Investing with Luminis

Investment Thesis

Luminis Capital has a group of committed investors who not only contribute the capital needed to fund transactions, but also contribute operational and strategic expertise to ensure that the investments reach their full potential.

Investment criteria

Luminis Capital will invest in middle-market manufacturing, distribution, and service companies in both mature and growing industries. Luminis believes that a key driver of success is partnering with high quality management teams, and the firm is particularly interested in investment opportunities with existing management. Luminis looks to leverage its operational expertise with a close partnership with management to expand sales growth as well as profitability.

The ideal acquisition target has a history of revenue growth and profitability. We will generally look for opportunities that satisfy the following criteria:

1. Enterprise Value
   $25M - $150M
2. EBITDA
   $4.0M - $20.0M
3. Industries
   Mature and stable industries, i.e. low-tech manufacturing/distribution and service companies with an industrial/business customer base in mature and growing industries.
4. Management
   Prefer management teams that are looking to grow the business, but will consider opportunities where owner/operator is seeking to retire or exit.
5. Profitability
   Proven profitability for last three years with future expectations of positive, stable, repeatable, and predictable cash flows.
6. Financial Status
   Liquid balance sheet, collateralizable assets, excess cash and marketable securities, low current leverage, predictable CAPEX needs, and separable non-core assets.
7. Geography
   Continental United States..
8. Type of Deal
   Will invest in LBO, recap, and growth deal structures.
9. Type of Stake
   Will take both majority and minority positions and will act as a co-investor as well as a lead/control investor.

Benefits compared to a typical PE investment:

Compared to the typical private equity model, Luminis’ model is superior in both its cost structure and investment oversight. Indeed, Luminis’ private equity model blends the appropriate mix of (1) investment size, (2) direct investment, and (3) investment timing, with a greater potential for (4) higher returns to investors.

Given Luminis’ size and presence in the middle-market, Luminis affords more scope for high net worth individuals to access the Private Equity asset class in the United States, an asset class that is often restricted to institutional investors. Also, investors have the opportunity for much more oversight of the target investment than in the typical private equity model. This oversight provide investors access to the target’s analysis regarding the investment strategy and allows investors to truly understand all of the risks and rewards of their investment. In addition, investors are only required to provide capital at the time of acquisition. The timing of capital distribution has a dramatic impact on the IRR of the investment as the capital will only be invested for the duration Luminis holds the portfolio company.

Overall, this modified private equity model results in higher returns to investors. As Luminis is not a “fund”, investors do not need to formally commit capital until an investment target is identified and a deal structure is in place. This allows investors to invest as they see fit in the interim and avoid becoming trapped in a fund for a decade or more. Furthermore, investors are only required to pay a management fee on invested capital (as opposed to contributed capital in most cases), which also substantially improves investors’ net IRR, a figure which is rarely reported by GPs, and which significantly undermines most private equity returns. All of the capital placed with Luminis is invested in a portfolio company for the entire duration of the investment. This also increases the net IRR because Luminis avoids the period of passive investment (in a money market fund or other low risk investment) typical in private equity as the GP searches for an investment.

Importantly, Luminis’ model does not incentivize it to preserve lucrative management fees at the expense of its investors. This behavior is prevalent in the private equity industry at the moment as management fees are deemed to be of greater value than carried interest. GPs are often delaying exits for the purpose of preserving fees, which lowers the IRR and delays the realization of investor returns.

Recent research has shown that net investor returns in private equity are similar to the S&P 500, but with additional risk. While private equity, before fees, still generates outsized returns, net returns in the industry only surpass the index in the top quartile of funds (with fees before carry amounting to around 7% of total investment). Indeed, Luminis’ model avoids these excessive fee structures and allows investors to capture the high returns of private equity while aligning Luminis’ incentives with those of its investors.