2. BIOCYCLE NOVEMBER 2009
D
ESPITE the extraordinary eco-
nomic challenges the U.S. and
global economies have experi-
enced, the organics recycling in-
dustry remains an active and at-
tractive sector, weathering the
economic storm comparatively
well. Indeed, if you were at last month’s Bio-
Cycle conference, it was hard to miss the op-
timism and excitement.
To be sure, our industry faces significant
challenges, including regulation, permit-
ting, technology, competition and legisla-
tion. However, heading the list in this
volatile economic climate may be access to
capital. The best business plans and the
most capable teams can do little without
the capital to turn ideas into realities. And
not just any form of capital, but capital at
acceptable terms and structured in the ap-
propriate way to achieve long-term eco-
nomic viability. There are many examples
of good businesses that fail because of bad
capital structures.
So how does one go about determining
what kind of capital is right for a particular
set of circumstances, and what terms and
conditions should be deemed “acceptable”?
One way to address this question is to look
at what others have accomplished. For ex-
ample, what deals have been done in our in-
dustry over the last couple of years? How
were they structured and why? What fac-
tors were unique both in terms of the par-
ticipants as well as the general economy?
What lessons can be learned? How might
these apply to your particular situation?
This article provides some basic tools to
Investment banking professionals dissect
recent transactions in the organics recycling
sector. Their findings will guide other
companies in this industry.
Andrew C. Kessler and Jason A. Seltzer
DEBT AND EQUITY
OPTIONS FOR
ORGANICS RECYCLING
INVESTMENTS
Garick Corporation was sold to Hendricks
Holding Company, Inc. in 2007. Its
composting operations (facility above)
process a variety of source separated
organics, including food waste (left).
RAISING CAPITAL
3. help answer those questions, including ex-
amples of recent transactions in the organ-
ics recycling industry.
CHOOSING THE RIGHT TOOL
Some key factors involved in making fi-
nancing and capital structure decisions in-
clude whether to raise debt or equity, or
some hybrid, and which types of investors
to target (and how to access them). Under-
standing when and how to use certain
tools or financial products can materially
impact the quality of the end product (i.e.,
the capital structure and resulting finan-
cial obligations). Knowing how to proceed
involves consideration of the following:
Strategic rationale. What is the end
game? Decisions you make regarding your
capital structure can often constrain your
strategic alternatives.
Use of proceeds. All investors want to know
how their capital will be deployed. Raising
capital that is paid out to shareholders
rather than used to build the business may
be problematic to some capital providers.
Collateral. Investors will always run a
“worst case” scenario. What if things go
badly, very badly? Are there assets that an
investor could rely upon to cover some of
the investment risk? How does pledging or
encumbering those assets impact your
business going forward?
Cash flow. How much cash flow does the
company generate? Is there consistency in
the historical cash flows? Is there enough
cash flow to meet anticipated debt service
and payment over time of the principal?
What kinds of risks are imbedded in the
cash flow stream (e.g., seasonality, cus-
tomer, product or market concentration,
technology, etc.)? The profile of the cash
flow must match the profile of the debt ser-
vice and amortization schedule.
Maturity. Unlike equity capital, debt
eventually has to be repaid. If you do not
anticipate having sufficient cash to repay a
loan, you are introducing “refinancing risk”
into your business model. To compensate
for perceived refinancing risk, lenders will
seek higher interest rates and contractual-
ly limit things you can and cannot do with-
in documents known as credit agreements
(in the case of a bank loan) or indentures (in
the case of a bond financing).
Market conditions. The presumption of ra-
tional behavior underlies most economic the-
ories. But people make decisions about eco-
nomic activities and people are, at best, only
occasionally rational. Financial products un-
dergo periods of fads, trends, bubbles and
crashes. It is within these periods when,
quite often, the market no longer rationally
prices risk. During bull markets, risk is of-
ten priced too cheaply — the cost of capital is
irrationally low and capital is available to
unreasonably risky projects. During bear
Some financial
sponsors require
control as a
condition of making
their investment.
Others do not.
BIOCYCLE NOVEMBER 2009
ADVANCING COMPOSTING, ORGANICS RECYCLING
AND RENEWABLE ENERGY
419 State Avenue, Emmaus, PA 18049-3097
610-967-4135 • www.biocycle.net
Reprinted From:
November, 2009
4. markets, the converse is true. Market condi-
tions must always be taken into account and
your financial tool chest will expand or con-
tract accordingly.
ACCESS TO CAPITAL
Depending on a particular company’s sit-
uation, financial profile and stage of growth,
there are a number of different ways to ac-
cess capital. These include: Incurring debt
by borrowing from banks, institutional
lenders or other financial sources; Issuing
new equity to private equity partners; Issu-
ing new equity via the public capital markets
(e.g., initial public or follow on offerings); and
Selling the company itself to a third party.
Private equity firms, commonly referred to
as financial sponsors, play various roles as
sources of capital and acquirers of compa-
nies. Private equity sponsorship may be a
compelling way to finance a company, partic-
ularly for early stage ventures when raising
debt capital is not viable due to insufficient
cash flow and operating history. In addition
to equity capital, financial sponsors can pro-
vide many important capabilities, which can
be particularly valuable to early stage com-
panies. These include strategic advice; access
to other sources of capital; network of rela-
tionships; financial analysis and modeling;
corporate planning and structuring; and ad-
ministrative and legal support.
But equity financing can be quite dilutive
to existing equity holders. Issuing equity is
granting another party the right to partici-
pate in the upside (or downside) of your com-
pany. A variety of private equity strategies
cater to different deal sizes and stages of
company maturity. Some financial sponsors
require control as a condition of making
their investment. Others do not, but even
those that do not will want some degree of in-
fluence in the form of Board representation.
Some common categories of financial spon-
sors include: Angel investors — including
professional investors as well as friends and
family — are often the first source of third
party equity; Venture capital investors invest
in early stage companies; Growth capital in-
vestors fund more mature companies seeking
expansion capital; and Leveraged buyout in-
vestors acquire control of companies and use
debt financing from the target company to
partially fund the acquisition price.
All of the financing and monetization op-
tions just described have been pursued by
various companies within our industry.
Within the set of transactions highlighted in
this article, there are examples of: Borrow-
ing to finance a large-scale facility (Peninsu-
la Compost Company, LLC); Selling to a cor-
porate acquirer (Garick Corporation); and
Partnering or selling to a private equity firm
(Harvest, Inc., Living Earth Technology
Company and StormFisher Biogas).
SALE TO CORPORATE BUYER
In October 1980, Gary Trinetti and
Patrick Mahoney founded Garick Corpora-
tion. Over the years, Garick has become a
leading manufacturer and distributor of nat-
ural resource products servicing the land-
scape, recreation, lawn, garden and con-
struction industries. In January 2007,
Trinetti and Mahoney sold Garick to Hen-
dricks Holding Company, Inc.
Although any financing that may have
been used has not been disclosed publicly,
Hendricks Holdings appears to have had
the wherewithal and access to credit to
make the purchase from existing cash flow
and/or lines of credit. Hendricks Holdings is
one of the largest private companies in the
U.S., with a diverse portfolio of operating
companies. ABC Supply (one of the princi-
pal assets in the portfolio) is currently
ranked the 155th largest private company
in the U.S. by Forbes, achieving sales of
$2.9 billion with 5,005 employees. Accord-
ing to Forbes, Ken Hendricks himself had a
net worth of more than $2.6 billion in 2007
and was ranked 91st in its list of 400 rich-
est Americans.
Like most private transactions, this was a
“friendly” deal. Trinetti met Hendricks 23
years ago at a conference in Houston. Over
the years, the relationship grew. Discussions
between the companies started informally
as early as 2002 when Hendricks became in-
creasingly intrigued with monetizing what
others considered “waste” into valuable and
marketable new products. By 2006, a com-
mon vision formed that led Garick’s control-
ling shareholders to sell the company to
Hendricks Holdings and agree to stay on and
carry out this common vision, a testament to
the close relationship forged between the
parties over many years.
Although Trinetti and Mahoney stayed on
to manage the company, strictly speaking the
transaction represents a clear example of a
successful financial exit within the organics
recycling sector. These are very important
data points for investors, particularly finan-
cial investors who want to fully understand
what exit strategies are viable before making
investments in a given industry. In addition
to the sale of a company, other exit strategies
include taking a company public (commonly
referred to as an Initial Public Offering or
IPO) as well as “cashing out” over time
through the receipt of dividends.
VENTURE CAPITAL SPONSORSHIP/INCUBATION
The story of Harvest, Inc. is less about a
transaction than it is about the birth of a
platform, i.e., the creation of a new company
(versus an early stage company shopping it-
self to investors). Conceived on a white board
in the Menlo Park, California offices of
Kleiner Perkins Caufield & Byers, Harvest
is an example of a company incubated by an
entrepreneurial firm to take advantage of
compelling opportunities they see in the or-
ganics recycling and biogas sectors.
Kleiner Perkins specializes in investing in
emerging industries. Although it is more
typical for a venture capital firm to invest in
an existing early stage company, in the case
of Harvest, Kleiner Perkins formed a view of
BIOCYCLE NOVEMBER 2009
Living Earth was
acquired for about
$37 million in a
classic middle
market leveraged
buyout.
5. the emerging biomass sector and assembled
a team to execute its business plan. That
team is led by Paul Sellew, who has been in
the organics industry for more than 25
years. Harvest is an organics management
company that integrates composting and en-
ergy production.
In the September 2009 issue of BioCycle,
Amol Deshpande, a partner at Kleiner
Perkins, wrote an article titled “Investing In
The Biomass Industry.” Elements discussed
in the article, which are relevant to this ar-
ticle, include: Monetize biomass on the basis
of highest and best use; Distributed models
that fit into existing organic feedstock sup-
ply chains will lead to more value than
megascale centralized approaches which re-
quire creating enormous supplies of feed-
stock; Leveraging existing supplies of organ-
ic feedstock as opposed to growing organics
to use as biomass feedstock; and Business
model must be viable without the need for
government subsidies.
MIDDLE MARKET LEVERAGED BUYOUT
Living Earth Technology Company is the
largest recycler of organic material and
commercial manufacturer of mulch, com-
post and soils in Texas, diverting and pro-
cessing over 600,000 tons of material an-
nually. Recognizing an opportunity to
acquire an attractive platform in the or-
ganics recycling sector, the principals of
Terra Verde Partners LLC acquired Living
Earth from Republic Services, Inc. in
November 2007. At that time, the princi-
pals of Terra Verde were part of the private
equity division of Hunt Consolidated, Inc.,
a diversified holding company directed by
Ray L. Hunt. Although Hunt’s principals
have been active in the organics recycling
industry for some time, Terra Verde was
formed to focus exclusively on the environ-
mental sector. One of its primary invest-
ment initiatives is to more aggressively
pursue new investments in the North
American organics recycling sector.
Living Earth was acquired for approxi-
mately $37 million in a classic middle mar-
ket leveraged buyout by a financial sponsor.
Republic had determined that Living Earth
was a noncore asset (often referred to as a
“corporate orphan”) and chose to divest the
asset. Such transactions are commonly re-
ferred to as “carve outs”. According to Re-
public’s press release announcing the trans-
action, Living Earth had average annual
revenue of approximately $50 million and
generated low double-digit operating income
margins. The investment appears success-
ful. According to Terra Verde, within ap-
proximately one year following the transac-
tion, revenue and operating cash flow grew
by 7 percent and 35 percent, respectively,
and the number of facilities increased from
13 to 16.
Consistent with traditional leveraged buy-
outs, the transaction was financed with equi-
ty from the financial sponsor as well as bank
debt and mezzanine capital. Traditional
bank lenders will typically only lend up to a
certain amount; however, some investors will
agree to lend more to a company in exchange
for higher yield. In this case, Living Earth
was able to access incremental debt from the
mezzanine market. Mezzanine capital refers
to deeply subordinated debt that often repre-
sents the most junior position within the cap-
ital structure aside from common equity.
Although mezzanine capital can be signif-
icantly more expensive than traditional bank
debt, raising incremental debt enables the
acquirer to reduce the amount of equity need-
ed to fully fund the acquisition price. Gener-
ally, the less equity needed to acquire an as-
set, the higher the potential equity returns
on that investment are likely to be. Of course,
with the potential for higher return comes
higher risk as one is now operating a compa-
ny with more debt (commonly referred to as
“leverage”) in the capital structure.
FINANCING A LARGE-SCALE FACILITY
Next month, Peninsula Compost Compa-
ny, LLC will complete construction of its in-
augural commercial composting facility in
Wilmington, Delaware. The $20 million, 28-
acre facility will be capable of processing
160,000 tons/year of organics and will be the
largest food waste and yard trimmings com-
posting facility on the East Coast. Peninsu-
la has partnered with the W. L. Gore & As-
sociates Company for use of Gore’s in-vessel
composting system that will be used at the
Wilmington facility.
The Delaware facility was financed with a
combination of equity from the senior man-
agement team and local equity partners as
well as bank debt. The bank deal was led by
WSFS Financial Corporation. Peninsula
was able to secure funding even as some of
the most well known commercial and in-
vestment banks were undergoing unprece-
dented trauma. It found a local lender who
understood the local market sufficiently to
commit capital to this project.
Peninsula’s experience is a lesson in per-
sistence and flexibility. During the spring
and summer of 2008, Peninsula was pursu-
ing a debt private placement and had been
making good progress. When the capital
markets began to severely deteriorate, com-
mitments they thought they had were no
longer reliable. By September 2008, they ef-
fectively had to start from scratch, but by
May 2009, they had secured committed cap-
BIOCYCLE NOVEMBER 2009
Peninsula Compost Company
was financed with equity from
the senior management team,
local equity partners and bank
debt. Startup of the $20
million, 28-acre facility is
expected in December. The
receiving/preprocessing
building is shown above.
The emerging
organics recycling
and biogas sectors
seem to have
elements that
appeal to different
categories of equity
investors.
6. ital from the local lender and broke ground
that month. Construction is expected to be
completed ahead of schedule.
During times of economic uncertainly, the
price of risk can rise dramatically. It is like-
ly that Peninsula’s cost of capital and the
amount of equity required in the deal was
significantly higher than what they would
have been had the deal been structured the
prior year. Nevertheless, Peninsula was able
to secure the necessary funding.
FINANCIAL SPONSORSHIP
OF EARLY STAGE COMPANY
StormFisher Biogas is developing biogas
facilities across North America utilizing
anaerobic digestion technology. In February
2008, StormFisher announced that it had
formed a strategic partnership with Den-
ham Capital Management, a global energy
focused private equity firm based in Boston,
Massachusetts, to develop a $350 million
(Cdn) portfolio of biogas projects.
According to StormFisher, Denham recog-
nized that StormFisher had many charac-
teristics that fit well with Denham’s invest-
ment criteria, including: High upfront
investment needs followed by annuity cash
flow; Replicable model; Low technology risk
given well established anaerobic digestion
markets in Europe/Asia.
We spoke to StormFisher about their re-
cent experience in accessing debt to comple-
ment the equity investment commitment
from Denham. The significant disruptions to
the capital markets over the past year have
had a negative impact on the project finance
market. There is a greater appetite for larg-
er ($100 million plus) deals with lower re-
turn profiles than smaller ($10 to $30 mil-
lion) projects with higher return profiles.
However, opportunities for debt financing
from equipment finance groups, agricultur-
al banks (“AG Banks”) and government
sponsored funding for renewable energy pro-
jects remain viable sources of capital.
However, given the more capital con-
strained environment, lenders are even
more focused on risk mitigation through con-
tractual arrangements, including: Feed-
stock contracts to provide both volume and
price certainty; Purchase power agreements;
Engineer Procurement Contract remedies
associated with biogas yield guarantees; and
End product sales contracts for the compost,
bedding, etc.
TAKEAWAY LESSONS
The emerging organics recycling and bio-
gas sectors seem to have elements that ap-
peal to different categories of equity in-
vestors, blurring the lines between angel,
venture capital and later stage investors. We
know examples of development stage compa-
nies within our sector that have attracted an-
gel investors. Kleiner Perkins is an example
of interest from the venture capital commu-
nity. Terra Verde represents interest from
middle market, leveraged buyout investors.
And StormFisher’s experience demonstrates
interest from large/global energy focused fi-
nancial sponsors. This expanse of interest
provides operators and entrepreneurs with a
wide set of equity investor alternatives. It
should be noted, however, that each ap-
proach can lead to very distinct outcomes for
existing investors. As previously mentioned,
some categories of financial sponsors typical-
ly require control as a condition of making
their investment; others do not.
It is clear that the due diligence bar for ac-
cessing capital is higher than ever, which
underscores the need for operators and en-
trepreneurs to do the work necessary to mit-
igate the risk profile of their business and
justify all key assumptions that materially
impact their financial projections. Ask your-
self the hard questions and have answers to
them before meeting with investors. There is
not a “one size fits all” solution. Identifying
and assessing some of the factors we dis-
cussed will help you hone in on what form of
financing and structure is most appropriate
for a given situation.
KEEPING THE PHOENIX FLYING
Although the prevailing economic envi-
ronment can widen or narrow your financial
tool chest, good projects with good manage-
ment teams can be financed even in the
worst of economic times. There are lots of ex-
amples of successful companies that
launched during extraordinarily difficult
economic environments, including: Procter
& Gamble, The Panic of 1837; IBM and Gen-
eral Electric, The Long Depression, 1873-
1896; General Motors, The Panic of 1907;
United Technologies Corp., The Great De-
pression; and FedEx, The Oil Crisis of 1973.
We chose these examples out of dozens of
brand name success stories to make another
point. While good deals can get financed even
in the worst markets, success over the long
term and under changing competitive and
economic conditions is much more difficult.
The above list proves that “out of the ashes
can arise a phoenix;” the real trick is keeping
the phoenix flying over the long run. Ⅵ
Andrew C. Kessler (andrew.kessler@turning
earthllc.com) is a Managing Director and
Founding Member of Turning Earth, LLC, an
organics recycling company focused on produc-
ing biogas, compost and sustainable agricul-
ture. Prior to launching Turning Earth, he
spent 15 years as an investment banker. Jason
A. Seltzer, CFA (jason.seltzer@lovellpartners
llc.com), is a Partner with Lovell Partners LLC,
which provides financial advisory, capital rais-
ing and general consultancy services for select-
ed domestic and international clients. He has a
particular focus on alternative energy. The au-
thors thank the individuals at the companies
profiled, including Phil Arra, Terra Verde Part-
ners LLC; Amol Deshpande, Kleiner Perkins
Caufield & Byers; Ryan Little, StormFisher
Biogas; Gary Trinetti, Garick Corporation; and
Scott Woods, Peninsula Compost Company,
LLC. They also thank Deven Bhatt for his con-
tributions to this article.
BIOCYCLE NOVEMBER 2009
The due diligence
bar for accessing
capital is higher
than ever, which
underscores the
need for operators
and entrepreneurs
to do the work
necessary to
mitigate the risk
profile.
