By Dan Primack
September 28, 2010

Berkshire Partners today announced that it is selling Advanced Drainage Systems, a mere 22 years after originally investing. I guess we could call this the outmost edge of long-term investment horizons.

Back in 1988, ADS was a small manufacturer of small-diameter pipes to the agricultural market. It was also working on a new product — corrugated high-density polyethylene — that could be introduced into a storm drain market dominated by steel, concrete and clay.

Berkshire was a private equity upstart, and believed that ADS was sitting on a potential goldmine. The storm drain market was believed to be worth between $4 billion and $5 billion, and seemed to be a place where innovation had gone to die.

So Berkshire sponsored a recapitalization of ADS, in partnership with company management. The company moved into the storm drain market, and in 1993 established an ESOP that provided some liquidity for existing shareholders (including Berkshire). ADS also kept spinning off cash, providing Berkshire with positive multiples via a handful of dividend recaps.

By 2002, however, Berkshire’s investment was at a crossroads. The original deal had been made out of two funds, which had closed in 1984 and 1986, respectively. Limited partners were agitating to wind down the vehicles, but Berkshire felt that ADS had a brighter future than did many of the other “new deal” opportunities.

“ADS kept growing, and we always felt that its next chapter was better than the first chapter of other things we were seeing,” explains Michael Ascione, a managing partner with Berkshire.

So Berkshire basically sold the company to itself — moving shares from Funds I and II into Funds V and VI. It also put a new deal team in charge.

The swap gave Berkshire a 9x return on its initial investment, and the company did continue to grow. By 2010, however, it was time to say goodbye.

“We felt it was just harder for us to help the company today than it was in 1988 or 2002, so we looked for a capital investor to support its next phase of growth,” Ascione says.

The agreed-upon sale represents a 5x return on the 2002 deal, with an aggregate IRR somewhere between 20% and 30%. Still no word on who the buyer is, although Ascione said that he expects a follow-up announcement shortly.

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