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Capital ideas Featured

4:37am EDT June 30, 2004
John Aplin, managing partner of CID Equity Partners, brings both academic and business experience to the table, a combination that lends itself well to the potentially risky business of investing in developing and high-growth companies.

Aplin says he finds the challenges and uncertainty of the business exciting.

"The challenge of exploring new and creative ideas is what attracted me to the company," he says. "I enjoy the variety."

Variety is definitely part of the mix at CID. Since 1981, the company has been considered a leading provider of private equity and debt financing to high-growth companies throughout the Midwest. From offices in Indianapolis, Chicago and Columbus, it actively manages seed, venture and mezzanine capital funds that total nearly $440 million.

CID targets the information technology, life sciences, business services and manufacturing industries, which coincides with the state's and Indianapolis' economic development plans.

But Aplin says CID's interest in the life sciences sector began much earlier than these initiatives.

"We have been spending a lot of time in the life sciences," he says, "especially in the Midwest, and we have been historically successful."

CID works closely with its investment companies, working to build what it calls "solid organizations staffed with talented people." And with Aplin at the helm, CID is well-positioned to accomplish this goal. The former Fuller Brush Co. president and CEO also holds a Ph.D. in business, and was a faculty member of the Graduate School of Business at Indiana University and chairperson of the school's master of business administration program for nine years.

He's not afraid of the inherent risks that come with investing in growing businesses, pointing out that CID has a strong track record.

"I think our rate is a little better than the industry average," Aplin says.

But, he adds, it takes copious amounts of research and intense due diligence before deciding to invest in a business. Aplin says that for every 1,000 business plans CID reviews, it invests in fewer than 10. And CID reviews myriad factors before making that decision, among them the market breadth, quality of the management team and quality of the science.

Smart Business spoke with Aplin about the challenges and risks of private equity investments.

 

What are the differences between running CID and running the Fuller Brush Co.?

 

The biggest difference is the nature of the business. We are involved in a variety of companies. We invest in life sciences companies, supporting management buyouts and a lot of other activities.

At Fuller, there was more routine -- problems reoccurred a lot more, there was consistency. Here, we deal with many issues, make complex decisions, and it is challenging. There is a higher degree of uncertainty. Frankly, these are the very things I like about CID.

Way back, I did work with high-growth companies, and that experience has helped here -- like when we help companies with strategy and, more than anything else, management and personnel issues.

 

What are the pros and cons of focusing on Midwest companies? And are there any plans to expand your reach?

 

The biggest pro is that we can spend a lot of time with the companies we work with. Being in close proximity, we can work closely with them. If the companies were not close, the nature of the relationship would also be distant -- we could not provide as much support.

The cons are that we have a narrower market when it comes to deals. The Midwest only generates a certain number. And given that, not all of the companies succeed, and we only choose companies with the highest probability of succeeding.

If we opened our geographical boundaries, there would be a higher number of investment opportunities that we'd review. We are not planning in our offices to expand, though.

We have venture partners outside the Midwest that ask us to review companies, and we will review them on a case by case basis and invest in the best companies that we can find.

 

What are the benefits and inherent negatives of targeting start-up and mid-market companies?

 

The pros are that we have a great opportunity, getting in on the bottom floor of breakthrough companies and technologies. With a reasonable amount of capital, we can have a major impact on these companies. For example, we had the opportunity to work with a company five years ago that has grown and developed into a leader in cardiac therapeutics called Stereotaxis in St. Louis.

The cons are that these companies are higher-risk investments. There are market risks, and the management teams are just developing in early stage companies, so you are exposed to a higher risk factor.

 

Are there particular industries you target?

 

We have been historically successful in the life sciences, and we have invested a fair amount in manufacturing technologies. We also invest in later-stage companies, companies that are in buyout or recapitalization situations. They have a need for capital, which we can provide. More of those companies are involved in manufacturing, and business services are also very attractive industries.

 

With the slower economy, have you reduced the number of companies you've invested with in the last few years?

 

No, our investment activity has been very high. Because of the slower economy, companies have needed additional capital to support their growth plans. 2003 was the biggest year for investment that we've experienced.

 

What are the biggest changes you've seen in private equity investment in the last five years, and how have they affected operations?

 

With the precipitous drop in public markets, the major impact on us has been on exit opportunities. We normally view investments as five- to seven-year terms. These last few years have not been good for exiting, and it is more work for companies to exit.

But that is changing, and exits are starting to occur now. The economy as a whole is improving, and companies are more aggressive with capital spending. It's not happening overnight, and we'll see more merger and acquisition activity as well.

 

How often has CID invested in a company which hasn't survived? And how do you minimize the losses?

 

In the industry as a whole, one-third of the companies don't make it, one-third does OK and one-third does quite well. We do a little better than that historically. In the Midwest, in general, we vary from the national average.

During the dot-com boom, we didn't invest in as many of those companies in the Midwest. When that boom failed, it didn't hurt us as badly. The Midwest exhibits a higher degree of conservatism. What you try to do is, first, invest effectively. It takes a lot of effort and due diligence to review these companies, and determine which as the highest likelihood of success.

We see about 1,000 business plans each year, and we'll invest in less than 10 of them. It takes a tremendous amount of research, identifying the most attractive companies. The key is working very closely with them, helping them weather and deal with their issues. The number of things we look at is enormous, the questions we address remarkably large.

One of the most important questions is, does the company have the potential to capture a significant market? Do its products or services deal with a major issue or problem? The second most important question is the quality of the science.

Does the company have good solid science and technique to back them up? Does it have intellectual property protection for its ideas?

And we also look at the fundamental quality of the management team. Can they deliver on the promises in their business plan? That's a hard question to measure, and why we work closely with the companies we invest in to help them achieve their goals.

 

Are there certain industries or companies in the portfolio that are outperforming the rest?

 

I think in every industry sector, there are companies that are doing exceptionally well. For example, in the life sciences sector, out of the seven or eight companies in our portfolio, two or three are doing exceptionally well, two or three are doing OK and the remainder are doing poorly. And it's like that in all our sectors.

 

What are your biggest operational challenges, and how do you meet them?

 

The biggest challenge is to simultaneously perform management activities within the firm while managing my own portfolio of companies. It's like managing a law firm, where you have your own clients to serve.

I also serve on several boards and I travel frequently, so handling my management responsibilities here and working as a team operation, just communicating and being in touch, can be a real challenge. Thanks to e-mails, laptops and cell phones, I can keep in constant communication with everyone I need to.

My biggest challenge is probably setting priorities. With the five or six boards I'm on, looking at new deals, getting time, controlling time and keeping my hands-on approach is a challenge. I keep working on it. I work longer hours and make sure that, whenever possible, I focus on the most urgent priorities and get support from others on the investment team.

 

What areas are you working to improve?

 

I think that we should constantly be developing and improving our research and due diligence. Because we ask thousands of questions, the one we don't ask may be the most important. I'm constantly asking how can we improve and really understand the company and know what the critical questions are we should be asking.

The second area we can improve on is we could do a better job marketing ourselves. We are very focused on our work, and when we are not researching new companies, we are working on existing ones, not marketing. We need to have new investments, a good flow of new deals.

We do a lot of presentations and network with contacts. We visit those contacts and try to identify other companies in the market that could benefit from capital. We participate in conferences and give a lot of speeches and presentations, and we do a lot of phone calling. How to reach: CID Equity Partners, (317) 269-2350 or www.cidequity.com