Informed Capital
CAI is finding new venture capitalists from an old boys network
National Post Business, July, 2000
Rod McQueen
In August 1998, Maple Leaf Foods Inc. tried to spin off its only retail food subsidiary, Country Style Food Services Inc., by taking it public, but the Russian currency crisis spooked stock markets and nobody wanted to buy donuts or anything else. Enter CAI Capital Corp., a partnership based in New York that was willing to invest $22 million for an 82% bite of Country Style. Management remained, but rather than the 15 new outlets of previous years, Country Style will open 30 new shops this year and 50 in 2001. The company may also become a sector consolidator by acquiring competitors.
Beyond money, CAI provided Country Style with something even more important - expertise. "I have telephone numbers for people I can talk to that I didn't have before. They can open doors for me," says Garry Macdonald, president and CEO of Country Style. "They're very professional and very astute, they don't charge management fees and their involvement at the board level was very attractive." CAI-designated directors on Country Style's board include Dennis Frezzo, former president of Tricon Canada, Pepsi's franchising arm, and David Culver, former chairman of Alcan Aluminium Ltd. "They don't get involved in the day-to-day running of the business, which is a healthy way to have it."
CAI isn't your average investor/corporate mentor so much as a vehicle for corporate continentalism, raw power and personal networking. CAI was founded in New York in 1990 by seven individuals, including two partners from Salomon Brothers Inc.: Peter Gottsegen, who had been in charge of international investment banking, and Dick Schmeelk, who'd spent 40 years advising governments in Ottawa, seven of the provinces and numerous companies. Also part of the initial group were Peter Restler, former senior vice-president of Shearson Lehman Brothers, Leslie Daniels, former president of Burdge, Daniels & Co., and Culver.
The seven partners pooled US $10 million of their own money and then sought others who would be prepared to invest and advise. Because of their previous interest in Canada and the fact that the Canada-U.S. Free Trade Agreement was just coming into effect, they decided to focus on Canada. Their first investment was a 40% stake in Bio-Research Laboratories Ltd., of Montreal, previously part of a money-losing Crown corporation, Connaught Labs. The initial challenge was to change a culture where status depended upon the number of employees. When Culver first visited Bio-Research, the incumbent CEO looked out his office window and said, "That's what I like to see, a full parking lot." Replied Culver, "We like a full bank account and a half-empty parking lot."
Four CAI investors, including Culver and Walter Wriston, the former chairman of Citibank, were placed on the Bio_Research board and oversaw a $6-million expenditure on computerization, a substantial sum given the $29 million in annual revenues the company had at the time. A new marketing campaign was launched and, when CAI exited four years later, the U.S.$11.5 million investment had tripled.
Of CAI's two funds, the $150-million Fund One is now closed. Fund Two has about half its $200 million invested and more target companies are being sought. The original seven partners supplied about $14 million for Fund Two and another 35 individuals kicked in a similar amount. For them, the usual due diligence is almost unnecessary; 12 institutional investors have provided the remaining $170 million. Patient money flows from pension funds for the provinces of British Columbia and Alberta as well as Ontario Teachers' Pension Plan Board, corporate pension funds at Bank of Nova Scotia, Canada Life and Clarica Life, and U.S. funds such as GE Capital Equity Holdings and U.S. Steel Carnegie Pension Fund.
Getting powerful people matters as much as the commitments for cash. "We're a real alternative to mutual fund investing, which is quarter-to-quarter," says Restler. "When we ask people if they want to become investors, we've had very few say 'no.'" Individual investors include such luminaries as Peter Bentley, chairman of Canfor Corp., Paul Cantor, chairman of Russell Reynolds Associates, Lynton Wilson, chairman of BCE Inc., Raymond Garneau, chairman and CEO of Industrial-Alliance Life Insurance Co., General Alexander Haig, secretary of state in the Ronald Reagan administration, John McArthur, former dean of the Harvard Graduate School of Business, and Guy Saint-Pierre, chairman of SNC-Lavalin Group Inc., former Noranda Forest Inc. chairman, Adam Zimmerman and Michel Fortier, senior vice-president and director, Merrill Lynch Canada Inc. Networking goes well beyond the inner circle. CAI sponsors a dinner every two months for investors and local business leaders. In April, John Roth, president and CEO of Nortel Networks Corp. addressed the seven principals, 20 of CAI's investors and 30 of Toronto's business elite.
In addition to Country Style, CAI's investments have included Livingston International Inc., Canada's largest customs broker, and Sunquest Vacations Ltd. CAI's money allowed tour operator Sunquest to buy two new A320s rather than continue paying a major airline 14 cents a seat mile or a charter operator nine cents. With its own aircraft, Sunquest flies passengers for less than six cents a seat mile, enabling CAI investors to double their money in a year.
CAI also paid $26 million in 1996 for a 75% interest in Zalev Metals Inc., a Windsor, Ont., scrap metal business. CAI investors who joined the Zalev board included Roy Bennett, former chairman and CEO of Ford Motor Co. of Canada, and Darcy McKeough, former treasurer of Ontario. CAI sold its stake in 1998 for about $50 million, a 36% annualized return. "We don't fancy ourselves as managers," says Gottsegen. "We're just there to try and help."
That's good because the payoff is painfully slow. Fund One, now ten years old, has repaid 86% of the investors' contributions but there are still four companies to sell before there is a positive return. "For returns of 20% to 25% annually they're willing to become involved in a lock-up vehicle like this as part of their overall asset allocation," says Restler. For the 35 investors who have each put in an average of about $300,000, that nest egg could become more than $2 million. Not to mention the ongoing networking along with the growing net worth.