Over a span of nearly two decades, KPS Capital Partners has successfully made four transformative changes to its investment strategy and scope since raising its first private equity fund in 1997. At each juncture, the New York-based investment firm has met new challenges head on and established a strong track record as a leader in the private equity industry. David Shapiro, co-founder and managing partner, shared highlights of his firm’s evolution at the 2015 Michigan Global Private Equity conference on October 9. The event was sponsored by the Zell Lurie Institute and the Center for Venture Capital and Private Equity Finance at Michigan Ross.
“Since 1997, we have evolved from advisors to investors; from union advocates to employers of large workforces; from pure distressed investors to investors in challenged and healthy businesses; and from pure U.S. investors to global investors,” Shapiro said. KPS Capital Partners manages the KPS Special Situations Funds, a family of private equity funds with approximately $5.6 billion of assets under management. The firm has won the Buyouts Deal of the Year Award ─ given by Buyouts Magazine in recognition of exceptional buyouts ─ for three of the past four years.
KPS’s most recent evolution from a domestic to a global investor presented both opportunities and obstacles to its founders. “At first, globalization seemed a one-way street of badness, and we had no interest in outsourcing,” Shapiro said. “We viewed the rest of the world as a risk factor in our investment thesis as opposed to an opportunity.”
Two investment deals, one in a Pittsburgh-based steel manufacturer and a second in a U.S. machine tool business, changed KPS’s perspective after both companies saw industry competitors move their manufacturing overseas to China. “It certainly opened our eyes to what can happen and how quickly it can happen, if you are not paying attention to what’s changing on the demand side and how manufacturing is shifting around the world,” Shapiro said. “The lesson for us was that even if you are not making low-end products that can be outsourced by cheap labor, you are still vulnerable to changes and movements in manufacturing.”
KPS entered the international arena shortly after purchasing Wire Rope Corporation of America. Shapiro and his team revamped the company’s management team, purchasing a competitor in Mexico to expand the product line and geographic reach and optimize its manufacturing footprint. KPS then turned its attention to China, where there was no dominant Chinese manufacturer of high-quality wire rope. This vacuum created a market-entry opportunity for other investors and companies looking to set up low-cost manufacturing facilities in China and gain market share.
“We hired consultants to advise us on how best to get involved in the Chinese market, because we had very little experience in China,” Shapiro said. “We determined that finding a joint-venture partner would be better than trying to do it ourselves.” KPS negotiated a JV agreement with a Chinese material supplier, contributed capital and then sold the business. “One of the most exciting things for potential buyers was this international Chinese connection,” he remarked. “From our perspective, we sold the sizzle without actually building the JV.”
Since then, KPS has made successful investments in various companies around the globe. Today half of its deals are done outside the U.S. At the conclusion of his talk, Shapiro shared lessons-learned with other private equity investors seeking to enter the European and Asian markets:
- Investing outside the U.S. requires extra due diligence.
- Cultural differences need to be considered.
- Currency issues are huge, especially for dollar-denominated investment firms.
- Micro improvements can be swamped by macro factors, such as currency devaluation, labor inflation and market meltdowns.