How Alaris Royalty CEO Steve King gets yield out of private companies

A unique spin on private equity yields an 80% payout ratio on tried-and-true businesses

Alaris Royalty Corp. president and CEO Steve King.

Alaris Royalty Corp. president and CEO Steve King. (Portrait by Chris Bolin)

Steve King has spent most of his career surrounded by investors, yet the markets aren’t his passion. The president and CEO of Alaris Royalty Corp. (TSX: AD), which provides other companies with capital in exchange for non-voting preferred shares, is far more interested in talking about entrepreneurs.

Entrepreneurship has been a major theme in the Calgarian’s life. His father, Frank King, helped found energy company Turbo Resources and led the campaign to bring the Olympics to Calgary. Steve King’s own first job had him working alongside Eric Sprott at Sprott Securities.

Still, it took him a while to realize that he wanted to be a business owner himself. For a time, working as an analyst at Sprott was enough. He was covering technology stocks in 2001 when the sector went bust. That experience taught him a valuable lesson. “The companies that survived were the Warren Buffett kind of companies,” he says. “They were the ones that just made money.”

King went on to work with income trusts and learned something else. At their peak, before Ottawa nixed their tax advantage in 2006, trusts attracted more than 70% of the money raised in Canada, he says. There may no longer be trusts in most industries, but that demand for stable, high-yielding investments hasn’t disappeared. Indeed, King says, “as the population ages, they’ll be looking for more and more yielding products.”

In 2004, he formed Alaris Royalty as a diversified yield vehicle that has managed to outlast the income trust craze. He knew he was on to something when billionaire Clay Riddell offered to put up personal assets to help secure a $75-million bank loan to capitalize the company. The idea was simple: King would give companies money in exchange for preferred shares, which would pay a monthly yield. He’d then pass a large portion of those payments to Alaris’s investors.

Graph showing increase in monthly dividends produced by Alaris Royalty Corp.

King points out that Alaris, which went public in 2008, is not a private-equity company. He has no desire to sit on boards or get involved in company direction. He strives to generate a 16% yield on the initial investment and grow the return from there. Alaris has an 80% payout ratio, which would be recklessly high for a company that must reinvest in its operations. That’s the thing—Alaris has no such operations.

King’s company is unique, but his investment process is one any investor can emulate. He wants to own “steady Eddy old-economy businesses that don’t have a lot of obsolescence risk,” he says. “We know the business will be around 50 years from now.” And he plans to stay invested for as long as he can; he still holds shares in the first company he bought into a decade ago. The investee firms are private operations that want to fund an expansion or buy out a partner. Most have no exit strategy. Selling out is not King’s end game, though he has done it.

Today, Alaris is active in the health-care sector, owning stakes in LifeMark Health, Canada’s largest private health-care provider; and KMH Partnership, a medical testing provider. It also owns a flooring manufacturer, an aircraft repair company and a steel contractor. King makes three or four deals a year, but that could increase as Alaris reaches out to more companies in the United States.

“That’s by far my favourite part of the job,” King says. “I spend a lot of time with these people. I know what their kids are doing, and I know their wives. We’re in a long-term relationship.” ­