Every quarter we gather Vice Presidents in PE to discuss current industry topics and to offer these peers the chance to gather, share information, and decompress with one another. In our most recent event, we discussed how scarcity and inflation are impacting human capital in PE as well as how firms are approaching finding opportunities in a choppy market. We’ve listed our top takeaways below.
These forums are invite-only and follow Chatham House Rules, so listed below are high-level takeaways only. Are you in private equity and interested in joining fellow PE VPs during our next PE VP Forum? Register here.
Scarcity and inflation impacting human capital: One of the unsung areas where inflation is impacting the economy the most is human capital.
Firms are taking a closer look at culture to increase retention and not just thinking about wages, but the total employee experience and related rewards.
Investments are being made in portco HR (CHROs, VPs, Directors) to collaborate with marketing functions on recruiting content to promote the benefits of an organization beyond dollars per hour. Portcos are also utilizing their current staff to recruit and network with candidates, such as incentivizing them with referral bonuses.
Another interesting concept is building in-house training programs to grow net-new talent pools instead of taking and losing employees to and from competitors.
Finding opportunities in a choppy deal market: The confluence of rising interest rates and geopolitical pressures are causing the deal market to become increasingly choppy. Firms are looking for ways to find opportunities in the face of risk and rising recession risk.
Teams are getting creative in deal sourcing by exploring new channels by moving down-market and supplementing with add-ons, focusing on proprietary or limited process situations, looking for failed auctions, and continuing to build new relationships.
It’s becoming increasingly necessary to be mindful of quality when selecting which deals to pursue and heightened diligence in underwriting, particularly when modeling downside scenarios. This has become even more important as we’ve seen multiples climb higher and higher over the past 12 months. Deal teams are adding extra layers of scrutiny to verify that businesses are valued at a level that will be appropriate over the coming foreseeable months.
Teams are spending significant time exploring targets’ operating leverage to understand performance in downside scenarios.
A number of firms are seeing an economic reset as an opportunity to find unique opportunities to potentially get quality assets at lower multiples, gain market share, and/or consolidate markets as weaker competitors seek safety and circle wagons.
We thoroughly enjoyed getting to gather with PE VPs to discuss these current industry hot topics. We’d be happy to connect you to the PE-grade, exact-fit, third-party resources you need to assist you in this pressurized market, just contact us here.
Learn more about how we can specifically help Deal Quarterbacks and access a toolkit that can help you do your job more efficiently here.
An interim CHRO was needed during a multi-business merger
A principal at a middle market PE firm came to us with a vital need for an interim CHRO for their new global consulting platform that was a merger of 3 companies. The platform was closing in 3 to 5 days, our client needed the interim CHRO as soon as possible. They needed an individual to lead the merging of the new platform’s three HR departments into one. The key swimlanes included:
Advising on future state systems
Developing an end-to-end solution for a comprehensive compensation and benefits plan for 100+ employees
Organizing their Human Resources Information System selection process
Migrating off their professional employer organizations
We quickly collected the specific requirements for the interim chief revenue officer from our client
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade interim chief human resources officer needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of experienced HR leaders that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria. After that, we connected the client with the select pre-vetted interim CHRO candidates from our invitation-only Business Builders’ Network that fit their exact needs.
Interim CHRO hired to lead the talent portion of the merger
Twenty-four hours after our initial scoping call, we introduced the PE firm and portfolio company to two PE-grade HR executive candidates. Both of the candidates had relevant functional, geographical, and middle market PE firm experience. After meeting with each of the candidates, our client selected their ideal choice. The interim executive was onboarded within the needed timeframe and successfully managed all HR aspects of the merger.
ACG InterGrowth 2022, known as the premier dealmaking conference, was conceptualized to build and strengthen relationships between private equity firms and investment banks. This annual conference allows PE industry leaders to gather and discuss key trends. Last week was filled with cybersecurity, DE&I, and supply chain thought leadership conversations, plus some Las Vegas style poolside networking.
As hundreds of private equity professionals and investment bankers filled the ARIA Resort & Casino from April 25-27, 2022, our team was able to re-connect with familiar faces as well as meet new ones.
“You could feel the eagerness to be back in person the moment you arrived. From founders to deal teams to business development professionals, the atmosphere was engulfed by ideation and excitement,” says Michael Mahan, BluWave Account Management Director.
Here are some of our team’s top takeaways from our largest conference back in person:
Quality Deal Flow Challenges
PE firms broadly shared that activity is slower compared to last year at this time. Our data confirms this as due diligence projects have declined YoY, from 28% of the BluWave Activity Index in Q1 2021 to now 22% in Q1 2022. While overall deal flows are beginning to increase, deal teams expressed that quality deals are hard to come by.
Lights, Deals, Action!
While ‘digital transformation’ remains a top buzzword, we know that top-performing, proactive PE firms and their portfolio companies are looking to transform their businesses, not just optimize them. Industries such as manufacturing and supply chain are dependent on new technologies to scale growth and meet the industry demand post-pandemic.
Market Differentiation
Building brand equity to differentiate your firm is important in today’s crowded landscape. With less quality deals in the market, it is mission critical for firms to remain top of mind with investment bankers. PE firms are finding creative ways to do this through utilizing specialized resources that can help them with their internal branding, & more.
ACG InterGrowth 2022 exceeded our expectations, and it was great to have the opportunity to connect with so many individuals in person. If you were unable to attend the conference, but are interested in connecting with us, contact us here.
BluWave Account Manager Morgan Murphy concludes, “This year’s conference was instrumental in continuing to build our relationships with PE firms face-to-face. Until next year!”
Michael Fieldstone is a Co-Founder and Partner at Aterian and has worked in private equity investing for more than twenty years. Prior to founding Aterian in 2009, he was a principal at both Sun Capital Partners and Apollo Management, and part of the Mergers & Acquisitions Investment banking group at Salomon Smith Barney. With regard to taking the entrepreneurial plunge with Aterian, he says: “We set out to build a firm that appreciates all the stakeholders of a company. To be collaborative in working with management teams. To create a transparent atmosphere in which we are dedicated to solving problems. Success to us is taking companies to new heights, and in doing so, creating value for employees, customers, vendors, the environment, underlying communities, and our investors.”
While his sentiments seem lofty, Fieldstone and his Co-Founders, Brandon Bethea and Christopher Thomas have seen numerous successes over the last decade-plus, and have ridden the waves of economic uncertainty with grit and fortitude. The result: growing already great family-founder companies in ways they didn’t think possible.
During our inaugural BluWave 2022 Top PE Innovator Awards, we recognized Aterian specifically for their innovative practices across proactive due diligence, transformative value creation, progressive PE firm operations, and ESG. Michael recently sat down with me to share some of his experiences and strategies for both creating value and supporting middle market companies during rapid growth.
Sean Mooney: How do you make sense of growth versus value investing in today’s marketplace?
Michael Fieldstone: This is a perplexing question for many investors. The multiples in private equity have changed so much over the past two decades. For example, at the turn of the 21st century, the average multiple was 7x; today, it is an average of 12x. This appreciation applies to both large LBOs as well as those in the middle market which we participate in. Additionally, the range of multiples can be extreme – as one can buy into an out of favor or cyclical industry such as oil and gas for less than 5x or invest in a high growth software or social media company for 20x+. The last time growth investing was so robust was in the late 1990s, and this phenomenon was driven by venture capital firms and tech companies themselves. Moreover, large non-tech companies had to follow suit and develop or acquire an internet or digital strategy to keep up. Many large companies such as GE, as we know, had a difficult time adopting startup practices organically. Other large companies such as Polaroid or Kodak became walking dinosaurs.
This time around, PE firms are also participating in high-growth – almost venture-like investing –as both an offensive and a defensive strategy. With technological disruption impacting most sectors (i.e. e-commerce, fintech, alternative energy, streaming/media distribution, cybersecurity, Medtech – and the list goes on), and with cheap and abundant capital, why not invest large amounts alongside mega trends even if at higher valuations? The alternative is to invest against mega trends – for example, into a large, non-omnichannel retail chain – which is like building a plane while it’s flying.
SM: On what side of that investor equation do you see Aterian?
MF: It may sound diplomatic, but our approach to market is a combination of value and growth investing. We typically invest in companies that are “mature” – certainly they already have sales and have typically been in existence for many decades. Then we look to accelerate their growth through investments both organically and through add-ons. We enhance their existing infrastructure and customer relationships in ways the management teams desire but may not have had the capital or organizational expertise to do so under previous ownership. We look to drive innovation, including through new products or services, with greater conveniences or capabilities to become more vital to customers. A great example is Aterian’s backing of a company called The Pace Companies, a leading commercial plumbing contractor in NYC. Three years ago, we partnered with its founder, Andru Coren, to help him achieve his vision of being the leader in all the subcontractor trade groups in NYC and surrounding areas, including HVAC, mechanical, electrical, and fire protection. While driving this strategy, we also identified the greater regulatory need to assist developers and building owners on reducing their carbon footprint through energy-efficient buildings. Flash forward to today, through the formation of holding company Eaglestone with shared services, we have executed on Andru’s vision by acquiring over a half dozen companies and becoming a leading infrastructure company in NYC and surrounding areas where we provide a full suite of services including plumbing, HVAC, fire protection, solar, and EV charging stations, all in the context of improved energy efficiency building standards.
SM: What are the key areas Aterian focuses on in its valuation creation plan, and what in that plan is the hardest to achieve?
MF: There are no corners to cut – at the root of any plan is extensive third-party customer and industry research to figure out where the company fits into its marketplace, its strengths and weaknesses, and how to improve its competitive advantages in partnership with management. Oftentimes, our due diligence prior to acquiring a company confirms management’s strategic plan and it is all about getting there faster with the appropriate resources, whether hard dollars or human capital. Additionally, often uncovered in our due diligence phase, we learn about untapped market opportunities, and after confirming their strategic viability, we develop a plan to penetrate such markets organically or through acquisitions.
Organizational development – retaining and recruiting top talent is typically the biggest challenge to achieving any plan. The breadth of the team required to grow a company, all while keeping an eye on existing strategy execution is most critical as well as our greatest challenge. Sometimes we bring in independent board members (who have been in similar positions) as another set of eyes to assure the organization is ready to embark on growth and transformation.
SM: How do you ensure seamless acquisitions/investments so that founders feel supported? What are some of the strategies/tactics you use?
MF: It took years for us to learn this, but the most important thing with founders is to listen to what they are looking for, both professionally and personally. Additionally, it is important to align expectations upfront. Some founders want to continue to run and grow their companies, while others want help on an immediate succession plan. We have successfully worked with founders in both situations.
Another critical component of ensuring a seamless process is open and robust communication. PE-owned companies are much different than family-founder businesses. Most founders have heard horror stories about partnering with a private equity fund, along the lines of PE saying, “it’s our way or the highway.” They are afraid they won’t have any influence over the company culture and direction, and this poses a big risk for founders who want to stay in the business. Our goal is always to keep the culture intact as much as possible during the transition, and we do our best to communicate to founders that we want to invest in their teams as well as their valuation plan. These founders want transparency and candor, they don’t want “razzle dazzle.”
We also offer founders the opportunity to speak with other family- or founder-owned companies we’ve partnered with. This open book approach helps ease some of their fears, when they can hear directly from references who have found success working with Aterian already.
SM: What does Aterian specifically do to win founder- or family-owned business trust “early and often”?
MF: The most important thing we can do to build trust is to say what we do and do what we say. We also need to discuss business goals and objectives in a small group at least a couple times a year. Actions speak heavily as well – supporting companies analytically or by providing other resources they may not have both help build the bridge that we are actually on the same team.
SM: What are Aterian’s internal company values, and how do those get operationalized (or actualized) across your investment portfolio?
MF: We have three core values, and from these fall every action with regard to both our internal and external operations. The first is transparency. With our management teams, our lenders, our investors, everyone. It is our belief that while good news should travel fast, bad news even faster. Without transparency building trust is nearly impossible; and, without trust, you can’t properly evaluate or make decisions.
The next core value is the concept of being collaborative, and hands-on. We expect this from our management teams, and we certainly aren’t sitting back as passive board members. Having said that, it’s important to strike a balance – when to tackle something head on and when to let go.
Lastly, we value long-term thinking. We typically hold onto companies for four to six years but make decisions as though we will own them forever. Warren Buffett has this great quip about the types of companies he wants to buy; he says they should be equivalent to a great piece of art that you would be proud to hang in a museum. In a sense, that’s how we see it. We are willing to put in the time, energy, and resources to make a company art museum worthy.
Interested in hearing what other PE experts have said in our interview series? Check them out here.
Portfolio-wide need for digital marketing consultant
A PE VP of Operations came to us with a critical need for a digital marketing consultant for their entire portfolio. Each company within the firm’s portfolio was experiencing similar problems around communicating digital marketing spend. They saw this as an opportunity to bring in a team that could conduct a portfolio-wide digital marketing assessment and consult the portcos on their current processes, if they were good or bad, where to spend their budget, & more. Given the importance of digital marketing in today’s world, they were looking for an team that was available to start that same month.
BluWave assessed need and presented exact-fit digital marketing consultant
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade digital marketing needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of digital marketing consultancies 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 digital marketing consulting team from our invitation-only Intelligent Network that fit their exact needs.
PE firm confidently engaged provider to assess all companies in the portfolio
Quickly after the initial scoping call, the PE firm and portfolio company were introduced to a select few digital marketing consultancies that specialized in working with PE-backed companies to get their digital marketing up to snuff. The client selected their ideal choice. The PE firm was able to assess the digital marketing capabilities across the portfolio and provide them with the resources they needed to roadmap a plan for improvement.
A Partner at a LMM PE firm came to us with an immediate need for a board member for the manufacturing company they recently closed on. The PE firm bought the company from the founder and was in need of an experienced outside board member that could serve as a sounding board for the CEO, work on strategy to improve growth and help professionalize the organization.
The Challenge
Connect with Local Expert
They were in urgent need of an individual local to the area with experience in the industry, experience in transitioning a family-owned business to a professionally managed organization and the ability to commit to more than quarterly board meetings.
How BluWave Helped
Select Pre-Vetted Board Members Presented
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade board member needs. BluWave utilizes technology, data and human ingenuity to pre-map, assess, monitor and maintain deep pools of board members that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then identified a select few pre-vetted board members from our invitation-only Business Builders’ Network that fit their exact needs.
The Result
Accelerated Profitability, High-Valuation Sale
Quickly after the initial scoping call, the PE firm was introduced to the first identified exact-fit board member for their needs. After being presented with the select few options, the client selected their ideal choice. The PE firm was able to confidently engage the individual who provided the coaching and support the portco’s CEO needed, helping professionalize the organization and providing support for their strategy and growth needs.
We are uniquely equipped to move quickly for midmarket companies. We have a network of thousands of PE-grade individuals, specifically geared for midmarket companies, that we can tap into in order to connect a firm with the exact-fit board member they need.
A PE firm VP came to us with an immediate need for an interim CTO for their recent healthcare TPA acquisition. Having recently closed on the portco, they were looking for an individual that could help them remediate and roadmap the company’s tech stack. They urgently needed an individual that could modernize the tech stack and focus on cyber remediation so that the PE firm could then move forward with other value creation plans at the portco. They were in need of someone with coding skills, experience working with TPAs, experience working under HIPPA compliance, and availability to work on site.
Using pre-vetted network, BluWave identified interim CTO’s that met the exact needs of the firm
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade interim CTO needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of interim CTOs that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then identified three select pre-vetted interim CTOs from our invitation-only Intelligent Marketplace that fit their exact needs.
PE firm connected to exact-fit interim CTO for the portco
Within 24 hours of the initial scoping call, the PE firm was introduced to the first identified exact-fit interim CTO for their needs. After being presented with the select few options, the client selected their ideal choice. The PE firm was able to confidently engage the individual who immediately began road mapping and remediating the portco’s tech stack, allowing the PE firm to quickly move forward with further value creation plans.
As part of an ongoing series, we’re sharing real-time trending topics we are hearing from our 500+ PE firm clients. In our most recent installment, one of our Managing Consultants, Keenan Kolinsky, talks about one of the ways private equity firms are responding to The Great Resignation – Interim Executives. He shares why the need for interim executives is rising in private equity, how they can be used, and why they are beneficial especially to PE firms.
Interested in learning more about interim executives, how our clients have utilized them, and how we help? Check out our Interim Executives Hub to find case studies, scorecards, and more.
You can also learn more from Keenan in the video below.
Interested in connecting with an interim executive? Contact us here or click the “start a project” button above. We would be happy to promptly begin assisting you.
Large Cap firm needs ERP consultant with industry expertise
A VP at a Large Cap firm came to us with a critical need for an ERP consultant for one of their portcos. Since the acquisition, the PE firm knew that the company’s disjointed tech stack would need to be integrated. The portco CFO’s role specifically was lacking efficiency due to the lack of integration between systems, so the firm urgently needed an ERP consultant with industry experience that could help select and implement the new system. Knowing how critical this project was to advancing the portco CFO’s performance, he was quickly looped in as the decisionmaker.
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade ERP selection & implementation needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of ERP consultants that uniquely meet the private equity standard. We interviewed the PE firm and portco CFO to understand their specific key criteria and then introduced them to three select pre-vetted firms that specialized in ERP selection & implementation from our invitation-only Intelligent Network that fit their exact needs.
Firm engaged ideal choice to select and implement an ERP
Within 24 hours of the initial scoping call, the PE firm was presented and introduced to the three select firms. All firms not only had a deep knowledge of ERPs but also had specialized experience in selecting and implementing ERPs for businesses in the construction industry. The portco CFO had follow-up calls with each of the firms in order to make a final decision and selected their ideal choice. They got started right away on successfully selecting and implementing an ERP for the portfolio company.
Every quarter we gather Vice Presidents in PE to discuss current industry topics and to offer these peers the chance to gather, share information, and decompress with one another. In our most recent event, we discussed many topics and have listed our top takeaways below.
These forums are invite-only and follow Chatham House Rules, so listed below are high-level takeaways only. Are you in private equity and interested in joining fellow PE VPs during our next PE VP Forum? Register here.
Firm Differentiation: Both fund-raising and then deploying capital are increasingly pressurized in 2022. Business owners and LPs are trying to differentiate between approaching PE firms. It’s important to LPs and owners (especially founders) that you and your firm are doing something “different”- either from a track record or industry knowledge perspective. Some firms are leaning into well-defined theses with continued pressure testing, and many are complementing this with additional operational or advisory resources. Firms can make deeper connections with owners by relying on the experience of operating partners or senior advisors who have true industry experience. Show that you as an investor know where businesses have been, where they are growing, and how you can help them reach potential.
Deal Sourcing: When it comes to identifying potential assets for acquisition, firms are approaching this task in different ways. Some are sticking strictly to investment theses and related lists of companies, then ticking down these lists. Others are leaning heavily into the connections of their LPs and Partners. Not only does this make networking with business owners easier, but deal teams can move quickly once they have exclusivity due to their existing knowledge of the vertical. Focus on geography worked to the advantage of some firms during the pandemic, and firms are finding it easier to build a relationship with business owners who are local to them. Whether this means more in-person meetings or simply the connection between people from a similar area, it’s driving meaningful deal flow.
Developing and attracting junior talent: How to get junior talent in the door? If your firm is based in a smaller or more regional city (St Louis, Detroit, Nashville), stay in touch with those who are local to the area but may be working in banks along the coast. Many were interested in returning “home” during the pandemic. Other firms are cultivating relationships with local investment banks and hosting happy hours to meet with potential associate talent, thus creating a local pipeline to source junior talent. Some firms are looking beyond strict modeling skills (which can be taught), and leaning more into prioritizing soft skills and executive presence. Once these hires are made it’s important to get them involved in workstreams that make them feel like they’re contributing to firm initiatives. Culture is key, which is becoming easier as people return to the office.
We thoroughly enjoyed getting to gather with PE VPs to discuss these current industry hot topics. We’s be happy to connect you to the PE-grade, exact-fit, third-party resources to assist you in this tight market, just contact us here.
Learn more about how we can specifically help Deal Quarterbacks and access a toolkit that can help you do your job more efficiently here.
2021 was a record-breaking year for private equity, with total deal value reaching $1.2 trillion according to Pitchbook, and it isn’t expected to slow down in 2022. With record amounts of dry powder in the market ($1.32 trillion as of September 2021), S&P Global states that the demand for deals is driving valuations up. Between the pressure to find the right deals in a market that is flooded with opportunity, and the high prices that have to be paid in order to win a deal, commercial due diligence is more important than ever in order to ensure funds are being spent wisely.
A process that was once reserved for large cap funds with extra capital to spend on assessing a company’s potential end market in order to determine the soundness of the investment, commercial due diligence is quickly becoming a necessary standard operating procedure for all proactive PE funds. With this evolution of who is utilizing commercial due diligence comes the evolution of how it’s performed– no longer is it an activity reserved for generalist consulting firms. Private equity firms have discovered that in order to drive alpha in a sea of beta, smaller, more specialized commercial due diligence providers can provide them with more unique insights quicker.
Going Deeper Faster
Any consultant can accomplish commercial due diligence’s goal of providing intelligence on a target’s total addressable market, prospects for growth, competitors, risks, and other vital information through initial industry research. But specialized consultants with pre-existing industry knowledge don’t have to waste their time scratching the surface trying to gain a sense for the industry. Instead, they can provide a heightened sense of value by using their base knowledge to dig deeper and therefore provide more in-depth insights in the same amount of time.
This is why it’s no surprise that over the past 3 years, commercial due diligence has remained the #1 Use Case in the BluWave Due Diligence Index. Firms have recognized the long-term value that lies in going outside of their normal providers to work with small shops and independent consultants that can provide deeper insights faster.
Providing a Head Start for Value Creation
Commercial due diligence isn’t just a process that helps PE funds make wise investments – it establishes a foundation for future growth. The average holding period for PE assets is five years, which is a sound reminder that funds are often interested in forging long-term relationships with the companies in their portfolio. This is why it’s essential for the commercial due diligence process to be more than a routine vetting exercise and a perfunctory look at a company’s market. It should help funds explore opportunities for growth and methods of adding value that can turn a company into something its leaders never imagined.
By providing deeper insights into the nuances of an industry and having experience within it, specialized commercial due diligence providers are uniquely equipped to identify various opportunities for a target’s growth. With multiples at a historic high, this head start on value creation initiatives ensures your team will be able to hit the ground running and provide quick returns on the investments.
Ensuring Available Capacity
In a market flush with M&A activity, we experienced deal surges in 2021 that led to provider scarcity, especially within the larger go-to commercial due diligence providers. A benefit of specialized commercial due diligence providers during these times is their more available bandwidth. Because they aren’t being run to with projects across 8 different industries, they have the capacity to take on the projects that fall directly within their sweet spot. Even when service provider constraints have strapped the market, BluWave has maintained a 100% fill rate with commercial due diligence requests.
Over the past year, we have seen many firms that have resorted to a smaller, more specialized provider in times of scarcity permanently switch their processes going forward to always using a specialized provider due to the valuable insights they gained. In times where other PE firms are struggling to get the insights they need on the timeline they need, equipping yourself with unique insights quickly will provide you with competitive edge.
Interested in seeing how we’ve helped PE firms by connecting them to the specialized commercial due diligence providers they need? Check out these case studies:
We’d be happy to get started on connecting you to the specialized commercial due diligence provider you need, just give us a shout or use the “Start a Project” button in the banner above.
Charlie Gifford co-founded private equity firm New Heritage Capital in 2006, and has been investing in founder-owned, lower middle-market businesses for 22 years. He leads the firm’s origination practice, focusing his efforts on generating new investment opportunities and developing and maintaining intermediary relationships. In addition to his passion for the New England Patriots, Gifford is a strong believer in the concept of capital-and-thought partnerships for the companies in which his firm invests. The result: incentives for both founders and investors pointing in the same direction.
I caught up with him to get his take on everything from identifying the right-fit investments and what makes a great partner, to why expertise matters and the opportunities ahead for PE in 2022.
Sean Mooney: You co-founded New Heritage Capital in 2006, what was the genesis of founding the firm?
Charlie Gifford: I met my two current partners in 1999 while working for our predecessor firm. As that firm grew and began to move upmarket, the three of us were still interested in partnering with founder-owned businesses that had yet to access the institutional capital markets. Furthermore, we wanted to continue the model from our predecessor firm—one that incentivized all-star founders to stay on board for three to five years to help us grow the business. We wanted to be a capital partner and a thought partner to these founders. So, we essentially do an equity recap where the owner’s met their liquidity objectives, but we also allow the business owner to remain in control. Of course, the ultimate goal is to achieve superior returns for our investors, and we inherently believe the best way to do that is to identify bullish founders—owners who are interested in maintaining control post-close, and who are motivated by what we call “long term greed,” not just “short term greed.”
SM: You have a unique approach to investing called The Private IPO®—can you talk a bit about that, and how it’s differentiated from other forms of investment?
CG: I always like to point out that in the public markets you wouldn’t want to invest in a company where all the board members and executives are selling their shares. But in private equity, this is the standard model. A company gets acquired and as soon as a day later all the key executives can be laid off. This is counterintuitive to how great companies are built. We think it’s better when the founder is voting with their wallet and not their feet. In this way, we attract a self-selected cohort of maniacal owners who want to stay on board, want to remain in control, and are dedicated to growing their business.
In our Private IPO® solution, we provide significant up front liquidity for founders but also let them keep more control and earn a big piece of the upside. The founders we partner with come for the control piece, but they stay for the equity structure on the backend. If the business meets its growth targets, then they get a huge equity stake on the backend. As their partner, we help them to develop a growth strategy that allows them to double, triple, and even more in size, maximizing that backend equity value for everyone.
SM: What do you look for in a good investment, or partner? In other words, how do you identify founder-owned businesses that are the right fit for both New Heritage and the founder-owner?
CG: Interestingly, one of the very common traits we see in our partners is the individual that has worked at a large strategic competitor in their industry. They have grown a little skeptical about the prospects of growth: perhaps the company has taken their eye off the ball, isn’t innovating, or doesn’t treat the employees well. These founders have identified a clear market opportunity, so when they spin out of their current company they immediately begin to take market share by offering a better service or product. This new company is more nimble and meets the needs of their customer base more effectively.
SM: How do outside experts and advisors play a role in your business?
CG: If we look at the concept of market efficiency (where we are now versus 1999) there used to be no such thing as market networks. PE funds were left trying to figure out every detail out and conduct diligence on their own. The market is extremely competitive right now, particularly in terms of full-time talent; but the ability to call on BluWave for specialized project needs or interim executive talent means you have a better shot at not getting beat to the punch. In general, we are all attracted to growth, strong management, and industry tailwinds; but without the ability to get smart fast, it’s near impossible to be competitive.
SM: The pandemic certainly changed business as usual. What is the biggest lesson you’ve learned from the past two years? How has it affected your future outlook?
CG: One of the benefits of being a 15 person firm, many of whom have worked together for over a decade, is that there is a real comfort level in being candid, and a true sense of “all for one and one for all.” Everyone at the table has a voice. Our approach is collaborative and collegial. So, when the pandemic hit, we worked remotely for six months; but people wanted to come back to the office as soon as it was safe to do so. We inherently believe that this is an apprenticeship business and you learn by watching and doing. As for the future outlook, we think it’s bright. Our companies managed through COVID very well and the resiliency of the private markets has been incredible. We see strong earnings and strong deal flow in 2022.
SM: What are some major PE themes you’ve seen in 2021 that you think will have implications for next year (and possibly beyond)?
CG: For starters, PE will likely continue to pay up for good companies, and will be forced to close quicker with fewer contingencies. But I am just waiting for the music to stop, because things cannot go up and to the right forever. Having said that, it does say a lot about our country that our economy is still robust given all of these economic challenges created by the pandemic.
One common refrain we will continue to hear is the difficulty to attract workers and rising cost of labor. Due to this “missing middle”, prospecting and rainmaking has suffered somewhat, because everyone is working tirelessly on the necessary tasks to close deals in advance of year end.
SM: Now for the most important question: How do you really feel about Tom Brady leaving the Patriots?
CG: When you’re talking about the GOAT it’s hard not to wish him well, given the fact he always did what was in the team’s best interest by accepting a below-market contract. What he’s accomplished is truly remarkable. That said, I’m a Pats fan first and a Brady fan second, and now Belichick seems to be having the team playing it’s best football of the season around the holidays after a rough start– a true telltale sign of a Belichick coached team. It looks as though America’s worst nightmare is back…without Brady this time.
