John K. Castle Defies Predictions, Thrives in Middle Market
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John K. Castle Defies Predictions, Thrives in Middle Market

Castle Harlan and independent affiliate Branford Castle last summer teamed up to acquire Sunless, a maker of suntanning equipment based in Macedonia, Ohio.

Another new deal from Castle Harlan?

That might have come as a surprise to the Fortune editor who wrote the erroneous July 2015 headline, “Castle Harlan to wind down.” The misleading story still pops up in Google searches—much to the dismay of executives of the still-wound-up firm. (A spokesperson for Fortune did not respond to an email asking for comment.)

True, Castle Harlan that year had decided against raising a sixth fund. But the firm had a thriving portfolio of companies from its fourth and fifth funds to manage. And it had much of its executive team in place, even after its former president and two managing directors left to form a new middle-market firm, Argand Partners.

Moreover, Castle Harlan still had legendary investor John K. Castle at the helm hungry to do new transactions. “We always try to buy into companies that are leaders in their businesses,” Castle said of the firm’s investment strategy in a recent interview.

The firm also maintained a fan base of family offices willing to back the firm on a deal by deal basis. And it had a partner and co-investor in Branford Castle, led by Castle’s sons, President and CEO John S. Castle and Managing Partner David Castle.

Founded in 1986 to manage money for the Castle family, Branford Castle has been steadily growing its AUM even as Castle Harlan remained on the fundraising sidelines. Its debut fund closed at $117 million in 2016.

Castle Harlan and Branford Castle remain independent although they’ve co-invested in two companies—Sunless last year and, in 2018, oil and gas production company Titan Production Equipment. Executives at the two firms stay close, meeting every week to review potential transactions.

The elder Castle, who began doing buyouts back in the 1960s, and who served as president and CEO of investment bank Donaldson Lufkin & Jenrette before co-founding Castle Harlan in 1987, serves as chairman of both firms and as CEO of Castle Harlan.

In its heyday, Castle Harlan pursued transactions above $100 million in enterprise value. It can still pull off sizeable deals. In mid-2016, for example, the firm acquired Kings Super Markets and Balducci’s Food Lover’s Markets in a roughly $200 million deal in partnership with a Middle Eastern family. By contrast, the target range of Branford Castle tops out at enterprise values of $100 million.

Both firms target deals in consumer products and services; energy equipment, services and infrastructure; and industrial manufacturing and distribution. And both firms like getting bargains, then shepherding the companies they buy to a size where they can command higher multiples.

Castle Harlan has four companies left to manage in its two active funds—one in Fund IV and three in Fund V. Castle described the Fund IV company, a chain of 175 Burger Kings in Puerto Rico called Caribbean Restaurants LLC, as a “very successful company, a very profitable company.” The firm is looking for ways to cash out, said Castle, who believes the company could fetch a valuation in the neighborhood of $280 million to $300 million.

Another company, Tensar Corporation, sells a cost-saving technology that reduces the amount of aggregate needed in the foundation of roads. Castle described Tensar as an “excellent, excellent company” that continues to “grow nicely” and could be valued in the range of $400 million to $500 million.

Branford Castle on the hunt
Of the two firms, Branford Castle has been the more prolific in recent years. It has acquired eight platform companies and five bolt-ons for its first fund closed in October 2016.

Along with Sunless, the firm owns controlling stakes in ABC, a supplier of ventilation products used in mines and tunnels; Washington Chain & Supply, a distributor of anchors, chains and wire ropes to the shipping industry; and Drew Foam Companies Inc., a maker of foam packaging and building products.

Branford Castle scored its first full exit from the fund last fall, generating a 4.5x multiple when it sold portfolio company Surface Preparation Technologies to Dominus Capital. The sale came after a two-and-a-half-year holding period that included a significant add-on acquisition. Surface Preparation Technologies installs rumble strips on the sides of roads that alert drivers when they’re getting too close to the shoulder.

The firm has one company on the market—Drew Foam Companies, acquired in 2018, John S. Castle said. Over a relatively short holding period the company has grown EBITDA by about 60 percent, mostly via organic growth. “We expect to make a very nice return,” said Castle.

Castle declined to discuss specifics on how the fund as a whole has performed. But he would say the firm has acquired its 13 companies for an average purchase price multiple of just five times EBITDA and that in aggregate the companies are doing well.

“We’re very excited about how the fund has performed,” the younger Castle said.

Surely that bodes well for the future of Branford Castle. It could also indirectly give a lift to prospects for a sixth fund for Castle Harlan, since the two firms collaborate.

“It’s still a possibility,” said the elder Castle of raising a successor to Fund V. “We have a team of strong people and capable people.”

Private Equity Professional | April 10, 2020

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