Chicago, was hired in March as a principal.

At the same time, Waud Capital operates in a realm where names like Smith or even Swift would open few doors. Access to capital used to be a differentiating asset for venture capitalists. Now, "capital is a commodity," says David A. Posner, 30, another recently hired principal.

And while formal competition for deals is less in Waud Capital's niche, "it's a less perfect market than the larger-cap market that we deal with," notes Mr. Cressey.

That means there's a lot of hunting and scratching for potential customers among privately held, family-owned firms in unglamorous industries like auto parts and coatings, many of which lack successor management.

appearances belied

Mr. Waud's curtained office may say otherwise -- with "Private Gardens of London" and "Edward Hopper's New England" on the coffee table -- but the business is a nitty-gritty process that Mr. Waud, despite his pedigree, relishes.

And it's one his industry-experienced investors are happy to leave to him.

"A kid you wouldn't think would be terribly motivated is," says Mr. Oliver. Adds J. Robert Tillman, managing partner of executive recruiter Crist Partners: "I found him incredibly hardworking for someone who doesn't have to work."

Unlike many venture capitalists who look for two home runs among two dozen investments, Waud Capital's strategy is to find three or four solid deals a year out of, say, 1,000 candidates, as a platform for industry consolidation, or rollups.

"Sometimes," says Mr. Canning, "you have a seller who, for his own good reasons, did not try to grow the business. So, there's an opportunity."

Investment amounts will range from $3 million to $20 million, providing for comfortable debt-to-equity ratios -- 60-40 at Parish Publications, for instance.

Mr. Waud learned his art at Golder Thoma, which he joined in 1987 while working on a master's degree at Northwestern University's J.L. Kellogg Graduate School of Management and following a stint in Salomon Bros. Inc.'s corporate finance and venture capital units in New York.

He's been on his own since 1993, with early deals involving quintessential Chicago manufacturers like Sovereign Specialty Chemicals and auto supplier Christiana Industries, as well as a Michigan weather vane maker.

At Golder Thoma, it's said, Mr. Waud could flaunt his lineage, and that grated on some colleagues and probably hindered chances of promotion.

Mr. Tillman, who knows the industry, says: "He doesn't pull any punches. He'll speak his mind. What does he have to lose?"

Crain News Service

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