Venture capitalist returns to Los Angeles to open office for Chemical Venture Partners.

Venture capitalist returns to Los Angeles to open office for Chemical Venture Partners

David L. Ferguson opened Chemical Venture Partners' western regional office last month in West Los Angeles to seek management buyout and recapitalization investment opportunities here for the New York-based firm.

It was like old home week for Ferguson, 35. He worked on mergers and acquisitions in Los Angeles for Bankers Trust New York Corp. for a year and for Prudential-Bache Capital Funding for another couple of years.

However, PruBache closed its local M&A activities to concentrate them in New York, and Ferguson went there for PruBache. But he was approached there to join Chemical Venture last September with the understanding he would return to L.A. to open the western regional office here, the firm's only office outside of New York.

Ferguson is the only one of Chemical Venture's six general partners outside the Big Apple. Likewise, the sole limited partner is based in New York: Chemical Banking Corp., the nation's sixth largest bank holding company with more than $70 billion of assets.

Founded six years ago, Chemical Venture has invested in more than 50 mid-size, privately held companies and today has some $500 million under management, Ferguson reported. Aaron Bros. Art Marts and Boys Markets are among local companies invested in by Chemical Venture, Ferguson said.

While his firm does provide "later stages" venture capital (not seed capital), such deals are handled in New York. Ferguson and his L.A. associates focus on providing $10 million to $250 million of financing, primarily for management buyouts and refinancings for owners of privately-held companies.

"I want you to have something at risk," Ferguson said he tells managers of companies interested in a management buyout, "although you don't need to mortgage your house." After the excesses of leveraged buyouts during the 1980s, Ferguson said, "it's becoming more of a buyers' market" because of the drying up of credit.

"Since banks are not lending on the break-up value any more, the market has chased deals to us because cash is king and we got it. We're not dependent on the junk (bond) market."

Generally, he said, Chemical Venture "won't pay more than five to six times cash flow" with, of course, exceptions for growth rates, certain industries, working capital and capital expenditure needs. He wants the banks participating with loans to be repaid "comfortably" in five to seven years.

To help assure this, Chemical Venture is willing to put in more than 20 percent equity, Ferguson said; whereas, leveraged buyouts were structured with only 10 percent equity a couple years ago. Because of this extra equity exposure, he indicated, Chemical Venture seeks to average a return on the firm's equity investment of 30 percent to 35 percent a year compounded, and the time horizon for all deals is to exit in five years.