Miracle on Bay Street

Written by Rick Spence

It’s a long way from the polished granite of Toronto’s Scotia Plaza to the dusty headquarters of NPC Integrity Energy Services Ltd., an oil-services firm in Cochrane, Alta. Not many Bay Street investment bankers would want to be associated with the nondescript two-storey office, where roughnecks track in the prairie mud on the bottom of their workboots.

Yet this is a leap that Peter Wallace, president and CEO of Newport Partners Income Fund, enjoys making. He and 14 like-minded partners have jumped into the entrepreneurial arena to build a growth company comprising 10 diverse private firms, from ATM networks to marketing communications. Having taken Newport public last summer as an income trust, he’s now using its TSX listing to raise funds to grow faster. His strategy is to collaborate with winning entrepreneurs by giving them what they want: capital to expand, a chance to reduce their personal financial exposure and a hands-off philosophy. Says Wallace: “We want to be partners with Canada’s best entrepreneurs.”

With Newport expecting to invest $150 million a year or more in acquisitions, it could also become your best friend. As PROFIT warned in its September 2005 issue (see “The Trillion-Dollar Trap“), Canadian business owners face a succession crisis. Over the next 10 years, 71% will be exiting their businesses. So, if Newport can build a successful growth company by giving business owners a succession solution, why shouldn’t other Bay Streeters?

Wallace, the former president of Midland Walwyn Capital Inc. (which was acquired in 1998 by Merrill Lynch Canada), joined 14 other investment managers in 2001 to form Newport Partners Inc. (NPI), a financial advisory with a difference. It offered financial-planning services to entrepreneurs and their businesses. No one else was focusing on both the business and owners’ personal finances, says Wallace: “We felt we could be the entrepreneurs’ investment bank and advisor.”

But as stocks and bonds languished, NPI found its clients demanding higher returns. Traditionally, the highest returns come from investing in private companies. But that’s such a minefield of market risks and people problems that it’s generally left to venture capitalists, who expect only two big winners out of every 10 investments. But NPI’s principals had a solution in hand. With 400 entrepreneurial clients, NPI could access a range of companies whose balance sheets and principals were both known quantities.

Within 18 months, NPI had raised $100 million from its clients and invested in 10 businesses. (Even NPI, with $900 million in assets under management, was tucked into the portfolio.) Newport then raised $200 million in an initial public offering that landed it on the TSX as an income trust, which flows most of its profits directly to its investors.

Newport’s portfolio companies should generate more than $400 million in sales next year, even if the sagging stock market has dimmed Newport’s lustre. The stock that sold for $10 last August recently traded at $8.20. But Wallace insists Newport’s strategy will build wealth in the long run. It starts with Newport buying about 80% of a target company-leaving management with enough shares to keep them keen on growing the business. It also intends to keep raising money from public offerings so it can invest in more companies.

Newport’s solution isn’t for everyone. Some private companies—those that are of strategic value to a buyer or have sufficient prospects to attract a private-equity fund—command a higher premium than Newport will pay. Wallace says it’s common for such deals to prove disruptive to the selling company, which is often broken up or tucked into another firm. If a company is just looking for the highest selling price, Wallace won’t get into a bidding war. “It’s all about a continuing relationship,” he says. Once Newport invests in a firm, “we have no interest in selling the [acquired] company ever again.”

Which leaves one question: how much do Newport’s principals interfere in their portfolio companies? Wallace says he has no intention of second-guessing them: “If they’ve been successful in the past, they’ll be successful again.” He believes in billionaire Warren Buffett’s model at Berkshire Hathaway Inc.: “Hold it forever and stay out of the way.”

Two Newport entrepreneurs interviewed by PROFIT say it’s true. “Peter told me I’d be calling him more than he’d call me—and so far he’s been right,” says Tom Rechenmacher, president of NPC, a $90-million oilfield construction and maintenance firm. He’s impressed so far with Newport’s willingness to let him and brother Wally run the company, and with its support for an acquisition that was expected to close in November.

Andy Redmond of Jutan International Ltd., a Toronto distributor of consumer electronics, agrees. In the past year, Redmond and Newport have both anted up to acquire two of Jutan’s biggest competitors—moves Redmond admits he could not have made alone. “Newport is a terrific partner,” he says. “They’re not involved in the day-to-day, but they were there when I needed them to write cheques.”

With Newport’s businesses operating mainly in Ontario, Wallace is eager to expand. He’ll consider any well-run, growth-oriented company with revenue above $5 million and low capital-expenditure requirements. “Diversification is good for our investors,” he says. “The more we diversify into strong entrepreneurial Canadian businesses, the better I’ll feel.”

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