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By the time Berkshire Partners finally withdrew from its investment last year, 22 years later, ADS' $80 million business had turned into, by some estimates, a billion-dollar-plus enterprise.
There was little doubt its N-12 design would be the company's ticket to extraordinary growth. The company's success derived not just from the product, but also from constant product tweaks and strong engineering support to customers, combined with perspicacious managers, all of which propelled Berkshire's protracted involvement with ADS. That the investment lasted as long as it did was a function of Berkshire's ability to extract dividend payouts throughout the company's growth spurts. Its longevity stands out in the annals of private equity as somewhat unprecedented, with most holding periods not generally exceeding the life of the average 10-year PE fund.
Luck played a role, too. An opportunity to buy Prudential Capital Group's minority stake in ADS came to Berkshire just as the business' newfangled technology was poised to take off. Founded in 1966, ADS initially sold agricultural drainage systems that supplanted clay-tile pipes. Its markets over the prior decades included residential drainage, in situ waste treatment, mining, forestry and other areas, while civil engineering and construction were a small part of the business.
The development of N-12, whose corrugated exterior and smooth interior offered greater durability and improved water flow, was "an inflection point," recalls J. Christopher Clifford, a Berkshire co-founder who sat on ADS' board from beginning to end. Richard Lubin, another Berkshire co-founder, was also involved with ADS, as were managing directors Kevin Callaghan and later, Michael Ascione, Ross Jones and Chris Hadley.
The relationship was rough at first. "Management was very suspicious of Wall Street types," says Clifford. But Berkshire tried not to push too hard with unsolicited advice, he adds, while providing a Rolodex and being supportive of ADS founder Frank Eck's ideas.
Eck, a chemical engineer whom Clifford describes as having been "a real marketing pro," thought N-12 could muscle in on entrenched competitors. Through shrewd product positioning and capital expenditures, the company kept raising barriers to entry, Berkshire executives say. ADS made only one small bolt-on when it bought its largest competitor, Hancor Inc. of Findlay, Ohio, in 2005.
A year after Berkshire's initial investment, sales were down and profits were off by 25% because Eck believed the down cycle was an opportune time to boost the sales force and expand engineering capacity, says Clifford, then in his early 30s. Eck would eventually be proved right. ADS keeps its financials under wraps, but by 2006 media reports pegged ADS' annual run rate at about $1.2 billion. An employment stock option plan in 1993, which provided a partial realization for Berkshire, helped make millionaires out of line managers, says Clifford, now 65. Eck, who passed away in 2007, was among Notre Dame University's main benefactors.
Berkshire funds I and II, raised in 1984 and 1986, respectively, put in $12 million in equity and debt initially. From a series of debt-funded recapitalizations over 14 years, both funds posted a blended return of 9 times cost.
"In a way, it's average, but in other ways it's not average," Clifford muses. "Every single time you sell a successful investment out of your portfolio, you have a significant reinvestment risk. What's nice about this is, we got to keep on re-upping with a company and its management that we knew well."
The tricky part was transferring the investment to two successor funds, V and VI of vintages '98 and '02, respectively, which isn't always acceptable to limited partners because of conflict-of-interest issues potentially arising between funds. Fortuitously, one LP from the earlier funds, an insurance company, needed to exit, validating Berkshire's transaction with an arm's-length valuation. The firm's reinvestment posted a 5 times return by the time Berkshire was ready to exit. It sold its stake to American Securities LLC of New York.
It wasn't Berkshire's best-performing asset by any stretch, nor was it the only long-active portfolio asset, but it was, as the principals put it, a gift that kept on giving.
At the very least, it's a nod to Warren Buffett's long-standing mantra: Sometimes the best investment opportunity is one you already own.