Participate, Profit & Celebrate:
Q.: Do you think the Dodd-Frank legislation has affected the private equity business with respect to banks?
Mr. Sinnenberg: The absence of banks as investors in third party PE funds should not have a meaningful impact on the PE market. There seems to be a consensus that the number of PE funds will shrink over time as firms finish their current investment periods and are unable to raise new funds. I do not know if there will be an equal offset but I suspect that the absence of the banks will not have a meaningful long-term impact.

I have not seen the regulations with respect to Dodd Frank but if the regulations require banks to dispose of their PE assets in a relatively short period of time, it could lead to a buying opportunity for secondary funds. It seems that it would be in the best interest of the regulators and politicians if banks were allowed to liquefy their investments in PE assets over the normal course of their expected lives. An attempt to meaningfully curtail the holding periods might lead to sales in the secondary markets as a discount to NAV which would further impair the banks' capital positions.
Q.: As an independent private equity firm, what is different now?
Mr. Sinnenberg: As for our day-to-day operations, nothing has really changed. When we originally set up shop with Key in 1998, we made sure we would be allowed to have our own accounting and finance team and our own IT infrastructure. Key was supportive. We also had very little interaction with KeyBank in terms of deal flow. On day one of Cyprium, aside from the name change in our offices and on our business cards, there was no change to our daily activities.
Q.: So, what will be different moving forward?
Mr. Sinnenberg: Going forward, our competitive strategy will not change. We will continue to focus on providing flexible, primarily non-controlling capital solutions. By flexible, I mean any combination of subordinated debt, warrants, preferred and/or common stock that makes sense for the company given the prospective senior leverage as well as the proposed application/use of proceeds.

There are few mid-market firms that focus on working directly with family owned businesses, entrepreneurs and management teams to provide long-term, non-controlling capital solutions and we believe that this focus differentiates us in a marketplace comprised, in very large part, of ‘change of control' oriented PE firms.
Q.: As an independent firm, what are your near term business plans?
Mr. Sinnenberg: We believe we will complete another investment prior to the publication of this interview. Once completed Fund III will be about 80% drawn. In addition to the operating partner described above we are looking for two experienced analysts and associates.
Q.: In your experience, do the present-day economy impact opportunities for mid-market private equity investors?
Mr. Sinnenberg: We believe there is a bifurcated market today. For transactions in which there is a change of control lead by a traditional PE group, say for companies with EBITDA in excess of $25MM, credit and equity capital is readily available. For this segment of the industry, valuations appear to be approaching levels experienced in ‘06 and ‘07.

Cyprium primarily participates in the market for non-change of control capital (junior capital); market conditions in this segment remain relatively attractive on a risk-adjusted basis. The lower middle market, which has traditionally been serviced by the SBIC's, is the most attractive market at the moment given the relative lack of available unsecured, senior-term debt.
Q.: In concern to Cyprium's investment criteria, please describe what is meant by"compelling business model?"
Mr. Sinnenberg: We have neither the collateral of the senior lender, nor the ability to step in that a control investor has. Therefore, when we make our long-term, illiquid investments, we really want to invest in a business model and a management team that we feel will be able to maintain a competitive advantage for the duration of our investment horizon. We like to understand the prospective portfolio company's strengths and weaknesses such that we are convinced its operating margins are, at a minimum, sustainable.
Q.: Why it is important for a business to work with an"informed investor"?
Mr. Sinnenberg: A prospective portfolio company should want us to be an informed investor. The better we understand the company and its management team at the time of the investment, the easier it is for us to provide an informed, rational and thoughtful response to unexpected challenges or opportunities.
Q.: As a long-term investor in manufacturing, value-added distribution and service sectors. What is particularly attractive about the aforementioned sectors?
Mr. Sinnenberg: We find those sectors attractive because they are understandable (as opposed to leading edge technology companies) and there can be sustainable, competitive positions, which support operating margins. We like to focus on companies with recurring revenue models. We also like businesses that are lower in volatility than others and those less susceptible to meaningful adverse impact resulting from negative trends in the macroeconomic cycle.
Q.: In terms of manufacturing, what sub-sector is attractive in the current economic conditions of lethargic recovery?
Mr. Sinnenberg: Given our current view that market conditions are fluid, it would be difficult for me to speculate on specific subsectors that might yield attractive candidates for Cyprium's capital. Of course, given the current environment, we are somewhat reluctant to invest in companies that target enhanced discretionary consumer spending, particularly in durables. Additionally, we tend to stay away from anything that has significant government reimbursement risks, such as healthcare services.
Q.: How does your team source deals and qualify them for"minority" or"majority" investment positions?
Mr. Sinnenberg: Cyprium has two investment professionals that are dedicated to marketing, PR and business development. Among their primary responsibilities is coordinating our effort to continuously keep the Cyprium brand in front of referral sources. We source the majority of our investment opportunities through intermediaries such as investment bankers, senior lenders, business brokers, attorneys and accountants.
Q.: How are the deal structures different per your non-control investment positions?
Mr. Sinnenberg: The deal structures are varied as we can invest any combination of subordinated debt, preferred stock and common stock. Looking at the format for our capital, we have no predetermined hurdles per investment or per fund, which allows the firm and our prospective companies great flexibility in designing transaction-specific solutions. To that end, we determine the deal structure after understanding the owner(s)' business and personal objectives, and are then able to structure a deal that gives them the best shot at achieving those objectives.
Q.: As an informed investor, how do you strive to create value for your portfolio companies? What is your operational model for driving value?
Mr. Sinnenberg: We have always believed in improving companies “under our watch.” For the last several years we have had an operating principal assisting companies with tasks such as lean manufacturing, supply chain work, etc. We have our own internal IT resource that can help companies evaluate their back office and assist with an RFP process for, and implementation of, a new CRM or ERP system, if needed.

We also have a decade of experience in China—whether it is from a manufacturing platform or from a market evaluation standpoint—so we can help our portfolio companies evaluate and execute on China-centric opportunities. We anticipate enhancing our capabilities by bringing on board an operating partner – ideally a former CEO with extensive experience both in the US as well as in several non-domestic markets.
Q.: Many mid-sized businesses, especially family owned businesses, are cash strapped and unable to grow. Does Cyprium investment in these capital strapped businesses?
Mr. Sinnenberg: First, there is a difference between a company that is underperforming and one that is clearly distressed. We do not invest in distressed companies but we do help companies that have a clearly differentiated business model but find themselves with an upside down balance sheet. Sometimes by simply restructuring or recapitalizing the balance sheet, the company gains the breathing room it needs to execute on its operating plan.
Q.: How does a business owner determine which is the better source of finance?
Mr. Sinnenberg: Just like anything else, the business owner needs to evaluate not only the capital being provided, but also the provider of that capital. We believe the relationship we have with the owner/CEO is just as important as the competitive position of the business, if not more so. Company owners, therefore, should do their homework, get references on the prospective capital providers and determine which group would best be able to support the company and the owner's vision for growth. Secondly, given what I described as the bifurcated market in the previous question, mezzanine investors can assist companies, which do not have access to sufficient senior credit to achieve their financial and/or strategic objectives.
Q.: Do you foresee Cyprium entering the Chinese marketplace especially given the experience of the team as an investor in ASIMCO as well as serving on the board of the China Institute?
Mr. Sinnenberg: There has been a significant amount of private capital raised in China over the last 24 months via domestic RMB funds as well as in the form of the traditional offshore (typically US Dollar denominated) vehicles. The market in China is not one that readily supports change of control transactions, nor does it allow for the leverage levels used in North America and Europe.

From our perspective, there is a very attractive market opportunity to approach Chinese middle-market companies with an investment team that is philosophically predisposed to non-controlling investments and is comprised primarily of Chinese nationals. Having said that, Cyprium has no plans to raise a fund focused on China.
Q.: On a personal note, what book are you currently reading?
Mr. Sinnenberg: I am very involved with charter schools in Cleveland serving as the finance chair for the board of Breakthrough Charter Schools (www.BreakthroughCleveland.org). I have been reading both human-interest stories as well as books on best teaching practices and alternative approaches.

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