Vertana Group Targets Small, Specialty E-Tailers

Source: PEHub.com

Posted on: June 21, 2013

In recent years, micro VC funds have become de rigueur. If Matthew Holmes and Emmanuel Tesone have their way, private equity funds may be on the same course.

Last year, the pair raised $9 million from a mix of institutional investors and high-net worth individuals for a New York-based investment firm called 354 Partners, and they’re investing nearly all the capital in a holding company called Vertana Group, which will acquire sub-$1 million specialty e-commerce businesses.

The group’s first purchase came late last month, when it spent an undisclosed amount to acquire BigCeramicStore.com. The 14-year-old company, based in Sparks, Nev., has long sold products and supplies to ceramic artists and hobbyists. But Vertana has plans to buy as many as three, small, profitable businesses a year.

The other day, peHUB spoke with Holmes and Tesone, who met at Harvard Business School 10 years ago, where they first discussed joining forces. Holmes most recently founded a now-shuttered learning toys company for kids, and worked prior as a managing director at the German media conglomerate Bertelsmann; Tesone joined Holmes after more than five years as a vice president at the private equity firm GCP Capital Partners, formerly known as Greenhill Capital Partners.

Our conversation has been edited for length and clarity.

Q: Why go after small e-tailers?

Holmes: We’ve long talked about opportunities in the small business space. There are tens of millions of small businesses in the U.S. and many go out of business largely because there’s no one to take them over. And we decided to target online retail opportunities in particular because of the amount of spending that’s moving offline to online, the operational leverage you can enjoy, and the many opportunities to pick up businesses at low multiples because their founders are contemplating retiring or leaving the business for other reasons. Once we started combing through the opportunities, we were amazed by how many there are.

Q: How will you look to exit the businesses you plan to assemble?

Holmes: We’re not looking at making 10 investments in 10 separate companies, then exiting. We’re executing more of a buy-and-build strategy. We’re acquiring business and building Vertana Group out of them, so when we exit the business somewhere down the line, we’ll be exiting Vertana as a whole.

Q: As for the money you’ve raised for your small fund, 354 Partners, will it all be poured into Vertana?

Holmes: There might be some other thing we’ll be interested in, but right now we see opportunity in small, specialty online retail. And, quite frankly, we’d probably raise more for this same strategy.

Q: Tell us more about that strategy. What size companies are you looking to buy?

Tesone: We’re looking at a fairly specific size of company. Generally, it’s under $1 million and somewhere north of $500,000 in EBITDA, and it operates around a clearly defined specialty, has a dedicated customer base, and is profitable, though it features room for improvement. It’s a sweet spot we like to focus on partly because there’s a lack of competition. It’s too large for individuals, unless they have financing readily available. And at this size, it’s hard for institutional investors with traditional fund sizes and structures [to focus on].

Holmes: Beyond that, we’re looking for passion around a product, so we wouldn’t, for example, buy a cell phone accessories business. It’s very commoditized and there’s not much value we can add there. We’re more interested in enthusiast areas. Say I was going to buy a specialized type of model helicopter, but the site [I visited to learn more] looked really shady and I wasn’t sure about it. [Consumers] have these interests, but many of the retailers out there aren’t quite up to a standard that people have grown accustomed to from making purchases at larger sites. So our aim is to bring these businesses up to a more sophisticated, professional level, while preserving their brand identities and some of the quirkiness that makes these sites so special.

Q: How many companies are you planning to buy this year, and does it matter where they are located?

Holmes: BigCeramic was our first big acquisition but we have others in the pipeline and one in particular that will happen in a couple of months with a bit of luck. Our aim is to do two to three deals a year. And we’re looking nationally. These days, it’s quite easy [to manage a business] across distances, given that a lot of people work on the phone and it’s very computer-based and we work with other service providers.

Q: You have a mix of institutional capital and high-net worth individuals. What kind of time horizon are you operating on?

Tesone: Our fund is structured traditionally, with a 10-year life contractually with an option for an extension if our LPs approve it. We’re not targeting 10 years for our strategy, though, obviously. We’re targeting an exit within four or five years.

Q: Why call the business Vertana?

Holmes: I wish I could say I’ve been thinking about it for years and it came to me in a dream, but there’s no great genesis behind it. We thought of it as a collection of verticals, and ana just means a collection of things. It’s etymologically correct, but it fits together nicely. [Laughs.]