Every quarter our team analyzes the projects we work on with our 500+ PE fund clients to get a birdseye view of the market. For Q4 of 2021, we not only pulled together our quarterly insights but also analyzed year-over-year trends dating back to 2019 to gain a deeper perspective (grab your copy here).
Key findings from our annual analysis included a sharp increase in the rise of human capital activity and rebounding of operational investment post-COVID.
Learn more about the insights we gleaned from the report by watching the video below.
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.
With the importance of ESG rising in terms of investment evaluation across the board, we are hearing from our more than 500 private equity firm clients that questions on ESG policies and reporting are increasingly coming from LPs. Before you start raising your next fund, here are three steps you can take to start being proactive in being able to answer any questions that may come.
1) Develop policies at the fund level.
If you don’t have them already, the best place to start with ESG is to develop policies at the fund level. These policies can serve as a guiding light for how actions can be taken throughout the firm, down into portco investing, to help advance ESG efforts.
Our clients have leveraged third-party ESG experts to help them develop and implement ESG strategies for the first time.
Additionally, third-party ESG diligence resources have tools and scorecards they use to audit companies against SASB standards, allowing for an easy way for you to measure your target company against other companies in the same field.
3) Monitor progress against ESG targets at both the fund & portco level.
LPs are no longer just going to look for ESG policies to be in place, they are going to look to see if action is being taken against these policies. The best way to prove this is by having metrics that show progress, and we have third-party resources in our network that will help you build in ways to track them over time.
At the portco level, these resources will allow you to collect and visualize your ESG data, making the impact of your efforts easy to understand, demonstrate to LPs, and analyze. These resources will also allow you to implement software tools that will make tracking and monitoring your efforts more automated.
No matter your ESG need, we have the resources to help you streamline your efforts and prove your action. Contact us to schedule a scoping call, we’d be happy to hop on the phone and quickly get started in providing you with the solutions you need.
ESG diligence needed for a consumer products target
A PE firm VP came to us with a critical need for a provider that could perform ESG diligence on a target they had in the consumer products industry. With their 60 days of exclusivity about to begin, the firm needed a provider that could assess the target within that timeframe. The target’s products were environmentally related, the PE firm had little to no experience performing ESG diligence, and they didn’t know what specifically to be concerned about in this industry, so the PE firm critically needed an ESG expert with industry experience to perform the diligence for them in order to spotlight potential areas of concern.
BluWave has exact-fit diligence provider with industry experience
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade ESG diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of providers that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then presented the client with two select pre-vetted diligence providers from our invitation-only Intelligent Network that fit their exact needs.
Firm connected with two PE-grade providers and selected ideal choice
Less than 24 hours after the initial scoping call, the PE firm was presented with two PE-grade providers that had experience in the target’s specific niche of the consumer products industry. The client was introduced to their ideal choice and they were able to quickly engage them in order to perform ESG diligence within their timeframe and budget. The service provider was able to use their industry and area expertise in order to derive the necessary insights the PE firm needed to make an informed decision on how to proceed.
PE Firm needs commercial due diligence and GTM strategist for construction target
A PE firm managing director came to us with a critical need for a commercial due diligence and GTM strategy provider for a target they had in the construction industry. Since identifying this target, they were looking for a group that could quickly perform diligence to determine if the market was strong enough for investment, and then promptly post-close help them develop a GTM strategy. Close to obtaining exclusivity, the PE firm was looking to find a provider with experience in the construction materials space that could move quickly once exclusivity was gained and stay engaged to create value post-close.
BluWave identifies provider to meet exact needs
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade commercial due diligence and GTM needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of providers that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then connected the client with three select pre-vetted providers from our invitation-only Intelligent Network that fit their exact needs.
Firm engages with ideal provider to confidently move forward with investment
Less than 24 hours after the initial scoping call, the PE firm was introduced to three PE-grade providers that specialized in commercial due diligence and GTM strategy with experience in the construction materials industry. The client selected their ideal choice, and the PE firm was able to confidently engage this provider without wasting time or costs. They were able to leverage their insights to move forward with the investment and then utilize the same provider to quickly begin creating value in the new portco by developing a GTM strategy.
They have done a good job, been very responsive and given us valuable insights. I would give them good ratings on everything, would recommend them to others and I expect we will use them again in the future.
Firm needs operational diligence for target VMS manufacturing company
A PE firm principal came to us with a critical need for operational diligence on a target they had in the vitamins, minerals, and supplements (VMS) manufacturing space. A week into the diligence process after signing an LOI, the firm needed someone to answer their question on how the target could increase throughput given their issues with on-time delivery, backlog, and capsulation of their powders. They urgently needed an ops diligence provider with experience in the VMS space that could identify areas for operational improvement during their 45 days of exclusivity on the target.
Using our extensive network, BluWave identifies top PE-grade providers
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade operational diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of operational diligence independent consultants and boutique firms that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then introduced the client to two select pre-vetted operational diligence consulting groups from our invitation-only Intelligent Network that fit their exact needs.
Firm properly assesses target company using selected provider
Within 24 hours of the initial scoping call, the PE firm was introduced to two PE-grade ops diligence providers with extensive experience in the VMS space. The client selected their ideal choice. The PE firm was able to confidently engage the provider without wasting time or cost and ultimately identify ways for the target to improve their throughput. The firm was so pleased with the provider’s operational performance and improvement recommendations that they engaged them again post-close to implement them.
Firm critically needs senior advisor with software industry knowledge
A PE firm principal came to us with a critical need for a senior advisor that could provide them with industry insight on a target they had in the application security sector of the software industry. Before moving forward with an investment, the firm needed someone with technical industry expertise that could frame the competitive landscape for them, how the target was positioned against competitors, and apply this to the market opportunity. They urgently needed a mid-to higher level advisor with technical sector expertise that could answer their questions within 7 to 10 days.
BluWave quickly connects firm to advisor with industry expertise
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade senior advisor needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of senior advisors across an array of industries 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 senior advisor from our invitation-only Intelligent Network that fit their exact needs.
Firm engages advisor to gain valuable industry insight
Within 24 hours of the initial scoping call, the PE firm was introduced to a select PE-grade senior advisor that had deep experience working in the application security industry and was now doing consulting in the space. The PE firm was able to confidently engage the advisor and gain the necessary industry insights they needed from someone with technical expertise in order to make an informed decision on whether or not to move forward with the investment.
IT diligence provider needed for healthcare portco
A PE firm vice president came to us with a critical need for an IT diligence provider for a target they had in the intellectual development disabilities area of the healthcare services industry. With an LOI on the target and a need to close the deal by year-end, the PE firm urgently needed an IT diligence provider that specifically understood this niche area of the healthcare industry to come in and identify IT needs, risks, and opportunities for the target within the next two weeks.
Using pre-vetted network, BluWave identifies exact-fit provider
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade IT diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of IT diligence providers that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then connected the client with a select pre-vetted IT diligence provider from our invitation-only Intelligent Network that fit their exact needs.
Firm engages provider to make informed deal decision
Within 24 hours of the initial scoping call, the PE firm was introduced to a select PE-grade IT diligence provider with experience on similar projects in the behavioral health and rehabilitation space. The PE firm was able to confidently engage this provider without wasting time or cost and quickly gained the needed information about the target’s IT systems to make an informed decision on how to proceed.
Every quarter our team analyzes the projects we work on with our 500+ PE fund clients to get a bird’s eye view of the market. This report (grab your copy here) calls out the trends that we are seeing across thousands of projects.
Key findings include deal surge continues – but due diligence is still a major area of focus, value creation is gaining momentum – one thing to specifically call out is that portfolio company operation performance and improvement had a huge spike in Q3.
To see these insights and more, watch the video below.
An investment principal at a PE fund came to us with a critical need for Voice of Customer research on a target they had an LOI on in the staffing and recruiting industry. Expecting to get full exclusivity on the target in the next two weeks, they were urgently seeking someone who would quickly be able to perform primary and secondary research on the staffing industry in order to gauge its scope, size, and key players. They were specifically looking for a firm that could go to staffing firms and potential new clients to gather the research, and then synthesize it into usable insights. We quickly worked to understand the key criteria of their need and then leveraged our data and human ingenuity to match them with two select pre-vetted VoC providers. The client selected their ideal choice and were able to gain the customer insights they needed without wasting time or cost.
An investment principal at a PE firm came to us with a critical need for Voice of Customer research on a target they had an LOI on in the staffing and recruiting industry. Expecting to get full exclusivity on the target in the next two weeks, they were urgently seeking someone who would quickly be able to perform primary and secondary research on the staffing industry in order to gauge its scope, size, and key players. They were specifically looking for a firm that could go to staffing firms and potential new clients to gather the research, and then synthesize it into usable insights.
BluWave identifies select providers to fit exact needs
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade Voice of Customer needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of VoC providers that uniquely meet the private equity standard. We interviewed the PE firm to understand their specific key criteria and then connected the client with two select pre-vetted VoC providers from our invitation-only Intelligent Network that fit their exact needs.
Firm engages top VoC firm for essential insight on target
Within 48 hours of the initial scoping call, the PE firm was introduced to two VoC firms that exactly matched all of their key criteria. The client selected their ideal choice. The PE firm was able to gain the customer insights they needed by engaging with the selected VoC firm and were ultimately able to gauge the relationships and satisfaction level between the target company and their current clients without wasting time or cost.
A private equity firm came to us with a critical need for an HR consultant to conduct HR-focused diligence on a new target in the fintech space. With the target under LOI, the firm wanted to go a step further than normal and have an HR expert come in immediately to look at data such as employment contracts and compensation agreements, summarize the strengths and weaknesses they identified, find gaps in the current HR system, and then come in post-close to fix those gaps.
BluWave identifies provider with industry expertise
Leveraging our founder’s 20 years in private equity, we have extensive frameworks for assessing PE-grade HR diligence needs. BluWave utilizes technology, data, and human ingenuity to pre-map, assess, monitor, and maintain deep pools of specialized diligence providers 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 HR diligence resources from our invitation-only Intelligent Network that fit their exact needs.
Firm engages provider and receives top results
Within 48 hours of the initial scoping call, the PE firm and portfolio company were introduced to the PE-grade HR diligence provider that specialized in HR diligence and consulting for PE-backed companies. The PE firm was able to confidently drive an excellent outcome without wasting time and was so pleased with this resource that they brought them on for a project with another portco a week later.
