Realpoint, which is based in Horsham, PA, offers
secondary-market securities ratings, research, surveillance services and data to
help institutional investors identify credit risk in commercial mortgage-backed
securities (CMBS). More than 225 institutional investment firms subscribe to
Realpoint’s trusted ratings and analytics, including the majority of money
managers who invest in CMBS. These services are delivered via a web-based
portal on a subscription or contract-based pricing model. The other major
business line is the rating of new-issue structured finance securities, like
CMBS, where the issuer pays a rating fee.
ACG: Please give us a
little background on the genesis of the transaction?
We assisted management in their purchase of Realpoint
back in August, 2007, from CapMark Investments which was formerly GMAC's
commercial mortgage business. One of Realpoint's first strategic
initiatives post-closing was to obtain a Nationally Recognized Statistical
Ratings Organizations (NRSRO) designation for structured finance securities,
which they did in 2008. This is a significant development because it
enabled Realpoint to rate new-issue CMBS securities, not just securities already
trading on the market. Realpoint then focused on launching new products
and expansion into ancillary structured finance markets, such as residential
mortgage-backed securities (RMBS). These initiatives required substantial
additional capital to support the necessary increase in organizational
infrastructure and data resources. Griffin was advising the Board of
Realpoint at the time, and jointly concluded that the most appropriate source
for such capital would be strategic in nature; that is, a company already in the
financial data, research, and securities analysis world that could provide more
than just capital. Ultimately, this led to discussions with Morningstar,
Inc. (NASDAQ: MORN), a leading provider of independent investment research in
North America, Europe, Australia and Asia. When it became clear that the
combination of Morningstar and Realpoint made strategic sense on many levels,
Griffin negotiated the structure and terms of the announced $52 million
transaction.
ACG: So did the
broader macro issues of the subprime mortgage meltdown, and the role of the
traditional credit rating agencies in that meltdown, influence this transaction?
Definitely. If the big three ratings agencies
hadn't stumbled so badly with their ratings of subprime RMBS securities, it
probably would have been much harder for Realpoint to obtain the NRSRO
designation from the SEC. The entire subprime debacle highlighted the need
for accurate, conflict-free ratings of complex structured finance products like
RMBS, and to a lesser extent, CMBS.
ACG: Given that
management purchased Realpoint only 2 1/2 years ago, was it a difficult decision
for management to sell at this time?
Yes, to oversimplify, the plan was to develop RMBS over a
longer period, and wait for the CMBS market to gradually become more active
after a long period of almost zero new-issuance following the Lehman bankruptcy
in September 2008. I think management was proud of their strong financial
performance through a historically challenging period for any company, but
particularly one in the structured finance market. Having weathered the
storm so well, and seeing the CMBS market return in late 2009 - albeit at a low
level -, they were excited to take advantage of so many opportunities. It
became clear, though, that partnering with Morningstar would enable them to ramp
up these activities on a far larger platform with strategic resources well
beyond their own.
ACG: Are
financial services companies like Realpoint a focused industry vertical for
Griffin?
Definitely, although I think its broader than just
financial services. We have developed an expertise with professional
services firms in general. Realpoint, The PFM Group, a series of asset
management and insurance services firms are all good recent examples of that, in
that they all happen to be both financial and professional services firms.
However, we’re about to close on the sale of a healthcare services firm, sold an
environmental services firm, and raised capital for another healthcare services
company a few years ago, all select examples of professional services firms that
encompass more than financial services only. These are all companies where
the “assets walk out the door every night” and we’ve developed the expertise to
successfully represent them in M&A and capital raise transactions, with both
private equity and strategic buyers, and senior and subordinated debt providers.
ACG: Besides Griffin Financial,
were other ACG members involved in this transaction?
Actually, several ACG members were involved. Frank
Stumpo, the CFO of Realpoint is a member. Three of Realpoint's lenders are
members - Kirk Soxman from National Penn Bank, and Stephen Gurgovits Jr. and
Matt Harnett from FNB Capital Corp, the subordinated debt provider. On the
accounting and tax side, Smart and Associates (now LECG) represented Realpoint,
and they have several members, including John Stine, Jerry Buckley and John
McGonigal, though they were not personally involved in this particular
transaction. Although not an ACG member, I should note that Bob Kelly at
Eizen Fineburg & McCarthy acted as Realpoint’s legal counsel.
