Customer Type: PE Firms

It’s not every day you land a job with one of the world’s leading investment firms ($571 billion in assets under management), then one month later find yourself amidst a global pandemic—just as you’re getting acclimated. Enter Ann (Kim) Chung. In February 2020, Blackstone made this announcement welcoming her as a core part of their nascent endeavor, Blackstone Growth (BXG). As Ann puts it: “We are like a startup. Most of us at BXG are from outside the firm; we are a scrappy, entrepreneurial effort that’s rapidly growing.” A few weeks ago, in a rarefied interview, I captured her thoughts, feelings, insights, and predictions for how life in the investment world is shifting beneath our feet, while altogether keeping its “long view” fundamentals.

Katie Marchetti: What was it like joining as managing director for BXG, then immediately getting hit with the economic contraction?

Ann Chung: When I joined in February 2020, I was just beginning to work on integrating within a large firm [Blackstone]. Then Covid hit, and we all began working from home. Simultaneously, we were getting ready for a big LP event, and at the last minute had to flip it to a virtual format. This was the moment I thought: “Ok, this is going to be much different than what I expected.” At first, the firm was doing a lot of virtual meetings to maintain connectivity (over time it was pared back), and I was a little overwhelmed because I was still in the “getting to know you” phase with everyone—it’s different attempting to build a relationship over a video call. But Blackstone did a phenomenal job of checking in with me, with everyone, to make sure the culture was preserved.

KM: Did the pandemic change your initial investment focus?

AC: I was focused on consumer-based companies, and no one really knew what the consumer was going to do in the pandemic-driven environment. I basically thought I was going to sit around for a year, but within a few weeks the consumer began bifurcating rapidly; assets followed suit. Relationship-based, value-driven brands with loyal customers grew almost overnight. But the consumer traded down pretty quickly if they weren’t heavily invested (emotionally, economically) in a particular brand. In other words, the consumer chose the tried and true value option. This is why iconic, legacy brands like Kraft (and the P&G portfolio as a whole) did well, driven in part by the fact that grocery stores and retailers went back to basics.

In terms of deals, we quickly spotted winners in the consumer space and were very busy in April, May, and June. My first deal at BXG, with oat-milk company Oatly, closed in July. I thought we were going to get a breather, but we continued to get inundated with amazing opportunities, and as a result raised the bar on the types of deals closed.

KM: In your opinion, what makes a company “poised for high growth”?

AC: Companies poised for high growth have a proven ability to execute really well on their particular focus area. Essentially, this gives them “permission” to expand beyond the core product. I call this a “concentric circle” model. To use Oatly as an example, the company executed well on core milk products. They launched in high end coffee shops and proved to artisanal baristas why their product was better. This gave them permission to expand into grocery retail; now they produce ice cream, yogurt, and more.

KM: How has 2020 shifted your thinking about anything from your personal approach to daily life to your investment thesis? How will this affect decisions made moving forward into 2021?

AC: We have little kids (ages two and four), so when Covid hit it was suddenly extremely hectic. Every day felt like we were gearing up for battle. Over time we figured it out—lots of communication and flexibility. My husband was a godsend, and, because he’d been in his job for a while (and mine was new and all over the place), he did the brunt of housework and childcare.

The combo of all the disruption and the announcement of Oatly opened the floodgates. From late summer to early fall, I was on calls for 12 hours a day, working weekends, etc. When you’re working from home, it’s really easy to just schedule back-to-back calls. By Labor Day, I was back in the physical BXG office, so my husband and I had to find a new normal again. For most of 2020, I’ve had a lot of balls in the air, and I wasn’t able to give the right amount of attention to the right things. So for 2021, my goal is to carve out time to relax, spend quality time with my husband; and on weekends spend time exclusively with my kids.

Also, I’m trying to refine my own process for 2021, and not be tempted to look at other people. I’m trying to stay focused.

KM: What is one (or more) myths about private equity you wish would go away for good?

AC: There’s a pervading theme that investors are all super greedy capitalists. Certainly there are some who have a singular focus, but for the most part the people I’ve come across are focused on building businesses, not breaking them down and extrapolating every dollar. PE funds are generally good fiduciaries, and they aren’t making decisions solely based on the money.

To use Oatly as an example (again), part of our investment thesis was based on the CEO vision: Oatly can be a change agent for environmental sustainability on a large, global scale. The idea that a company can make money and do good. I think many funds are taking this holistic approach to investing, it just doesn’t get a tremendous amount of attention.

Lastly, I’m trying to open the aperture for future investments. I want our portfolio to be inclusive. As a team, we are working on laying the groundwork for these initiatives. As a thesis-driven growth fund, we are looking for all the players who can help support our thesis—and we believe this will come from casting a wide net, not by getting stuck in an echo chamber.

There’s a common misperception that private equity (PE) firms only make investments to maximize short-term profits, but this generally isn’t the case. Many PE firms develop long-term relationships with their portfolio companies (portcos), and the COVID-19 pandemic has been a reminder that these relationships can prove invaluable in times of crisis. Chris Paldino is a Managing Partner of Hidden Harbor Capital Partners, and he has more than two decades of PE experience across predominantly Business Services and Industrials industries. Chris understands the value of healthy relationships between PE firms and their portcos, and he recently took the time to chat with BluWave CEO Sean Mooney about how these relationships are sustained and what changes he’s seeing in the PE industry during COVID-19 and beyond.

Sean Mooney: What will the PE industry look like in 2021?  

Chris Paldino: Our economy will likely continue its recovery in 2021, although economic activity will still be depressed, particularly in certain industries. The stark contrast in performance across different end markets will likely create PE portfolios with more of a “barbell” profile than expected (which refers to having winners and losers with less in between). This has wide-ranging implications for industry participants that invest across the capital structure.

SM: What lessons have you learned during the pandemic?  
 
CP: The pandemic has forced many changes that have affected all of us to varying degrees and we have focused on supporting the health of our colleagues.  Quarantining and social distancing has created isolation while health concerns overlay fears about jobs and financial well-being. This combination results in increased stress and a lack of healthy interactions to counteract such stresses. This is why we have encouraged our employees to take more frequent vacations and tried to enable full disconnection from work during these times.  Relatedly, we have also highlighted the importance of managing mental/emotional well-being.

SM: How do you ensure that your portcos are creating value? What are you doing to support them?  

CP: We have an in-house operating team that works full-time with our portcos. Their job is to provide guidance and resources that accelerate each company’s progress on growth initiatives. This team differentiates Hidden Harbor from others in the lower-middle market and helps to deliver better, more consistent outcomes for our investors.

SM: What types of companies excite you the most? 

CP: We look for companies within business services and industrials with strong value propositions that are founder-owned or a division of a larger entity (corporate carve-outs). We believe these situations align with our in-house operational capabilities and hands-on approach to building value.

SM: What has been your deal sourcing strategy through the downturn? 

CP: We have used this time to more effectively convey Hidden Harbor’s key areas of industry expertise. To do this, we have expanded our roster of Executive Partners in focus industries and spent more time developing relationships with industry bankers.

SM: What attributes do you look for in leadership teams for your portfolio companies? 

CP: We tend to focus on hiring ethical managers who have proven experience executing on initiatives that will build value at a specific company. Colin Powell said it best when he advised to “hire for strengths, not lack of weaknesses.” Therefore, we develop a detailed list of experience and competencies for each candidate that are needed to drive identified areas of value creation. We then interview and grade relative to those competencies. This process helps us distinguish between candidates we like and those who are most likely to create value.

SM: How has 2020 shifted your investment thesis? 

CP: 2020 has been challenging and it has reinforced our view that our most important job is to support our management teams. There was no playbook for operating through a pandemic and, in many cases, there were no good solutions available. We are so thankful for the extraordinary efforts of our portfolio management partners who continue to work through this unprecedented situation. My hope is that 2020 provides an important reminder that value is created at the companies by talented individuals, not in the PE conference room. Anyone who thinks otherwise is looking at the world through the wrong lens.

SM: What’s one myth about PE you wish would go away for good? 

CP: There’s a perception that PE is solely focused on short-term shareholder gains. However, we believe that investing in businesses to promote long-term success is the only way to consistently build enterprise value. Consequently, we invest in people, processes, and systems that promote long-term growth and organizational health across our portfolio.

SM: What are your suggestions for outsourcing expertise? 

CP: I spend a lot of my time ensuring that our diligence processes focus on critical questions and that we have the right resources evaluating each of these important issues. We must be brutally honest about where we lack expertise and access experts who can guide us appropriately in these areas. Firms such as BluWave help us quickly identify resources to help across diligence and post-close value creation.

COVID-19 has fundamentally altered the way many businesses operate, and restaurants have been forced to make the most significant changes of all. Richard Fitzgerald is a co-founder and Managing Partner at CapitalSpring, a PE firm dedicated to the restaurant industry (companies in their portfolio include staples like Taco Bell and Dunkin’ Donuts), and he recently shared his insights about how his portfolio companies are responding to the pandemic and what his industry can teach us about navigating one of the biggest crises companies have faced in decades.

Sean Mooney: What do you see as the post-COVID future of the restaurant industry?  

Richard Fitzgerald: The National Restaurant Association recently reported that the restaurant industry has experienced 100,000 closures tied to the pandemic. Many of those are independent mom and pop businesses or concepts that come into the pandemic in a weak position. The industry has become crowded – growth in the number of restaurants has been outpacing growth in the population. In other words, supply has been exceeding demand, which could ultimately mean COVID-19 will be healthy for the industry because it corrects for the imbalance.

Post COVID-19, labor management will likely be easier, as higher unemployment will lead to easier hiring and lower turnover. It’s been hard for restaurants to grow in recent years, because rents have been high with fierce competition for good locations. More affordable locations will become available after the pandemic; meanwhile, a pivot toward delivery, drive-through, and off-premise services will take place. Fast casual restaurants (FCR) and quick service restaurants (QSR) will likely see continued growth, as they are best positioned for our “new normal.”

SM: What has CapitalSpring been focused on over the past six months?  

RF: Between March and June, we stopped looking at new deals and really focused on the portfolio. We talked to most of our companies every day for months. We didn’t know how long the headwinds would persist, so we wanted to fortify portfolio company balance sheets and ensure operations were as efficient as possible, and prepare for a severe and protracted downturn. We also worked closely with the portfolio to ensure off-premise capabilities were optimized, including creating temporary drive thrus and outside dining rooms with tents in parking lots and other stop-gap measures.

SM: What attributes do you look for in your companies’ leadership teams? 

RF: We’re always trying to find leaders who have solid track records of managing through certain environments and against specific goals. If we’re looking to back a company that will focus on acquisitions, we try to find someone who’s done that before. Matching up leaders’ experience and track record to the growth strategy of the business is a core priority for us.

Throughout COVID-19, we’ve had a lot of discussions with portco leaders about how they handled the economic crisis in 2008 and 2009, and the current crisis will help to inform relationships with portcos down the road. For example, we’ll be able to ask, “What did you do when you saw the news about restaurants being closed, people sheltering at home, and so on?” This is a new stress test against which we can evaluate people and companies. If managers did a good job through the pandemic, they’ve been battle-tested and will likely be reliable partners in future crises.

SM: How does CapitalSpring use third-party resources and expertise to fill gaps with their portfolio companies? 

RF: There are a lot of great resources out there that help improve decision-making around new site selection – for example, resources that can be used to identify the right location to build a new restaurant by leveraging AI to analyze large datasets of variables related to traffic patterns, site attributes, and local demographics. We also rely on third parties for supply chain and procurement analysis – everything from napkins and food to how restaurants can improve their facilities by reducing the cost of engineering and maintenance.

We work with a group that helps us look for efficiencies at the store level and optimize menus (there’s far more science behind this than most people realize). There are data analytics services that can tell restaurant owners how to implement a 3 percent price increase while minimizing reductions in foot traffic – for example, by changing prices on items that people purchase less frequently (think hash browns versus the Big Mac). We collect a lot of proprietary data with our portcos, but in some areas they don’t have the “depth of data” that third parties can provide.

SM: How has 2020 shifted your thinking about how you interact with portcos? 

RF: One major challenge is maintaining a healthy company culture while working remotely. I spend a lot of time just calling colleagues and checking in on them now. You don’t need to be as proactive about culture when people are seeing each other every day, but now it’s difficult to know who’s overwhelmed or who’s potentially dealing with stress at home.

SM: What is one myth about private equity you wish would go away for good? 

RF: There’s a pervasive idea that PE firms buy companies, strip them down, and try to sell them as quickly as possible to make a profit. In the vast majority of cases, this simply isn’t true – the industry often adds jobs, spearheads diversity initiatives, and brings focus on environmental, social, and governance (ESG) issues. PE firms also cultivate long-term relationships with their portcos – there are times when we’re lenders and times when we’re owners, but our role is always to put a company in the strongest possible position to succeed. That way, everyone wins.

As American companies fight to recover from COVID-19 and the resulting economic downturn, the private equity industry has stepped in to provide capital, expertise, and many other forms of assistance. But how, exactly, are PE firms approaching such an unprecedented situation? What lessons can they teach other companies, including those that aren’t PE-backed? What does the future of the industry look like? Scott Plumridge is a Managing Partner at The Halifax Group, and he recently took some time out of his busy schedule to answer these questions and offer other insights on the state of the PE industry.  

Sean Mooney: What industries and companies do you primarily invest in? 

Scott Plumridge: We invest in healthcare and pharma services, business services, and franchising companies. Examples of our prior and current portfolio companies include Caring Brands International (the leading international franchisor of homecare), StrataTech Education Group (a major welding and training school for HVAC and industrial trades), AAMP (a provider of aftermarket parts for vehicles), and many others.

SM: What kind of strategies have you implemented and what investments have you made during the economic contraction and why? 

SP: The pandemic has been a great time to highlight the value of functioning PE relationships for a lot of small to medium-sized businesses. Many were dealing with supply chain issues, closed facilities, or COVID breakouts with staff. We helped to plug the financial hole – non-PE-backed companies don’t have our financial resources. But we were also able to give our portcos “CliffsNotes” versions of best practices and considerations.   

For example, we started a weekly newsletter and webinars that ran over the course of eight weeks, which discussed issues such as furloughing employees, safety, how to bring teams back, unique forecasts for each company, cash flow, and contingency plans. We wanted to make sure companies had capital to weather a storm, fund new models, and meet new requirements (masks, shields, and so on). It’s essential for PE firms to provide emotional, technical, tactical, and financial support to keep businesses on track. We’ve got ten portcos, and we’re consolidating best practices and using them with all our companies. 

SM: What general advice would you offer other companies trying to get through a period of economic uncertainty?  

SP: The hardest discipline we offer in the middle of an environment like this is: don’t forget about your growth plan. Look for opportunities to offer new services or products. We had multiple companies launch new services or complete acquisitions during this period.  

SM: What role does data play in your decision-making, as well as portcos’ ability to be agile and quickly make decisions?  

SP: One of the biggest things is data transparency. Our companies need help organizing and understanding datasets. We help them set goals against data and the overall business environment, then we use that data to enhance offerings compared to competitors. Figuring out how to channel and productize data can be an alternative business model. 

SM: What can non-PE-backed businesses learn from the way PE-backed companies approach growth and value creation? 

SP: Two things came to mind. First, I would tell any independent business: don’t try to do it all by yourself. Seek out experts and build a diverse team. We come in and work with our management team, then we bring in a bespoke set of directors to identify gaps and fill them, and selectively use third parties (which BluWave helps us with). Have a good group of advisors who will hold you accountable and who have a stake in your success. 

Second, constantly be looking for undiscovered opportunities for reinvestments. Every company we’ve ever worked with has had fabulous reinvestment opportunities that were unrealized when we came aboard. Most people have either become set in their ways with a narrow vision of what their business is, or they’re scared to reach into their wallets and fund themselves. We can unlock new opportunities. The highest return dollars come from reinvestments we do after the initial investment. 

SM: What trends are you seeing over the next six to twelve months? 

SP: The role of PE will only become more vital. There are tough times ahead, but as other sources of capital shrivel up, PE will step in to keep companies moving forward and fill the void.