by: Liv Hanninen
A great strength of the NSPE podcast, hosted by ECA Director Steven Haug, is the broad range of guests they bring on the show. Though all have forged successful careers in the LMM (lower middle market) private equity space, they represent firms that exist in very different niches. For example, Rick Goldberg, who features in Episode 2, is the CFO of Founders Table Restaurant Group, a PE firm that – you guessed it – focuses rather tightly on the food industry. Jeri Harman, star of the pilot, is a partner at Avante, a PE firm that is industry agnostic but at the forefront of promoting diversity within the PE space. Cole Jackson, VP of Portfolio Acceleration at Montage Partners, talks listeners through his role that spans multiple industry segments, but focuses on companies on the smaller size (EBITDA between $1.5-$7 million) that tend to be founder-led. John Claybrook and Andrew Towne, two guests from slightly later on in the series, both represent PE firms that focus on acquiring blue-collar industries (pest control and car washes, respectively).
Despite the different positions and investment interests that these experts hold, there are some clear themes that connect their vantage points. Looking back through the first five episodes, the guests share common ground when it comes to the role of value definition within the broader PE landscape. They also, by and large, agree on many points as to why the PE industry endures under certain stigmas.
Jeri Harman (Episode 1) sets up the importance of value creation by laying out some of the major trends in PE from the early months of 2023. Though company valuations are starting to moderate, they are still high due to the billions of dollars that the PE funds were able to raise over the last 3-4 years. A compounding factor here is the economic reality of 2023, which makes it harder for PE funds to acquire debt to buy companies. Taken together, this means that PE companies need to engage in serious value creation in order to make their investments worthwhile for their financial backers; it is no longer the case that PE firms can simply buy companies when the price is low with a view to sell them when the price is high without serious legwork.
Though the guests place slightly different emphases on “value creation,” they are certainly in agreement on this latter point. Harman’s Avante spearheads their value creation via diversity initiatives, such as a SBIC-diverse intern scholar program, that places women and people of color across 30 funds. Though there is an abundance of research that backs the notion that “diverse teams, diverse boards, diverse management have better results,” an institution that provides tangible steps towards that end is a definitive value-add. Rick Goldberg (Episode 2) highlights the role that the finance team plays in value creation – modern PE CFOs have to be highly strategic without losing sight of the numbers from an accounting perspective. John Claybrook (Episode 3) highlights two other all-important aspects of value creation – installing “five-star leaders,” and transitioning more traditional, smaller businesses from all-paper to all-digital. Cole Jackson (Episode 4) hones in on the critical role of talent acquisition and making sure the right people are brought on to accelerate growth. Andrew Towne (Episode 5), on the other hand, talks about the importance of choosing to invest in companies that already have excellent cultures and strong retention. Companies that care about their employees, and have good relations with their communities, tend to be the ones that are primed to excel when a PE firm enters the scene (so long as the goals of the company and the PE firm are well-aligned).
Host Steven Haug makes a point of having guests poke around under the hood of the stigmas that plague the private equity space. Harman hits the nail on the head: “private equity has done a terrible job in PR.” By and large, the guests agree that PE’s negative reputation owes largely to the mega deals done at the heftiest end of the market. This is a different world from the LMM, and, as many of the drivers behind “value creation” attest, it is hard to drive that value if people are being treated badly. Indeed, the most common reason a company looks to sell is that the owner wants to retire but does not want to close up shop to leave their employees high and dry. For Claybrook, this comes with a hefty moral responsibility: “We really try to honor the legacy of the people that that we’ve bought companies from by really taking care of their people and hopefully treating them better than they’ve ever been treated before in a work situation.” Many of the guests also highlight that they tend to stay away from companies that are in distress. Jackson touches upon another critical theme that works against PE’s negative stigma, which is the importance of transparent communication between PE firm and the portfolio company. To him, what’s critical is, “having a team that we can trust and then build[ing] that mutual trust” with the acquired company.
Stay tuned for part 2 of this article, where we draw together themes from the guests who graced the airwaves of episodes 6-10.
Liv Hanninen is a Project Manager at ECA Partners. She can be reached at [email protected]