Private Equity Firm Treadstone Partners Seeks Out Alternative, Distressed Investments That Can Pay Big Dividends

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August 24, 2008


“Alternative” is a buzzword to describe everything from lifestyles to energy sources.

For the last 15 years, Treadstone Partners LLC has defined its business model by choosing special situation, alternative investments that are outside the mainstream of traditional opportunities.

The Dallas-based private equity firm targets lower- to middle-market operating companies in industries such as manufacturing, distribution and real estate.

The results? Of its 200 investments, which total more than $500 million, only six have lost money. According to firm principals. Treadstone enjoys an internal rate of return of more than 35%.

“We have had a considerable amount of success in the lower- to middle-market niche,” says Phil Dixon, president. “There is no desire on our part to (change direction). It’s the proverbial, ‘You have to dance with those who brought you to the party.’ ”

The party dates in this case are companies that are overleveraged, undermanaged or confronting an event-driven development such as a management dispute or major customer loss. Dixon describes the ideal candidates as those “operating on less than eight cylinders.” A management explosion would rate six or seven cylinders, while a bankruptcy play is one or two cylinders, he says.

Treadstone typically buys the company’s debt and assets or a controlling equity interest. The firm invests between $2 million and $25 million and hires a turnaround management team to engineer a return to profitability.

“The goal is to amend and repair companies and bring them back to profitability and higher value,” says Gary Thomason, principal.

The current soft economy is considered a hot market for investors like Treadstone, which focuses on companies with revenue between $10 million and $200 million.

“There’s a lot of competition in the distressed arena when the economy is in a cyclical downturn like it is now,” Thomason said. “The more turmoil there is, the lower the price is. We like to buy at a value level that others might consider low. We’re always looking for a catalyst that gives us an opportunity to buy at an effective level.”

Although much of the firm’s work is focused on financials, there are other rewards, such as providing jobs for people who might otherwise lose them.

Earlier this year, Treadstone acquired a shipbuilding company based near Seattle. It manufactures tugboats and other specialty workboats. The nearly 50-year-old company was in a bankruptcy proceeding with a skeleton force of fewer than 50 employees. Six months later, more than 160 employees are on board and four new boats are under construction.

The firm also acquired control of a 150-employee packaging company that was confronting major financial challenges and whose ownership was in disagreement as to corrective action. Treadstone stepped in with a low, eight-figure infusion that has stabilized the company, allowing a high percentage of employees to remain and positioning the company for future growth.

Treadstone is a tightly knit firm that likes to keep a low profile. Its management team is heavy on experience and prominently notes ties to NationsBank and the University of Texas at Austin.

When Dixon and Thomason co-founded the firm in 1993, they relied on single-sponsor relationships with funding groups such as Cargill and Varde Partners, both based in Minneapolis. The sponsors had final say over every transaction Treadstone brought to the table. Now, however, the firm has its own fund, Treadstone Capital Management LP, which allows investors to contribute but gives management proprietary control over all deals.

Treadstone execs are active investors, providing advice and direction when needed, but also rely on a Rolodex of turnaround experts to transform the management of a distressed company.

“The turnaround guys are real good at cauterizing the wound and working with the companies,” Thomason said.

Steve Massanelli, senior vice president of finance at Irving-based Zale Corp., knows the Treadstone business model well. The former NationsBank alumnus served as a firm partner from 1994-97, and agrees that the niche market is a perfect fit with management’s talents.

“Gary and Phil have been in the banking business for their entire careers,” he said. “They have a lot of experience and a ton of integrity. They stick to their knitting, meaning they don’t get risky and step out there and do things they don’t know. They found a niche in terms of the lower- to middle-market investment that allows them to leverage their talent, skill set and experience.”

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