David Mullen: Capital gains

David “Mullenator” Mullen leads Fulcrum Capital Partners, a new Vancouver-headquartered private equity firm recently spun out of HSBC Bank Canada

A corporate financier wouldn't be the first candidate to spring to mind if you're looking for someone to film for a heli-skiing movie.

But a couple of years ago, David Mullen and a group of skiing buddies got a few minutes of fame in a documentary about northern B.C.

"The producer showed up at the helicopter ski operation and wanted some footage of us skiing up there. It was like something out of a Vietnam War movie with the helicopter doors opened," recalled Mullen, managing partner and chairman of Fulcrum Capital Partners in Vancouver, the investment management firm that bought $750 million worth of HSBC Capital (Canada) Inc. assets last November.

"The helicopter swept across as we went down the mountain. I've never seen myself from the air. It was really cool."

At 56, Vancouver-born Mullen remains an ardent adventure skier. Each year, he makes it a point to go heli-skiing in northern B.C. or cat-skiing near Golden with a group of friends.

Mullen introduced Lindsay Gordon, HSBC Bank Canada's president and CEO, to the group eight years ago.

"I'm a very avid skier, but I'm jealous of Dave because he's a better skier than me. I don't mind if you quote me on that," Gordon laughed. "On the ski hill, he's known as the 'Mullenator.'"

While Gordon is looking forward to another ski adventure with Mullen in March, the two also remain relatively close on the financial front, despite the sale of HSBC's private equity and mezzanine (a hybrid of debt and equity loans) financing business.

Gordon noted that the decision to sell the business was made at an international level. It was prompted in part by regulatory changes that have encouraged global banks to focus on core retail and commercial banking operations and abandon less regulated financing activities such as private equity.

Since June 2010, London-headquartered HSBC has been negotiating management buyouts of its private equity business worldwide. One of the bank's first units sold was its Hong Kong private equity group, which became Headland Capital Partners in December 2010.

In April, London's HSBC Specialist Investments became InfraRed Capital Partners.

Meanwhile, the November close of Fulcrum's HSBC asset buyout was followed by the sale of HSBC's U.S. division in early December to Graycliff Partners.

HSBC will be the key provider of mezzanine financing for Fulcrum's clients and continue to invest in Fulcrum's latest private equity fund.

In Canada, HSBC Capital has had fairly substantial growth since it was founded in 1994, when Mullen joined as vice-president. Its first private equity fund was $15 million, and it generated approximately $10 million in mezzanine financing. Today, Fulcrum, formerly HSBC Capital, manages $400 million in mezzanine loans and $300 million in private equity. The company's fourth fund, which includes investments from HSBC Canada and several of the country's largest pension funds, has approximately $180 million worth of private equity. It will focus on Canadian mid-market deals between $5 million and $25 million.

Mullen believes the firm's track record of producing strong returns for its investors helped it raise capital for its latest fund, which was launched in 2010, two years after the global financial crisis hit. While global economic uncertainty has created some challenges, Mullen said it has also provided good investment opportunities.

A lesson learned from his days as an investment banker at Pemberton Securities in the 1980s and at Citibank was to always be ready at the window of opportunity to buy or sell an investment, because, as Mullen pointed out, by the time investors are on a buying bandwagon, it's likely the worst time to acquire assets at a good price.

"When cycles happen, take advantage of them," said Mullen. "Usually, when no one wants to buy [it's] is the best time to be an investor. When everyone else wants to be an investor [it] is the best time to sell companies. We've sold a couple of our oil and gas companies recently because there's a lot of demand there."

Mullen recalled how some of his company's best investments were also some of the most challenging.

One such deal involved Latham Pools, an above-ground pool manufacturer based in New York that had operations in Canada. Mullen was considering investing in the company shortly after the 9/11 terrorist attacks in the United States, when economic uncertainty was near its peak.

"That was a situation where we were opportunistic. The deal turned out to be an exceptionally good one for us ... when we exited four years later, we sold it at a very good price because the market had come back."

In the past couple of years, Fulcrum's predecessor made two private equity investments: one in Toronto-based adventure travel operator G Adventures, the other in Edmonton's Petrospec Engineering Ltd., which services the oil sector.

Mullen noted that Fulcrum's fourth fund is considering closing a third investment soon.

Despite Europe's persistent sovereign debt crisis, many companies in North America have reported strong balance sheets with lots of cash and available lines of credit. Mullen said that kind of corporate strength bodes well for his firm when it comes time to sell an investment to strategic buyers.

"We've seen a lot of strategic buyers in the market in the last year, and I think we'll see that trend continue. If they're having a hard time growing their business organically, a strategic acquisition makes a lot of sense."

The sale of baby-boomer businesses as owners cash out and retire will continue to be among the trends that will drive deal activity.

Mullen hasn't seen a huge wave of retirement-related deals yet, but he said the economic downturn and slow recovery will likely convince some owners to sell sooner than later.

Even though he has spent 30 years in the finance sector and is a year older than Fulcrum's other two managing partners, Neil Johansen and John Philip, Mullen has no plans to retire soon.

He's kept a keen interest in finance since his days at the University of British Columbia, where he graduated in 1978 with a commerce degree before heading to the University of Western Ontario for an MBA.

"I'm a deal junky," he conceded.

Even so, Gordon described Mullen as "an authentic individual."

"Dave has good values," Gordon said. "This is an industry where I can't say that about everybody."

Wherever the next deal will originate, Mullen said his team is eager to continue the firm's positive track record as an entity separate from HSBC.

"The whole management team is very excited about this," said Mullen. "It's a great opportunity for all of us to ... control our destiny." •

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