Middle Market Executive // Spring 2022 by Association for Corporate Growth

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Risky Business I

KATIE MULLIGAN Content Director, ACG Media kmulligan@acg.org

n this edition of Middle Market Executive, you’ll find a lineup of articles addressing how to manage and mitigate risk, whether from cyberthreats, regulation or macroeconomic uncertainty. One Q&A, for example, features a conversation between a private equity investor and an attorney, in which they discuss the cybersecurity risks that can delay a deal or impact the return on investment, and how to avoid them. Another story looks at the pressure on private equity firms to comply with new and existing demands from regulators and limited partners, including those related to cybersecurity, ESG and reporting. More and more private equity firms are finding that relying solely on outside counsel is no longer enough. Increasingly, firms are hiring chief compliance officers, either in dedicated or hybrid roles. Inflation, interest rate increases, supply chain snags and other macroeconomic challenges are also weighing on the minds of business leaders. Our feature story examines how the aftermath of the pandemic and emerging risks are changing how company performance is being measured and forecast. Strong leadership and creative problem-solving are central to navigating these and other risks facing companies today. Our cover story looks at how some private equity firms are using executive networks of C-suite leaders and board members to steer portfolio companies toward growth and, in some cases, support them as they continue to rebound from the pandemic. Several contributed articles from ACG sponsors likewise lean into the theme of thriving amid uncertainty and disruption. CEO Coaching shares five simple tools for breakthrough growth. Insperity offers ways to accelerate momentum by adapting to the changing talent landscape and using scenario planning. In a profile of Globalization Partners, the firm explains how midsize companies can tap into the global pool of talent as a way to fill roles with the right people. In a sense, this edition encapsulates the purpose and mission of the Association for Corporate Growth, an organization dedicated to idea sharing and knowledge exchange, and a facilitator of connections between middle-market firms. In some cases, that takes the form of pairing capital with deal sources; in others, it’s helping companies with a problem find a trusted partner with the right solution to meet their needs. //

MIDDLE MARKET EXECUTIVE // Spring 2022

Letter from the CEO

Leading the Way N

THOMAS BOHN, CAE, MBA

President and CEO, ACG

middlemarketgrowth.org

ow more than ever, leadership is one of the biggest factors affecting the success of a company, particularly in the middle market. Navigating all of the challenges that have materialized in recent years— such as supply chain issues, remote work and changing customer expectations—requires vision, ingenuity and a clear purpose. As much as all that is affecting independent businesses right now, leadership has almost always been a challenge with portfolios. Constantly generating new leadership teams from scratch is a burdensome process that slows growth and comes with risk. As investment opportunities narrow it has become even more vital that firms have steady and innovative leadership that they can rely on to produce growth and maintain culture. Our cover story goes in-depth on what this looks like in today’s landscape, and how firms are stepping up their support of C-suite executives on a more full-time basis. ACG has likewise stepped up our efforts for these important members of the M&A community, including the launch of this Executive edition of Middle Market Growth. We want to support executives and operators of all kinds with more relevant content, insights from your peers, and access to networking opportunities. In addition to this issue, we have also launched The Private Equity Operators Council, which is supported by SAP. It is designed for operators who are responsible for driving growth to share best practices about value creation and the challenges mid-market businesses face today. If you’re interested in joining, you can fill out an application on the ACG website. ACG has also recently acquired GF Data, an industry-leading provider of middle-market transaction multiples and other deal data. The platform offers aggregated data and analysis through a paid subscription, delivering digital reports and access to its valuation database composed of anonymized acquisition details provided by more than 250 private equity firms. While this is valuable information for dealmakers, we hope to make the platform more widely accessible to founder CEOs as they gauge the value of their company, and the right time to sell. We hope you continue to uncover more value at ACG as we grow and invest in more relevant experiences for every member of the middlemarket community. //

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Contents MIDDLE MARKET EXECUTIVE // SPRING 2022 EDITION

PRESIDENT AND CEO Thomas Bohn, CAE, MBA tbohn@acg.org CHIEF OPERATING OFFICER Matthew Hickman, MBA mhickman@acg.org VICE PRESIDENT, ACG MEDIA Jackie D’Antonio jdantonio@acg.org CONTENT DIRECTOR Kathryn Mulligan kmulligan@acg.org SENIOR EDITOR Anastasia Donde adonde@acg.org DIGITAL EDITOR Carolyn Vallejo cvallejo@acg.org ART DIRECTOR, ACG MEDIA Michelle McAvoy mmcavoy@acg.org

FEATURES 34 FOLLOW THE LEADER Middle-market private equity firms are increasingly leaning on networks of executives to find and win deals, jump-start growth after an investment, and help struggling companies come out ahead. Here’s how firms are building those networks and partnering with seasoned leaders to maximize performance across the portfolio.

SENIOR VICE PRESIDENT, SALES Harry Nikpour hnikpour@acg.org

40 PEELING BACK THE CURTAIN Investors and operators are assessing the impact of two years of disruption and doing their best to forecast performance. Sellers are finding that a powerful narrative about business fundamentals and future growth is critical to sealing a deal.

SENIOR DIRECTOR, STRATEGIC DEVELOPMENT Kaitlyn Gregorio kgregorio@acg.org

Association for Corporate Growth membership@acg.org www.acg.org Copyright 2022 Middle Market Growth® and Association for Corporate Growth, Inc.® All rights reserved. Printed in the United States of America. ISSN 2475-921X (print) ISSN 2475-9228 (online)

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Cover illustration by Davide Bonazzi

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INSURANCE

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Contents

24 THE STAND-UP

PEOPLE FIRST

FEATURES

10 On Trend: Managing Cyber Deal Risk

20 Human Capital: Bringing the CCO to the Table

34 Follow the Leader

12 The Workplace: Remote, Office or Hybrid?

22 Peer Profile: CEO of Renovo Home Partners

40 Peeling Back the Curtain

24 On the Move

middlemarketgrowth.org

46 In Focus: Globalization Partners

58 PERFORMANCE REVIEW

THE WRAP-UP

52 Value-Add: Funding Southern Lower Mid-Market Businesses

55 Best Practice: 5 Tools for Breakthrough Growth

58 Backstage: Moving the Needle on DE&I in Finance

54 Best Practice: Accelerating Your Momentum

56 Executive Suite: Lessons from ACG’s Digital Transformation

60 Key Takeaways

MIDDLE MARKET EXECUTIVE // Spring 2022

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The Stand-Up TOPICAL ISSUES AFFECTING MIDDLE-MARKET EMPLOYERS

ON TREND: MANAGING CYBER DEAL RISK

A private equity investor and an attorney discuss when and how to evaluate cybersecurity considerations during a transaction.

15 ADVERTORIAL:

TROUTMAN PEPPER

A look at the specific tax concerns for sovereign wealth funds, an important source of capital for PE funds.

THE WORKPLACE: REMOTE, OFFICE OR HYBRID?

Mid-market companies can gain a competitive advantage by carving out their own strategy for their workforce.

MIDDLE MARKET EXECUTIVE // Spring 2022

TH E STA N D -UP //

On Trend

ybersecurity presents a constantly evolving challenge to dealmakers looking to invest and exit successfully. Ransomware and data breaches can cause deal value to evaporate faster than yesterday’s social media post. Philip Lewis, a partner at Fulcrum Equity Partners, and Justin Daniels, corporate M&A and cyber counsel for Baker Donelson, recently discussed managing cyber risk on the “She Said Privacy/He Said Security” podcast, which Justin hosts with his wife, Jodi Daniels. Below is an edited version of the conversation.

JUSTIN DANIELS: Philip, how has cybersecurity and privacy changed how you evaluate deal risk?

PHILIP LEWIS: I think it’s a constantly evolving topic. Fifteen years ago, I don’t think there was a lot of thought put into it. At this point, it is at the forefront of your mind in any transaction you’re looking at. Now on every deal, you are asking questions like: What does your perimeter security look like? What is your mobile device management? Do you use multifactor authentication? I think the level of diligence you have to do and the number of questions you ask on the front end to make sure that you don’t end up in a precarious situation has really evolved, especially over the last two years.

Securing Your Merger: Managing Cyber Deal Risk

PHILIP LEWIS

Partner, Fulcrum Equity Partners

middlemarketgrowth.org

JUSTIN DANIELS

Corporate M&A and Cyber Counsel, Baker Donelson

JD: As you go through the diligence, how can cybersecurity impact the deal?

PL: I’d say the biggest issue could be delaying the deal. Although I have not seen it kill a deal yet, I have seen a requirement to make necessary security investments on Day One

Illustration by Joey Guidone

A big lesson we have learned is you have to have the security function reporting directly to the CEO or COO, not the CTO. post-close and making sure the company is on board with that expenditure. I think the other way it could evolve is assessing the ongoing liability if a company has had a breach in the past.

JD: How can it impact the rate of return on an investment?

PL: Worst case is it stops a deal. A lot of times when you sell a company, you’re going to have to get some sort of escrow put into place that is a percentage of the transaction. If you have cyber issues or past incidents, the holdback could be much larger and held back for a longer period of time. Another issue is the exit can result in a much lower purchase price because the buyer has to spend a lot of cash to fix all the cyber problems of the company. The other risk is reps and warranties insurance. Lackluster cyber hygiene might cause the insurer to carve cyber risk out of the policy. JD: I would add that getting reps and warranties insurance to cover cyber in the current environment is difficult and expensive, even if cyber hygiene is good. The insurance industry has been decimated by all the claims surrounding ransomware and business email compromise leading to wire fraud.

JD: When it comes to managing cyber deal risk and looking to get full value for your exit, is an ounce of prevention worth a pound of cure?

PL: Yes, but you are never done. I think a lot of it is: Are you doing the right things? Are you taking the right steps? Are you putting cyber at the forefront of your business? It’s one of those things that can always be better. The challenge is the bad guys can always figure out a way in. However, if

you have taken the appropriate steps, then an investor has more comfort looking at your business.

JD: What type of specific investments have you seen made in portfolio companies to manage cyber risk post-close?

PL: A big lesson we have learned is you have to have the security function reporting directly to the CEO or COO, not the CTO. The CTO’s job is to deliver technology in the best, most efficient way possible, so that the salespeople can go out and sell. The security person’s job is to make sure your infrastructure is secure and that the software that’s being put out is secure. Sometimes those are not in lockstep. You need to make sure that the security individual is reporting independently of the CTO. It can provide unbiased feedback to the CEO. At that point, it becomes a business decision. We also make sure that multifactor authentication is in place.

JD: Where are we at with deal document reps and warranties, where it specifically says that the seller will have multifactor authentication, end-point detection and other specific cyber measures?

PL: It’s coming. I’m not sure it’s 100% there yet. We are putting that in place and I think you’re going to start seeing it more and more often.

JD: What do you like to see in your due diligence process when it comes to portfolio companies managing cyber and privacy risk?

PL: I think one of the biggest items is an attitude toward privacy and security. I have to say that Service

Organization Control 2 (SOC2) compliance does not automatically equal great security. You could have that put into place, but at the end of the day, if you’re not actually following everything in there routinely, all you’ve done is spent a bunch of money on a great checklist of things you have not been maintaining. We are actively making sure that our employees are aware of the vulnerabilities out there versus doing a bunch of forms that check a box. A critical aspect of security awareness training is that you make sure that it’s not optional to complete, and that employees do it every month. And if they don’t, they’re no longer going to work at the company.

JD: Philip, what are your final thoughts on this topic?

PL: From our investor perspective, cyber is now a primary consideration in all our deals, from due diligence to the contract to post-deal integration. It is also critically important that a company carve out the security function and make it independent of the CIO and IT function. And one last time: multifactor authentication. JD: From my perspective, the value of data is driving many deals these days. Companies are also migrating to the cloud and relying exclusively on computer technology. Lastly, cyber regulations like the ones just announced by the SEC will continue to expand the cyber and privacy regulatory landscape. As a result, cyber risk will only become greater and more resources will need to be devoted to managing it. I think the biggest takeaway from our conversation is that cybersecurity needs to be part of a company culture, period. //

MIDDLE MARKET EXECUTIVE // Spring 2022

Remote, Office or Hybrid? How Mid-Market Businesses Can Make the Right Choice

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THE STAN D - UP / /

The Workplace

Return to the office, embrace a hybrid workforce or continue with a remote strategy? HR professionals consider how mid-market businesses can make the right choice for their needs. BY CAROLYN VALLEJO

ome of the biggest names in business led the way at the beginning of the pandemic to embrace a remote workforce. The middle market, on the other hand, took a bit of convincing before embracing the shift. “The mid-market was a laggard, in my opinion, in really going public about what they were going to do,” says Scott Baker, founder and CEO of HR leadership and consulting firm Stage 3 Leadership. “They held back to see what the other ‘bigger companies’ were going to do.” With pandemic restrictions easing, and confidence about in-person gatherings gaining strength, some of those big names—including Microsoft and Google—have publicly announced their plans to return to in-office work. While some middle-market companies may be tempted to once again wait for cues from multinational conglomerates, HR and talent experts agree: Mid-market companies have an opportunity to gain a competitive advantage by carving out their own strategy for the workforce.

A Competitive Advantage

Amid the Great Resignation, it’s now a well-known trend that employees hold much of the leverage during the hiring process. It’s also widely

Illustration by James Steinberg

understood that many professionals are prioritizing a work-life balance, one that allows for flexible or entirely remote working. As Nate Olsen, former ACG board member and vice president of global alliances, global employment outsourcing at HR outsourcing and payroll service provider Safeguard Global, explains, middle-market companies can secure a significant competitive advantage by continuing to support a remote workforce. “The pandemic has essentially fast-forwarded the ability to reach talent pretty much anywhere on the planet,” he says, admitting that while he was skeptical in the beginning, the prominence of remote staff has proven its benefits: happier employees without compromising productivity. Rather than viewing the HR decisions of Google and Microsoft as a blueprint, middle-market businesses should instead look at those developments as an opportunity to gain an even greater competitive edge, says Jason Blonstein, managing director at ECA Partners, which provides talent solutions for businesses and private equity firms. “Whether you think you’re competing with Google or not in terms of your product or services, in some

ways, you’re competing with them for talent,” he notes. Stage 3’s Baker agrees. “This is a once-in-a-lifetime opportunity for mid-market companies to go and grab some incredible talent from Microsoft and Google that normally would not be attracted to the mid-market,” he says, pointing to research that suggests professionals are willing to take a pay cut in exchange for greater job flexibility. Indeed, last November, Owl Labs and Global Workplace Analytics released the annual State of Remote Work survey, which found that nearly half of U.S. workers would be willing to take a 5% pay cut in order to continue working remotely or in a hybrid environment. What’s more, 25% of the 2,050 full-time professionals surveyed said they would quit outright if they were no longer allowed to work remotely. For the middle-market companies that deploy flexible work strategies, there is an opportunity to scoop up the professionals who choose to reenter the job market rather than stick around with a company that requires a return to the office.

Justifying the Return

Of course, a fully remote workforce isn’t the right decision for every business. Blonstein points to manufacturing companies, for example, that do not necessarily have the option to have professionals work away from the plant. And even if a company does have the option to continue a remote working strategy, there are arguments in favor of the return to the office.

MIDDLE MARKET EXECUTIVE // Spring 2022

THE STAN D - UP / /

The Workplace For a company like Google, Olsen says, often the justification for returning to the office is the concept that in-person collaboration spurs innovation, which creates a competitive advantage. The problem arises, however, when companies fail to adequately communicate to their staff why they have made the decision to require a return to the office. According to Baker, failing to justify that decision to talent can backfire, harming workplace culture, increasing turnover and dulling a company’s competitive edge. “A big part of a highly engaged team is having trust,” he says. “Companies need to articulate why they need employees back in the office, and I don’t think many companies have done that. ... What data has Microsoft shared to say they think their employees are more productive and effective by being in the office? I have not seen or heard of that data being shared yet.” Even hybrid strategies can fail to meet employee needs and expectations, he warns. If businesses require their most essential and valuable employees to work at the office, remote-working employees may feel devalued. If one employee is allowed to work remotely for several days to care for a sick child, other professionals may feel slighted that they aren’t permitted to work from home as well. Business leaders have everything from employees’ child care needs to daily commutes to consider when deciding whether to return to the office or not, and with so many factors at play, it can seem overwhelming to begin the process of making any workforce changes.

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According to Olsen, executives should take a data-driven approach to this evaluation by first surveying staff to understand their needs and obtain feedback. That way, when it comes time to make and implement the decision, those business leaders will be able to justify their choice. “We’re not saying you should be all-remote, all over the country, all over the world,” Olsen adds. “What we’re saying is, you should evaluate your situation, and evaluate how you

“As the market will inevitably shift back to an employer-driven market, I think you can expect to see more and more companies requiring people to be in-person,” he says. Others aren’t so convinced of this inevitability, especially considering recent findings that remote work does not lead to a decline in productivity. That same Owl Labs report, for example, found 90% of remote employees reporting they were as productive, or more so, working

Companies need to articulate why they need employees back in the office, and I don’t think many companies have done that.

can meet those employees where they are.”

Making the Right Choice

While the Googles and Microsofts of the world may be publicizing their choice to return to the office, HR executives agree that middle-market companies need to carefully consider their own needs and goals before doing the same. In addition to understanding competitive opportunities, as well as employee needs, business leaders should also remember that the job market remains in flux, and further changes may be coming. For one, Blonstein predicts that the balance of power that currently weighs in favor of job-seeking professionals will eventually readjust.

from home compared to working in an office. Olsen emphasizes the importance of challenging CEOs and other business leaders to make a decision backed by data and a full understanding of the implications of any move. But more importantly, he says, middle-market companies should broaden the scope of the conversation beyond simply where employees will physically operate, and begin to consider deeper, more fundamental changes to workforce strategy and talent management. “It’s so much bigger than just where people work,” he says. “It’s not just work-from-home, hybrid or whatever. It’s really about rethinking the entire structure of how we work together.” //

Sovereign Wealth Funds: Important Investors With Specific Tax Concerns By Steven D. Bortnick and Morgan L. Klinzing Sovereign Wealth Funds (SWFs) are an important source of capital for private equity funds. SWFs generally enjoy favorable tax treatment in the U.S., but this treatment is subject to specific limitations; SWFs typically require separate LPA provisions or side-letter protection to ensure that their favorable tax treatment is not thwarted by the activities of the funds in which they invest. US Tax Exemption. Foreign governments (including for this purpose wholly-owned subsidiaries (1) formed in the same jurisdiction as the foreign government, (2) the net earnings of which inure entirely to the benefit of such subsidiary or the foreign government, and (3) all of the assets of which must be paid to the government in the event of liquidation) are exempt from U.S. tax on certain U.S. source income, including dividends and interest paid by U.S. payors, and gain on the sale of stock and bonds issued by U.S. issuers. Commercial Activity Income. Importantly, income from commercial activities (CAI) is not exempt from tax. Moreover, income received by a controlled commercial entity (CCE) does not benefit from this exemption, nor is income (e.g., dividends) from a CCE or gain from the sale of a CCE exempt. Commercial activities include activities ordinarily conducted with a view toward producing income, but do not include investing in stocks and bonds or trading in stocks, securities, or certain commodities for the foreign government’s account. A CCE is an entity in which a foreign government owns 50% or more of the interests (or in which the foreign government has effective control) and that is engaged in commercial activities. As SWFs often are controlled entities, if such entities engage in commercial activities

(anywhere in the world) that may preclude a SWF from benefiting from tax exemption on U.S. source income (even passive income, such as dividends and interest). Thus, SWFs regularly request that PE funds not generate CAI, and expect funds to use below the fund blockers or alternative investment vehicles that block such income for SWF investors. Generally, the nature of the income derived by, and activities conducted by, partnerships flows through and retains its character in the hands of their partners. To ameliorate the extreme result that CAI recognition by a partnership in which a SWF is invested would taint all of the U.S. source income of the SWF, proposed regulations provide that CAI derived through a limited partnership will be taxable, but generally will not taint other U.S. source income so long as the SWF does not have rights to participate in the management and conduct of the partnership’s business. Though these proposed regulations indicate that taxpayers may rely on them even before they are finalized, SWF investors generally do not rely on the proposed regulations because of the risk that they will not be enacted and because of the lack of clarity as to certain terms (e.g., whether serving on a fund’s limited partner advisory committee constitutes control).

Steven D. Bortnick Partner

steven.bortnick@ troutman.com 609.951.4117

Morgan L. Klinzing Associate

morgan.klinzing@ troutman.com 215.981.4560

troutman.com © TROUTMAN PEPPER ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship.

n e t e e w S

The

Dea l

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Now Playing: Middle Market Trends GrowthTV highlights top deals, covers newsworthy trends and features in-depth conversations with middle-market investors and business leaders to help foster growth and innovation.

STRE AM THE LATEST AT ACG.ORG/GROW THT V

People First INSIGHTS INTO FOSTERING EFFECTIVE WORK CULTURES AND CAREER ADVANCEMENT

HUMAN CAPITAL: BRINGING THE CCO TO THE TABLE In today’s regulatory environment, relying on outside counsel is no longer enough for many PE firms.

22 PEER PROFILE: JOHN DUPUY OF RENOVO HOME PARTNERS

THE MOVE 24 ON Recent hires and promotions, including PE operating partners, advisors and C-suite executives.

BDO 28 ADVERTORIAL: How private equity funds may positively impact EBITDA with the employee retention credit.

The CEO of a home remodeling business talks about partnering with Audax Private Equity on a buy-and-build strategy in his fast-growing sector.

MIDDLE MARKET EXECUTIVE // Spring 2022

PEO P L E FI R ST / /

Human Capital

Overcoming Resource Limits to Bring the CCO to the Table Having external compliance partners may no longer suffice for private equity firms facing a swiftly changing regulatory environment. Here’s how PE firms can bring the CCO title to the table, even with limited resources. BY CAROLYN VALLEJO

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rivate equity firms have plenty of compliance issues to keep track of. Cybersecurity threats and data privacy, shifting regulatory requirements, and the rise of environmental, social and governance initiatives all add to the growing list of compliance matters, some of which can catch firms off guard. Historically, outsourcing compliance workflows to an external third party has been a reliable strategy to ensure compliance without the financial burden of hiring in-house experts. Yet in today’s environment, that reliance on outside counsel may no longer suffice. “Today’s regulatory requirements of registered investment advisors under the SEC call for senior-level compliance engagement, which is ill-suited for an outsourced CCO model when integration in the investment process is expected,” explains Joshua Cherry-Seto, managing director, CFO and CCO of Blue Wolf Capital Partners, and co-chair of ACG’s Private Equity Regulatory Task Force. As PE firms respond to regulatory pressures, many must weigh the benefits of bringing on a dedicated chief compliance officer against their other priorities, given the limited resources at their disposal.

A Laundry List of Concerns

For The Riverside Company, a middle market-focused private equity firm headquartered in Cleveland, hiring its first chief compliance officer, Jennifer Boyce, came in 2012, two years after the Dodd-Frank Act went into effect. According to The Wall Street Journal, Dodd-Frank created a wave of PE firms bringing their compliance efforts in-house with dedicated CCOs, rather than relying exclusively on outside counsel. Today, a similar trend may be on the horizon as cybersecurity threats intensify, the Biden administration signals efforts to enhance regulatory oversight of the private equity space, and more firms prioritize ESG within their portfolios. Cybersecurity in particular is a compliance issue topof-mind for Boyce, though she tells WSJ that the main topic that keeps her up at night “could change at any given time.” That’s especially true for growing and evolving PE firms and their holdings, whose product offerings and cross-border expansion expose the enterprise to new regulatory requirements and frameworks. What’s more, in the U.S., PE firms are keeping a closer eye on the Securities and Exchange Commission and its anticipated changes to reporting requirements, most recently evidenced by its proposed amendment to Form PF.

Adding CCO to the C-Suite

As Boyce explains, having third-party external partners to

support compliance efforts can be vital. But an internal chief compliance officer creates a dedicated point of contact between external partners and stakeholders within the firm to ensure communication lines are clear and compliance efforts are efficient. However, for many private equity firms, especially smaller and midsize operations, hiring a dedicated CCO is out of the question from a cost standpoint. In order to enhance compliance efforts without draining limited resources, some firms take a hybrid approach, adding the CCO title to another member of the C-suite and strengthening collaboration between that internal leader and existing external partners. Blue Wolf’s Cherry-Seto is evidence of this trend, taking on both roles of finance and compliance lead. “It makes a lot of sense, as the CFO is process-oriented and touches a lot of the data required by the SEC,” he explains, adding that combining the CCO role with other C-suite titles is part of the “reality” of modest-size teams across private equity.

Relying solely on outside counsel for compliance matters may no longer suffice. The CCO Proliferates

Already, there is evidence of the CCO role gaining popularity within private equity: In February, Houstonbased middle-market private equity firm Milton Street Capital announced the promotion of Kevin Crook to partner and CCO, while JUSTLY Markets, an ESG-focused crowdfunding platform that connects investors to private equity markets, hired Donna Bartlett as its new compliance chief. Private equity firms One Rock Capital, ParkerGale Capital and TSG Consumer Partners have similarly welcomed new CCOs in recent months. Whether PE firms establish a dedicated CCO or link the role to another C-suite title, the benefits of investing in internal compliance expertise could outweigh the costs of noncompliance—especially considering the complex shifts of today’s regulatory environment, which Riverside’s Boyce says demands diligence and attention. “I think it’s just continually trying to evolve with living in these times and the pandemic,” she told WSJ. “Just when you think you might be a little bit out of the woods, along comes something else.” //

MIDDLE MARKET EXECUTIVE // Spring 2022

PEO P L E FI R ST / /

Peer Profile

Remodeling’s Longevity

JOHN DUPUY

CEO, Renovo Home Partners

BY ANASTASIA DONDE

hen Audax Private Equity brought John Dupuy into its fold, it was to execute on a thesis the firm had already developed—that home remodeling would see lasting interest from consumers for some time to come. Dupuy joined in August to launch a buy-and-build strategy in the sector. He had previously worked as an operating partner at several other private equity firms and as a CEO of PE-backed companies. In the next several months, Audax went on to acquire three brands in the home remodeling category: Dreamstyle, Remodel USA and Alure Home Improvements. In January, the firm announced the launch of Renovo Home Partners, a Dallas-based direct-to-consumer provider of repair and remodeling services focused on bath, window, siding, roofing and other areas. The three brands will now operate under the Renovo umbrella with Dupuy at the helm as its CEO. The business is looking to acquire similar

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companies around the country to expand its geographic footprint.

An Ongoing Trend

Home remodeling became popular during the COVID-19 pandemic when many office workers spent more time at home and decided to spruce up their surroundings. Now that most COVID restrictions are gone and offices are open again, it seems questionable whether remodeling will continue to be popular, but Dupuy and Audax are betting that it will. Most workers haven’t gone back to the office full-time and many companies are adopting remote or hybrid models, prompting people to continue to spend more time at home than they had pre-pandemic. “As a result of COVID, we’ve rediscovered our homes for both work and leisure,” says Dupuy. “People want to age in their home. With home prices rising, many people would rather upgrade than buy new.”

We’ve rediscovered our homes for both work and leisure. People want to age in their home. With home prices rising, many people would rather upgrade than buy new. People who already own homes are getting older and choosing to stay in their houses through retirement and fix them up. The pandemic also prompted many people to flock to the suburbs. Now demand outstrips supply and houses are becoming expensive, which leads those who already own property to stay put and remodel rather than move, Dupuy explains. “We believe that there is significant and sustained momentum in this industry,” says Jay Mitchell, managing director at Audax. “There are a number of secular shifts underpinning continued tailwinds, such as low housing availability causing would-be buyers to instead renovate, desire to age in place in existing homes, rising home equity values incentivizing home investment, greater interest in non-urban living and a more flexible work environment.” Renovo focuses on high-volume, quick-turn remodeling projects as opposed to custom remodeling, Dupuy says. Renovo’s businesses work on short-duration remodeling jobs, including shower conversions, cabinet refacing, window and door replacement, roofing and the like. These projects can usually be completed in one to three days. “This is a very attractive and scalable business model,” Dupuy notes. “During the early days of COVID, people tended to focus on small DIY projects that cost less than $5,000,” Dupuy says. “Once things started opening up, they started shifting to larger and ‘do it for me’ type projects.” These tend to be in the $15,000-$25,000 range, Dupuy adds.

Scouting for Add-Ons

The Dreamstyle business is based in Albuquerque, New Mexico, while Alure is headquartered in East Meadow, New York, and Remodel USA is in Capitol Heights, Maryland. Dupuy wants to expand Renovo’s presence around the country, looking at areas like Texas and the Southwest in general, the Midwest, Florida and the Southeast. While Alure and Remodel USA already give the company a foothold in the Northeast, Dupuy is interested in building a bigger presence there, too. Renovo’s initial plan is to acquire businesses that have at least $10 million in revenue, Mitchell says. “Our goal is to partner with strong operators who have great brands and provide superior customer service,” he adds. The brands will continue to operate under their own

names and management teams with Renovo serving as an umbrella organization that handles a lot of back-office functions. Renovo is building a corporate team in Dallas to lead functions in finance and accounting, information technology, and human resources and recruiting. Several key senior positions have already been filled. Dupuy had held senior roles at several private equitybacked businesses and helped them with buy-and-build strategies in the past. Prior to joining Renovo, he was on a temporary assignment as interim CEO of MPL Co., a Wynnchurch Capital-backed manufacturer of cultured marble bath products. From 2017 to 2020, Dupuy served as an operating partner at Align Capital Partners. While there, he held several roles at Alignbacked companies across industries as a chief executive or board member.

Renovo’s Advantage

Dupuy thinks of Renovo as more than a holding company. The business is looking to share best practices among its brands, build out best-in-class IT infrastructure, and optimize systems and processes, while still letting the brands operate independently, capitalize on their brand recognition and work with their original executives and founding teams. “The level of collaboration between our acquired partner companies has been fantastic,” Dupuy says. “Our competition typically replaces management teams and dictates how to run the business. That’s not what we do. We’ll encourage them to adopt a best practice, but I’m not going to dictate to them what to do.” Renovo and Audax are spending millions of dollars on investment in IT business systems, infrastructure and cybersecurity. They are also investing heavily in people and process enhancements in areas like marketing, finance and accounting, human resource management and recruiting. “This delivers resources to the brands that they wouldn’t be able to afford on their own,” Dupuy says. “We’re having very different dialogues with potential sellers, in that we respect their brand heritage and management team and take a partnership approach in managing the business, instead of a heavy-handed one-size-fits-all approach.” //

MIDDLE MARKET EXECUTIVE // Spring 2022 23

PEO P L E FI R ST / /

On the Move

LISA DOMBRO Denver-based private equity firm Revelstoke Capital Partners hired Lisa Dombro as an operating partner. She will be providing strategic guidance and execution across Revelstoke’s portfolio of healthcare services companies. She has worked as a chief experience and innovation officer for Agilon Health. She’s also worked at Fresenius Medical Care North America as chief of staff to the CEO and senior vice president of physician practice services.

MICHAEL RAPP Austin, Texas-based Praecipio Consulting, an IT services and business process management consulting firm, hired Michael Rapp to be its CEO. Rapp has more than 25 years of experience in building technology companies. He led many different types of businesses, including startups and multi-billiondollar companies. Previously, he was CEO of Cleveland-based Champion One, a designer and supplier of optical networking components. While at Champion One, Rapp led a growth plan that resulted in the sale to Legrand, a global specialist in electrical and digital building infrastructure. He has also worked at En Pointe IT Solutions, PCM, Software Spectrum and Admor Memory.

GREG MAYER Argosy Healthcare Partners, a division of Argosy Capital, hired Greg Mayer as vice president, portfolio company operations. Mayer was previously a director of corporate strategy and M&A at Avantor, a chemicals and materials company serving biopharma, healthcare and other industries. Prior to Avantor, he was an associate in healthcare high-yield research at Bank of America.

middlemarketgrowth.org

KEVIN LANG Kevin Lang joined New York-based One Rock Capital Partners as an operating partner to focus on driving post-acquisition value of One Rock’s portfolio companies. Lang has nearly four decades of experience in the food and beverage industry in operations, research, development, financial management and quality. Before joining One Rock, he founded Soundwatch Consulting. He previously served as chief operating officer of Delavau, a food technologies supplier, and as innovation and research development leader at Hostess Brands.

MITCHELL DAITZ

DAVID FULLER

New York-based private equity firm WindRose Health Investors hired Mitchell Daitz as an operating partner. He will assist WindRose in evaluating healthcare investments and will work with portfolio companies. Before joining WindRose, Daitz was the co-founder, CEO and executive chairman of Vital Decisions, a provider of tech-enabled healthcare planning services. He was also the co-founder and CEO of IntrinsiQ Research, a leading oncology electronic medical record and information company, and president of healthcare market advisory firm Datamonitor.

David Fuller joined New York-based private investment firm Searchlight Capital Partners as an operating partner. Before joining Searchlight, Fuller was president of Rogers Wireless. He spent 15 years with TELUS, a communications and information technology company, in many executive roles across business solutions and marketing departments. He also has many years of experience in the management consulting business, where he worked globally with clients across different industries.

KEITH CLINE Phoenix-based Cultural Experiences Abroad hired Keith Cline to be the CEO of Cultural Experiences Abroad and CAPA: The Global Education Network, a newly merged company under private equity firm Infinedi Partners. The combined company serves more than 500 U.S. universities with educational programs and internships abroad. For the past two decades, Cline has held executive leadership positions in the hospitality and specialty retail industries as president and CEO of La Quinta Inns & Suites and president and CEO of CorePoint Lodging.

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PEO P L E FI R ST / /

On the Move

JORGE ORDONEZ GoExpedi, an end-to-end digital supply chain and data analytics company in Houston serving the industrials supply market, has named Jorge Ordonez as its CFO. Most recently, Ordonez was CFO at US Med-Equip, a medical equipment provider, which tripled its revenues during his tenure. Prior to that he was CFO for Detechtion Technologies, a global provider of software as a service (SaaS) and other technology solutions to the energy industry. Before Detechtion, Ordonez was CFO for Energy Solutions International, a global supplier of monitoring and decision support software and services for energy companies.

RANDY DOBBS EnableComp + Argos Health, a newly merged healthcare outsourced services company, hired Randy Dobbs as the new CEO. Dobbs has more than 30 years of experience working as CEO at GE Capital’s IT Solutions, Phillips Medical System North America, U.S. Investigation Services, Matrix Medical Network and American Vision Partners/Medical Management Resource Group. Dobbs is the author of “Transformational Leadership: A Blueprint for Real Organizational Change.”

TONY ABENA West Palm Beach, Florida, private equity firm Lightview Capital hired Tony Abena as operating partner. He will work with portfolio company CEOs and leadership teams on strategic objectives and performance goals. Abena has more than two decades of leadership and investment experience in managed and technology-enabled

middlemarketgrowth.org

services, information services/analytics and software/ SaaS growth businesses. Before joining Lightview, he was CEO of Insite Software and president of the global legal division of Thomson Reuters. He also worked on the founding team for Deloitte’s venture accelerator for alternative technology/data businesses.

LEO SNIGER Bethesda, Maryland-based IMB Partners, a lower middle-market private equity firm, has brought on Leo Sniger as an operating partner. Sniger is the president and CEO at Energy Services Holdings, a provider of electrical and instrumentation services to the energy infrastructure market. He has concurrently served as a special advisor to IMB since 2020. Sniger works alongside the IMB team to manage deal execution, bringing with him over 45 years of construction, project management and operations expertise across the utility, power and transportation markets. After beginning his career in the heavy civil construction market, Sniger held leadership roles in industrial services across the country, including serving as director of operations at Jacobs, where he was responsible for the direction of construction operations throughout the U.S.

CAMERON EVANS Cameron Evans joined New York-based Dominus Capital as an operating partner. At Dominus, he will focus on the specialty chemical distribution, packaging and automotive aftermarket industries. Previously, he was president and CEO of Niteo Products, a manufacturer of automotive chemical products, and president of Red Line Synthetic Oil Corp., a manufacturer of synthetic lubricants and performance chemicals for automobiles and motorcycles.

MAURICE MARKEY IMB Partners has brought on Maurice Markey as an operating partner. Markey already serves as board director for Alder Foods, an IMB portfolio company that was acquired in 2016. Markey began his career holding several positions of senior leadership in the U.S. and Asia with Kraft Foods, before moving on to leadership roles at Sam’s Club, Eli Lilly and consulting services firm Windfarm. Prior to joining IMB, Markey was the vice president, head of strategy and corporate communications for Designer Brands, one of North America’s largest footwear retailers.

MIDDLE MARKET EXECUTIVE // Spring 2022

How Private Equity Funds May Positively Impact EBITDA with the Employee Retention Credit

Private equity (PE) funds typically do not consider tax planning an effective strategy for boosting portfolio company earnings before interest, taxes, depreciation, and amortization (EBITDA). This is because realized tax benefits and the accompanying tax planning expenses generally do not positively impact EBITDA, thus causing an unintended impact on this critical metric used to evaluate a company’s operating performance. However, the federal employee retention credit (ERC) may positively impact EBITDA, and in addition, the nonrecurring fee paid to support the credit may qualify as an EBITDA addback. Specifically, PE funds looking to maximize financial performance may generate cash by claiming the recently enhanced ERC for eligible portfolio companies. The ERC is a refundable payroll tax credit first introduced as part of the Coronavirus Aid, Relief, and Economic Security Act, commonly referred to as the CARES Act, that provides employers a credit up to $26,000 per employee for qualified wages paid to employees after March 12, 2020, and before September 30, 2021.1 Although Congress does not permit taxpayers to claim the ERC for calendar year 2022, PE funds may still claim the credit for these prior years on behalf of their eligible portfolio companies. Many portfolio companies have been able to avoid reporting a financial loss during the pandemic by claiming the ERC. For example, an eligible company with 40 employees could receive over $1 million in retention credit and would not need to report a federal income tax liability to qualify. While the ERC may provide PE funds substantial benefit, navigating the qualification and calculation considerations for PE portfolio companies can be complex.

ERC BENEFIT & ELIGIBILITY REQUIREMENTS PE companies must carefully evaluate the ERC eligibility requirements before determining whether and to what extent they qualify for the credit. To determine eligibility for the ERC, an employer must be able to demonstrate either: (i) its operations were fully or partially suspended as a result of a governmental order related to COVID-19 (the government order test); or (ii) it incurred a significant decline in gross receipts (the gross receipts test). Notably, qualified wages are calculated differently for 2020 and 2021 and may also be subject to a facts-and-circumstances evaluation to determine the total ERC benefit available to a portfolio company.

BDO’s ERC Calculator makes it easy to find out if you qualify for the credit, and if so, by how much.

CALCULATE YOUR BENEFIT u www.bdo.com/erc-acg

MAXIMIZING EBITDA While the ERC may provide significant opportunities for PE portfolio companies, a nuanced and complicated analysis is necessary to evaluate whether the governmental order test or the gross receipts test is met and, ultimately, the amount of a proper ERC claim. This article does not address every potential situation and factor to be considered and, therefore, PE portfolio companies should seek professional guidance. Specialized tax advisors have developed significant expertise working with PE funds and their portfolio companies to identify and document ERCs in a manner that helps maximize EBITDA, net income, and free cash flow.

The ERC is one of many tax credits and incentives offered by federal, state, local and non-U.S. governments. BDO helps organizations identify, negotiate and secure tax credits and incentives — including retroactive and future opportunities — to minimize total tax liability and increase cash flow.

CONTACT: David Wong Partner and Business Incentives & Tax Credits National Practice Leader dwong@bdo.com

Reasons Private Equity Funds Should Take Advantage of the Employee Retention Credit (ERC)

2 3

Above-the-line payroll tax deduction, which could positively impact EBITDA

Cash refund up to $26,000 per employee An eligible portfolio company with 40 employees could receive over $1 million and does not need to report a federal income tax liability to qualify

Fees to calculate the credit are non-recurring, and therefore may be eligible for an EBITDA add-back

The ERC is one of many tax credits and incentives offered by federal, state, local and nonU.S. governments. BDO helps organizations identify, negotiate and secure tax credits and incentives — including retroactive and future opportunities — to minimize total tax liability and increase cash flow.

BDO has successfully helped ACG and its members secure ERC benefits. Accountants and Advisors

www.bdo.com

BDO’s ERC Calculator makes it easy to find out if you qualify for the credit, and if so, by how much.

CALCULATE YOUR BENEFIT u www.bdo.com/erc-acg

Contact: David Wong, Partner and Business Incentives & Tax Credits National Practice Leader dwong@bdo.com Gabe Rubio, Business Incentives & Tax Credits Partner grubio@bdo.com © 2022 BDO USA, LLP. All rights reserved.

Expand your network and fast-track your business goals with ACG Membership ACG Members represent the most active and engaged professionals within the middle market. They embody ACG’s mission of driving middle-market growth by carrying out their own missions: to source and close deals, to grow their own organizations, to win business, and to continue developing their own careers. And we help make it happen. When you join ACG as a member, you gain access to the exclusive network and benefit from the connections that ACG actively facilitates. Does this sound like you? Are you among the middle-market’s foremost, deal-making, business-growing, investment-finding, ladder-climbing, acquisition-targeting, talent-sourcing, hand-shaking, professionals? Do you aspire to be?

75% of ACG Members do deals with other members

If so, we encourage you to join ACG as a member and take advantage of the following benefits: � Invitations to Member-Only Events - Collaborate with other ACG members and benefit from expert panels and industry insights. (Some events are just for fun.) � Member-Only Discounts for just about all ACG-hosted events, including InterGrowth: the premier dealmaking conference in the middle market. � Access to – and a presence – within the ACG Member Directory: Search for and connect with fellow ACG members with our exclusive directory of middle-market professionals. � A Subscription to Middle Market Growth® Magazine: Keep up to date on news, trends, best practices and thought leadership in the middle market. � ACG JobSource® - Post or search for a job on ACG’s job board. � Earn your MMP via ACG’s Middle-Market Professional Certification Program at a discounted rate. � Member-Only Offers courtesy of ACG’s Partners ∆ 6-Month Free Trial for FoundersCard ∆ 2-Month Free Trial for CLEAR (or a $30 discount for a year-long subscription) ∆ Exclusive benefits on subscriptions to Grata ∆ Pre-approval for a free membership to EPG ∆ Enroll your company in the ParityINDEX®, a proprietary DEI measurement tool created by Parity.org.

86% of ACG Members are either very or extremely likely to recommend ACG to a friend

Features AN IN-DEPTH LOOK AT TRENDING ISSUES FACING EXECUTIVES AND OPERATORS

FOLLOW THE LEADER

PEELING BACK THE CURTAIN

How private equity ﬁrms are using their executive networks to gain a competitive edge.

Sellers today are digging deep into their businesses to craft compelling narratives for buyers about performance and future growth.

FOCUS: GLOBALIZATION PARTNERS 46 IN Globalization Partners helps its clients adapt to remote working,

If a deal is priced to perfection, sponsors start taking a closer look at what’s going on with product delivery and how much labor costs are going to go up. When those become long-term problems, you start seeing impacts to working capital, revenue and profitability. TODD MCMAHON Head of Investment Banking, Capstone Partners

hire employees abroad and retain existing workers, even if they move far away.

MIDDLE MARKET EXECUTIVE // Spring 2022 33

Features

Follow the Leader WRITTEN BY

Jen A. Miller

ILLUSTRATIONS BY

Dan Bejar

middlemarketgrowth.org

How PE firms are using executive networks to gain a competitive edge

Features

hen middle-market private equity firms invest in a business, they’re not always doing the deal first and then thinking about management afterward. Instead, many are creating pools of talented leaders known as “executive networks,” from which PE firms can hire people into leadership positions—whether that’s a CEO, board member, chairman or other C-suite role—before a transaction closes and, in many cases, learn about new investment targets. Middle-market firms are finding that this approach gives them an edge, especially when identifying opportunities that aren’t public yet, and a jump-start in growing portfolio companies from the day the deal closes. The reliance on strong leaders has become a way to generate value in a business, particularly one that is already operating efficiently. There are also nuances to leading a private equity-backed business, including the fast pace at which executives are required to operate. Having the right executive team ready to go is critical in today’s fastpaced dealmaking environment, but also because some companies are still struggling to emerge from the COVID-19 pandemic and require the right leader to get back on track. Here’s how middle-market firms are using their executive networks, finding the right leaders and compensating talent for the value they bring to portfolio companies.

THE EXECUTIVE NETWORK MODEL

As more money has poured into private equity, sponsors are under pressure to find high-quality targets and deliver a return on investment. Talent can give firms a competitive edge both in making deals and growing portfolio companies as soon as they’re acquired. Middle-market firms are often expecting operating partners to take a more hands-on role in building executive networks in order to find the right talent to lead portfolio companies, even if the firm doesn’t have a dedicated chief talent officer.

middlemarketgrowth.org

That’s the case for Five Points Capital, a private equity firm based in Winston-Salem, North Carolina. In March, it hired a new director of business development to help build out the firm’s executive network, to supplement the work done by Brent Kulman, Five Points’ managing director of business development, over the past 16 years. Those networks, in turn, have helped Five Points zero in on potential deals within its chosen industry niches. “We have historically taken a broad approach to investing in the business-to-business services sector, but this effort would be to identify more narrowly defined categories within B2B services, and try to find investment opportunities that may or may not be on the market in those sectors,” Kulman says. “Using those executive networks will also help us to diligence opportunities we find through intermediary channels and better identify value-creation levers.” The need for a more robust executive network is especially key right now given the competitive state of the market and a shift toward specialized sourcing. “The days of investment bankers taking a broad approach to marketing businesses are behind us,” Kulman says. “By bringing on people into an executive network and sharing those relationships with the intermediary community, it helps us to get looks at deals that are not going to be broadly marketed.”

A HEAD START

Instead of making a deal before finding the right talent to lead the business, many middle-market sponsors are using their executive networks to pick the right leader first. In many cases, those executives also identify potential acquisition targets. These networks can give private equity sponsors a leg up on opportunities, especially in an incredibly busy M&A market. Plus, they can enter their bid with a management team already in place, which may give them an advantage over other interested buyers. Post Capital Partners, a private equity firm based in New York, built its “Executive First” investing strategy with the goal of leveraging the expertise and

It allows us to proactively search in attractive industry subsegments we’ve underwritten with an executive we’ve identified to build a business one add-on at a time. MICHAEL ZUKAS Principal, Huron Capital

connections of its executive partners. “The central idea is that the most important driver of value creation in a business we invest in is the quality of the senior leader,” says Mitch Davidson, managing director and co-founder of Post Capital. The firm finds executives first, then potential targets. These executives might have a business in mind, or they can help Post Capital evaluate a company. Importantly, they “have a track record of success and either can develop a vision or a strategy for where they think there’s opportunity in the market,” Davidson adds. This approach works particularly well for Post Capital because the firm tends to invest in smaller companies and is “almost always the first institutional capital in a business,” he says, adding that the businesses are “usually ready for that next level of institutional leadership and market knowledge and structure.” Having an executive already identified, who can meet with the potential company as

part of the dealmaking process, can help the owners feel more comfortable with selling their business. Since its founding in 1999, Huron Capital, a PE firm based in Detroit, has had an executive-led market entry initiative, which it branded “ExecFactor” in 2013. “It allows us to proactively search in attractive industry subsegments we’ve underwritten with an executive we’ve identified to build a business one add-on at a time,” says Michael Zukas, principal at Huron. “We go to a business owner with a fully developed thesis, with conviction around the market that they play in, and with the capital and resources needed to take their business to the next level.” Having the right executive is a “way to differentiate and helps us drive clarity in terms of the types of opportunities we are looking for before even knowing which company we’re going to pursue first,” Zukas says. It can also put business owners at ease knowing they will be partnering with

MIDDLE MARKET EXECUTIVE // Spring 2022

Features

a private equity firm and executive with shared values and a shared vision for growth. In August 2021, Chicago-based PE firm GTCR launched its new Strategic Growth Fund to support “The Leaders Strategy,” an investment approach that is centered on GTCR’s thesis of finding and partnering with executive-level leaders to identify, acquire and build market-leading companies. The fund closed in January with $2 billion of limited partner capital commitments. John Kos, managing director of GTCR, says The Leaders Strategy is especially important when buying companies that don’t already have a management team, like corporate carve-outs or businesses with a founder who “wants to transition out either immediately or shortly after the transaction.” An executive network also gives GTCR an advantage in an active dealmaking environment. “We’ve made our initial platform acquisition with a team that we really trust,” Kos says. “Then we can go out and aggressively compete against people who don’t have that team.”

EXECUTIVE SEARCH

Finding executives for a network is all about marketing, say middle-market PE investors. That means identifying potential candidates, putting out feelers and spreading the word that the firm is seeking talented individuals to join its executive roster. Kos says that he is often looking at strong enterprises and determining who the great managers are and who are the “number twos” looking to become number ones. “I’m proactively reaching out to people that I come across and just having conversations about their career in their industries and whether they might be interested in doing something like this,” he says. Walter Florence, managing partner of Chicagobased PE firm Frontenac, says that in addition to reaching out to executives directly, the firm “never misses a chance to ask our friends in investment banking who they know.” He adds that some of the best CEOs tried and “failed” at retirement and are looking to get back to building a business.

middlemarketgrowth.org

“For many public company CEOs, the job becomes more about governance, corporate structure and external relations, and it is no longer about building great teams to deliver great products and services for customers,” Florence says. “Deals and companies in the lower middle market are smaller. You would be surprised how many executives had told us the most fun they have had in their career was running that smaller $50 million - $200 million division where they were empowered and could get their arms around all the issues and opportunities and really make a positive impact. Those are the executives that we want to work with.” In 2014, Olivier Amice became CEO of Whitebridge Pet Brands through a deal with Frontenac, which happened six years after he was first introduced to the firm. Amice previously had a long career working at Royal Canin, a pet food company, and resigned from the CEO role in 2008 when the company was bought by a consumer packaged goods company, which changed the culture. “I wanted to stay in the pet industry, working for a brand in a more entrepreneurial environment,” he says. In 2010, Amice was brought in by PE firm HKW to lead FURminator, which makes pet tools and grooming supplies, after HKW acquired the company. He took on the CEO position because “18 months after they made the deal, they were not happy with the trajectory of the company,” he says. He stayed until 2012, when the company was acquired by Spectrum Brands. Amice first met with Frontenac in 2008, and in 2010, he worked with the firm to evaluate a pet distribution company. (Frontenac ultimately passed on the deal.) In 2013, Amice looked at an opportunity with Frontenac to expand into pet products for one of its portfolio companies. Then in 2014, “we came across a pet treat opportunity and agreed to pursue it together,” he says. That led to Whitebridge Pet Brands. By then, Amice and Frontenac had been working together for six years. He credits the firm’s long-term executive relationships with continuity in portfolio company leadership. “Their approach reduces the

significant risk of needing to change the CEO in the first two years that you often see in deals,” he says. While Amice sees why becoming part of an executive network is an attractive opportunity— and one that has worked well for him—it’s not for everyone, especially when it comes to leading smaller companies. “You need to be more hands-on than in larger companies, you need to understand and be comfortable with the lender’s constraints, you need to be comfortable with the pace given the sponsor’s timeline,” he says. He adds that a successful partnership requires the leader and sponsor to be on the same page in terms of their values, their perspective on management, and how they react to rough patches. “In my case, Frontenac and I had a long relationship before I became CEO of one of their companies,” Amice says. “We both knew we were compatible and complementary.” And it worked out: In 2021, Frontenac exited

At Huron, “every CEO is unique to the situation,” says Zukas. “They’re not hired just because they develop a great ExecFactor idea. They must be seasoned leaders with the vision and capability to execute the value creation plan.” The firm offers executives upside potential through equity ownership and a competitive cash compensation package that scales with the platform. Huron also rewards executives who exceed their companies’ performance targets. At GTCR, executives also invest their own money into the business “so when we buy stock in the company, we buy with them and they buy the same stock we do,” says Kos. “We give them a portion of the upside that they generate through the carried [interest] pool.” It’s like options they don’t pay for, he adds: “They get the payout if they generate returns for investors and themselves.” Financial returns and compensation are part of what make the investor-CEO partnership effective, but success also requires both parties to feel good

I’m proactively reaching out to people that I come across and just having conversations about their career in their industries and whether they might be interested in doing something like this. JOHN KOS Managing Director, GTCR

Whitebridge, having grown the company’s revenue by 10x, according to Amice.

THE COMPENSATION QUESTION

Just as the type of company and role varies for each member of an executive network, so too does compensation. “It depends on the objectives of each individual,” says Kulman of Five Points Capital. “In some cases, they’re looking to become the CEO of a business. In other cases, they may be people that have been CEOs of a business and don’t want to do it again, but want to actively be involved at a board level.” If they’re joining a board, or taking over as CEO, they’ll be compensated like a board member or CEO. If they’re investing their own money, they can also reap the rewards of success.

about the arrangement, and even be willing to do it again. During an interview on ACG’s GrowthTV, Michael Pfeffer, Davidson’s co-founder at Post Capital, described a successful partnership as one where each party can give the other a strong recommendation after selling the business. “To me, that’s the best determinant of success,” he says. “And I’ll go one step further: Can we do it again?” By bringing on an executive they’ve worked with previously, private equity firms can save time, energy and money, and reduce the risk that comes with an untested leader. Instead, they can hire someone they know well and work with them again—and again, and again. // JEN A. MILLER is a freelance writer and author of “Running: A Love Story.” She lives in New Jersey.

MIDDLE MARKET EXECUTIVE // Spring 2022 39

Features

Peeling Back the Curtain WRITTEN BY

Bailey McCann

ILLUSTRATED BY

Stephan Schmitz

middlemarketgrowth.org

How dealmakers are assessing the impact of COVID disruption and new macro risks, while forecasting future performance in a time of uncertainty

Features

y almost any measure, the past two years have been record-breaking ones for mid-market M&A. The level of activity has surprised many, given the impact of the coronavirus pandemic on the world. Now, as economies begin to reopen, businesses and investors are faced with fresh waves of uncertainty, including ongoing supply chain issues, rising inflation, rising interest rates, increased labor costs and geopolitical concerns. For companies and general partners hoping to transact, these new concerns could put pressure on balance sheets and deal activity overall. Investors and advisors are now scrutinizing potential acquisitions for how well they managed through the pandemic, how companies are responding to a set of new risks, and whether those that enjoyed a “COVID bump” can maintain their good performance. If rising costs, rising interest rates and geopolitical shocks continue to build precarity into the economy, it could dampen M&A potential or drive valuations down, advisors say. Paul Aversano, managing director at consultancy Alvarez & Marsal, sees both sides. “We’re getting a lot of sell-side work to position companies going to market right now. That has a long lead time, so if I am looking toward the end of the year, there’s a strong pipeline of deals that is still building right now,” he says. If companies and their bankers can position their story well and highlight a runway for growth, the pipeline for the second half of the year should be strong, barring any new macro uncertainty. But if rising costs, rising rates, inflation and geopolitical shocks become more than a series of unfortunate events, there could be trouble. Aversano anticipates the rate of restructurings could start to increase around 18 months from now.

BUT FIRST, THE DATA

The pandemic had a significant impact on businesses, even if it hasn’t hit valuations or deal flow.

middlemarketgrowth.org

In a recent Citizens Financial Group survey of middle-market executives, 58% said the pandemic made it harder for them to do business. But it’s not the only factor. More than half—54%—said labor market challenges, including increased costs and the tight supply of workers, have made it difficult to grow. Commodity prices came in third, with 49% saying those cost increases are a big challenge. In the first quarter of this year, the conflict in Ukraine also caused some businesses that were considering a sale or other transaction to move to the sidelines. According to data from Bloomberg, at least 100 companies worldwide have delayed or

If a company is still making COVID adjustments, it’s likely from industries that haven’t been able to bounce back. SAM HILL Managing Director, Capstone Partners

pulled financing for deals since the start of Russia’s invasion. This includes M&A deals, IPOs and new rounds of financing. The U.S. accounts for the largest share, with 49 companies delaying plans. Taken together, all of these factors are putting pressure on companies as they try to grow. The impact of these issues is causing something of a bifurcation between industries. Consumer, industrial and manufacturing companies that rely more heavily on in-person workers and commodities have been under constant pressure since the pandemic began. Meanwhile, companies in industries that could pivot to remote work or saw accelerated demand over the past few years, like technology, business services, media, healthcare and digital education, have all done well. But these businesses too are

54% OF MIDDLE-MARKET EXECUTIVES SAID LABOR MARKET CHALLENGES, INCLUDING INCREASED COSTS AND THE TIGHT SUPPLY OF WORKERS, HAVE MADE IT DIFFICULT TO GROW

58%

49%

OF MIDDLE-MARKET EXECUTIVES SAID THE PANDEMIC MADE IT HARDER FOR THEM TO DO BUSINESS

OF MIDDLE-MARKET EXECUTIVES SAID THAT COMMODITY PRICE INCREASES ARE A BIG CHALLENGE

Source: 2022 M&A Outlook Report, Citizens Financial Group

beginning to face some headwinds when it comes to closing deals. Valuations are high in these sectors and the companies will be under pressure to show they can maintain accelerated revenue growth. “For most companies, the direct impact of COVID is behind them if they survived. The market valuations will still be impacted when looking back over the past two years, but if they have recovered (or actually benefited), the impact will be less,” explains Sam Hill, managing director at middle-market investment bank Capstone Partners. “There are just a lot of other factors taking precedence now, such as lingering supply chain issues and inflationary dynamics. If a company is still making COVID adjustments, it’s likely from industries that haven’t been able to bounce back. “Labor costs are overtaking the pandemic now and depending on the industry, supply chain and energy costs are having a bigger impact,” Hill

continues. “Interest rates may now become more meaningful and inflation (if unchecked) threatens consumers and the ripple effect may create longer-term issues. In some cases, manufacturers have struggled with passing on costs as quickly as they need to in order to protect profitability.” Forecasting the future isn’t easy. A recent report from Bain & Co. shows that the biggest factor in deal failure is a misunderstanding of future revenue. Revenue-enhancing strategies like new business models, combined product offerings or updated go-to-market approaches can be challenging to execute in a highly volatile economy. Overestimating the revenue potential from updating a product or service often leads to underperformance down the line. If a company survived or even thrived over the past few years, that’s a bonus going into a deal process. But the business and its investment bankers have to show that there are continued

MIDDLE MARKET EXECUTIVE // Spring 2022 43

Features

opportunities for growth that are defensible. Right now, investors are willing to sign on for stories that include growth of the customer base, future acquisition potential or new product offerings, but the narrative has to be strong and likely include more than one of these growth paths. For companies that came through the past two years in a weakened state, successful deals are still happening if the business can show opportunities for operational improvements that will lead to better EBITDA numbers in the long term. This can include cutting labor costs, finding new sources of supply for those hit by the recent supply chain crunch, or even steadily improving product delivery times. Companies that lack either a growth story or a business optimization story could be headed for restructuring. Here, the push has been toward setting up performance improvement plans rather than going into full bankruptcy.

THE “NEW ECONOMY” HOLDS ON TO THE LEAD

So-called “new economy” industries like business services; healthcare IT; and technology, media and telecom (TMT) continue to lead both in terms of deal flow and valuation. That’s unlikely to change. In the Citizens Bank survey, 52% of executives expect valuations to increase in TMT this year, while 32% expect valuations in business services to rise. Companies that fall under this umbrella were able to shift to remote work and, in some cases, saw demand increase as businesses sought help with outsourced administrative services, a shift to remote work and virtual communications. “The balance sheets are very strong across all of the sub-verticals that fall under business services,” says Larry DeAngelo, managing director and head of the Global Business Services Group at Houlihan Lokey. “I think if you see any slowdown, it will be a function of price. But if sponsors think they can grow revenue and create operational efficiencies, many of them are still willing to pay.”

middlemarketgrowth.org

Healthcare, which was one of the fastest growing sectors before the pandemic, continues to accelerate. In the Citizens Bank survey, 68% of executives said they expect that valuations will increase in this sector in 2022. Within the middle market, healthcare IT services companies in particular have seen significant growth in response to the increase in demand for telehealth, electronic visits and delivery of prescriptions by mail. Companies that support remote administrative work also saw an uptick in demand and therefore revenues. “Healthcare is somewhat unique because it’s not cyclical,” explains Jeffrey Stevenson, managing partner at VSS Capital Partners, an investment firm that makes debt and equity investments in lower middle-market companies, including healthcare IT services. Stevenson anticipates that the demand for these companies will remain high because the demand for healthcare itself grows fairly consistently year-over-year.

PEOPLE AND MATERIALS BUSINESSES FEEL THE HEAT

Companies with high commodities exposure or those that require a lot of in-person workers have been under pressure since the pandemic began and that’s likely to continue. Companies that rely on energy, like transportation and logistics businesses, are facing new volatility in the energy market due to the situation in Ukraine. Similarly, recent volatility in the metals market is adding pressure to industrials companies that have already been hit by the chip shortage or those that require metals or chemicals as a core part of their operations. Hospitality and aviation, two people-heavy sectors, have also had difficulty fully rebounding as labor costs rise. Citizens Bank data shows that executives still expect to see valuations rise in consumer (43%), industrials (31%), and transportation and logistics (21%), but getting the price right will be tricky. There is now more scrutiny on balance sheets as the market tries to understand where future growth will come from.

“Supply chain problems have shown up in places a lot of people didn’t necessarily expect,” explains Thomas McConnell, a managing director at Capstone Partners. “The chip shortage has hit a lot of different industries and so you’re seeing big delays in product delivery, which impacts revenue.” Private equity firm Platinum Equity, for example, recently secured a new financing arrangement for one of its portfolio companies, aerospace supplier Incora. The company has been hard hit by the abrupt changes in demand for airplanes and the inability to easily get parts. In that deal, Platinum was able to get a fresh cash infusion for the company by swapping bonds that were due in 2024 for longer dated issuance. But, according to Bloomberg, it only happened through an aggressive practice known as “priming,” which puts some creditors ahead of others outside of the original terms of a deal. Either way, Platinum has insulated its position at least for the near term, but if

hotel was purchased by DiamondRock Hospitality Co., a publicly traded REIT that includes 33 hotels and resorts. DiamondRock owns several other properties throughout the South Florida area. Despite operating at a loss last year, DiamondRock is still doing deals and says it anticipates that travel will steadily return over the near term and is banking on popular destinations like Fort Lauderdale or Destin. Still, rising labor costs and changes in consumer sentiment could put the brakes on already discounted deals. Todd McMahon, head of investment banking at Capstone Partners, says the challenges faced by companies like these aren’t insurmountable, but it could take longer to get a deal done. “If a deal is priced to perfection, sponsors start taking a closer look at what’s going on with product delivery and how much labor costs are going to go up. When those become long-term problems, you start seeing impacts to working capital, revenue and profit-

Supply chain problems have shown up in places a lot of people didn’t necessarily expect. The chip shortage has hit a lot of different industries and so you’re seeing big delays in product delivery, which impacts revenue. THOMAS MCCONNELL Managing Director, Capstone Partners

Incora’s fortunes don’t improve soon, it could be difficult for the company to find an exit strategy. In hospitality, there has been some effort to buy up smaller hotels that have seen a significant drop in revenues over the past two years. Banyan Investment Group raised a $20 million fund at the end of last year to do just that. These transactions often happen at significant discounts, while many of the properties haven’t had consistent investment over the past two years and also cut back on housekeeping and staff. Investors are looking for hotels that can be fixed up reasonably cheaply, have a decent enough growth story as travel resumes, or that could be acquisition targets for strategic buyers. Banyan recently sold a Kimpton-branded hotel in the Fort Lauderdale, Florida, area for $4 million less than the price it paid for the property in 2020. The

ability. That can limit what a buyer can do when it comes to operational efficiencies or business strategy. Sponsors largely still think the impact is going to be temporary from what we’re seeing, but you could see deals slow down if it starts to look like an ongoing problem.” Looking ahead, 2022 could prove to be a Rorschach test for the market, even if deal activity remains elevated. So far, private markets have been able to skate around the big macro narratives impacting public companies. Yes, costs are up, but balance sheets are strong and sponsors are still willing to pay ever increasing multiples because they have money to put to work. // BAILEY MCCANN is a business writer and author based in New York.

MIDDLE MARKET EXECUTIVE // Spring 2022 45

F From left, Globalization Partners’ Kevin Burke, Director of M&A, Private Equity and Venture Capital, and Lou Vassalotti, Senior Director of Strategic Partnerships

FE AT URE S / /

Globalization Partners

In Focus

Hiring Talent Gets Easier with a Larger Pool of Candidates Globalization Partners helps its clients adapt to remote working, hire employees abroad and retain existing workers, even if they move far away

PHOTOS BY ADAM GLANZMAN

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ost would agree very little good has come out of the pandemic. However, there are a few bright spots. One of them is that remote work options are here to stay and appealing to both employees and employers, which can lead to successful outcomes for all parties involved. The shift allows employers to increase their talent pool and potentially lower labor costs, while allowing employees to live where they please without having to be located close to a company’s physical office. Having the ability to work from anywhere is a valuable incentive for employees and helpful given today’s tight labor market. “Companies need to get the most productivity out of their employees to create value. Most success or failures revolve around the people. I can control what I can control, but the people running the business are the ones who can ensure success,” says Lou Vassalotti, senior director of strategic partnerships with Globalization Partners, an Employer of Record company that allows companies to hire anyone, anywhere.

MIDDLE MARKET EXECUTIVE // Spring 2022

F E AT URE S / /

In Focus Casting a Wide Net

There is an advantage to being able to hire anywhere in the world. “Previously, employers may have tried to hire most of their employees within a 50-mile radius of their headquarters; now they can find talent that meets their needs anywhere in the world,” Vassalotti says. “For example, a New York-based tech firm can look for talent in Silicon Valley instead of settling for someone not as great just because they are based in New York,” he adds. “If Silicon Valley talent is too expensive, or an employer can’t find the right talent, they can even look abroad. That world has opened up, and it is great for employers.” More than one-third of companies (36%) say they are willing to hire remote workers anywhere in the world, according to The Conference Board, which surveyed more than 300 HR executives primarily from large U.S. companies. That’s a significant increase from the 12% that were receptive to that approach before COVID-19. EditShare, a media workflow storage and editing solution company, realized early on that hiring internationally was important to its business thesis and it was a good solution as COVID dissipated. “We are constantly scanning the markets for talent. Part of our current company strategy is to execute in returning markets—meaning those bouncing back from COVID first. That means a degree of flexibility around where we are operating and how,” says Jackie Hazan, vice president of people operations at Watertown, Massachusetts-based EditShare. “And part of that, especially in the remote-first world, is looking at the best talent. How do we attract the best talent?” EditShare turned to Globalization Partners for help because the process of hiring outside of a company’s jurisdiction is not as simple as it sounds.

The biggest thing people aren’t aware of is how quickly they can hire in a country with our help. It’s a long, painful road for companies to go this alone. KEVIN BURKE Director of M&A, Private Equity and Venture Capital at Globalization Partners

middlemarketgrowth.org

The Nuances of Looking Abroad

There are challenges that companies contend with when they hire in different states and different countries. For starters, companies must establish a legal entity in each country they wish to hire in, which can be time-consuming and expensive. Additionally, tax policies, labor laws and employee benefits vary from state to state and country to country, leaving employers with lots of work to do before they can hire outside of their operating jurisdiction. “Many companies grow by expanding into new markets. However, just because you want to put a sales team in Europe

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or Latin America, it doesn’t necessarily mean you want to set up all the infrastructure to legally do business on the ground,” says Vassalotti. “Most companies do not want to figure out employment laws and tax information for so many different countries. Most companies don’t have the slightest clue how to set up legally in another country. We make that easy.” With the help of Globalization Partners, EditShare has expanded its workforce from about 50 people to over 130 all over the world, including China, Europe, the Middle East and Africa.

Retaining Far-Flung Talent

Monday.com had a similar experience. The cloud-based project and team management tool company, which is aimed at simplifying collaboration, says the pandemic resulted in its employees looking to relocate in different locations. The Tel Aviv, Israel-based company wanted to be sure it kept talent even though it didn’t have a presence in the part of the world where its employees wanted to live. “With everything going on in the world, a lot of our employees are looking to relocate to different locations. And, sometimes, we still want to keep them,” says Debbie Ben Zaken, regional senior HR manager at Monday.com. Instead of investing the resources to set up an entity in another country, the company partnered with Globalization Partners. “Setting up an entity is a very complicated process, and

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it takes a lot of time,” says Ben Zaken. “It was really hard for us to understand what we have to do as the employer, what is mandatory, and what other companies like us do. Globalization Partners gave us the insight into what hiring would be like in Brazil and Canada.” Globalization Partners operates in 187 countries and can help companies hire outside their jurisdiction by becoming the Employer of Record handling hiring, payroll, human resources and tax issues. The firm also makes sure local laws and regulations are followed. This has been proven to be difficult for companies that have no presence in a country. Globalization Partners is nimble and can help a company make a hire anywhere in the world within 24 hours. “The biggest thing people aren’t aware of is how quickly they can hire in a country with our help. It’s a long, painful road for companies to go this alone. When companies learn there is an easier path that will make you compliant, Globalization Partners becomes an easy choice,” says Kevin Burke, director of M&A, private equity and venture capital at Globalization Partners. Burke estimates that his company’s industry has seen its growth accelerate by 10 years as a result of the pandemic. “Our business has taken off in the last two years. We are hiring all over the world and it’s for every title,” he says. “Employers are now free to hire the best candidate wherever they may be. It’s as simple as that.” //

MIDDLE MARKET EXECUTIVE // Spring 2022 49

MONDAY, JUNE 13, 2022 11:00 AM - 5:00 PM

Golf Tournament

2022 UPPER MIDWEST CAPITAL CONNECTION

Minneapolis Golf Club

1:00 PM - 5:00 PM

Lawn Bowling

Brookview Lawn Bowling 5:30 PM - 7:30 PM

Private Equity Wine Tasting Opening Night Reception

JUNE 13TH AND 14TH

MINNEAPOLIS MINNESOTA

Minneapolis Event Center

TUESDAY, JUNE 14, 2022

8:00 AM - 8:30 AM

Visit our website at acg.org/capcon or Scan QR CODE

Registration, Breakfast and Networking 8:00 AM - 5:00 PM

Deal Lounge

Make connections, set meetings, relax & unwind in the Deal Lounge. Hosted beverages and snacks provided all day.

For more than 15 years the ACG Minnesota Upper Midwest Capital Connection has been the premier sourcing, networking and educational event for deal makers

8:30 AM - 10:30 AM

in the area. It kicks off with an afternoon of golf and lawn bowling, followed by a

Roundtable Sessions

lively opening night reception. Then we get down to business with a full day of

Participants will have an opportunity to choose from a variety of roundtable sessions in this portion of the morning program.

productive conversations, timely panel discussions and informative speakers. We work to provide private equity firms and investment banks with multiple

9:00 AM - 11:00 AM

opportunities to meet and source deals while making sure our valued sponsors

DealSource

and other attendees make important, long-lasting connections.

The 2022 event will offer two sessions of DealSource to provide more time to meet with investment bankers registered for DealSource®. Meetings will be arranged in advance.

LUNCH KEYNOTE

ROSS WIDMOYER

11:00 AM - 12:00 PM

M&A and Private Equity Panel

PRESIDENT & CEO | FARIBAULT WOOLEN MILLS

The panel will provide insights and anecdotes on deal volume, valuation, inflation, deal structuring, availability of leverage, enduring COVID-19 impacts and more.

Ross will share their story of turning around a local icon. Celebrating a 150 year anniversary in 2015, the Faribault Woolen Mill is once again family owned after 5 generations

12:15 PM - 1:30 PM

Lunch and Keynote Speaker

of family ownership and then selling to an investment group. One of the last vertical woolen mills in America, Faribault has

Ross Widmoyer, President & CEO, Faribault Woolen Mill Co.

a bright history of quality but its business success is relatively new. In fact at one point,

1:30 PM - 3:30 PM

DealSource

they had to close their doors for a period. Join us to hear from Ross and learn about the strategic plan implemented to bring this story of American craftsmanship to profitability

1:30 PM - 5:00 PM

by using that Minnesota hockey adage of “skate to where the puck is going.”

PLATINUM SPONSOR

GOLD SPONSORS

Closing Reception

OPENING NIGHT RECEPTION SPONSORS

LAWN BOWLING SPONSOR

GOLF SPONSOR

Performance Review STRATEGIES FOR CREATING VALUE AND GROWING A BUSINESS

VALUE-ADD: FUNDING SOUTHERN LOWER MIDDLEMARKET BUSINESSES

TGC Impact makes the case for bringing capital and operational value creation to underrepresented markets.

BEST PRACTICE: ACCELERATING YOUR MOMENTUM A look at four interconnected momentum-building considerations for businesses.

55 BEST PRACTICE: FIVE TOOLS

FOR BREAKTHROUGH GROWTH Most companies are underperforming somehow, but five simple tools can help them break through.

56 EXECUTIVE SUITE: LESSONS

FROM ACG’S DIGITAL TRANSFORMATION

Company.com offers insight for how companies can pursue their own digital journey.

MIDDLE MARKET EXECUTIVE // Spring 2022

PE RFO RM AN C E RE V I E W / /

Value-Add

Bringing Transformational Capital to Lower MiddleMarket Southern Businesses to Build Market Leaders TGC Impact aims to maximize value for investors by combining access to underrepresented markets with operational value creation in businesses at an inflection point

EMILY HALPERN

Co-Founder and Partner, TGC Impact

middlemarketgrowth.org

TAMIKA TYSON

Co-Founder and Partner, TGC Impact

ccording to the Small Business Administration, 67% of small businesses fail within the first 10 years due to a lack of capital and operational expertise, narrow business networks and the inability to purchase significant product quantities to qualify for competitive pricing. Women- and minority-led businesses are disproportionately affected by the cost of and/or lack of capital. TGC Impact is a growth equity firm founded to provide patient capital and a network of industry experts to undercapitalized businesses to build capacity so that great companies have the wherewithal to scale. The firm’s leadership, Tamika Tyson and Emily Halpern, combine Fortune 500 corporate experience with lower middle-market private equity expertise to partner with founders who have reached an inflection point. They are driven by the belief that the health and existence of small businesses are essential to economic recovery and stronger communities. The COVID-19 pandemic and recent social justice movements highlighted the racial and gender disparity in business ownership and inequities in the U.S. financial system. With struggle comes change, as the events brought about a renewed commitment from Fortune 500 companies and the current administration. The U.S. government, for example, pledged to increase the share of contracts going to women and minority businesses by 50% by 2025, which is expected to translate into an additional $100 billion over the next five years. Today, women-owned businesses account for 1 out of 5 businesses with revenues over $1 million. In 2020, minority-owned businesses generated more than $400 billion in economic output. TGC Impact’s founders believe more can be done to help established and growing women- and minorityled businesses propel into their next phase, resulting in economic prosperity, stronger communities and job growth. TGC Impact invests in great companies, not concepts, with proven business models and demonstrated growth, needing additional capital to scale and reach that next level. These businesses are women- or minority-led and are strategically located in the South with a product or service focused on one of the five core industries that the firm believes are the backbone of the U.S. economy: • Infrastructure • Transportation and logistics • Energy transition and renewables • Manufacturing and distribution • Business services The firm was created to fill a void in access to capital for growing lower middle-market Southern-headquartered businesses. The South is an opportunity for economic growth and prosperity and is home to one of the largest populations of women and minority founders, and more than 150 Fortune 500 companies are headquartered

there, many with diversity initiatives to meet shareholder demand and differentiate from their competitors. Despite this, Southern-based U.S. businesses have historically received a disproportionately smaller percentage of funding compared to larger investment communities based in the Northeast, Midwest and Western regions of the country. TGC Impact seeks to bridge the gap by partnering with founders who have reached an inflection point and require capital and expertise to fulfill their growth potential. Beyond capital, their portfolio companies gain access to the TGC Impact ecosystem of industry experts who have demonstrated track records in the sectors in which the firm invests. The powerful network of Fortune 500 executives, entrepreneurs and business owners works hand-inhand with founders to implement strategies that support transformational growth and lasting change. TGC Impact’s model focuses on six areas, enabling the firm to address the financial and human capital needs of founders by leveraging the skillset of the TGC Impact ecosystem. TGC Impact aims to maximize value for investors by combining access to underrepresented markets with operational value creation in growing businesses facing an inflection point. Beyond alpha generation, the firm’s impact-focused approach results in more economic growth, builds stronger communities and stimulates job growth. // EMILY HALPERN is the co-founder of TGC Impact and has over 20 years of experience in lower middle-market investing, diversity initiatives and business development both on the private equity and institutional investor side. Prior to launching TGC Impact, Halpern was responsible for originations in the Southeast for Brightwood Capital Advisors, a minority-owned firm with over $3 billion in assets, providing flexible capital in the lower middle market. Halpern serves as a strategic advisor for Innovate Capital, a Northeast-focused SBIC fund investing in women and minority businesses and is the chair of ACG Maryland’s Diversity Equity and Inclusion Committee. TAMIKA TYSON is the co-founder of TGC Impact and has over 25 years of risk management experience. She has worked with small businesses to multinational enterprises in a cross-section of industries, including energy, oil and gas, transportation, manufacturing, pulp and paper, infrastructure and business services. Prior to TGC Impact, Tyson was the global head of credit at Noble Energy, a former Fortune 500 company. There, she was a key member of the deal team that facilitated one of the largest transactions in history between Israel and Egypt, a $19.5 billion project. Tyson serves as a lifelong member of the National Black MBA Association and Alpha Kappa Alpha Inc.

MIDDLE MARKET EXECUTIVE // Spring 2022 53

P E R FORMAN C E REVI E W / /

Insperity

Best Practice

What’s Next, Starts Now—Accelerating Your Momentum company, their jobs and those who lead them. Absent this confidence, momentum is thwarted.

MICHAEL LIPE

Managing Director, Brand & Marketing Strategy, Insperity

ooking back at the past two years, 2020 became the recovery year, filled with new assumptions, operational adjustments and spinning up from the unimaginable. Headwinds still prevailed, but businesses had decoded the pandemic effects and made plans to move forward again. 2021 was a year of establishing a cadence within new business realities. Companies fortified supply chains, retooled processes, found new workers and retained key ones against a national trend of resignation and renegotiation. 2022 is all about accelerating the momentum that began to build with new strategies. Here are four interconnected momentum-building considerations: SCENARIO PLANNING: The unforeseeable is the enemy of effective planning. If the pandemic taught us anything it was that a single-threaded strategic plan is insufficient in times of uncertainty and change. Being caught unprepared again for an unseen event will crush business momentum. It is well worth the effort to develop plans for several less likely, yet possible scenarios and to set aside some budget to enable them if needed. MOMENTUM LEADERSHIP: Fundamental to establishing momentum is the reestablishment of trust in the organization and the employment relationship. Exhibiting faith in the future of the enterprise, leaders must rally employees around a convincing strategic vision. They must be able to articulate the end from the beginning and illuminate a clear path to success for the firm and its employees. Open, transparent communication of milestones achieved will aid employees who are trying to regain confidence in their

middlemarketgrowth.org

CULTURE OF PERFORMANCE: Culture is the sum of individual employee attitudes, outlooks, manners, beliefs and civility balanced on trust in the company. A culture that thrives upon productivity, positivity and performance is the dream of every leader. Positive culture is a compounding force within the firm that drives participation and commitment. It requires a highly engaging shared vision and an ennobling meaning behind the work. A culture of performance is driven by a strong and positive vision of the company toward worthy and rewarding goals. CHANGING TALENT LANDSCAPE: The employment relationship today is much different than two years ago, as the power has shifted from employer to the employee. The pandemic resulted in a more demanding employee base desiring personalized work arrangements, most of which do not align with pre-pandemic notions and geographic requirements. The scarcity of skilled and willing prospects has driven up their price both in salary and benefits expectations. Beyond pay levels that border on uneconomic for some companies, many are seeking child and elder care benefits, shorter work weeks and flexible schedules to meet family needs and lifestyle preferences. Success in today’s employment market requires forethought, creativity and flexibility. These interrelated areas—strong scenario planning, skilled leadership, a united and motivated performance culture and an updated approach to hiring and retaining employees—will fan the flames of momentum when managed well. They are within the skill range of successful leaders but will require a keen focus and persistence. // MICHAEL LIPE joined Insperity in 2012 and serves as the managing director, brand and marketing strategy. He provides leadership and strategic planning for the organization and is charged with building Insperity’s brand and messaging strategies, creating sales enablement tools and resources, and fostering increased engagement with customers and partners.

Content Provided by ACG Partners and Featured Firms

P E R FORMAN CE REVIE W / /

CEO Coaching International

Best Practice

Five Simple Tools for Breakthrough Growth CHRIS LARKINS

Senior Partner and Chief Growth Officer, CEO Coaching International

orking one-on-one with over 400 CEOs across the middle market, CEO Coaching International has learned one simple truth: Most companies are underperforming somehow, even if they’re growing. We know this because companies that work with CEO Coaching International have broken through to grow revenue at 2x and EBITDA at 4x the U.S. average, as indexed by NYU Stern. Our clients have several things in common. One is a set of healthy business rhythms to manage strategy and execution, as featured in our recent book, “Making Big Happen,” a Top 5 Wall Street Journal bestseller. They also use a successful former CEO as their coach and “personal trainer,” who helps the company maintain accountability and focus. These clients also followed five simple tools to design and execute their growth strategy. Those five simple tools for breakthrough growth are the following:

1. Revenue Bridge

A revenue bridge outlines your multiyear growth trajectory to a defined future goal. If you don’t know where you’re going, you’ll never get there. This tool also helps you understand the key inflection points in your future growth: when your growth rate needs to increase the most and when it might need to be boosted with strategic acquisitions.

2. Two-Factor Sensitivity Analysis

This incredibly powerful tool identifies the most important drivers in your business, and how modest improvement in

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both at the same time can have a massive impact on revenue and profit. This allows your sales team to focus most of its energy on the activities that will foster exponential growth.

3. Road Map

The road map defines all of the assumptions related to how you will grow. How much of your growth will come from new customers versus increasing your average transaction value to existing customers? If your plan is to grow by 20%, do you really need to grow by 25% to make up for expected customer churn? And do you have a plan to reduce that churn? Many of these simple questions often go unasked, leading to one-sided and less effective sales strategies.

4. Plan

The plan consists of all the specifics that define the assumptions in your roadmap. For example, if you need to acquire 50 new customers, what do those customers look like (size, profile)? Where will you hunt for them? What products will you lead with? Specificity matters.

5. Playbook

This consists of the specific funnel of trackable, leading activities that fulfill your road map and plan. Crucially, it also offers a process to cultivate an effective “Challenger Sale” talk track that your salespeople can use to deliver the most productive and consistent sales pitch for that funnel.

Conclusion

These tools are straightforward, but as they say, “simple, not easy.” The power of asking the right questions, digging for the best answers and acting upon them deliberately and with accountability sets “breakthrough growth companies” apart from the middle of the pack. CEO Coaching International would be happy to walk you through these tools, with two complimentary coaching calls for any ACG member or referred company. Visit https://ceocoachinginternational.com/acg-special-offer/ for this exclusive offer. //

MIDDLE MARKET EXECUTIVE // Spring 2022 55

P E R FORMAN C E REVI E W / /

Company.com

Executive Suite

Lessons from the Front Lines of ACG’s Digital Transformation successful digital transformation. And these diverse perspectives are all critical when managing risk.

DAVID KRAMER

COO and Head of Product, Company.com

RYAN CLARK

CTO, Company.com

Q: Speaking of risk, what were some of the challenges you’ve encountered, both expected and unexpected?

A: Partner dependencies come to mind (laughs). The Company.com digital experience platform acts as a technology conduit between ACG and their other technology partners—that’s how we’ve been able to accelerate this digital transformation from taking years to now only a few months. As a result, there is a dependency on the other partners, their technology, documentation, availability, etc., and that can be challenging. Some of those challenges were expected, others were unique to ACG partner technologies, and were therefore unexpected.

Q: What adjustments have you made to counter these challenges?

n case you haven’t heard, the Association for Corporate Growth is well underway with its digital transformation effort, aided by ACG endorsed partner Company.com. The new experience will launch in selected ACG chapters in the coming weeks. ACG sat down with Company.com leaders who are fully involved in the transformation to see what lessons they could offer other middle-market companies considering going down the same path.

Q: What was your philosophy on digital transformation going into this project?

A: We feel that the most successful companies view digital transformation holistically. Equal parts human-centered and technology-driven, where the purpose is driving value and solving real problems. Recognizing product management, user experience design and technology as having equally important perspectives across the three dimensions of people, process and tools provides the balanced input needed for

middlemarketgrowth.org

A: Basically, we stopped assuming anything and started questioning everything. Is this out-of-the-box technology, or is it customized? Is the documentation accurate? Was this created for a business case that no longer exists? Finding this information out up front is highly preferable to surprises mid-stream!

Q: What other advice would you give our readers considering digital transformation?

A: Don’t forget the human element, especially when it comes to change management. These decisions impact people depending on the technology to not only do their jobs but to improve their ability to perform on a daily basis. One thing that has helped us immensely is following decision-making best practices. That in itself is probably a whole other article though.

Q: Excellent. Any other final words of advice?

A: I would point you back to our philosophy going in. We have to constantly stay grounded in the holistic approach and bring our clients and partners along every step of the way. Because alignment is hard to obtain and even harder to keep. //

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The Wrap-Up RECAP OF RECENT EVENTS AND KEY TAKEAWAYS FROM THIS EDITION

BACKSTAGE: MOVING THE NEEDLE ON DE&I IN FINANCE

Three panelists offer practical advice for how financial services firms can improve their diversity, equity and inclusion initiatives.

KEY TAKEAWAYS

Insights from the stories in this edition.

It’s hard to become what you can’t see. And representation is very important as it helps junior attorneys, but also junior investors and entrepreneurs to see examples of what they can aspire to become. DARIO DE MARTINO Partner, Allen & Overy

MIDDLE MARKET EXECUTIVE // Spring 2022

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Backstage KATIE MULLIGAN: Two years ago, the killing of George Floyd sparked racial justice protests, as well as a lot of corporate statements about commitment to diversity, equity and inclusion. Since then, how have each of you seen attitudes and strategies evolve, and have organizations followed through with the commitments they made?

Moving the Needle on DE&I in Finance Two years after the death of George Floyd brought social justice and systemic racism concerns to the forefront of American corporate discourse, business leaders continue to drive progress within their spheres of influence, with diversity, equity and inclusion initiatives. Three panelists offer their observations of how the corporate community has responded in the wake of Floyd’s killing, sound off on some of the barriers to implementing DE&I initiatives and provide practical advice for others in the corporate finance space pursuing similar goals. A condensed conversation that originally appeared on GrowthTV follows. DEBORAH GALLEGOS Managing Director, Palladium Equity Partners

MARLON NICHOLS

Managing General Partner, MaC Venture Capital

middlemarketgrowth.org

DARIO DE MARTINO Partner, Allen & Overy

KATIE MULLIGAN Moderator

DEBORAH GALLEGOS: I think that the attitudes have evolved to now acknowledging and recognizing that DE&I is an issue that needs to be addressed, so that’s very positive. One thing I think is also very positive is that people are now attaching metrics to measuring DE&I. And it’s not just a discussion that’s taking place, but it’s actually something that people are starting to measure, so that we can see progress going forward. MARLON NICHOLS: For me, it’s about dollars flowing into Black and brown fund managers, and we have seen a small uptick there. I’d say there has been some traction. A number of corporations made pledges and they’re following through on that. The question is: What happens after that initial outflow of capital? Do you continue to participate? The jury’s still out on that, but there was an initial bump. DARIO DE MARTINO: I think there’s been more sustained focus on systemic barriers. More resources are being placed to advance DE&I. There’s just a greater willingness to engage in DE&I. That said, if you look at demographic data about race, ethnicity and gender stats for large law firms two years ago and compare it against stats from this year and ask yourself what has changed,

the answer is, unfortunately, not that much. I recently looked at a few stats and unfortunately it appears that still 9 out of 10 top leaders are white. Over 80% of those of top leaders are male among attorneys who lead firm-wide practice groups or departments; 27% are white women; 6% are minority men and 4% are minority women. Even if it’s not as quickly as I would’ve hoped, we’re still moving forward.

KATIE: What are some of the impediments or barriers that continue to get in the way of progress on the DE&I front?

DARIO: I think the first one is a lack of representation. It’s hard to become what you can’t see. Representation is very important as it helps junior attorneys, investors and entrepreneurs to visualize examples of what they can aspire to become. So we need to increase the number of minorities, especially Black professionals, but also women and LGBTQ+ folks, and advance their careers at all levels. It’s important to consider that there’s also denial: Despite the fact that extensive research has shown that diverse teams are just better in every way, smarter, more innovative, more effective, a lot of people are still in denial and believe that inequality and oppression don’t exist.

KATIE: Marlon, what are some of the barriers and obstacles in the venture capital world?

MARLON: I think it’s really simple. If you think about what venture is, it’s all about relationships: relationship building and getting to a level of comfort with the folks that you invest in. When you have 90% of the decisionmakers in venture capital being white men, who primarily come from affluent families and neighborhoods, who went to Ivy League schools, it’s

hard for someone with that profile to connect with someone that grew up in the inner city or that had to take care of their siblings, as well as put themselves through school. It’s a little bit difficult to make that connection. If we’re going to really see big changes in terms of who receives venture financing, the decision-makers are going to have to look different. The limited partners, corporations and endowments are going to have to start funneling more capital to diverse fund managers. I think it’s really that simple. DEBORAH: I would agree with both Dario and Marlon. It’s basically about change, and people are uncomfortable with change. It’s really difficult to bring in somebody that doesn’t look like you or speak like you, so we have to get people more comfortable with

KATIE: If we were to boil down some of what you’ve been talking about into actionable tips that readers can use within their own workplace to initiate and implement DE&I initiatives, what would you tell them?

MARLON: Where I play is early-stage investing. There’s a lot of research that says the first 10 employees are what matter the most. If you’re not starting from a diverse place, it’s going to be hard to build a diverse company. The thing is to hire senior diverse people— decision-makers who can affect your corporate culture in a positive way and then they can start to bring in folks to help the company become more diverse. DEBORAH: In order to get past all the excuses, just look at the bottom line. Take a look at what a diverse board does for your corporation or your

There’s a lot of research that says the first 10 employees are what matter the most. If you’re not starting from a diverse place, it’s going to be hard to build a diverse company.

change. I particularly like change. I think it’s good. Diversity is great, as we all agree. It’s also that the excuses are too easy. A lot of what we see in our industry is, ‘Yeah, we’re doing a lot at our entry-level positions. We’re hiring new analysts. 50% of our analysts are diverse.’ But when it comes to the senior leaders, there’s no diversity there and it takes a long time to get to those positions. I’ve been in the business for 30 years, so you also have to be willing to make that change at the top. Because we don’t want to wait 30 years for change.

company, the idea generation that comes out of a diverse staff, the new product development that comes out of people with different ideas. That will be the motivator to get you over the obstacles. DARIO: My additional tip is: What gets measured can get improved. Measure DE&I stats, compare yourself to your competitors and hold yourself accountable. Have recurring meetings where you look at your numbers and then hold yourself and the decisionmakers accountable. //

MIDDLE MARKET EXECUTIVE // Spring 2022 59

CATCH UP QUICK: From hiring trends to strategies for positioning an exit, here are a few of the highlights from this edition of Middle Market Executive.

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Key Takeaways

CHAIN OF COMMAND

When it comes to securing your company’s infrastructure from cyberthreats, the person in charge of the organization’s security function should report directly to the CEO or COO, not the CTO. The CTO’s job is to deliver technology in the best, most efficient way possible to support sales, whereas the security function should be tasked with protecting infrastructure and software and be able to provide unbiased feedback to the CEO. “Securing Your Merger: Managing Cyber Deal Risk,” p. 10.

REMOTE CONTROL

Tech giants like Google and Microsoft are sending employees back to the office, but that doesn’t mean mid-sized companies should follow suit. In fact, offering a chance to work from home could give middle-market employers a once-in-a-lifetime chance to snatch up high-quality talent away from corporate behemoths as they seek a more flexible work option. “Remote, Office or Hybrid? How MidMarket Businesses Can Make the Right Choice,” p. 12.

TALKING POINTS

Even if a company survived or thrived over the past few years, the business and its investment bankers have to show prospective buyers that there are continued opportunities for growth that are defensible. Right now, investors are willing to sign on for stories that include growth of the customer base, future acquisition potential or new product offerings, but the narrative has to be strong and likely include more than one of these growth paths. “Peeling Back the Curtain,” p. 40.

SNEAK PEEK

Having a stable of C-suite and board-level talent in the wings can benefit private equity firms in numerous ways, including earlier access to deals in niche industries. Now that targeted deal sourcing is the norm, partnering with an experienced executive in a particular sector can help firms see deals that intermediaries aren’t marketing widely. “Follow the Leader,” p. 34.

THE WORLD IS YOUR OYSTER

More than one-third of companies say they are willing to hire remote workers anywhere in the world, according to The Conference Board, which surveyed more than 300 HR executives primarily from large U.S. companies. That’s a significant increase from the 12% that were receptive to that approach before COVID. “Hiring Talent Gets Easier with a Larger Pool of Candidates,” p. 46.

DEEP IMPACT

Firms like TGC Impact are leaning into the opportunity to help businesses owned by women and minority founders reach their next stage of growth. Today, women-owned businesses account for 1 out of 5 businesses with revenues over $1 million. In 2020 minority-owned businesses generated more than $400 billion in economic output. TGC is focusing on the South, a region that’s home to 150 Fortune 500 companies, and one with a strong presence of women and minority entrepreneurs. “Bringing Transformational Capital to Lower Middle-Market Southern Businesses to Build Market Leaders,” p. 52.

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Middle Market Executive // Spring 2022

Articles inside

Backstage: Moving the Needle on DE&I in Finance

Executive Suite: Lessons from ACG’s Digital Transformation

Key Takeaways

Best Practice: 5 Tools for Breakthrough Growth

Best Practice: Accelerating Your Momentum

Human Capital: Bringing the CCO to the Table

Peeling Back the Curtain

The Workplace: Remote Office or Hybrid?

Value-Add: Funding Southern Lower Mid-Market Businesses

Follow the Leader

Peer Profile: CEO of Renovo Home Partners

On Trend: Managing Cyber Deal Risk