CoreNetwork of Toledo, OH recently completed a successful exit with Pump Engineering, LLC, doubling the angel groups investment in about twelve months.
CoreNetwork and Plymouth Venture Partners (PVP) of Ann Arbor, MI invested $2.4 million in the Southeast Michigan company, which sold to California-based Energy Recovery, Inc. (ERI) for approximately $20 million and one million shares of ERI's common stock (NASDAQ: ERII). Pump Engineering will operate as a wholly
owned subsidiary of ERI.
Operating as a network, CoreNetwork invests across Ohio and Michigan and even beyond.
About the investment
"Pump Engineering historically always made pumps," says Bob Savage, Jr., founder and managing partner of CoreNetwork. "Then two to three years ago, they came out with a line of turbo chargers that were cutting edge in the water desalinization industry."
Desalinization, removing salt to make water usable and drinkable, represents a huge market in second and third world countries and even in the developed world.
Pump Engineering's energy-efficient centrifugal turbine technology harnesses unused energy from desalinization processes and cycles it back to power the desalinization plant. The technology can also be applied to other high-pressure fluid processes.
In 2008, Pump Engineering experienced tremendous growth. There were offers to buy the company, but the principals saw greater potential in growing the business themselves, Savage says. But, like many companies their size, they couldn't go to the bank to borrow enough to grow.
"Along with PVP, we put together the investment package," Savage says. "For us, Pump Engineering was a larger and later stage deal than we typically get involved in, but we look at enough opportunities to know that this was a great looking deal."
With the capital to expand, Pump Engineering moved into a new facility that increased their capacity. They gained contracts for two of the largest desalination projects in the world. For ERI, who had competed against Pump Engineering, this was a strategic acquisition.
"It is great to see the Pump Engineering management team succeed this way," Savage says. "They held on to the company and developed the technology. They stayed with it and so did their community. This is a great win for the Midwest and for Michigan. We do engineering and manufacturing very well. The plan now is to send some of the work done in California back to Michigan."
Advanced manufacturing, a regional core competency, leads to good deals
"Our group has been in place since 2004," Savage says. "We've been around long enough to have a good reputation. We put together quality deals and quality investors. We have a good track record on exits-four in six years, with only one loss. We syndicate most of our transactions. The bigger the deal, the bigger the partners."
CoreNetwork's diverse investments include companies in broadband telecommunications, relationship management software, and traffic management data and systems. Many of the portfolio companies are in advanced manufacturing.
"That's what this region was built on," Savage says. "From the time of Thomas Edison and the Firestone Brothers, this has been a hot bed of innovation. There is a lot of manufacturing expertise, good management talent, and many hard working people here."
CoreNetwork invests in about five deals per year. Typical rounds are between $650,000 and $1.5 million. "We have a good mix of folks in the group. We don't have venture capital members, but we syndicate about 95 percent of the time with other angel groups and VCs," Savage says. "When the VCs send us deals, as in the case of Pump Engineering, they typically lead, and we are glad to have them perform that role."
CoreNetwork and their syndication partners tend to play an active role in their portfolio companies. "In this deal, the CEO of PVP became vice chair of the board," Savage says. "He rolled up his sleeves and was very active in the company and performed some of the negotiations in the sale."
Deal flow in the Ohio-Michigan region is good.
"There are always more people starting companies when the country is going through a rough stretch," says Savage. "Given the way the credit markets are today, there are a lot of companies that can't raise capital from the banks. That has helped our deal flow. We are currently seeing more later stage deals."
