Small Firms, Thinking Big

As growth opportunities for smaller companies become increasingly limited, small-business owners
can benefit from the help of private equity firms now more than ever. It’s that idea that keeps Terrence Mullen, a partner with Arsenal Capital Partners, busy these days.

“With all due respect to entrepreneurs, the world’s incredibly challenging. In a more benign growth environment, say in the 1990s or the last decade, growth was reasonable, if not abundant. Today, growth is not abundant, and there are significant structural and fundamental problems with the U.S. economy,” says Mullen.

The fact is that, unlike North America, some parts of the world are seeing double-digit growth. So Mullen sees access to global economies as a key challenge for smaller entrepreneurs and a critical component of growth.
Arsenal will typically bring in experienced management to help a portfolio company become global or, when it makes sense, will help outsource different components of a business. “They enable small companies to act with global sophistication,” says Mullen. “Many people in our firm have worked for Global 500 companies and have run businesses around the world. So the arbitrages that we can bring to these small businesses create a lot of value for them.”

Global expansion has always been an important strategy for the New York–based private equity firm. In fact, by the time Arsenal sold its 10 portfolio companies out of its first fund, six of them had operations set up in China. Going forward, the firm will continue to implement this strategy for its Fund III, which has raised $325 million thus far and is targeting $750 million, according to reports.

“To help small companies grow and compete globally is a major advantage for Arsenal versus most of our lower midmarket peers, who just don’t have the global reach or sophistication,” says Mullen.

In addition to growing companies, Arsenal has been taking advantage of the exit opportunities as well, because strategics have been interested in paying up. In 2012, Arsenal was able to sell portfolio company Novolyte Technologies to BASF, which turned BASF into a global supplier of lithium-battery electrolyte technology. Novolyte is based in Cleveland and operates in the U.S. and China. BASF is based in Germany.

“When you build high-quality businesses, corporates are interested,” says Mullen. “They are looking for high growth, high quality, but they are very discriminating on the standards.”