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Top trends in middle market private equity
A new era of quiet uncertainty
By Harris Smith
Recent trends have altered the way the private equity community conducts business and affected investment opportunity in the sector. Some of these trends are important because of the cyclicality of the private equity business, while others are emerging trends that may become mainstream in the coming years.
Grant Thornton’s research (download PDF of complete white paper) shows that the middle market has been able to hold its own quite well compared to the big-deal market.
The current environment
The private equity market will finish out a year that will be remembered as the one when the record dealmaking streak ended. A new era of quiet uncertainty has come over the industry. Gone are the days of frenzied dealmaking. 2007 produced the third and last year of consecutive record-breaking deal volume. According to Thomson Reuters, U.S. buyout firms completed only about $55 billion worth of deals during the first half of 2008, making it extremely doubtful that 2008 will reach the $475 billion in deals completed in 2007.
Seven trends
The first trend is that a cyclical market brings change and change breeds uncertainty. The subprime mortgage/housing debacle and its impact on credit is the primary trend that has triggered the 2008 down cycle. Private equity firms are returning to the days where they spend substantially more time looking for quality companies to invest in, and they are performing more thorough due diligence rather than jumping in to an investment headfirst.
However, contrary to the headlines that grace industry trade publications, all is not doom and gloom. The middle market has been able to hold its own quite well compared to the big-deal market. That being said, there’s no denying that there has been a flight to quality, a contraction in leverage multiples and a tightening of financing terms. The good news is that deals are still getting done.
The second trend is that private equity firms have adapted to the changing market by opting to do cross-border deals. Middle-market investment banking firms, like Harris Williams & Co. for example, say that they expect to spend more time on globalization and emerging markets, and they see their clients also doing so in the next year.
A third trend is the hiring of operational partners, representing another way private equity firms have been able to transform themselves. Hiring operational partners is a recent phenomenon.
While larger firms always put big-name advisors on their letterhead, middle-market firms have increasingly been hiring partners who don’t necessarily have private equity knowledge, but who do possess expert knowledge in a particular sector. Touting operational partners is a good way for firms to woo management teams in today’s market, where competition for quality deals is more fierce than ever. Bringing extra capabilities to the bargaining table can only help firms become more competitive.
The fourth trend affecting the private equity community is the emergence of sovereign wealth funds (SWFs). Morgan Stanley researchers say SWFs, mainly in Asia and the Middle East, poured around $45 billion into a range of companies and assets in 2007 alone. Some analysts believe SWF assets could reach $15 trillion by 2015. SWFs are here to stay; they will have an increasing long-term impact on the marketplace.
The squeeze on middle-market compensation is the fifth significant trend. As the megafunds have grown even larger, they have hired more talent to broaden their scope, luring private equity talent away from middle-market firms. This white paper discusses practices that middle-market firms are using to retain top talent.
The sixth trend is that certain industry sectors have remained particularly strong, despite the global credit crisis. The technology, health care and energy sectors continue to present strong investment opportunities and are expected to do so for years to come.
Lastly, with the lines blurring between private equity firms, hedge funds, lenders and bankers, private equity firms are emerging as asset managers. This trend has already begun to take place in the larger market, and is now emerging in the middle market. Many believe it is the natural evolution of the industry.
Read the Grant Thornton white paper, “Top Trends in Middle Market Private Equity,“ to get a broad perspective on the current and emerging impact of these trends, how they developed, what is driving them, how widespread they have become, how they affect market participants and what challenges they create for the middle market.
Harris Smith is managing partner Private Equity and Strategic Relationships for Grant Thornton and director, executive committee member and chairman of the Association for Corporate Growth (ACG).
Get on the roller coaster
Managing the transitions of company growth and acquisition
By Rebecca Cole
One word to describe the roller-coaster ride of company creation and growth? Adventure.
That’s what Rich Troksa told a crowd of about 150 last month at ACG-Denver’s monthly luncheon, and that his experience over the past few years certainly fits the bill of a wild ride. (Watch the video)
A 20-year veteran of IBM and currently a vice president for Hewlett-Packard’s enterprise solutions group, Troksa in 2003 became CEO of Exstream Software, small technology company based in Lexington, Ky.
Chartered with driving revenues from $15 million to $600 million, over the next four years Troksa helped build Exstream into one of the world’s fastest-growing technology companies, eventually culminating into a strategic acquisition by Hewlett Packard.
“We focused on industry-specific applications,” Troksa said. “It also helped that we focused our company on Fortune 5000 accounts throughout the world. A lot of companies were focusing on PC software or client-server software, but we went to market with a $500,000 piece of software.”
During that period, Troksa said, analysts were questioning the company’s tactic of tackling the document-solution space. But from 2001 to 2004, the company established the No. 1 shareholder position in their industry and in 2006 created more licensing revenues than the next seven competitors combined.
And although the analysts may have been caught sleeping behind the wheel on Exstream, other companies were taking notice. In 2007, American Capital conducted a recapitalization of the company for $548 million. Only a few months later, HP came knocking, wanting to add Exstream to its arsenal of document software solutions.
Troksa said that the first thing companies have to do when contemplating strategic growth and acquisition is to focus on the business.
“Know what your business is about and what your customers are about,” Troksa said. “Examine your core competency. Before anybody is going to acquire you, you’ve got to have presence in the marketplace and show you have a good product and solid customer base.”
Troksa said the way the business is run and the focus on the financials is critical to mastering the fundamentals of business and “gets you prepared for an acquisition.”
Once an acquisition is in play, Troksa said the key to integrating a small company into a new larger dynamic is to maintain the culture of the business’ presence and success while leveraging the new corporate structure. The biggest challenge, he said, is transitional.
With all of this happening in just a little over a year, Troksa said a primary goal was “to remain sane” while motivating the team.
“Luck is important,” Troksa said. “But luck isn’t what you can rely on. All the hard work and insight may get you to the point where luck makes the over-the-hill difference.”
A simple plan for success
Leadership and corporate culture are keys to growth
By David Lewis
“Build, Buy or Sell” was the slogan of ACG Denver’s 6th Annual Rocky Mountain Corporate Growth Conference in March, and that about sums it up. In corporate life, what more is there? A business either grows through reinvestment of its own surpluses or other types of internal infusions, or it buys another entity, or it sells part or all of itself.
After that explanation it gets considerably more complicated. But to hear the corporate chieftains and commentators who plan to contribute their wisdom to the conference, the key is “keep it simple.“
And you know the rest of that saying.
To the CEO, keeping it simple means keeping one’s eye on the ball whether your company is buying, selling, growing organically, or doing some or all of all three. Chief executive officers, chief financial officers and other corporate leaders need to keep their mergers and acquisitions muscles pumped up.
“You are always in a mergers and acquisitions mode,“ says Aaron Todd, chief executive officer of Denver-based Air Methods Corp. and conference co-chairman.
And that means keeping everybody’s eyeballs on the corporate culture, whatever yours might be, and whatever changes the business weathers when it is building, buying, selling, or preparing for its sale.
Culture
To hear the CEOs and the experts tell it, consistent, constant, definable, actionable (not in the sense of litigation) and repeatable corporate culture is the hallmark, the glue, of a growing business with leadership that seeks to fulfill its potential.
Branding expert Joe Calloway, a conference keynote speaker, brings up the $36 billion combination of Sprint and Nextel, both past clients of his. The merger complete, today “they are working on that consistency of message and constancy of message,“ he says.The most common thread among companies that have strong cultures is leadership that bangs that drum day and night.
“When he was at GE, Jack Welch said, ‘There are days when I talk of the company’s mission and who we are so much that I get sick of hearing myself,‘ but he kept doing it because his view was, ‘Hey, I’m the leader of the company. That is my job, above anything else, to remind everybody of who we are and what we’re about.‘
The examples go on and on and on and on about the consistency of message and constancy of message,“ Calloway says.
Corporate culture
Take the example of an acquisition of a near-equal. This recently was the case when Denver-based Air Methods Corp., the world’s largest air medical transportation company, grew by 40 percent by acquiring Pittsburgh-based CJ Systems Aviation Group Inc.
“When you are bringing two organizations of equal size together, culture is the No. 1 challenge,“ Todd says
On the buyer’s side, “culture will develop and evolve over time with acquisitions. It starts with the leadership of the corporation, and then it works its way down,“ says Rick Eldridge, president and CEO of Denver-based Intuitive Insurance and conference chairman. “As you continue to add people, there are going to be the people who get on the bus and help drive it, or people who get left at the bus stop.“
And on the business seller’s side of the triangle, again there’s corporate culture: “Ultimately, a company’s corporate culture is important when you’re looking at prospective buyers,“ says David Mead of Englewood-based Mead Consulting Group, and ACG chairman and past president. “It’s very important to find alignment between the seller and the buyer.“
The Rocky Mountain Corporate Growth Conference, held last March, aired all sides of the question with the help of business leaders such as Todd, Eldridge and Mead, and growth award winners such as Mac Slingerlend, president and CEO of Ciber Inc., and Kevin Reddy, president and CEO of Noodles & Co. (Watch video of Noodles CEO Reddy)
The gathering also brought in world-class speakers such as Calloway; Howard Putnam, former president of Southwest Airlines and Braniff Airlines; and Colleen Abdoulah, CEO of Wow! Internet, phone and cable. (Watch video of Wow! CEO Abdullah)
ACG-Denver’s conference culture is straightforward. More than an idea factory, the conference annually convenes three groups essential to the processes of build, buy and sell: corporate officers; more than 50 private equity groups and M&A intermediaries; and service providers such as CPAs, consultants and attorneys.
Asking, “How can we help mid-sized businesses grow?“ the association provides access to what Mead calls the organization’s “constant unique mix of people—many private equity firms in attendance that business owners or prospective business buyers can become acquainted with, other business owners, CFOs and CEOs of middle-market companies that they can interact with, and a mix of service providers involved in middle-market growth.
This is a good thing, too, because the mergers and acquisitions market for mid-size businesses is hot. Experts say it’s bound to get hotter.
According to the ACG/Thomson DealMakers Survey, as of mid-December 2007, worldwide merger and acquisition activity smashed all records to reach $4.35 trillion, a 20 percent increase over last year’s record year, albeit with slowing activity in the second half.
Meantime, the percentage of Colorado mergers and acquisitions professionals who called the M&A environment “good” or “excellent” dropped to 77 percent from the dazzling 94 percent tallied in June 2007.
The ACG/Thomson DealMakers Survey, completed twice yearly by the ACG and Thomson Financial, polled 813 deal pros, 35 of them in Colorado, including investment bankers, private equity professionals, corporate development officers, plus lawyers, accountants, consultants and other service providers.
The M&A market is red hot and on its way to becoming white hot, Mead says. A big reason: simple demographics. Older baby boomers in their 50s or 60s are looking to sell their businesses and retire. (Mead notes one study that predicts 1 million business sellers on the U.S. Market by 2012.) Younger baby boomers now are in their 40s, the typical age for business owners to be looking for acquisitions.
Mead adds that Colorado is a great place to be if you’re a business owner who knows how to position your company for growth, acquisition or merger, or a sale.
“Being in Denver is an advantage,“ he says. “Many of the private equity groups and financial buyers prefer to buy a business in this market because of the quality of life, because of the quality of the workforce. We hear from private equity and financial buyers on a regular basis that they like doing business in this market.
“I’m not sure that translates into a higher price,“ Mead says with a laugh, “but it does attract more prospective buyers.“
And so CEOs “always have to be open-minded to all potential opportunities that may be out there, even including the divestiture of your own operations, if that’s the right answer for shareholders,“ Todd says.
Interesting thing, though. Even sellers in this seller’s market are interested in corporate culture and corporate values,—their own and not just the prospective buyer’s.
“Most business owners transacting their business are interested in getting as high a price as they can for their business,“ Mead says. “But what is even truer is that they want to protect the company they’ve built and make sure there’s a future culture that’s good for the employees who have been loyal to the company and built the business. Good alignment of the values of the buyer with the culture of the (selling) organization is critical.“
Corporate culture can be practically anything as long as it is productive. Calloway came up with the Nextel-Sprint example because those two corporate cultures, he says, could not be more different. Merging Nextel, with its hard-charging aggressive style, with Sprint’s buttoned-down businesslike approach, could take some doing.
But it has to be done. “The one thing that companies with strong cultures all have in common is that they not only have tremendous clarity about what is important here, but they talk about it absolutely all the time,“ Calloway says. “Leadership is constantly bringing everything back to, ‘Remember our vision, remember who we are, remember what we are about and how we do things.‘ What it does is it gives everybody a sense of real understanding and real stability.“
Corporate culture, an amorphous term, means different things to different people, Calloway concedes: “It is not an exact term. I would rather boil it down to, what is important here? Or, if you had to describe your DNA as a company, what is it? What is your corporate DNA?
“It always comes back to values,“ he says. “Values can mean integrity; it can mean innovation; it can be collaboration; it can be that we treat each other and everyone we deal with, with respect. Your values are whatever your values are, but then your values are the engine that drives your strategy and ultimately, your tactics. Because when you are making decisions on what do we do next you go back to your values and your vision, and those become your guiding points.“
Examples abound, such as Apple’s enshrining of innovation, or Southwest’s touchstones, low-cost flying plus “love and fun.“
Calloway adds the example of Portland, Maine-based TD Banknorth, a unit of Toronto Dominion Bank, which now is merging with New Jersey-based Commerce Bank.
“Their driving vision is to be easy to do business with and hassle-free. So when they look at, ‘Should we open a branch here? Should we offer this product? Should we make this change on our website?‘ they go back and say, ‘Well, will this make us easy to do business with and hassle-free?‘ And that is their mantra; that is their rallying cry.“
Paul Edwards is a principal of the Denver-based CPA firm of Ehrhardt Keefe Steiner & Hottman, and ACG awards committee chairman. He says his company’s culture pushes it toward organic growth and away from acquisitions.
“In our business there’s a lot of stress and a lot of hard work, so we carve out time for fun in the workplace—we smile, we greet everybody in the hallway, and make it an enjoyable place to come to,“ Edwards says.
“We have a really strong culture around making our firm employer of choice. It’s a pretty simple philosophy for us—we want to go above and beyond to take care of clients. To do that, we need really good people, and we need to have those people around for a long time. Success follows.“
As one might expect, hiring and training are “huge” areas of concentration for EKS&H, Edwards says.
Kevin Reddy is president and CEO of Broomfield-based Noodles & Co., winner of this year’s Emerging Growth Award, and a company where fun is prized as much as at EKS&H. Formerly chief operating officer of Denver-based Chipotle Mexican Grill Inc., Reddy says it’s different being the big boss. “I love being CEO,“ he says.
The restaurant business, says Reddy, is all about operations, execution, and “as a CEO, you have a significant responsibility for execution.“
But being the top guy, “You are thinking about an external audience a little more in terms of the need to communicate what is your culture—how you behave, how you inspire folks—as a company we talk a lot about nourishing and inspiring—so you just have more external demands as a CEO.“
Apart from growing and acquiring, companies with strong corporate cultures are more likely to survive the rough times.
“Strong corporate values are the greatest insurance policy a company can have against the risk of damaging instability, ranging from growing too fast to the bottom falling out,“ Calloway says. That’s because, “Great companies are seldom made up of nothing but superstars,“ he says. “Great companies are made up of ordinary people who do extraordinary things. That tends to only happen when what they are doing matters deeply to them. And if it matters deeply, that is a sign of strong culture.“
Message to women seeking the executive suite: Don’t sell yourself short
Cable executive Colleen Abdoulah says women should play up their strengths and support each other
The following is an edited transcript of a video interview with Colleen Abdoulah, CEO of WOW! Internet-Cable-Phone by ColoradoBiz Editor Mike Cote. (Watch the video)
ColoradoBiz: What do women bring to the executive suite, and why is that good?
Abdoulah: Their intuitive sense helps them a tremendous amount as leaders, and they are tremendous multitaskers. We can handle a lot of different things at once. And I think the balance between the feminine and the masculine helps a great deal at an executive level in any corporation.
CB: WOW! consistently gets high marks for employee satisfaction and customer service. How do you accomplish that?
Abdoulah: It’s truly because we focus on the employees, on each other. We have what we call service structure, where we define who everybody’s internal customers are. We take away the focus on titles, control and power and bureaucracy. And we are simply there to serve each other and help each other do the best we can do so we can then serve the end customer.
CB: Give me an example of how that manifests itself.
Abodoulah: Once a year when we do our internal survey of how people are doing, we have frontline employees evaluating people all the way up to my level. Anyone who is in management who doesn’t touch the end customer, who isn’t on the front line, once a month has to go in a truck with an installer or has to go to our call center and listen to phone calls and write a report on it. ... When we see that something doesn’t work, we can change it. Leadership can lose touch with the people who do the actual work or with the customer paying their salary.
CB: What can women business leaders learn from each other?
Abdoulah: First and foremost is to support one another. Men are terrific with bonding with one another, supporting each other. Women can be incredibly critical. And I think it starts internally. We tend to be far more critical of ourselves than individual men are. And so we take that criticism that we apply to ourselves internally, and we do that to other women. I think that is something that we have to really change in order to see an overall fundamental change where women are in the boardroom.
CB: How about men and women, what can they learn from each other in the corporate structure?
Abdoulah: Men need to learn to embrace their feminine and take advantage of their masculine. Women need to know how to embrace the masculine side and take advantage of their feminine. And in one specific way they can do that: Women tend to take things very personally, their feminine side. Everything that occurs - a project goes wrong, “it’s my fault,“ not that the team maybe wasn’t organized well enough or that the goal itself was stupid. It was all “me.“ And men don’t do that. They get it, they move on, and they make it work the next time. The male leaders who are really wonderful are the ones who know how to do this.
CB: How would you assess the current status of women in the corporate workplace?
Abdoulah: There are some external factors that affect that, whether the leadership is all male-dominated, whether the industry you’re going into is male-dominated, you might have a tougher go of it. But I also think there’s an internal issue there. I think women are not as good at negotiating for themselves as men are. Men will go in knowing that they only know half the job. But they will act like they know it all, they will act in charge, and they will ask for the top dollar. Women will say, ‘Well, OK, I’ll accept that and then once I prove myself you can pay me more.‘ It just doesn’t happen. So I think women have to become better at negotiating for themselves, believing in themselves and negotiating top dollar.
Fanning the flames of a brushfire business
Ciber and Noodles & Co. honored with 2008 ACG growth award
By David Lewis
The chief executives of this year’s Association for Corporate Growth-Denver’s Outstanding Corporate Growth Awards winners have a lot in common, considering that one runs a systems integration consulting company and one runs a restaurant chain.
The two have never met, yet Mac Slingerlend, president and CEO of Ciber Inc., and Kevin Reddy, president and CEO of Noodles & Co., betray many of the same traits: fierce pride in their companies and employees; a strong business model; emphasis on corporate culture; and working like crazy but having fun, too. (Watch video of Kevin Reddy explain Noodles’ expansion goals.)
Each CEO is a passionate advocate, a powerful communicator, a tireless evangelist. Both seem to be unusually relaxed individuals. Each runs a business that has grown like brushfire.
Ciber, winner of the 2008 Outstanding Corporate Growth Award, built its revenue from $608.3 million in fiscal 2002 to $995.8 million in fiscal 2006. That near-billion clearly tantalized Slingerlend, who on Dec. 6, 2007, announced that to his best reckoning Ciber that day had tallied its billionth dollar.
Noodles & Co., winner of the 2008 Emerging Growth Award, started with one Denver restaurant and today comprises about 180 eateries, 140 company-owned and 40 franchised restaurants. The company is growing at a rate “north of 30 percent,“ Reddy says. Meantime, Noodles beats industry norms with same-store sales growth in the mid- to high-single digits. This was accomplished without price increases, says Reddy, while “in 2006 we ran high single-digit same-store sales in that year we did it with a price decrease.“ Unlike Ciber, Noodles is a private business.
ACG awards committee chairman Paul Edwards is a principal of the Denver-based CPA firm of Ehrhardt Keefe Steiner & Hottman PC. He gets excited talking about his own firm and the awards committee’s work, and he looks for that passion in the CEOs of the companies the committee reviews each year.
In the beginning, Edwards says, comes the number-crunching. In the end there’s, “really a gut feeling from our standpoint, and if you look at somebody like a Ciber—they have been around for a long time and have had consistent growth almost through their whole history. You get a pretty good feeling on that.“
Toward the end of the process, a dozen or so final candidates are winnowed from, in effect, the universe of Colorado businesses. The committee uses public sources of information such as Securities and Exchange Commission filings and back issues of ColoradoBiz and it solicits financial data such as profit and revenue numbers from privately held companies.
“Then you meet Mac (Slingerlend), and you say, ‘Yeah.‘ You get a pretty good feeling from that meeting so, yeah, that gut feeling comes into play.“
Slingerlend doesn’t deny his leadership qualities, but he tries not to dwell on them.
Leadership?
“It’s got to be in your nature,“ he says. Then he pauses and says, “I’m not the biggest egomaniac you’ve ever met; unfortunately, I may have (an ego). But that’s not really where I’m trying to come from here.“
Slingerlend says leadership means keeping an even keel, celebrating then getting back to work; getting back to work without forgetting to celebrate.
And when the tough times come, “With the passage of time you get to where the size of your company is $1 billion and you operate in 18 countries, and you tend to get to where you can take things in stride, whether or not they sound like they are something that you should be taking in stride,“ he says. “You’ve put it on cruise control, and you get used to it.“
Slingerlend jokes that he is the only one sometimes allowed to be a jerk at Ciber. It is a joke because, a critical part of Ciber corporate culture could be boiled down to: “No jerks.“
Looking at that corporate credo from the positive point of view, Slingerlend describes his company’s values as focused on caring, concern, teamwork. He also points out that, while Ciber culture despises jerks and show-offs, it embraces nerds. “Some people have trouble with left-brained individuals. We do not. That’s not the issue,“ Slingerlend says.
Reddy’s list of charactertistics at Noodles & Co. echoes Ciber’s workplace values.“As a culture we talk about beliefs and behaviors, and we aspire to get to the point where each of us treats each other with respect, that we are genuine, that we’re truthful, that we are passionate,“ Reddy says.
At Noodles & Co. they, “go back to some very fundamental things—are we being nice to each other? Do we have each other’s backs?“ Reddy asks. “The stuff that all of us want in a relationship that we would describe as good and meaningful—it is really something that we try to hold each other accountable for in real behavior. I don’t know that it’s fancy, or rocket science, but I will tell you it is genuine.“
