Customer Type: PE Firms

Tools and techniques to love this February and beyond

February 18, 2021 Houston Slatton

Where would we be as solutions-focused experts without a few favorite tools and techniques we can depend on, even during the most challenging engagements and ever-shifting workplace environments?

With the lightning speed of innovation these days, not to mention skill sets required to stay on course, this month I wanted to share a few ideas—in the vein of “digital transformation”—that may be useful for managing the daily demands of business development, client work, and the 948 other things on your plate (including reading emails like this!).

Idea One: Instead of overwhelming your teams, contractors, or yourself with app after app (and password after password), try consolidating into one suite that can be used company-wide and allows for outside collaboration. The 800-pound gorillas here are Microsoft Office and Google Workspace, but there are more suites to choose from depending on your line of business. For example, if you’re visually-based, Trello could do the trick. Or just embrace the complexity and use a tool like LastPass!

Idea Two: Looking to build and maintain strong relationships, even while things are virtual? Check out Thnks: “Growing business with gratitude.” While it may seem old school, saying thank you actually never gets old, even if you’re doing it in a modern way.

Idea Three: If you are a small to midsize business that operated in 2019 and 2020, chances are you may be dealing with all sorts of new changes due to the stimulus packages—not to mention all the “rules” for 2021 that come with a new White House administration. Many positive changes were made in an attempt to help businesses stay afloat, while simultaneously creating more work. Stay on track with payroll, tax deadlines, and more with a platform like Gusto or ComplYant, and help alleviate some of the work in these “headache” areas.

Bonus idea that has nothing to with technology: Feeling stressed? Needing some time away from WFH? The benefits of Infrared Saunas are quickly becoming mainstream: better sleep, relaxation, detoxification, and muscle soreness relief, to name a few. Chances are, if you’re located in a regional or major metropolitan area, there will be an IR business nearby.

Stay tuned for more BluWave insights, and don’t forget to follow us on LinkedIn and Twitter.

How We Did It: Healthcare Turnaround and Performance Improvement Case Study

February 9, 2021 Sean Mooney

A multi-site healthcare provider portco was in need of turnaround expertise to help improve their growth-stalled performance. Moving quickly, we worked to thoroughly understand the client’s specific turnaround needs. Tapping into our Intelligent Network, we were able to match the client with a resource who fit their exact requirements (including geographic location) and was able to efficiently start moving on the strategy. In the short-term, the PE fund was able to quickly gain confidence in the interim executive. In the long-term, the PE fund hired the candidate full-time to lead and execute the turnaround plan. 

 

For the full story, read the case study here.

How we did it: Digital marketing due diligence case study

February 5, 2021 Sean Mooney

Our PE fund client needed a resource to perform digital due diligence for an e-commerce-enabled aftermarket products business. They needed a full overview of the digital landscape, including SEM, SEO, UX, conversion path analysis, Google Analytics, and digital GTM strategy. We used our extensive experience in digital marketing due diligence to immediately connect our client with expert groups from our invitation-only Intelligent Network. They used the insights gathered from the chosen digital marketing group to make an informed decision and quickly close on the investment opportunity. Ultimately, we were able to help the client find a clear path forward. 

For the full story, read the case study here.

The year of specialized work and continued recalibration

January 28, 2021 Houston Slatton

What better way to kick off 2021 than with some age-old wisdom from the most outstanding figure in medicine, Hippocrates: “Persons in whom a crisis takes place pass the night preceding the paroxysm (spasm) uncomfortably, but the succeeding night generally more comfortably.”

In other words, if last year was the “uncomfortable paroxysm” then this year should be markedly less so, as most of us have adjusted to the new normal. Yes, things are still a little shaky, but at least we aren’t at the height of the disruption. In fact, in many cases it seems companies are embracing the changes and shifting their hiring practices and organizational frameworks to include more remote workers.

According to a recent World Economic Forum report: “41% of companies plan to expand their use of contractors for task-specialized work” and as a result of the COVID-19 recession, “day-to-day digitalization has leapt forward, with a large-scale shift to remote working and e-commerce, driving a surge in work-from-home arrangements and a new marketplace for remote work.”

Another interesting insight based on a four-year projection by the authors, “by 2025, the time spent on current tasks at work by humans and machines will be equal. A significant share of companies also expect to make changes to locations, their value chains, and the size of their workforce due to factors beyond technology in the next five years.”

However, despite these shifts and focus on technology, it still holds true that “despite the current economic downturn, the large majority of employers recognize the value of human capital investment.”

As far as the future is concerned — namely for those willing to innovate, get creative, and adapt — opportunities abound. Furthermore, specialized workers and the demand for expertise will continue to grow as companies recalibrate. The intended result: workforces and an economy that comes back stronger, more resilient, and better equipped to adapt to future disruptions.

 

To read the full WEF “Future of Jobs Report” click here.

Quickly perform digital marketing due diligence on new business

Firm quickly needs digital marketing diligence on target

Understanding the digital landscape has never been more important. Our PE firm client needed a resource to perform digital marketing due diligence for an e-commerce-enabled aftermarket products business. To build confidence in the investment, our client needed to know more about the target’s SEM, SEO, user experience (UX), and transaction process (mobile versus desktop, etc.) capabilities, as well as gain clear insight into the state of the platform itself. Additionally, the client required a quick turnaround time.

BluWave identifies top expert groups to perform diligence

BluWave utilized its extensive experience helping other PE funds with similar digital diligence requirements to intimately understand our client’s needs. Immediately following our scoping call with the PE firm, we connected our client with three expert groups from our invitation-only Intelligent Network. Each one had extensive experience with digital marketing due diligence—particularly in the areas of SEM, SEO, UX, conversion path analysis, Google Analytics, and GTM.

Client engages ideal provider, gaining insight on target

Our client efficiently selected an expert PE-grade group with specific experience in the target’s industry as well as best-in-class e-commerce/online retail experience. Beyond digital marketing due diligence expertise, this group also understood the target’s specific tech stack. The PE firm was able to assess the company with unique insights that enabled them to quickly close on the investment opportunity.

Urgent Interim CEO To Provide Turnaround, Performance Improvement

Interim CEO immediately needed for healthcare portco

A PE firm VP came to us with a critical need for an interim CEO for their multi-location healthcare services portfolio company. The portfolio company was experiencing stalled performance and the firm was urgently seeking an interim CEO that could turn around this problem and improve performance. They not only needed the resource to have the necessary skills but also required that they be in the same city as the portfolio company’s headquarters in order to limit travel concerns.

Using pre-vetted network, BluWave finds exact-fit candidate

Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade interim CEO needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of interim CEOs that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then connected the client with the select pre-vetted providers from our invitation-only Intelligent Network that fit their exact needs.

Firm engages candidate to lead company turnaround

Quickly after the initial scoping call, the PE firm was introduced to a PE-grade interim CEO who was local to the portfolio company’s area and specialized in multi-location company turnarounds. The PE firm confidently engaged the individual and after an initial assessment and interim service, was so pleased with the individual’s work that they hired the executive full-time to lead and execute on the turnaround plan.

In 2021 Focus on Healthy Communication, Collaboration, and Inclusivity

January 12, 2021 Katie Marchetti

Despite all the uncertainty and disruption still lingering from last year, 2021 offers ample opportunities for companies to refocus on what matters most: healthy communication and collaboration, an inclusive workplace culture, and ultimately greater productivity. While companies need to understand what will be different in the post-COVID era, they should also remember what will stay the same: the need for real human connection, whether it is mediated by technology or not.

 

#1 – New Ways To Assess and Engage With Employees

Office politics has always been a fact of life – employees have often been rewarded by who knows how to best navigate office politics versus who does the best work. We are now seeing signs that remote work can help companies reward employees based on merit and by giving traditionally overlooked colleagues more of a voice and having more objective processes to measure them. In some cases, the remote work era is even prompting companies to consider new employee performance metrics altogether.

According to a recent PwC survey of U.S. executives in the process of shifting to remote work, most companies are focused on “greater flexibility in work hours” (57 percent) to drive productivity. In effect, outmoded measures of employee performance – such as the number of hours an employee works – are becoming less important. Companies are instead moving to a more merit-based model: efficiency in completing a task, quality of work, and the ability to collaborate productively with colleagues.

While the trend toward evidence-based employee assessment was already underway before COVID-19, the pandemic has privileged some forms of interaction and evaluation over others. For example, a recent Deloitte report explains that remote work is “usually assigned by the outcome, instead of by task, enabling productivity assessment.”

The influence of office politics on managers’ perceptions becomes more limited as they make assessments based on concrete outputs versus subjective impressions. Although after-work drinks or trips to the golf course help colleagues build closer connections, these activities can also be exclusionary and give managers a biased attitude toward employees’ performance.

We will never get to a point where in-person interactions are completely supplanted by technology (nor should we want this to be the case), but managers should take this opportunity to determine if their assessment methods are as rigorous and impartial as they can be.

 

#2 – Balancing Productivity With “Organized Serendipity”

Many employees have proven that they’re capable of being just as productive at home as they are in the office – in fact, 94 percent of employers say productivity has been just as high or higher during the pandemic as it was before. Other surveys (such as this one conducted by the Boston Consulting Group) have found that a significant proportion of employees have maintained their productivity while working remotely. Meanwhile, 72 percent of office workers say they would like to work from home at least two days per week.

Although productivity has remained steady, employees haven’t been able to interact with their colleagues or clients/customers as naturally as before. Without chance encounters in the break room, close colleagues poking their heads around corners to say “hi,” and the occasional coffee meetup with a client, employees may feel disconnected. As we all know by now, this can eventually take an emotional and psychological toll. What can companies do to address this?

As offices remain closed and people continue to work from home, companies may consider creating what I call organized serendipity – getting people together in a structured but organic way to facilitate relationship building and creative collaboration. For example, at BluWave, we’ve launched a virtual, topic-driven event series to share best practices among our roster of PE fund clients. After a brief panel discussion, clients break out into discussions on sub-topics and network with each other using an interactive technology platform. The organization comes from cutting the groups by functional expertise, but the agenda is loose enough to allow for actual networking that does not feel forced.

On the employee front, while some are still working from home and others are socially distancing at our physical office, we host “Friday lunch hours” that gather everyone together to share a meal and chat about the upcoming weekend.

 

#3 – Making the Era of Remote Work More Human

“Zoom fatigue” – a term used to describe the lack of motivation for hopping on yet another video work call, joining a digitally-driven event, or getting together with family and friends virtually – is becoming a real threat to remote workforces. No matter how well we integrate remote work into our lives, we will never be able to replace the value of in-person human connection or shared experiences.

According to a recent survey by Slack, 45 percent of newly remote workers report that their sense of belonging has suffered since they began working from home. This is a powerful reminder that companies should focus on building authentic and consistent human connection into their remote work platforms.

Once it’s safe to do so, companies should swiftly prioritize in-person interactions. Even now, many companies recognize that it’s impossible to shift to 100 percent digital communication – a reality I’ve seen personally with private equity fund managers who still need to shake the hands of the management team before purchasing a company or stepping into the company’s facility. Once the threat from COVID-19 subsides, remote-focused companies should still give employees opportunities to interact with meet-ups, site visits, and other events that satisfy our need for human connection.

The original version of this article was published on Toolbox HR.

How to thrive with your lenders in 2021

January 5, 2021 Sean Mooney

As we roll up our sleeves and move full steam ahead into 2021, it is clear that many of the challenges of last year linger. In fact, many companies—particularly in the travel and hospitality sectors—still face unprecedented circumstances and continue to scramble from one problem to the next. This can often mean losing sight of long-term goals, and when it comes to your lenders and liquidity can quickly lead to major, even irrevocable, problems.

This is why companies should continue to proactively reach out to their lenders and other trusted partners during these times to enable them to become part of the solution. In my past experience as a private equity (PE) partner, I noticed that companies often waited until it was too late to contact their banks and others that could help. Their earnings had already retracted, their cash was depleted, and their options were constrained beyond repair. By the time they reached out, their lenders were often caught off guard and felt like they had no choice other than to go into crisis mode and do whatever they could to protect their loans. When this happens, owners of businesses are often left behind.

Companies need to play ahead and take action during times of crisis. If you don’t get ahead of events, they will get ahead of you. This mindset is not only critical for your internal operations, but also for your external partners – particularly your lenders. Bring your relationship bankers into the discussion early so they can help you help yourself. The sooner you get your relationship bankers involved, the more options they’ll have to maintain your equity, which is in all parties’ best interest.

Cultivate a proactive versus reactive mentality

After nearly 20 years in private equity, one of the most essential things I’ve learned during a crisis is that cash is king. If you’re not actively thinking ahead about your liquidity, it can evaporate in a moment’s notice and then your game is over. Your lenders are one of your most critical sources of liquidity during difficult times. If they feel like they are part of the solution, they will act with your (and their) best interests in mind and help you fund your operations. If they feel like you are constantly surprising or misleading them, they will clamp down and do whatever they can to salvage their loan with relatively little concern for your equity.

When I was in private equity, I developed a litmus test called the “three board meeting rule.” In the first meeting, someone says “I think there’s a problem” and the management team swears to resolve it. By the second meeting, little action is taken and someone more loudly says, “Okay, now there is really a problem.” During the third meeting, everyone is looking around at each other as things have gotten worse and worse and drastic actions then have to be taken. It pains me to admit that earlier in my career I was often the guy who waited until the third meeting. In retrospect, I never looked back on a decision and wished I took more time to address a critical need. We need to act between the first and second board meeting. Hope is not a strategy. The longer we wait, the fewer options we have.

According to a 2019 McKinsey report, companies that were more resilient during the Great Recession “prepared earlier, moved faster, and cut deeper when recessionary signs were emerging.” By the first quarter of 2008, these companies became nimble while their lower-performing peers were still adding costs. At the end of the day, crisis management is not all about cutting costs, though. It’s about maximizing cash. Cash is the fuel that gives you the options to stay afloat, repair your business, and course correct until the storm passes and calmer times return. Your relationship with your lender will play a meaningful role in your ability to maximize your cash resources.

Eliminating bias against perceived failure

Companies in crisis often have unhealthy internal dynamics that can prevent difficult but necessary decisions from being made. First, there can be a bias against taking action because that would require an admission of shortcomings. This leads to the diffusion of responsibility, which can cause a company to delay until it runs out of time and options. Second, companies’ leaders often convince themselves that they don’t need outside assistance – there’s a culture of autonomy that can develop when times are good, so these leaders insist that “we can fix it ourselves.” And third, even when companies recognize that they have a serious problem, they have meeting after meeting about it without taking concrete actions.

Partnering and building relationships across the board

In addition to cultivating strong relationships with lenders, do the same with other partners like private equity investors and third-party turnaround advisors.

Third party turnaround advisors have learned every lesson at least twice and can help you navigate your recovery with a much higher probability of success. Trusted outside advisors will cost you money, but they also bring a more objective perspective and institutional knowledge to the table, which can lead to more impartial and better-informed assessments of a company’s situation and how to deftly maneuver through challenges. Your lenders will also be comforted by you bringing outside assistance. In fact, if you don’t bring in your own advisor, they’ll likely eventually require you to use one of theirs.

Private equity investors are also a tremendous asset during difficult times. They bring capital, experience, and networks that will help you be more agile than your competition. Their portfolio companies typically view times of crisis through the lens of opportunity. PE investors have a powerful incentive to make sure their portfolio companies are doing everything they can to make the business as resilient as possible, especially in a crisis. Lenders view this affiliation and mindset positively and thus are more likely to step up for companies that are backed by PE investors than those that are not. This is why it’s no surprise that one of the reasons PE-backed companies perform better than their non-PE-backed peers amid economic contractions is their ability to take advantage of these relationships and secure capital more easily and affordably.

No matter what a company’s financial situation happens to be, the first step toward determining what needs to be done is an honest assessment of the challenges it faces. Then it’s critical to take informed action while working with your trusted partners to give you the greatest opportunity to survive and thrive.

The original version of this article appeared in CEOWorld Magazine in November, 2020.

With the long view, PE firms make steady partners through the ups and downs

December 17, 2020 Sean Mooney

When people think of the private equity (PE) industry, they often picture big Wall Street firms launching headline-grabbing takeovers of multi-billion-dollar companies. But this is a caricatured version of what PE firms actually do: forge long-term relationships with companies of all sizes across industries to help them scale and build value sustainably. In fact, according to the American Investment Council (AIC) more than 30,000 American companies (which employ 8.8 million workers and account for 5 percent of total U.S. GDP) have received PE investments, and these investments are a major engine of economic growth. Companies such as ServePro, RV Share, and EllieMae have all been turned around by private equity and are prime examples of PE’s power. 

PE-backed companies don’t just benefit from the capital provided by the firms – they’re also more resilient than their peers amid economic contractions like the one we face today. This is because PE funds not only have strong relationships with financial institutions, but also bring operational expertise, unique access to market data, and deep knowhow supporting companies throughout economic cycles. The resilience of PE-backed companies also makes them robust investment vehicles, which is why the private equity industry is a top-performing asset class in the United States.  

PE firms take the long view on companies in their portfolio, which makes them steady partners in times of crisis – as well as models for other companies that are doing their best to navigate COVID-19 and the economic fallout it has caused. Knowing the industry is a force for economic growth and stability, we should take a closer look at how it functions and what its nuances can teach companies of all types. 
 

The value of long-term relationships 

One common misconception about the PE industry is the idea that firms have strictly transactional relationships with their portfolio companies. In fact, PE firms typically develop long-term partnerships with their portcos—the average holding period in the industry was more than five years between 2012 and 2018. 

Drew Maloney is the President and CEO of the AIC – an advocacy organization which provides information about the private investment industry and its effects on the U.S. economy – and he explains that PE investors “provide capital, operational expertise, and access to wider networks and supply chains, which helps businesses grow or restructure.” While most people associate PE funds with financial investments, beyond providing access to capital, funds draw upon rich data (market studies, voice of the customer surveys, data analytics) to understand the trajectory of industries and quickly make objective, evidence-based decisions to support long-term growth.  

As Maloney puts it, PE firms are in the business of providing “long-term, patient capital.” However, any long-term business and investment plan has to acknowledge that circumstances can change rapidly. Maloney observes that PE-backed companies are “nimble, agile, and can move faster” than their peers, giving them a significant advantage when economic conditions change drastically and without warning. 

 

How the PE industry is handling COVID-19  

Earlier this year, BluWave released data which demonstrated that private equity funds have been proactively investing in their portfolio companies during COVID – not trying to cut expenses by slashing jobs and downsizing in other ways. This reflects my experience during past recessions – because funds have the long-term horizon in mind, they use their access to capital, technology, and specialized expertise to position their companies to thrive during periods of crisis while others go into defensive mode.   

Scott Plumridge is a Managing Partner at the Halifax Group, and he points out that PE firms provide “emotional, technical, tactical, and financial support to keep businesses on track” amid COVID-19. Plumridge believes the “pandemic is a great time to highlight the value of a functioning PE relationship for a lot of small to medium-sized businesses.” He says his firm has been providing critical information on best practices, forecasts and cash flow, contingency plans, and a wide range of other issues.  

According to Plumridge, the “hardest discipline” PE firms offer in the middle of a situation like COVID-19 is urging portcos to remain focused on a growth plan. As other companies have been pulling back, Plumridge points out that “We had multiple companies that launched new services or completed acquisitions.” Maloney echoes this point, explaining that companies need to be “thinking 10 years out and making decisions over the long term,” even during a period of economic uncertainty.  

 

Nothing is more important than human capital 

 Maloney outlines why PE has a solid record of helping companies through recessions: “During contractions, we have more flexible capital, which is one of the reasons PE had returns well above 10 percent during the last recession and are better positioned to ride out a downturn.” The data agree with him – an analysis of how PE-backed companies performed during the Great Recession found that they weathered the downturn better and recovered more quickly than their non-PE-backed peers.  

One reason for the higher performance of PE-backed companies is their access to financial capital. However, PE firms don’t just provide dollars. Maloney emphasizes that PE-backed companies benefit from the “wide networks and operational expertise” PE managers offer their portfolio companies. Plumridge makes a similar point: “Don’t try to do it by yourself. Seek out experts and build a team of diverse people and backgrounds. Get yourself a good set of advisors who will hold you accountable and who have a stake in your success.” 

Relationships like these are particularly important right now, as companies are confronted with one the worst economic downturns in living memory. The principles that make PE firms successful in recessions – staying calm, taking the long view, making data-driven decisions, accessing specialized advice and expertise, and searching for and quickly acting on informed growth opportunities – can guide all companies, whether they’re PE-backed or not.  

 

 

An interview with Blackstone Growth’s Ann Chung

December 14, 2020 Sean Mooney

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.

An interview with Hidden Harbor’s Chris Paldino

December 2, 2020 Sean Mooney

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.