By Maureen Flanagan
Interior Specialists, Inc., based in Carlsbad, CA, is a leading provider of interior design and installation services for homebuilders in the Southwestern U.S. Founded in 1983, the company has grown from a single location to become one of the five largest interior design service providers in the country. The company's 16 design centers feature a wide range of flooring, window coverings and countertop products available in a variety of materials. Its strong delivery and installation performance, the high level of service it provides to home buyers, and the overall value proposition it offers to both home builders and home buyers have made ISI a preferred partner for homebuilders and homebuyers in the country's fastest growing regional housing markets.
In a March 31, 2004 buyout, ISI was purchased by KRG Capital Partners, LLC, a Denver, CO-based private equity firm. American Capital Strategies, Ltd. (Nasdaq: ACAS) supported the transaction with an investment of $13 million of senior subordinated debt.
"With its strong market share position in some of the most attractive regional markets in the country, ISI has significant growth opportunities through acquisitions, Greenfield projects, and expansion of products and service offerings," said Kenneth E. Treaster, ISI's CEO.
ISI's strong regional position was developed through partnerships with the country's largest homebuilders. The company targets homebuilders of developments, typically from 25 to 200 "move-up" homes, and enters into agreements with them during the planning stage of new construction. ISI typically provides a model home in the homebuilder's development and shares a portion of revenues from upgrade sales with the homebuilder in exchange for homebuyer referrals.
"ISI allows homebuilders to focus more upon their core competencies, such as land acquisition and project management, while ensuring that the homebuilders' customers are pleased with their new homes, bolstering the homebuilders' performance ratings and reputation in the marketplace," said American Capital Managing Director Darin Winn. "ISI also allows the homebuilder to maximize their return on investment through increased sales of upgraded home interior products, while providing the homebuilder access to the highest quality labor, minimizing time to closing and funding of the home sale."
Through its professional designers and installers, ISI provides homebuyers with the entire "colorized" design service, including professional assistance with style and pattern selection, instant pricing on non-standard upgrades that can be added to the homebuyer's mortgage, room-by-room diagrams, material sourcing, and scheduling and installation. The company specializes in selling design upgrades to its homebuyer customers, enabling ISI -- and the homebuilder -- to increase revenues. Pictured at left are ISI's hardwood floors, bringing warmth and comfort to this kitchen.
ISI is known for its strong focus on quality assurance. It offers a unique pre- and post-inspection program that has resulted in an industry leading 98% no-defect rate. The company's strong relationship with its vendors also enables ISI to offer customers unconditional satisfaction guarantees on upgraded carpet and vinyl products.
In the March 2004 buyout, Madison Capital and Harris Bank provided a revolving credit facility and senior term loans alongside American Capital's investment. KRG Capital, Madison Capital, and the company's senior management also invested in redeemable preferred equity.
Since 1997, American Capital has invested more than $2.7 billion in middle-market financings. Its portfolio of companies includes a broad representation of manufacturing and service industries, including several companies in the building and home d�cor related sectors. For more information about American Capital's portfolio click here. American Capital has invested with KRG Capital on seven prior transactions.
The U.S. homebuilding industry has experienced tremendous growth for much of the past decade. From 1995 through 2003, construction value for residential building grew almost 8% a year and now accounts for $453 billion, or 51% of total U.S. construction. The highly fragmented interior design services segment accounts for some $13 billion of this figure.
As one of the market leaders, ISI is poised to capitalize on current homebuilding trends. Low interest rates and home affordability have driven the national homeownership rate to an all-time high (above 68% as of September 2003). Moreover, the housing demands of an aging baby boomer population - trading up or purchasing second homes -- have contributed to continuing market strength.
The company's markets are thriving. Southern California, Arizona, and Las Vegas have strong economies, driven by job growth, immigration and favorable climates which have stimulated booming increases in population. As a result, the demand for housing has been consistently strong, even exceeding supply in Southern California and Las Vegas, NV, and giving rise to a staggering 15 to 25% rate of growth in home values.
The company anticipates enhanced opportunities from the expansion of its products and services. Its acquisition of New Home Interiors, Inc. in 2000 gave ISI an entry into the granite fabrication business, which entails cutting, detailing and polishing slabs of granite chosen by the homebuyer. The result has been an increase in countertop sales and the addition of new customers. Given this success, the company is considering adding similar facilities in other markets. Pictured at right is an example of an ISI granite countertop, adding beauty to one's home while simultaneously increasing its value.
The company's broad and superior product offering, customer-friendly design services and accent on quality work are what homebuilders and homebuyers are looking for to make a house a home.
