Brazos

1. What is Brazos’ investment strategy? Does it seem well suited for its position as a first-time fund? How do you assess the merits of the GTT transaction?

Brazos’ investment strategy emphasizes buyouts of mid-size companies that show predictable cash flows, have good management teams in place, have well-developed niche markets, and are located in Texas and the Southwest. This strategy suits its position as a first-time fund because this geographic area is underserved by LBO firms. Additionally, the existence of dependable cash flow and management make it easier to acquire debt financing and increase leverage. GTT offered merits for both sellers and Brazos. It gave sellers a way to cash out if they desired, while allowing them to retain significant equity ownership. The structure of this deal also delayed taxation until shares were liquidated. It gave Brazos minority ownership with significant board representation, supermajority rights to block major changes, and the right to take control of the board in the case of severe underperformance.

2. How has the current recessionary climate affected Brazos’ investment strategy, in both favorable and unfavorable ways?

Favorable: Brazos’ strategy matched well with new strategies in the industry, including investing in smaller companies, establishing a specialty investment focus (niches), developing operating expertise to aid the companies after acquisition (good management), and diversifying geographically (TX and Southwest).

Unfavorable: Tightened regulations and increased risk aversion among lenders meant less opportunity for debt leverage and increased reliance on equity contributions. Recessions make this worse since less equity is available to be invested. Fund-raising fell from $63.5 billion to $35 billion in 2001. Furthermore, rising operating productivity makes it harder for buyout firms to add value while also leading to better earnings and higher initial prices. As a result, companies sat on the sidelines, waiting for valuations to recover, and competition increased for deals that did look favorable.

3. Is CoMark an attractive investment? What are your major concerns with the proposed deal? How attractive is the purchase price?

The proposed LBO deal of Comark Building Systems is an attractive investment for Brazos because it fits into Brazos’ “sweet spot”- a reasonable priced company with solid cash flow and good management. We can project cash flow at $6.8 million in 2002 and $12.3 million in 2006. In terms of the purchase price at $40 million, it is very attractive