NEP believes Minnesota Rubber is in good hands with KKR

MINNEAPOLIS—When Norwest Equity Partners laid the foundation for Minnesota Rubber & Plastics, it always hoped it would turn into a launchpad to help the firm long after the private equity's ownership tenure ended.

That time is now.

NEP has sold the company to global investment firm KKR & Co. L.P. for an undisclosed amount in a deal that closed in mid-November. The firm had owned Minnesota Rubber for the past six years and invested significantly to give the company a strong foundation for further growth.

It trusts that KKR will continue the work it started.

"We want to make sure our companies go into the hands of people who are like-minded, want to grow businesses, have a great deal of capability and a level of integrity and culture that is similar to ours," NEP Managing Partner Tim DeVries said. "KKR is a great owner for this business going forward. They have the highest level of integrity, they perform extremely well and we couldn't be happier that Minnesota Rubber is moving on to a firm as fine as KKR."

Minnesota Rubber & Plastics—officially Quadion L.L.C. but it does business under the MR&P name—is a Minneapolis-based producer of seals and transmission components for highly demanding markets. The firm focuses on three core areas: automotive/transportation, water and beverage, and medical.

At the time of NEP's investment, Minnesota Rubber chased a variety of markets. DeVries said NEP brought more focus, and that led to establishing four core verticals for the firm, the three aforementioned areas plus fluid power.

Minnesota Rubber CEO Jay Ward said in the last few years, the company has shifted its focus away from fluid power as the company found it difficult to leverage its differentiated technology in that space. While it still serves the fluid power industry with its legacy business, it has doubled down its focus on medical because it's become Minnesota Rubber's fastest growing segment.

He expects the growth trends to continue under KKR.

"KKR comes at this in a partnership manner," Ward said. "If we have strengths in certain segments, we want to further penetrate them. At some point we may look at adjacencies, but the markets we're focused in are quite large. We feel there is a tremendous amount of opportunity to grow organically. However, if another company will allow us to accelerate our strategy we are now in a position, thanks to NEP, to make strategic acquisitions."

Setting the foundation

Since 2012, NEP has invested about $20 million upgrading machines and building out Minnesota Rubber & Plastics' infrastructure. That footprint consists of seven locations—four in the U.S. and one each in Mexico, France and China—and utilizes elastomers/silicones, plastics and integrated components, bonding elastomers and plastics to produce its products.

Ward said more than half of its business comes from elastomers, including silicone, while plastics accounts for about 20 percent and its integrated components/bonding capabilities have been growing fast thanks to increased medical demand.

That deep library of intellectual property was one of the main attractions to KKR.

"They have a very extensive library of elastomer formulations and many years of manufacturing know-how that results in very valuable trade secrets that allows it to address challenging customer problems for elastomer applications," KKR Member Josh Weisenbeck said.

Prior to NEP, each facility did a little bit of everything. DeVries said this included overlapping industries with both long and short runs on the same equipment.

Now each location is more focused. The firm's Litchfield, Minn., site focuses mainly on its water and beverage products; River Falls, Wis., is geared toward medical and high precision plastics; Mexico and China both focus on transportation/automotive, with China also producing water and beverage products; and its site in Mason City, Iowa, prepares formulas and services the network with Minnesota Rubber's compounds.

Its site in France has some manufacturing, but is mostly distribution, and its corporate headquarters is based in Minneapolis.

"We made the company much more efficient by focusing in on the big picture," DeVries said. "Where should we be doing Project X, where should we be doing the small runs, where should we be doing the large runs. We worked on pricing and location, and our focus and concentration on our four core customer categories all helped make the operation much more efficient."

NEP sought to build a foundation for Minnesota Rubber & Plastics, and DeVries said that takes time. That involved a comprehensive look at its core competencies: strong customer relations, strong engineering capabilities and strong material science capabilities.

It then took the firm's strengths and matched it against the markets it served to determine which ones should be the primary focus. Once the foundation, and the people, were in place, the focus gradually shifted toward growing sales.

"When we go into an investment, we put together a game plan," DeVries said. "We don't really operate by the calendar, we operate by measuring the progress we make against the objectives we come up with when we first make our investments. We came to the point where we've accomplished what we wanted to accomplish when we bought Minnesota Rubber."

Ward said the broad approach used prior to NEP's ownership worked, but adding focus has made a major impact on business and helped the company achieve strong growth throughout all markets.

It recently invested $1 million to add equipment at its China facility to serve booked business that is set to increase its 2019 sales by 30 percent. The CEO added that the site is projected for similar metrics in the next two to three years thanks to the country's strict fuel economy requirements.

"Our core competencies are in material science and understanding applications in demanding operating conditions." Ward said. "We focus on niches within our targeted end-markets that are fast growing and attractive. We can partner with customers and bring a unique solution that adds value to what they're doing."

Employee-focused culture

With its mission accomplished, DeVries said the firm put together a list of interested buyers. KKR checked a number of boxes, but its commitment to growing the business and taking care of its employees was something that stood out to both NEP and Ward.

NEP made sure the Minnesota team was taken care of before selling the business. All 1,200 employees will transfer to KKR.

"The culture and values of Minnesota Rubber are very much aligned with ours," Weisenbeck said. "They have a huge focus on worker engagement through their team share programs. They have a very high integrity culture and, under the leadership of Jay Ward, we think they're very well situated for this next leg of their journey."

While the firm's culture stood out, Ward said the new owner brings a global reach and an extensive network combined with deep experience in executing strategic acquisitions, tools that potentially could accelerate Minnesota Rubber & Plastics' growth.

Weisenbeck said KKR sees growth potential within all three core verticals, and through its network of 20 worldwide offices the firm can help facilitate Minnesota Rubber moving deeper into each market.

"We like all of them, and that's one of the things that attracted us to them," Weisenbeck said. "They're all growing markets that have very precise requirements. I think our global capability is an excellent match for a company at this point in its development."

KKR places a strong focus on employee engagement through a broad-based model that Weisenbeck said it utilizes throughout all its investments.

The model has three components, with the most important being safety. Weisenbeck said nothing else matters if the company's employees aren't safe every day. KKR intends to invest to ensure that happens. Safety metrics also will be included in the company's quarterly review with the board of directors.

The second element is to work with its companies to find a charitable outlet that matches its core values, something Weisenbeck said KKR and Ward are in the process of doing now.

Finally, Weisenbeck said all employees of KKR-owned companies get to participate in the benefits of ownership. KKR sets aside a defined portion of the profits of its investment for non-management employees—management has its own equity plan.

Upon exit through a liquidity event, KKR will pay out to the employees that didn't participate in the management equity ownership.

"We do it because first of all we think it's a nice thing to do," Weisenbeck said. "But it also engages and excites our employees. That's important, because there is a cost to it, but we think that cost is outweighed by the excitement we see from the employees around the world at the companies we buy."

Regardless of where Minnesota Rubber goes in the future, with KKR and beyond, NEP's impact won't be forgotten anytime soon.

"NEP can feel really proud of what they've done here," Ward said. "They're a patient operator who wanted to create a strong basis for growth. That takes time, and they were patient about it. They were able to build a team that was able to do that. Their legacy here will be creating that foundation, then helping build a culture and putting a team in place that gets things done."