Insider's look at non-traditional GHS deal

As you can read on the SSN website, GHS Interactive Security recently secured a $50 million credit facility. 

Michael Barnes, founder of Barnes Associates Inc., the consulting and advisory firm that specializes in the security alarm industry, provided SSN with interesting insights about the non-traditional deal, noting that GHS had recently reached a milestone $500,000 in RMR.

Here's what he told SSN:

“GHS is a very interesting company. Steve Baker and Topspin Partners were looking for an opportunity in the industry and liked the idea of buying a sales and installation engine and building a full-service company around that, as opposed to buying an existing integrated alarm company.  We [Barnes Associates] had sold an ADT dealer the year before and knew there was real value in companies that have the account origination capability … but no RMR.

“This is not the normal path by which private equity invests in the industry. Typically, they seek out fully operating companies that have a material customer base and RMR that can be leveraged, Day One. At market prices for these companies, however, most investors can't get the returns they are looking for without substantial growth after the initial acquisition.

“Steve Baker and Topspin Partners recognized that buying a highly capable originating company, and then building up the operations around this capability and the RMR they could generate afforded the chance to grow a large successful company using a better cost dynamic. Rather than buying a fully functioning, integrated alarm company and then taking the risk associated with developing additional growth capability at a low cost, they bought the growth engine and took the risk that they could build a functioning full-service company around it.

“Basically, this is following the path Vivint took, where they first developed a material account origination capability and then started to keep the accounts and build up the necessary infrastructure to own and service them.

“Steve Baker knew the perfect company to acquire—LifeLine Security. The company was founded and owned by Gordon Johnson and John Fox, who had perfected the year-round door-to-door sales model (as opposed to the “summer sales” model), in several California markets. They were generating almost $200,000 a year of new RMR under a dealer program and were looking for a way to change their model to one that would build a fully integrated company.

“Gordon and John also had experience earlier in their careers in other parts of the Southwest, and had the proven capability to expand into new markets. This meshed with Steve Baker's vision to broaden geographically into Texas, Arizona and Nevada in order to have a more diversified footprint and a larger overall market opportunity.”

“Starting with no accounts in mid-2013, when GHS acquired LifeLine, they have grown to over $500,000 of RMR.

“This rapid growth requires capital, and we have enjoyed working with the GHS team to develop the best approach to satisfying this need.  We identified Topspin Partners as the best fit for the equity, given their highly successful prior play in the industry and their appreciation for the opportunity. The debt part of the capital structure was a challenge, however, as the company needed a lender that could start small, Day One, and grow rapidly with the company.  Most of the lenders that truly understand the industry dynamic typically require the full servicing infrastructure to be in place and proven, and a seasoned existing account base.  Neither of these were present with GHS.  Additionally, most of the industry lenders had minimum initial borrowing amounts well above GHS's initial need.  We found a division of Barclays that provided the initial facility.

“Fortuitously, Brent Humphries and Patrick Fear had left Barclays and moved to Alliance Bernstein to head up a very large non-bank debt fund, AB Private Credit Investors. Brent and Patrick were instrumental in setting up the initial facility and were intimately familiar with the company. We conducted a relatively broad placement process, and they quickly distinguished themselves by proposing a highly flexible package of debt capital that met every one of GHS's needs, along with highly competitive pricing and an ability to cycle through the approval and closing process quickly.  Since they are not a bank, they brought an inherent flexibility that was attractive.  They are truly a capital partner, rather than a “lender” in the traditional sense.

“AB was great to work with.  Not only are they perfect for GHS, but I know they have the appetite to do more in the industry.”