Middle Market Executive // Fall 2022

Power the people behind

ANASTASIA DONDE

Senior Editor, Middle Market Growth adonde@acg.org

Laser Focus

With a number of challenges plaguing American corporations includ ing unabating inflation, rising interest rates and declining growth, many are becoming hyper focused on keeping their businesses afloat.

For some large companies, that means layoffs or hiring freezes. Several tech and media companies, including Meta, DocuSign and Netflix, have announced these moves in recent months.

It’s often easy to get complacent while the going is good. But now busi nesses large and small are feeling the pain of a recessionary environment and the aftershocks of the COVID-19 pandemic, and they’re looking for different ways to batten down the hatches.

Our feature story in this issue explores the rise of corporate carve-outs. Divestitures have been on the rise for some time now, with Dealogic report ing especially high volumes last year. Now that we’re in a market downturn, industry experts think that carve-outs will continue to be popular as large corporates look to shore up cash, pay down debt, nix underperforming assets or focus on some specialties. “My prediction is that recent Fed hikes, stock market volatility and other macro nuances are putting pressure on corporates to proactively review their portfolio and optimize their holdings with potential divestitures,” notes Aaron Polack, head of business develop ment at Lion Equity Partners. You can read more about how investors and corporates approach carve-outs on p. 40 in “Picking up the Pieces.”

Staffing has also been top of mind for middle-market companies. Between labor shortages and now layoffs, many are thinking about fine-tun ing their workforce to optimize costs while not detracting from quality.

This month’s All Hands piece (p. 28) from Insperity talks about the trend of “quiet quitting” and how companies can better screen for employees who have mentally checked out. A review of a panel at ACG’s virtual Operators’ Summit (p. 52) explores the tactic of outsourcing some business functions and how this can save time and boost profit for small businesses.

For private equity-owned businesses, operating partners are tasked with overseeing some of these strategies and many more to grow and improve businesses while trimming any unnecessary fat. Our cover story in this issue

(“Operating Partners Take Center Stage,” p. 32) talks about how private equity firms are getting more methodical about organizing their operating partner bench: by function, industry sector or on an ad-hoc basis. Often, the individuals coming into these roles are former CEOs who are well versed in running businesses and are eager to get to work on a portfolio of companies.

We hope the expertise of company executives and operating partners in this issue gives you more insight into how to tackle the current rocky environ ment. And we look forward to hearing more tips from our readers. //

Letter from the CEO

Closing Time for InterGrowth

If you were listening to the radio in the late ’90s, you’ll undoubtedly recognize Semisonic’s earworm “Closing Time” and one lyric in particular that’s been on my mind: “Every new beginning comes from some other beginning’s end.”

It’s a sentiment that captures a fresh start we’re embarking on at ACG as InterGrowth—or more specifically, the conference’s name— closes its tab and heads to bed. In its place, we’re excited to introduce DealMAX and a new beginning for the ACG community.

THOMAS BOHN, CAE, MBA President and CEO, ACG

The inaugural DealMAX will take place on May 8-10, 2023, in Las Vegas. Registration is now open, and those who sign up can expect an event that delivers the dealmaking efficiency of InterGrowth, along with new and expanded offerings for senior-level dealmakers, operating partners, value-creation advisors and strategic acquirers.

For example, the conference will include a one-day program exclusively for private equity operating partners, where they can discuss challenges and strategies to accelerate value creation. A committee of operating partners is working closely with ACG to plan the Operating Partner Forum, scheduled for May 8, which will feature deep-dive sessions and opportunities to share best practices.

Another one-day event, the Strategic Acquirer Forum, will take place concurrently on May 8 at DealMAX. A committee of strategic acquirers is helping to plan this track, which is designed exclusively for those involved in corporate M&A.

As a trade association focused on mergers and acquisitions and corporate growth, ACG is the place where all participants in the middle market should be going to meet their business needs. DealMAX signals a shift toward maximizing the value that ACG members of all stripes get from belonging to this community.

But DealMAX is only part of this push for great inclusivity. The ACG team is actively planning other programs, both in-person and virtual, that cater to PE operating partners, portfolio company executives, value-creation advisors, senior dealmakers and strategic acquirers.

This is just the beginning of an exciting new chapter. We hope you’ll join us in May in Vegas to bid farewell to InterGrowth and open the door on DealMAX and the new future it represents. //

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FEATURES

32 OPER ATING PARTNERS TAKE CENTER STAGE

The number of middle-market private equity sponsors hiring full-time operating partners is rising. As the role gains popularity, PE firms are developing new ways to organize their operations teams based on the firm’s size and investment focus.

40 PICKING UP THE PIECES

As macroeconomic stressors and geopolitical turmoil put pressure on corporations’ balance sheets, business leaders are looking critically at their assets and, in some cases, deciding to sell them. Private equity firms discuss their experience acquiring corporate carve-outs and why the current moment could spell opportunity.

46 IN FOCUS: FORVIS

FORVIS’ versatile team supports clients by providing tailor-made solutions that help them create value—including in today's challenging environment.

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

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

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.

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ISSN 2475-921X (print) ISSN 2475-9228 (online)

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The Stand-Up

ON TREND: OPEN FOR BUSINESS

Penny Pritzker, investor and former U.S. secretary of commerce, offers a look at her current ventures and the tech innovations she's watching.

GIVING KPIS PURPOSE IN AN UNCERTAIN MARKET

Investors and operators shed light on how to develop and use key performance indicators effectively.

WATCH LIST: PRIVATE EQUITY IS READY TO ADOPT AI—BUT HOW?

PE firms are looking to gain an edge in any way possible, but figuring out how to adopt artificial intelligence can be challenging. Here’s what to consider.

FOR BUSINESSOpen

Entrepreneur, investor and former U.S. Commerce Secretary Penny Pritzker discusses her current ventures, team building, disruptive technology and more

Photos by Miles Boone Photography

On Trend

Penny Pritzker is the founder and chairman of PSP Partners and its affiliates, Pritzker Realty Group (PRG), PSP Capital and PSP Growth. From June 2013 through January 2017, she served as U.S. secretary of commerce in the Obama administration.

Pritzker is an entrepreneur, civic leader and philan thropist, with more than 30 years of experience in numerous industries. In addition to her work at PSP Partners, Pritzker has launched a number of businesses over the course of her career, as founder of Vi Senior Living (formerly known as Classic Residence by Hyatt) and co-founder of The Parking Spot, Artemis Real Estate Partners and Inspired Capital Partners. Pritzker currently serves on the boards of Microsoft and Icertis, among others, and on President Biden’s Council of Advisors on Science and Technology.

She recently corresponded with Middle Market Executive about her investing approach, hiring effective leaders, navi gating challenges in today’s environment and more.

organizations. We are incredibly pleased not only with our strong recent investing momentum but also with our deep engagement with our partners and companies to help them amplify growth and optimize their businesses. Altogether, we are now invested in more than two dozen companies and partnerships.

Within PSP Partners we focus on three sectors— advanced industrials, business and technology services/ software, and real assets—and have three direct invest ment platforms: PSP Capital, PSP Growth and Pritzker Realty Group.

First, PSP Capital invests in larger, more established businesses in two sectors of the economy in which we have deep conviction and bring to bear highly relevant experi ence and relationships: advanced industrials, and business and technology services. Second, PSP Growth invests in earlier-stage, high-growth B2B software technology companies that enable efficiency and disrupt the status

A: I believe that building durable businesses and investing in growth and innovation is an inherently noble endeavor. Building businesses successfully—and the right way— requires more than capital and certainly more than one person. I am so proud of our culture, vision and team at PSP Partners, which includes so many talented profession als and leaders, including Troy Noard and Mike Oleshansky (managing directors who lead PSP Capital), Momei Qu (managing director who leads PSP Growth), Jon Skinner (who joined us as our CEO at the start of the year) and a number of others.

Since we founded the firm 12 years ago, and certainly upon my return to PSP Partners following my service as commerce secretary, we’ve worked as a team to continu ously enhance and evolve our strategy to ensure success not only for our firm but also for our partners. We invest in long-term macro trends; focus on sectors and business models in which we bring experience, expertise and valueadded resources; and partner with innovative leaders who share our passion for building great and lasting

quo. Finally, Pritzker Realty Group invests in commer cial, industrial and multifamily real estate through PRG Industrial and PRG Multi-Family. In addition to these direct investment platforms, we invest in other areas through our asset management group at PSP Partners.

Some recent investments include Ntiva, a leading managed IT services firm addressing significant and long-term global digital transformation demand, and StormTrap, a stormwater management and water quality business addressing a growing need to manage and treat water in the face of extreme weather events, population trends, inadequate legacy infrastructure and rising land costs. Both investments reflect our strategy of themati cally investing in sectors and businesses where we believe PSP can be a value-added partner, leveraging our global network, expertise and resources to help amplify growth

Q: You’ve launched and grown several businesses across an array of industries over the course of your career. What are some common threads across these endeavors, and how does your background as an entrepreneur inform PSP Partners’ investment strategy?

If there’s anything we’ve learned in these past two years, there are some challenges for which you cannot prepare in advance.

On Trend and connectivity for our businesses. Most importantly, we are a values-based organization that leads with integrity, honesty and passion for developing and supporting great leaders and organizations.

Q: It’s clear that you genuinely enjoy building and growing companies, and a key part of that is aligning yourself with an effective team and leaders. What do you look for when choosing people to lead a business alongside you?

A: My team and I look for several attributes in effective leaders and leadership teams. It starts—and frankly ends— with integrity, humility and a values-based culture. I sit on the board at Microsoft, and Satya Nadella often says that the “C” in CEO stands for “culture.” I couldn’t agree more. Second, we look for leaders who can articulate and align an organization around a bold vision and clear,

tangible goals. Third, we look for leaders who are talent magnets and committed to developing the people who work with and for them. Lastly, we look for leadership teams who are intentional in employing a “management operating system” to drive priority setting, effective communication and accountability throughout the organization. In our experience, the combination of these attributes typically leads to high-functioning teams and resilient organizations.

If there’s anything we’ve learned in these past two years, there are some challenges for which you cannot prepare in advance. It is in those times that you will need partners with a combination of qualities I mentioned earlier to achieve success.

On a personal level, I would also add that I take a “life is short” mentality and always strive to work with and along side partners that I like, respect and enjoy.

Q: Given the uncertainty in the economy today, what’s one piece of leadership advice you would offer readers as they help their organizations navigate current challenges in the market?

A: Business leaders today are dealing with a compounded and difficult set of economic challenges: global inflation, the ongoing climate crisis, tightened supply chains as we continue to heal from the pandemic and a massive labor shortage, to name just a few. Whether you are an opera tor or investor, the reality is that these conditions will be around for a while. My advice is to actually do a number of things in concert. First, you need to ensure that your balance sheet is strong to weather any difficult periods, so watching your burn carefully is essential. Second, manage ment teams should do regular scenario planning and pres sure test various outcomes to best manage and mitigate risk. Third, you should be curious about your blind spots and institutional biases to create an environment where you can safely challenge assumptions. Fourth, overcom municate with your management team and to your com pany as a whole. Fifth, you must be nimble to quickly take advantage of opportunities that may arise. Last, make sure you do everything you can to support a strong, innovative and resilient culture—and that starts with the leadership team setting the example.

Q: As both a private sector investor and a former public official, what role do you see for private capital in helping American businesses compete globally, and where is government action needed?

A: I have always believed that it is the role of private busi nesses to create jobs and not the role of government. I also believe that in many instances business leaders are patriots that create increased opportunity for millions of people throughout our country. That being said, the government can play an important role to create the conditions for economic growth. Initiatives like the passage of the federal infrastructure law and the CHIPS and Science Act in recent months can not only make a significant direct impact on broadband, digital infrastructure and semiconductor production, research and development, which are so vital to our global economic leadership; but they can also spur investment and growth of American businesses (which we’ve already seen).

At the same time, however, I would like to see our

country do much more to help the millions of working Americans trying to adapt and adjust to the impact of tech nology. A better system of workforce training at scale is critical to help these workers more easily move into higher paying jobs of the future. For example, I believe we should be doing more as a nation to support public-private work force partnerships that focus on upskilling and advancing American workers.

Q: Technology is a throughline in many of your current roles—as a Microsoft board member, co-founder of the civic-tech organization P33 in Chicago and through your investment activities. Is there a particular innovation or tech application that you’re particularly excited about for its disruptive or enabling potential?

A: You are right, in my vantage point from those affilia tions, as well as a member of President Biden’s Council of Advisors on Science and Technology, I am amazed to witness many cutting-edge innovations and trends up close. I am particularly interested in quantum computing and its potential commercial applications in manufacturing and technology. Illinois has become a hotbed of innova tion in quantum computing, with two national labs that each won one of the large Department of Energy quantum center grants and a host of promising dynamic companies. At the same time, the focus on environmental stewardship and sustainability will continue to grow and impact every sector with so much investment flowing into the space. Technology will play a critical role in developing environ mentally responsible ways to support economic growth. I believe we will see incredible innovation in this area in the coming months and years.

Lastly, I see us still being in the early days of cloud migration, and there are a number of innovative soft ware companies that are changing the way companies do business. For example, one company in our portfolio, Icertis, is the leading provider of contract intelligence software, enabling large, complex enterprises not only to gain extraordinary efficiency through the cloud-based management of all of their contracts, but moreover, to more quickly analyze those contracts, realize the intent, draw actionable insights and drive better outcomes. These types of solutions really excite me, and I think the future for Icertis and other companies working in the cloud is just enormous. //

You should be curious about your blind spots and institutional biases to create an environment where you can safely challenge assumptions.

The Workplace

Giving KPIs Purpose in

BY CAROLYN VALLEJO

Tracking performance is table stakes for private equity-backed middle-market companies, especially in an uncertain economic environ ment. Yet private equity sponsors, operating partners and executive teams may not have the most effec tive strategy for managing key per formance indicators, or KPIs. These leaders may be tracking the wrong metrics or measuring performance without a clear vision of how that data affects growth and goal achievement.

“Ultimately, the metrics are just a sign of how the business is being run. But if it’s not being used as part of the daily dialogue to … make progress, then it’s a set of metrics that’s just made for window dressing, which is not serving any purpose for anyone,” said Kush Tulsidas, operating partner at One Rock Capital Partners, during the “KPIs and Strategies to Measure and Track PortCo Performance” panel at ACG’s virtual Operators’ Summit on Aug. 16.

Tulsidas joined fellow panelists Eric Goodstadt, CEO of UpSwell Marketing, and David Venker, vice president of portfolio operations at HCI Equity Partners, alongside panel moderator and ParkerGale Capital partner Cici Zheng. The group discussed how lead ers in the middle-market private equity ecosystem can extract the maximum value from the exercise of developing and tracking KPIs.

Putting KPIs Into Context

Too often, operating partners and executives fall into the trap of track ing KPIs for the sake of it, rather than developing a holistic strategy. That more comprehensive approach includes identifying the KPIs that will

provide the greatest level of clarity into company health, understanding which factors will drive progress toward performance goals, and embracing the opportunity to shift which KPIs are measured as a business evolves.

“Every time we look at a metric coming in from our portcos, we ask the question, ‘What is this going to drive? What value creation initia tive is that going to move forward?’” Tulsidas said, adding that if a KPI is not tied to any specific initiative, like cross-selling efforts or growth within a company’s existing customer base, then leaders must ask why the metric is being produced in the first place.

There isn’t always a single KPI that will work better than the rest. When it comes to assessing the health of the sales pipeline, for instance, Goodstadt pointed to “talk time”—the ideal amount of time a salesperson speaks with a prospect for conversion—as well as customer churn. Tulsidas highlighted the need to track not just year-over-year revenue growth but year-over-year margin growth as well. Meanwhile, Zheng noted that tracking net promoter scores is now standard for all ParkerGale portfolio companies.

The panelists agreed that a lack of communication and synergy around KPIs can thwart growth efforts, even after leaders agree on the metrics that should be tracked. If a goal is to grow revenue by $100 million, or EBITDA by $50 million, for instance, there must also be an understanding of where that growth will come from. Whether it’s from product innovation, pricing adjustments or M&A, all par ties must agree on what’s required to achieve the company’s financial goals. Finally, companies and their PE

sponsors should be ready to shift the data they track as a company’s needs change. “Based on the different seg ments of your growth plan, you might want to be measuring those (KPIs) and focusing on different areas,” said Venker. For instance, businesses entering a new market segment will want to focus on “top of funnel,” a metric that reflects marketing’s efforts to increase brand awareness. For those looking to expand into an existing core segment, however, track ing close rate and win rate—proxies for the performance of sales teams— will offer a clearer picture of progress.

Growth Through Transparency

Even after reaching a consensus as to which KPIs must be tracked, progress is rarely a straight line. In analyzing the data over time, performance as measured against KPIs might not always look the way PE sponsors, operating partners and executives would like.

The panelists agreed that leaders should not shy away from evaluating the whole, honest picture of a compa ny’s performance.

“From an operator standpoint, you have to create the culture that opera tors feel comfortable telling you that the pipeline is not where it needs to be,” said Goodstadt. “A lot of times we say we want truth, we want transpar ency, and then we go and show you bad numbers, and it becomes a very contentious conversation. From a PE sponsor standpoint, you have to create that environment for transparency.”

Underperformance against KPIs doesn’t always signal a problem, either. Goodstadt pointed to an example of

a company early in its lifecycle, for which top-line revenue growth is an appropriate metric to track. This may come at the expense of gross profit margin, but understanding that this fluctuation is part of a longer-term plan will keep growth initiatives on track. “It’s all part of the vision,” Goodstadt added, “and those things will shift or course-correct themselves over the duration of the relationship.”

In instances in which a business is falling short on its financial KPIs, investors and executives can still extract valuable insight, especially during periods of market uncertainty. Goodstadt noted that a company’s growth thesis might not need to change as a result of underperfor mance; the business may just need a revised plan for how to reach its goals.

In times of macroeconomic weakness, executives and operating partners can turn to qualitative KPIs to gain a sense of a company’s health. Venker noted that these indicators might include the progress of digi tal transformation, for example, or organic growth.

Goodstadt urged leaders to use such qualitative metrics during times of market pressure.

“As an operator, it’s actually your responsibility … to keep those qual itative metrics front-and-center,” he said. “Sometimes, all the things won’t be falling into alignment just yet. But if you keep building out your management team, you build out your economic moat, you keep doing those qualitative things, eventually you’ll see all the other metrics turning green.” //

CAROLYN VALLEJO is Middle Market Growth’s digital editor.

From an operator standpoint, you have to create the culture that operators feel comfortable telling you that the pipeline is not where it needs to be.

ERIC GOODSTADT, CEO, UpSwell Marketing

Watch List

Private Equity Is Ready to Adopt AI—But How?

previously unseen targets. udu is flexible and easily extensi ble to new industries.

Buy or Build?

The answer depends both on the firm’s objectives as well as its existing areas of expertise.

Artificial intelligence has already transformed countless industries. Private equity seems poised to be the next. PE firms are notoriously late adopters of technology. But in a competitive industry, firms are looking to gain an edge in any way possible. However, figuring out exactly how to adopt AI can be challenging. Is it better to build a system internally, or buy an existing technology solution?

Build

Firms like Pilot Growth, EQT and Jolt Capital have built their own AI-powered deal sourcing and workflow tools to source and analyze proprietary investment opportunities at early stages. However, building a proprietary system requires a sub stantial investment of time and money, particularly at the out set but also on an ongoing basis. To generate returns faster, firms often build solutions targeted only to a specific sector of interest. This can prove effective for that particular use case but make it difficult and expensive to expand in the future.

Buy

For firms that would rather spend time and money on core business development strategies than software devel opment, there are AI-powered platforms available on a subscription basis. Platforms like udu offer a welcome alter native to building an in-house solution.

udu helps investment teams transform their sourcing efforts by identifying companies that fit their criteria but may not be findable through traditional methods. Investment teams using udu can uncover thousands of

Will Lee and Neil Callahan, the founders of Pilot Growth (who created the AI platform NavPod), were software developers before becoming investors. They had a natural inclination to build their own solution, and the techni cal know-how to get it done. Also, as they discuss on the “Private Equity Technology Podcast,” their firm’s investment thesis is narrow. The combination of this specialization and their previous experience made the firm a uniquely good candidate for building an in-house system.

Some firms may also have deal data that they want to incorporate into their AI solution, which may seem to lend itself to a customized solution. However, existing plat forms can also personalize their product to incorporate proprietary information. The udu team regularly contracts with clients to incorporate custom data or address unique use cases.

Today, time is of the essence for firms looking to adopt AI to increase their competitive advantage. For firms without software development experience or vast proprietary data, adopting an existing solution likely makes the most sense. Firms can get started faster, and they don’t have to worry about maintenance or updates. They will also have the flexibility to adjust their investment interests in the future. Furthermore, with an existing solution, what you see is what you get—whereas when you build your own (especially when relying on contracted software developers), the out come isn’t quite so certain. //

RETT CROCKER is a multidisciplinary system architect who has previously developed numerous innovative software technologies including programming languages, game engines, speech synthesis systems and multiuser collaborative platforms for education.

RETT CROCKER CEO and CTO, udu

People First

HIRE POWER

ON THE MOVE

ALL HANDS

PEER PROFILE:

ALEXANDER

Hire Power

Investors tap into a growing staffing industry, where specialist healthcare and IT recruiters are in high demand

BY BAILEY M C CANN

Human Capital

The staffing and recruitment industry has expanded significantly over the years and now has a market size of approximately $28.5 billion, with an annualized growth rate of 5.3%, according to data from IBISWorld. Analysts say that the industry has been on a steady growth trajectory since the Great Financial Crisis, in part because companies have shifted toward a preference for contingent work. So, too, have many specialist workers.

Those trends have only increased in the wake of the pan demic, with a growing preference for remote and flexible work from employees of all types. Industries like health care and IT, which already had a high demand for contin gent and specialist workers, went into overdrive over the past couple of years. Analysts say staffing demand is likely to continue for those two industries for the foreseeable future. Staffing companies that have the systems in place to screen and hire nurses or skilled knowledge workers are well-positioned to take advantage of this need.

Staffing companies themselves aren’t the only ones cashing in on the trend. Private equity firms are making more investments in staffing and recruiting companies as demand for contract workers increases. H.I.G., Halifax, Littlejohn & Co., MidOcean Partners, TA Associates and Vista Equity Partners have all done deals in this space in recent years. Those investments are likely to continue, says Thomas Bailey, an Atlanta-based managing director for Houlihan Lokey’s Business Services Group.

“These companies tend to have high free cash flow. It’s also a fragmented industry and there is a lot of opportunity to buy and build,” he says. “There are a number of special ist firms, as well, which are attractive.”

Bailey adds that the majority of these companies are mid-market businesses in terms of size and revenue, which makes them attractive to private equity investors that are focused on operational improvements. For sponsors investing in these companies it's about people and a focus on process, Bailey says. “So helping them standardize internally, giving them support on growth plans—maybe helping improve technology within the organization—is the value [private equity] brings in professionalization.”

Along for the Ride

Chicago-based LaSalle Network is one such company. Infinedi Partners, an investment firm based in New York, made an undisclosed investment in the company in

February. Two members of Infinedi joined the board of LaSalle as part of the deal.

LaSalle launched in 1998 and provides staffing, recruit ing and consulting, with specializations in technology, cybersecurity, accounting and finance, and other areas.

“The investment is part of our growth strategy,” says Maureen Hoersten, COO at LaSalle Network. “We’re in kind of uncharted territory. We have crossed $100 million and there aren’t many staffing firms that have reached that level. Our investment team wanted to get in early and come along for the ride.”

LaSalle has been growing organically since it started in 1998 and takes a hands-on approach to its services. “We’re boots on the ground when we expand into new markets, so we aren’t just parachuting in. We are focused on building deep connections,” Hoersten says. She adds that much of the company’s geographic expansion has been driven by existing clients. “As they expand, they come to us to find candidates and so we have gotten into new geographies with them.”

Hoersten says the demand for LaSalle’s services contin ues to grow steadily as employers in industries try to man age staffing. She adds that there is significant interest from skilled workers as well. “There are benefits for both sides,” she explains. “There are companies that prefer project work or don’t want to manage full-time benefits. The can didate side has also had more power recently—especially in industries where labor is tight.”

Specialists in the Lead

One industry with outsize demand is healthcare. Healthcare was already facing a staffing crunch before the pandemic, which was only exacerbated. Healthcare systems are reporting significant amounts of turnover as a result of the demands placed on the system to respond to the ongoing COVID-19 pandemic. That comes along side all the usual issues that prompt an organization to seek staff, such as retirements, people changing fields and provider growth.

Travel nursing, a type of nursing contract where nurses sign on to work with a provider for a set period, is one way the healthcare industry has adapted to high demand for professionals. Historically, travel nurses have had a bit more control over which contracts or shifts they take and where they go, which is keeping more nurses on the job. These contracts often also have higher compensation than

Human Capital localized agreements. However, that’s starting to change as a result of the pandemic, and many travel nurses are leaving the field.

FleetNurse, a nurse staffing company that launched in 2019, is working to change some of the pain points associ ated with travel nursing. The Eugene, Oregon-based compa ny’s model includes more flexibility for nurses, so that they aren’t locked into contracts for a set number of weeks, while still providing practitioner screening and staffing services for healthcare providers. Nurses can accept local per diem shifts in their areas rather than sign a months-long contract.

The company created a specialized technology platform to support candidate and provider matching. Healthcare admin istrators can use FleetNurse’s service to broadcast available shifts to a large pool of credentialed healthcare workers, allowing facilities to fill shifts within an hour’s notice.

“We’re in kind of a two-sided market,” explains Corina Pigg, vice president for sales and marketing at FleetNurse. “Practitioners get the flexibility but providers also sign on with us because the total cost is lower. They can also staff up based on current need, which can change over time.”

FleetNurse started by working with providers in Houston and has since expanded throughout Texas and into the Southeast U.S., with plans to grow nationally over time. The company received an undisclosed investment from HCAP Partners, a California-based private equity firm, in May. Pigg says the company plans to work with HCAP on continuing to build out its technology platform in addition to growing the business.

“We wanted to work with a firm that had a lot of trust in us,” Pigg says. “This is a very specialized business, and you have to be able to screen candidates to make sure that they are who they say they are and that the credentials are there. The technology component is also significant because, again, we are dealing with specialist work.”

Healthcare systems tend to be complex, which Pigg notes can be a benefit. “That helps us in some ways,” she says. “I don’t think you can just jump into healthcare as an agency.”

Elias Dokas, managing director of business services at private equity firm MidOcean Partners, agrees. He notes the importance of companies' relationships with candi dates and clients, as well as the addition of consulting services, which can differentiate them from competitors. “This has led to greater growth and margins in recent years,” he says.

Based in New York, MidOcean has been investing in staffing and recruiting firms since 2012, with a focus on platform deals. The firm acquired General Healthcare Resources (GHR), a healthcare staffing company, from Platform Partners at the end of last year.

GHR is a provider of healthcare staffing services offering travel nursing, local nursing, per diem nursing, perma nent placement and other services to healthcare facilities nationwide. The company launched in 1993. MidOcean plans to support its ongoing organic and acquisition-based growth plan.

Dokas says that human capital companies that can build mature businesses are well-positioned as steady growers and provide an opportunity for sponsors to help support and accelerate that growth. “The human capital industry remains very fragmented, providing significant opportu nity for private equity firms focused on middle-market companies,” he says. “So if you have a staffing agency with $20 million of EBITDA, private equity can help create a road map to get it to $50 million during the lifespan of the investment, and that’s significant.”

Managing Volatility

Even with high demand for staffing across a number of industries, there is still a level of uncertainty facing recruit ing companies. Many large corporations have announced hiring freezes and layoffs in recent weeks, and the risk for recession remains elevated in the U.S.

LaSalle’s Hoersten is philosophical about the potential impact. “We’ve been around for over 20 years, so we have navigated a few of these market cycles,” she says. “What we have found is that there are always companies that need staff.”

In her view, a marked downturn wouldn’t necessarily spell trouble for staffing businesses.

“If we do see a slowdown, it may also look different than recessions in the past. They are all a little different from each other, but we have higher levels of contract employees now, so there could be some wiggle room for employers,” Hoersten says. “We have also reprioritized in the past in response to shifting market dynamics. That’s the nature of this business. We’ve managed before and we can do it again.” //

BAILEY M C CANN is a business writer and author based in New York.

Peer Profile

Greener Pastures

DAVID ALEXANDER

BY ANASTASIA DONDE

When David Alexander left his CEO post at TruGreen, one of the largest lawn care companies in the world, in 2018, several industry publications concluded that he had retired. Instead, Alexander says, he wanted to end his career run as a CEO and transition to working as an operating part ner or advisor for private equity-backed companies. Having worked at TruGreen, as well as several large retail compa nies, including Family Dollar and Citi Trends, as a CEO over the years, Alexander says he enjoys the task of building a business. By working with private equity on different assign ments, he can bring these skills to a variety of companies.

Whether it’s a big or small business, Alexander says he enjoys “working with people across all talent levels, under standing succession plans and having the right process and technology to succeed.”

After leaving Clayton, Dubilier & Rice-backed TruGreen, Alexander spent a year and a half as an executive advisor at Thomas H. Lee Partners, which he left in 2020 when the firm decided to de-emphasize residential services. He then began to focus on his relationship with Detroit-based Huron

Operating Partner, Huron Capital and Co-Chairman, ExperiGreen

David Alexander hung up his CEO hat to help private equity firms run companies, like ExperiGreen, as an operator

Capital, which was targeting the sector more closely at the time. He joined Huron in January 2019 and subsequently became a board member of Huron-backed 1-800-Hansons, a Detroit-based roofing and siding business.

Alexander also began working with the firm to identify targets and build brands in the sector. Now he’s helping run ExperiGreen, a Midwestern lawn care company that Huron recently invested in. The regional company is much smaller than TruGreen, but Alexander is excited about helping the business grow and bringing his expertise in lawn care to the table.

Lengthy Courtship

Brian Rassel, a partner at Huron Capital, and Alexander began looking at ExperiGreen last fall. Huron ultimately bought a stake in ExperiGreen in August, though the private equity firm had already been working with the business by offering strategic advice and helping it look for expansion and acquisition options in the year prior.

The talks between Alexander and Joe Kucik, who was chairman of ExperiGreen’s board and a major investor in the company, began before that. Kucik founded Real Green Systems, a software business dedicated to residential lawn care, in 1985. He and Alexander knew one another from their previous work in the industry. “We began talking about technology, integration and growth,” Alexander says, which is how he came to know ExperiGreen.

“We couldn’t have done this deal if we didn’t know David,” Rassel says. The partnership with Alexander and investment in ExperiGreen are part of Huron Capital’s ExecFactor strategy, where the firm partners with execu tives to identify and build businesses. The strategy is becom ing trendy among other middle-market firms, as it was covered extensively in Middle Market Executive’s spring issue.

ExperiGreen is headquartered in Mishawaka, Indiana, with local branches across the Midwest in Chicago, Cincinnati, Columbus, Detroit and Indianapolis. The business also has one outpost on the East Coast, in Charlotte, North Carolina.

Kucik and other senior leaders at the company are staying on with the business, and their plan is to take it from a regional Midwestern company to a national brand.

President John Moehn, Chief Financial Officer Mike Goodrich and Chief Operating Officer Dana Irwin are all continuing with the company. Alexander now serves as co-chairman alongside Kucik.

Expansion Plans

After growing multiple retail businesses and oversee ing TruGreen’s turnaround, which saw the company go from losing $5 million to gaining $177 million, Alexander is no stranger to growing businesses. When it comes to ExperiGreen, he is focusing on what he calls “route density.” These are “neighborhoods where we can service multiple lawns, where people have signs in their yards and everyone knows that this is the preferred provider,” Alexander adds. As such, the company is targeting loca tions with larger populations.

ExperiGreen will look to expand both organically and through acquisitions. When it comes to acquisition targets, the company will focus on players that already have a solid presence in a geographic market.

With Kucik’s help, ExperiGreen also plans to improve its technology, data and analytics functions, Alexander says. “The business intelligence area needs improvement, which means tools that allow us to sort data better, dig down into the KPIs and understand the customer.”

Industry Backdrop

Some of the things that drew Alexander and Huron Capital to ExperiGreen involve ongoing industry trends that were especially accelerated by the pandemic. “More people are choosing to age in place and the front edge of millennials are beginning to buy their first homes. They’re more likely to be ‘do-it-for-me’ type people,” Alexander says.

Additionally, staying home during the pandemic made people pay more attention to their homes and invest in upgrading them.

Rassel and Alexander are mindful of market headwinds, including a recession, that could affect ExperiGreen and other businesses, but they don’t think these will be too harmful for residential services. There are about 10 million to 12 million homes in the country that use residential lawn care, they estimate. These tend to be middle-income and above-bracket people. “They tend to view their homes as their biggest investment and want to maintain value in their homes,” Alexander says. He believes this momentum will help propel the company forward, despite broader financial clouds. //

ANASTASIA DONDE is Middle Market Growth’s senior editor.

More people are choosing to age in place and the front edge of millennials are beginning to buy their first homes. They’re more likely to be ‘do-it-for-me’ type people.

On the Move

LISA COSTELLO AND AMY STREMMEL

Lower middle-market private equity firm HCI Equity Partners announced that Lisa Costello (pictured) has been promoted to chief administrative officer, a newly created position, and managing director. Costello joined HCI, which is based in Washington, D.C., in 2004 and will continue to serve as the firm’s chief compliance officer. Prior to this role, Costello served as HCI’s chief financial officer for more than a decade. HCI also promoted Amy Stremmel, to the role of CFO. She joined HCI in 2005 and has worked on the finance team, managing the accounting functions and assisting with SEC compliance and partnership reporting.

DIANA BARR AND PHIL GADREAU

One Rock Capital Partners, a private equity firm with offices in New York and Los Angeles, announced the additions of Diana Barr and Phil Gadreau to its operating partner team. Barr will work to drive post-acquisition value at the firm’s portfolio companies, primarily through recruiting and proactive executive network development.

Prior to joining One Rock, Barr led Boeing’s global executive staffing division and created the company’s in-house executive recruiting function. Gadreau’s role at One Rock will include working to drive value for the portfolio in the areas of strategic financial, accounting and HR solutions. He previously served as vice president and controller at Armstrong Flooring, a multinational producer of flooring products.

LARRY CHURCHWELL

DRT Holdings, a manufacturer of highly complex systems and machined components for a wide range of end markets, announced that it has appointed Larry Churchwell as president of DRT’s Metal Packaging Systems and Precision divisions. Headquartered in Dayton, Ohio, DRT is a portfolio company of Mill Rock Capital, a private investment firm headquartered in New York. Churchwell brings over 25 years of experience to this role, including 12 years of experience in the food and beverage packaging industry. Most recently, he led marketing and product management for automa tion and equipment at Sealed Air Corp.

VANESSA D’CUNHA

Red Arts Capital, a middle-market supply chain sector-focused private equity firm based in Chicago, announced it has added Vanessa D’Cunha as chief financial officer. She joins Red Arts from CapX Partners, a fund management and equipment finance firm, where she was vice president and controller. She also served as director of finance at Accord Financial after its purchase of CapX. Prior to her time at CapX and Accord, D’Cunha was the controller at Lantern Partners in Chicago, as well as chief financial offi cer and treasurer at Commerz Futures.

JEFF DEPLANTY

WILsquare Capital, a St. Louis-based private equity firm, announced the hiring of Jeff DePlanty as executive vice presi dent and operating partner. DePlanty joins WILsquare with over 20 years of private equity experience within the lower-middle market, working across multiple industries in various leadership roles. Most recently, DePlanty was an operating partner with Benford Capital Partners, a private equity firm based in Chicago, after spending 18 years at Harbour Group, a St. Louis-based private equity firm.

On the Move

EMILY HAK, DANNIE DIEGO AND RANDY FISHER

Insperity, a provider of human resources and business performance solutions and an ACG Official Sponsor of Growth, announced its newly created Private Capital Markets team and a slate of promotions.

Emily Hak (pictured) was promoted to manag ing director of the new team. Formerly a district manager and business performance advisor with Insperity, in her new role she will help optimize Insperity processes and service offerings, lead marketing strategy and expand upon business development education and partnerships specific to venture capital, private equity and family office relationships.

Dannie Diego was promoted from senior stra tegic alliances manager to private capital devel opment director on the new team, where she will lead marketing strategy and business devel opment efforts focused on the private equity, middle-market and mergers and acquisitions ecosystems.

Randy Fisher, who was previously senior stra tegic alliances manager and strategic marketing manager at Insperity, was also promoted to pri vate capital development director. He will work with companies and venture capital investors to grow and scale businesses by providing essen tial HR resources, improving infrastructure for operational credibility and helping increase valuation momentum.

STEVE CHOPP

Pet Honesty, a pet health products brand in Vestar Capital Partners’ portfolio, announced that Steve Chopp has joined the firm as chief financial officer. Chopp most recently served as chief financial officer and chief operating officer for Bragg Live Food Products, a brand of apple cider vinegar, where he oversaw the finance, supply chain and technology functions. Earlier in his career, he spent more than 15 years working in the rapid growth supplements industry in roles including executive vice president and CFO.

BRIAN BECKER

RSM US, a Chicago-headquartered provider of audit, tax and consulting services focused on the middle market, announced that Brian Becker has succeeded Joe Adams as managing partner and CEO in a planned transition. Becker previously served as leader of RSM’s consulting line of busi ness, technology consulting leader and central region consulting leader, and he served a term on the RSM US board of directors from 2011 through 2015. He began his career at RSM as an auditor before transferring to consulting to build the firm’s technology infrastructure service line.

JOSHUA CHERRY-SETO

Joshua Cherry-Seto, former managing director and chief financial officer at private equity firm Blue Wolf Capital, has joined San Francisco-based StartUp Health as partner and chief financial officer to help scale its ecosystem of dedicated health-focused funds, which target challenges like ending cancer and curing Alzheimer’s. CherrySeto will be responsible for overseeing and leading all finance and accounting efforts, and helping the company scale its assets under management and its global investing platform. He will also play a role in honing business models within StartUp Health’s portfolio of more than 300 active companies and 1,000 entrepreneurs.

Signs of Employees Overworked 6

Hands

How employers can prevent burnout

ABE TURNER

Manager, Insperity’s Strategic Marketing Department

1. POOR WORK PERFORMANCE: Keep an eye out for employees who are missing deadlines, turning in incomplete or poorquality work, or doing the bare minimum just to get by.

2. ABSENTEEISM: Note when team members are frequently missing work.

3. HEIGHTENED EMOTIONS: Watch for employees having a shorter fuse, acting stressed or unhappy, or having conflicts with co-workers.

4. DISCONCERTING CUSTOMER FEEDBACK: Pay attention to whether customers notice a change in customer care or make comments like, “I can never seem to get an appointment with Shannon.”

No one could have foreseen the distress and personal chaos of the pandemic experience. For those who lost jobs outright, the impacts were immediate, but for others the strain was subtle and cumulative. Many people worked harder to keep their jobs, never realizing the accumulating tensions and health impacts. When the economy began to turn around, some employers reopened with fewer employ ees, increased production expectations, or reduced salaries and benefits.

A 2022 Gallup poll found that over 50% of American workers surveyed were “not engaged.” No wonder employ ees have retired early, resisted the return to the office or resigned to seek new opportunities elsewhere. A more recent reaction is called “quiet quitting,” when employees opt not to leave their jobs but instead limit their work time and effort—just doing enough to get by and no more.

6 Warning Signs of Overworked Employees

This quiet quitting is likely the result of stress, overwork, isolation or disconnectedness. A recent Indeed.com survey showed that 52% of respondents feel “burned out.” A majority of those stated that their feelings wors ened post-pandemic. Companies must recognize the signs of employee burnout early to improve engagement and control attrition. Here are six early warning signs to watch for:

5. OVERWORKING: Look out for employees working excessive (unhealthy) hours—every weekend or holidays, for example—or never taking vacations.

6. REVEALING STATEMENTS: Listen to your people for comments like, “I practically live here” or, “I can’t take a vacation without making up the hours later.”

Take Care of Your People

These warning signs are symptomatic of overwork and burnout. The antidote is taking care of your people by help ing them balance their work and personal lives. Here are a few key steps to achieving company success and healthy employees:

CREATE A CULTURE OF CARING. Positive culture starts with a genuine concern for your people. It is inten tionally created and maintained by leaders and employ ees, and is founded upon clear and specific values that guardrail the activities and interactions of all employees. A positive culture rests upon a strong company mission that ennobles employees, uniting them in a worthy endeavor and guiding them to accomplish more than what they believed they could achieve. It is constantly monitored through feedback mechanisms, including regular employee meetings and annual engagement surveys that result in real change.

DEVELOP ENLIGHTENED LEADERSHIP. What a difference a leader makes! Great leaders and managers strike a balance between achieving business imperatives

Hands

and preserving the company’s most valuable resource: its people. Efficiency in managing human assets is not like efficiency in managing physical assets. People can not be run until they break, then repaired and started up again.

ESTABLISH TRUSTING RELATIONSHIPS. When work ing with great managers, employees know they have their best interest at heart and will listen to and treat their concerns fairly. Great managers also encourage their peo ple to balance their personal lives and career ambitions.

COMBAT ISOLATION WITH COMMUNICATION. When left alone too long, employees think too much. Especially in remote work environments, employees need at least one meaningful conversation with their supervisor weekly. Reassure employees that they and their work are important to company success. Engage them in planning and problem-solving. Recognize outstanding efforts in front of peers. Be sure to explain how they will be impacted by any changes affecting their work.

They maintain awareness of individual employee circum stances and ensure each has access to needed resources. Great managers provide timely and honest feedback that fosters confidence and real performance success.

SHARE CONTROL IN MANAGING OBJECTIVES. One contributing stressor felt by employees is not having control of their work and outcomes. Helping employ ees be in control of their objectives positively impacts their well-being. The employer should show employees how strategic objectives are divided by department and ultimately assigned to individuals. They should also share the process of setting goals with employees and agree to annual objectives with each employee, including dead lines, standards, resources, performance measures and review intervals. It’s important to faithfully schedule and hold regular feedback meetings to discuss perfor mance progress, and to celebrate success and reward achievement.

The Bottom Line

An ounce of prevention is greater than a pound of cure. Create an environment of care by establishing a vision, culture and environment that sustain your people. Train managers to constantly monitor their people, recognize signs of burnout, and never let anyone reach a breaking point. You will be rewarded by a healthy and motivated workforce that stays with you and gives their very best. //

ABE TURNER is a manager in Insperity’s Strategic Marketing Department and responsible for a team of project managers overseeing subject matter expertise and content development to support the sales and service business needs for Insperity.

A positive culture rests upon a strong company mission that ennobles employees, uniting them in a worthy endeavor and guiding them to accomplish more than what they believed they could achieve.

PICKING

IN

THE PIECES

JELENA

H From left, Jim Murphy of LLR Partners and John Broderick of Argosy Private Equity

WRITTEN BY Meghan Daniels

PHOTOS BY Jeff Wojtaszek

For private equity firms, creating value for portfolio companies is both more challenging and more crucial than ever. Financial engineer ing, once PE’s bread and butter, is not enough in today’s competitive environment. In most industries, low-hanging investment opportuni ties have long been harvested, and the companies that remain require significant work to create value.

Many middle-market firms come in as the first insti tutional capital a company has ever received, which tends to correlate with a significant need for operational improvement. Add to this other factors—including a greater emphasis on environmental, social and gover nance factors and diversity, equity and inclusion, as well as challenges around talent acquisition and retention— and the task for private equity firms seems monumental.

Enter the private equity operating partner.

While operators have always had a place in private equity firms, the number of middle-market sponsors hiring full-time operating partners is rising. A 2019 survey by Heidrick & Struggles reported that the private equity oper ating partner role was “the fastest-growing position within the industry.” Previously, many firms brought on operating experts on an ad-hoc basis, hiring them to source a specific deal or consult with a particular portfolio company. While this model is still in play, more firms are rethinking their strategy to bring on operations experts full-time.

“It’s a direct response to the proliferation of private equity firms and competition over the last five to 10 years,” says Josh Woodbridge, managing director at private equity firm Berenson Capital. “Private equity firms need to differentiate to win deals in this market, and partnering with operating executives who have been in the seat of the founder and CEO can be an important element to setting a firm apart.” Earlier this year, for example, Berenson unveiled a new Operating Executives program, which marks the first time the firm has brought on operators to work with the firm

We get a jumpstart on value creation during diligence. Gone are the days when value creation started post-close. The faster we complete talent assessments, voice of customer research, market studies and strategic planning, the faster we can contribute to professionalizing and growing the business.

JOHN BRODERICK Operating Partner, Argosy Private Equity

full-time on sourcing and value creation for portfolio companies.

There’s also pressure from limited partners, who are increasingly eager to invest in private equity firms that can prove their operational expertise. “With the explosion of funds in the marketplace, investors are asking how firms are differentiating, how they’re mitigating risk and improving their companies,” says Travis Dziubla, principal at private equity firm Lion Equity Partners. “Limited partners are look ing for firms who can really bring about operational improvements.”

FUNCTIONAL FOCUS

When John Broderick entered private equity after a decade and a half in executive roles at companies like Sandvik, Siemens and Danaher Corp., his first order of business was to develop a system for value cre ation. Broderick modeled the business system on best practices and processes used at the likes of Toyota, GE, Siemens and Danaher.

Nearly six years ago, Broderick joined Argosy Private Equity, which invests in lower middle-market companies with EBITDA up to $10 million. “We differentiate ourselves by providing a value-creation playbook for our portfolio companies. Most PE groups investing at our level don’t offer that type of systematic approach,” says Broderick. Argosy’s system is based around five functional areas of expertise: human capital, operational excellence, front office/ transactional excellence, strategy and growth.

Currently, Argosy has three full-time generalist oper ating partners who help portfolio companies deploy the system. This includes working with the leadership team on strategic planning and helping them execute the plan, which involves KPIs, action plans and fre quent reviews of the progress being made. “Our system is not prescriptive. It is a set of best practices offered to our portfolio and leadership teams,” says Broderick. The firm’s operating partners also work with external industry or functional experts who are deployed as consultants by the portfolio companies. Operating partners sit on the board and work together with deal partners, who hold the position of chairman.

Private equity firm LLR Partners also bases its val ue-creation model around functional areas of exper tise. LLR currently has nearly 50 portfolio companies and a value-creation team of 23 people. While the firm doesn’t employ “operating partners” per se, its in-house team works with portfolio companies to help them excel in core functional areas, namely human capital, finance, strategy, product and go-to-market.

“We wanted to create a model that would appeal to CEOs and founders and support them in their jour ney to growth,” says Jim Murphy, senior managing director at LLR and leader of the firm’s value-creation team. “By organizing functionally, we can get to a level of depth that moves the needle for our compa nies and also gives them the breadth of support they need to succeed.”

LLR’s value-creation team is involved at every step of the process, including performing diligence; partnering with management and investment teams to develop a post-closing value-creation plan (analo gous to a traditional 100-day plan); and overseeing the implementation of that plan to ensure a great start in the LLR portfolio. “The next step in the value-creation team’s maturity journey is to incorporate a data dash board to be proactive about ongoing company engage ment, rather than wait for management or investment teams to reach out for help,” says Murphy. A couple of examples of this data include pipeline information to ensure booking targets will be met or financial metrics that can anticipate any future liquidity needs.

ALTERNATIVE MODELS

Structuring an operating partner program around functional expertise is just one of the models being used today. Other private equity firms organize their operating partner programs by industry verticals. For example, Berenson Capital, which invests in B2B tech nology businesses, has brought on operating execu tives with backgrounds in specific subsectors, such as compliance and life sciences, healthcare and human capital management. Understanding the particular dynamics of a given subsector provides a leg up when it comes to deal sourcing, talent acquisition and stra tegic planning, according to Woodbridge.

TRAVIS DZIUBLA, Principal, Lion Equity Partners

In addition to industry expertise, Berenson looks for operators with a track record in a variety of exec utive positions, including those who have both led companies as a CEO and managed functional teams.

For smaller private equity firms, the most effective value-creation approach may be slightly different. Lion Equity’s Dziubla serves as a jack-of-all-trades operating specialist for the firm’s three active port folio companies. He describes his role as somewhere in between the “experienced professional” operat ing partner model, where firms employ industry or functional experts, and the generalist model, where executives with broad experience are employed to tackle a wide variety of topics.

Dziubla spent five years as a consultant with McKinsey before joining Lion, and he acknowledges that he doesn’t yet have the experience or resume necessary to serve as a sole advisor or executive coach for the CEOs of Lion’s portfolio companies, many of whom are in the chief executive role for the first time. However, his consulting experience means that he can identify what good business models should look like— whether that’s in strategy, operations, hiring, tech nology or other areas. He works closely with Lion’s senior advisors—former chief executives themselves who can draw on industry or functional expertise to provide coaching and support to Lion’s CEOs.

This model of combining a full-time operating specialist with expert advisors works well for a firm like Lion, which focuses on carve-outs across a variety of industries, including light manufacturing, business services, software and consumer. It might be less effective for PE firms with a deeper industry

specialization. For them, it might make more sense to build out an internal team of industry experts rather than rely on outside advisors.

One of the biggest benefits of Lion’s model is that it affords the firm the ability to adapt on the fly. “As the saying goes, no battle plan survives first contact with the enemy,” says Dziubla, who is a former submarine warfare and special operations officer with the U.S. Navy. Having a full-time strategy and operations pro fessional provides a competitive advantage. “I can roll with the punches and help our companies adjust our strategy as we get feedback and see if things become successful or not,” he adds. “Five or 10 years ago, a lot of funds would have said, ‘We hire consultants and pay them and then go execute.’ It’s a viable strategy, but it comes at the expense of being nimble, which is a key differentiator for creating value.”

NOT FOR EVERYONE

While more firms are bringing on operating partners as full-time employees, a significant number still find the traditional contract model a better fit for their goals.

Private equity firm SFW Capital Partners invests in the industrial and life sciences technology sector, including companies that provide test measurement devices, automation, technology and tech-enabled services. The businesses serve a variety of end mar kets. “We’re generally the first institutional capital that’s going in. We make a lot of operational and orga nizational changes to our companies,” says Ahmad Sheikh, partner at SFW. When it comes to operating professionals, “our goal is to have more, rather than fewer, relationships. Given the breadth of end mar kets and niches we cover in our investment strategy, we prefer to try to match the most relevant executive with each opportunity that we pursue,” he adds.

SFW finds it doesn’t make sense to have fulltime industry experts on the payroll while the firm is focused on finding the right portfolio company. “Operators want to operate. They want to work with companies,” Sheikh says. “If you’re searching for com panies for two years with an operator, they’re going to start getting antsy and want to invest in everything that comes across our desk, even if it’s not a great fit for their experience or our strategy.”

A key part of SFW’s strategy involves engaging regularly with operating executives, with a goal of reaching 10 to 20 executives each quarter. The firm has hundreds of executives in an internal database,

With the explosion of funds in the marketplace, investors are asking how firms are differentiating, how they’re mitigating risk and improving their companies.

Features

tiered by background, experience and preferences. “When the right opportunity comes in, within a matter of hours we can try to get to the right person for that specific role,” Sheikh says.

TRUST IS PARAMOUNT

In a market suffused with private equity firms (who in turn are awash in cash), everyone is trying to get ahead. “Every firm is trying to go faster,” says Argosy’s Broderick. “We get a jumpstart on value creation during diligence. Gone are the days when value cre ation started post-close. The faster we complete talent assessments, voice of customer research, market stud ies and strategic planning, the faster we can contribute to professionalizing and growing the business.”

Figuring out the value-creation plan post-close is a key part of most operating partners’ responsibilities, agrees Lion’s Dziubla. “We co-create the strategy with the deal team: Here’s why we’re buying the company, here’s what we’re going to do to reduce manufacturing costs, improve sales and so on,” he says. From there, the team works together to come up with a tactical list of several big initiatives. That might include imple menting a new enterprise resource planning (ERP) system over the next 18 months or bringing on a new sales leader to focus on improving gross margins.

As such, most operating partners’ roles start early in the investment lifecycle. Broderick estimates he spends about a quarter of his time on due diligence of poten tial investments and internal process improvements, and the rest of the time on post-close value creation.

But for all the focus on speed, gaining the trust of the portfolio company’s CEO and management team is the top priority. “An operating partner is not going to be suc cessful in adding value unless he or she can build uncon ditional trust—the kind of relationship where you can collaborate and be truly authentic. That is the goal,” says Broderick. “Once you’ve formed that trust, the entire team is going to be much more likely to work together, respond to challenges and execute strategic plans.” //

MEGHAN DANIELS is a freelance writer and editor based in Brooklyn, New York.

By organizing functionally, we can get to a level of depth that moves the needle for our companies and also gives them the breadth of support they need to succeed.

JIM MURPHY, Senior Managing Director, Value Creation, LLR Partners

Picking up the Pieces

WRITTEN BY Annemarie Mannion

As deal activity ramped up in the past two years, both buyers and sellers found increasing M&A opportunities in corpo rate carve-outs. Dealogic reported that 9,155 carve-out transactions worth $2.3 trillion were announced globally last year, a 67% increase in value over 2020. An expand ing economy, rising company valuations and eager private equity buyers looking to make up for lost time contributed to the surge.

The macroeconomic picture today is less rosy, as corporations grapple with ongoing supply disrup tions, rising interest rates and slowing growth, among other challenges. Yet rather than halting carve-outs, the adversity could motivate some companies to sell unloved assets that can flourish under new ownership.

Geopolitical turmoil, high inflation and supply chain challenges stemming from China’s ongoing lockdowns have put pressure on company margins in recent years. That pressure, in turn, is prompt ing leaders to look critically at their organizations, says Jelena Guzenko, who joined Schneider Electric this year as vice president of strategy and business development. She previously worked at Siemens and Siemens Energy and has executed multiple carve-outs since 2010.

“More strategics may be motivated to undergo restructuring and spin-offs, among other things, to free up more cash to finance investment in other strategic areas of growth for them,” she says.

While carve-out activity has not been as strong in 2022, it is still significant. A total of 3,837 deals worth $641.8 billion were reported between January and June this year, down 19% in volume and 44% in value compared to the first half of 2021.

A sampling of recent carve-outs in the mid dle market includes the August 2022 acquisition of Litmos, an online learning platform, by San Francisco-based Francisco Partners from SAP America. In another deal that month, New Yorkbased Mill Point Capital acquired CrashPlan Group, a provider of cloud-based end-point data backup and recovery software. Earlier in the

year, Atar Capital of Los Angeles completed a carve-out of North American Controls, a division of BorgWarner. Headquartered in Detroit, the business manufactures components used in the automotive industry.

DECIDING WHAT TO SHED

While a low-performing division may seem like a natural candidate for divestiture, there are myriad other reasons why a company may decide to let go of a business unit.

“Sometimes it’s a very profitable division, but it’s not part of the company’s core business or strategy,” says Dan Florian, managing director at private equity firm Sun Capital Partners in Boca Raton, Florida. “Or Wall Street believes that A and B divisions belong together, but C doesn’t. And even though it’s a good business and is well operated, the company believes it will get a good value for it today and the public markets will react favorably.”

In other cases, the U.S. Department of Justice may require a company to sell a division to dilute its potential market share to receive approval for a merger. Or a corporation coping with a revenue shortfall might want to bring in cash or pay down debt by selling a division or asset—especially if it can offload it for a premium.

“Recently, the economy has been quite frothy,” Florian says. “Valuations have been very high, so large corporations were saying, ‘We have this noncore asset within our business, an underperforming asset or an asset that just doesn’t fit, and now is a good time to sell it because everyone is paying high prices.’”

Although the economic outlook has dimmed since the dealmaking highs of 2021 and valuations have declined since the start of the year, Guzenko says it is rare for a business to sell its targets at any price in what amounts to a fire sale.

“Ideally, the target is identified at a moment of strength, giving the seller more power in the process and making it an ideal target, both for

PEs, who will be interested in a target’s strong financials, and other strategics, who are poten tially looking even more for its technological and strategic fit and the overall health of the company,” she says.

REBRANDING AND BEYOND

Even before Bed Bath and Beyond experienced its current struggles with restructuring and store closures, Denver-based Lion Equity Partners saw potential in several non-core divisions of the company.

During the height of the COVID-19 pandemic in 2020, Lion acquired two divisions of Bed Bath and Beyond—T-Y Group and Harbor Linen— both of which sell linens to hotels, cruise lines and other hospitality businesses. Lion combined those with Riegel Linen, a company the pri vate equity firm already owned, and renamed it 1Concier.

“We went through an entire re-branding and repositioning of these companies that had once been non-core pieces of larger entities,” says Aaron Polack, principal and head of business development for Lion. “The combination of these

three businesses has allowed us to scale, optimize operations and become well positioned in the marketplace.”

Polack says that even when the pandemic dec imated the hospitality business, Lion didn’t lose faith in the deal.

“We believed hospitality would come back at some point, even if it was not 100% to what it was,” he says. “Additionally, we already had a business in the hospitality space, so we had a good foundation to bring these businesses together.”

Another non-core business that successfully changed hands from corporate owner to private equity is St. Louis-based Aclara Technologies, which produces smart infrastructure systems for water, gas and electric utilities. It was carved out and acquired by Sun Capital from ESCO Technologies in March 2014.

“It was a smaller division,” Florian says. “It wasn’t as profitable or consistent. It was kind of a stepchild—an undermanaged, non-core division.”

The transition following the carve-out involved designating new leadership, including a new CEO, and instituting other changes.

“They also had an engineering department that was bloated,” Florian says. “They had a to-do list of 100 things, but nothing ever got done. We went in with to-do lists of three things and said, ‘No one is leaving until those three things are done and then you get three more.’”

Analyzing areas for improvement was only one part of the transition. Sun Capital also needed to communicate with employees and ease their concerns about what new ownership would mean for them.

Those sorts of conversations took place in 2015 when Aclara, under Sun Capital’s ownership, acquired General Electric’s electricity metering business. Florian and a colleague from Aclara vis ited the company to meet with employees.

“Imagine working at General Electric assem bling meters,” Florian says. “You were proud that you worked for GE for the last 30 years. Then you find out one day you work for Aclara, a company

you’ve never heard of before. That’s a lot for a loyal employee to take in.”

For Sun Capital, messaging was a key step in helping employees feel comfortable with the transition from a legacy corporation to their new employer. “We take a lot of pride in communicating and spending time with every employee and really addressing the human element—the emotional ele ment—of change,” Florian says. “These are human beings, not numbers in a model.”

BREAKING UP IS HARD TO DO

Along with employees, the various systems of the carved-out asset must also move from one owner to another. Extracting a target requires untangling the many different business functions—such as IT or human resources—that it shares with its parent company.

Germaine Gurr, a partner with global law firm White & Case who often advises on corporate carve-outs, describes a two-step approach that a parent organization should take as it considers selling a business unit or other asset.

“The initial step is identifying the assets that the company is looking to divest, and then specifically identifying where those assets are located. You need to figure out how they are connected to the business that is going to be left behind and what is the most efficient way, for tax and other reasons, to remove it as a separate business that can be sold,” she says.

Once a deal is underway, Gurr points to over lapping considerations across accounting, IT, tax, finance and legal that can add complexity. It’s criti cal that sellers understand and communicate these issues and how they intersect, she says, to give the buyer a full picture of what it's purchasing.

“Coming across as really understanding the busi ness you are carving out and addressing any inter connected issues will be key to giving the buyer the comfort that this business, that was part of a larger entity, can function on a standalone basis, either shortly after the acquisition or immediately after

it, and there are no additional costs they are going to have to foot to make it a standalone business,” Gurr says.

A critical part of the handoff from the seller is the transition service agreement, or TSA, which establishes the services a seller will provide to a buyer, such as accounting, IT and human resources, and at what cost. A TSA specifies the conditions of the transition until the buyer can establish these departments on its own. Terms of these agree ments often vary in length of time from about six months to two years and cover the ins and outs of how business operations will transition.

“These are agreements to help a business move off of shared systems like ERPs (enterprise resource planning systems), communicate with customers and transition employees,” Polack says. “TSAs facilitate the transition of a corporate carveout. It allows the new owner to set up the business effectively and minimize disruption.”

Aclara was sold for $1.1 billion in 2017 to Hubbell Power Systems, a wholly owned subsidiary of Hubbell Inc.

As Florian puts it, “We went from a sleepy, undermanaged company that was thought of as reliable but not innovative to a very reliable and innovative partner to utilities.”

Looking ahead, there’s a good chance many other businesses could find themselves passing from cor porate ownership to private equity. Florian notes that if economic growth continues to slow, some corporations could see less cash coming in.

“This could lead to more carve-outs, especially for companies carrying debt that will see their leverage profile increase and look to sell assets to pay down debt,” he says.

Polack, too, think it’s likely that carve-outs will flourish in the coming year.

My prediction is that recent Fed hikes, stock market volatility and other macro nuances are putting pressure on corporates to proactively review their portfolio and optimize their holdings with potential divestitures.

A BRIGHTER FUTURE

If all goes as planned and the transition is success ful, the carved-out asset has the chance to thrive under new ownership.

1Concier, for example, is performing well, according to Polack. “We continue to win new customers and deliver high-quality products and services to our existing account,” he says.

For more than three years as a Sun Capital portfolio company, Aclara continued to grow and improved its market position through other add-on acquisitions of complementary businesses that were also carve-outs from corporate parents.

“My prediction is that recent Fed hikes, stock market volatility and other macro nuances are put ting pressure on corporates to proactively review their portfolio and optimize their holdings with potential divestitures,” he says.

The robust M&A activity over the past two years could also play a role in increasing divestitures over the next 12 months. Polack adds, “As the dust settles on many of these acquisitions, corporates will continue to prune non-core pieces that might have come with these transactions.” //

ANNEMARIE MANNION is a former reporter for the Chicago Tribune and a freelance writer who covers business.

AARON POLACK, Principal and Head of Business Development, Lion Equity Partners

F FORVIS’ Mark Miller, Principal, Private Equity Group

Tailor-Made Solutions for Changing Times

How FORVIS’ versatile team helps clients excel in all aspects of their business

In today’s environment, it’s no secret that it has become increasingly difficult for middle-market companies to enhance enterprise value. The margins can be very tight, especially for private equity firms that have a short time horizon. FORVIS is ready to help. With more than $1.5 bil lion in annual revenue and 5,500 employees throughout the U.S., U.K. and the Cayman Islands, FORVIS is now among the top 10 largest accounting and advisory firms in the U.S. and is dedicated to value creation and performance improve ment of PE-held and other middle-market companies.

FORVIS focuses on key drivers of value across four dimensions for its clients: revenue growth, value deliv ery, business enablement and financial management. “If you look at how private equity firms define value, it’s on multiples of earnings, so the question becomes how much can you impact growth and earnings in a three-to-five-year horizon,” says Mark Miller, a principal in the private equity group at FORVIS, who was an operator with Vista Equity for five years. “We have learned there’s a lot of impact to be made in those four areas.”

FORVIS recently helped a private equity firm from a business enablement and financial management perspec tive, acting as the company’s CFO and integrating the

In Focus

company’s back office, which led to greater efficiencies and better insight into the company’s growth opportunities.

Recently, a founder of a software company sold his company to a private equity firm. Prior to the purchase, the PE sponsor knew there were issues with the company’s back-office capabilities, something that’s not uncommon for founder-led businesses such as this one, according to Mike Zimmerman, an advisory leader in technology consulting.

“Founders are so worried about growing the business, closing sales and the overall day-to-day operations that as they grow the company, their back-office functions and technology environments often don’t mature at the same pace,” Zimmerman says.

The private equity buyer recognized the need to estab lish a scalable accounting, technology and finance plat form for the business, and that it would need an effective partner to transform the company’s finance function to set it up for future growth.

Building Bridges

The private equity firm called on FORVIS. The accounting and advisory firm, which formed earlier this year through the merger of BKD and Dixon Hughes Goodman, noted the software company’s staffing gaps and swiftly added resources to fill them, putting in an interim CFO/controller.

“The company had a local bookkeeper generating finan cial statements in a proprietary database and very little support. They needed to unhook from that and stand up the business with a scalable finance and accounting solu tion,” says Miller. “We took over the finance function.”

The FORVIS team started by translating all the financial data over to the desired state. It quickly realized the com pany needed a scalable enterprise resource planning (ERP) solution that could handle everything from reporting requirements for lenders to payroll processes. But it didn’t just need a solution—it needed the right one.

“There are many great software solutions in the market,” says Anthony Reggiannini, an advisory partner focused on system implementation and modernization. “FORVIS has strong partnerships with a range of providers, from tactical software vendors to the largest, multifunctional compa nies that deliver an integrated technology ecosystem. Our focus is always to match a client’s current needs, as well as forecast growth, with solutions that drive efficiency and integrate well with other platforms.”

We are bringing solutions and training so the C-suite leaders can teach their teams and know that the solutions are scalable.

MARK MILLER

Principal, Private Equity Group, FORVIS

The team determined an ERP system for the business. By taking on the responsibilities of a chief financial officer and running the company with the new ERP system, FORVIS helped improve the back-office operations for the portfolio company, thus speeding up the transition for its financial sponsors. “We offered them a bridge solution that allowed them to get the company up and running quickly,” says Miller.

Revenue Growth and Value Delivery

Revenue growth and value delivery are also important driv ers of FORVIS’ performance improvement plan. FORVIS recently helped a private equity firm with a roll-up of a sports events firm. With various types of sporting events in different U.S. states, the portfolio company was having a hard time measuring profitability. “We helped our client build a profitability model and then trained their manag ers on how to use the model for evaluating the business, making decisions and creating budgets,” says Miller. “What we did allowed the company to get to the next level. We took a bunch of sports enthusiasts and turned them into businesspeople.”

FORVIS also recently set up a procurement system to streamline buying processes for a moving and storage company, directly leading to margin growth by taking costs out of the equation. “The company was just buying what they needed all over the country. There was no strategic sourcing, and, in turn, the company was taking on costs. We set up a company-wide procurement system and then utilized an ERP system to help the company gain better insight into their spend,” says Miller. “Cutting out costs leads to earnings growth. Professionalizing functions and making processes more efficient always impact the bottom line positively.”

FORVIS Is Ready for the Future

Miller credits the customized approach FORVIS takes with its clients for many successful transformations. By carefully considering each of its client’s needs and growth objectives, the FORVIS team aims for immediate results without losing sight of the long-term financial health of the business.

“It’s not an out-of-the-box solution we are offering. It’s tai lored. We are bringing solutions and training so the C-suite leaders can teach their teams and know that the solutions are scalable,” he says. “They can grow, go overseas or change however they need to, and we can help them get there.”

During their time advising clients over the years, the professionals at FORVIS have watched the accounting and finance landscape change rapidly, with an influx of more complex transactions and accounting issues. Meanwhile, the introduction of new technologies has created new opportunities to accelerate business growth through cus tomized tech-enabled strategies.

Using tools that improve efficiency is important for any business looking to grow. It’s especially critical for private equity portfolio companies, whose investors measure suc cess based on cash-on-cash returns.

FORVIS aims to be ready with a solution no matter what the situation. “We have a very versatile team that can identify opportunities and pain points across functions. Our goal is to ultimately help our client's business excel. We particularly excel at integrating complex acquisitions through our M&A playbook that focuses on cross-func tional management,” says Miller.

Ben Redman, overall middle-market advisory leader for FORVIS, agrees: “Private equity-held and other middlemarket companies require a more hands-on approach to improving performance and FORVIS has the talent and flexibility to provide what is needed.” //

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let the

work for

EXECUTIVE

EXECUTIVE

Where, When and How to Outsource

When private equity firms get involved in a business, they often aim to make operational improvements. One of the levers they can pull is tapping outsourced pro viders to save time or money and improve profit. Speakers on a panel titled “Outsourcing Strategies to Improve Value Creation” at ACG’s Operators’ Summit held virtually on Aug. 16 discussed ways that outsourced services can help small businesses, how to go about selecting providers and what both sides can learn from the relationship.

When it comes to outsourcing, one of the first questions companies or investors ask is, “Which service to outsource and why?” Moderator Jon Repka, vice president of sales at Paro, an outsourced finance and accounting service pro vider, asked panelists, “How do you go about identifying where outsourcing can drive the largest lift?”

Kunal Mehta, expert partner at consulting firm Bain & Co., said he likes to think about it in terms of the “magicBY ANASTASIA DONDE

Panelists at ACG’s Operators’ Summit discussed how outsourcing some business functions can drive value creation at small companies

number,” which is year-over-year revenue growth divided by the money spent on sales and marketing. “Outsourcing plays a large role from a time-to-value perspective,” he said. Outsourcing can involve anything from building propensity models to fast tracking “top of funnel” work on the way to a sale, supplementing business development, modernizing the operating system or improving customer service. Any of these services can advance “the magic number,” he added.

Mehta, who previously worked at several private equity firms as an operating partner, said he often tapped out sourced providers for sales development. “That’s one area where we always started with outsourcing, when it comes to going to market and getting there quicker,” he said. “Because we can’t replicate those results internally.”

Ranjith Rajendran, managing director in the U.S. Private Equity Practice of TBM Consulting Group, an operations consulting firm that provides supply chain advice to manufac turers and distributors, said his company likes to think about outsourcing in terms of a “time bound” factor: Figuring out what to outsource and getting there fast is important. “The earlier, the better to ID what to outsource,” Rajendran said. “People come to us and tell us, ‘We need this now,’ and that has been very effective for bringing in outsourcing help.”

Tim Kardish, board member at Veritas Medical Solutions, added, “I’m always looking for things like what Kunal [Mehta] has described: What can be done to use external resources to better address market opportunities faster.”

Kardish, who was previously involved in several private equity-backed manufacturing and distribution businesses as an operator, said he looks at a variety of factors to figure out what to outsource and where to lean on the existing team or executives.

Many of the small businesses that Mehta and Kardish ran in the past were previously founder-owned. “A lot of com panies like that have grassroots promotions and haven’t seen different ways of doing things,” Mehta said.

“As we look to outsource any service, we look at a few things: Are we saving money, are we enabling other changes, are we driving more agility?” Mehta added. “We’ve learned so much from our outsourced vendors.” By working with competitors, outsourced providers often see trends and can advise on customer success, renewal rates and other matters, he explained.

Getting to Common Goals

Panelists also discussed ways to parse which functions require outsourcing help and getting on the same page with company executives.

“When I come in with a first round of institutional capital, I’m also navigating around talent, culture assessment and leadership assessment, and asking where I need to make a

change,” Kardish said. Some executives and teams can be better enhanced organically while others could use out sourced providers, he explained. “It’s about where I can grow that individual and that team in a way that will provide that operational excellence and professionalization that private equity effectively brings to these founder-owned companies.”

Kardish has used outsourced services across all functions of a business, “but sometimes the individual in that posi tion can coach, mentor and grow that team in a way where you don’t have to use outsourced providers,” he said. For Rajendran, getting on the same page with the client company and the sponsor about future goals is important. “With our clients, it’s about agreeing on a deliverable and a timeline,” he said. “We believe in objective diagnostics of the current state. It changes the perspective for everybody if we know this is where we need to go and this is the time frame,” he added.

The next part is evaluating the existing team and how its members will help or hinder the company’s progress. “There are going to be people who are followers, people who are leaders and people who are resisting. We give that feedback to the sponsor and make sure that we have a plan for each of those individuals,” Rajendran said.

Repka asked the panelists how they get the legacy team on board with the outsourced function scenario. “We can’t afford an ‘us vs. them’ mentality,” he said.

Kardish replied, “If you’re transparent about what you’re try ing to achieve to evolve and enhance the business from a best practices approach, people will often self-select out.”

Mehta added that private equity’s advantage is pattern recognition. “You’re able to say, ‘If this function was oper ating at full potential, this is what we would expect,’ and they have a data set to show a management team where a company could be compared to where they are now,” he said. “If they’re up for it, they are often willing to learn shortcuts to get there faster, rather than building it on their own.”

When it comes to selecting service providers, panelists agreed that references from existing clients are import ant. “Their references and the quality of the outcome they produce matters a lot,” said Mehta. It’s also crucial for the service provider to leave behind valuable lessons. “The golden outcome is if I’m learning from them things that I don’t know. It’s incredibly important in terms of my selec tion criteria,” he added.

Rajendran agreed: “As a service provider, our job is not just to help them improve. We want to leave a methodol ogy or something that allows them to succeed, whether it’s an audit or a management system.” //

ANASTASIA DONDE is Middle Market Growth’s senior editor.

Real Estate Optimization in the M&A Process

EDWARD OTOCKA Senior Managing Director, Private Equity Specialist, STNL Advisors

value of the real estate is highly impacted by factors like lease term, base rent, tenant credit and whether the tenant is sponsor-owned. Without fully understanding how the lease negotiation impacts property value, PE firms can forfeit millions of dollars of value.

When a private equity firm buys a business, it considers labor rationalization, economies of scale and cost reduction. But PE sponsors often over look lucrative options related to real estate, particularly when a sale-leaseback opportunity isn’t immediately apparent.

Sponsors have become more broadly informed over the last several years of the benefits of a sale-leaseback, in which a company sells its real estate and signs a lease for use of the property. These can be highly accretive trans actions that occur simultaneously with an acquisition. Yet when a sale-leaseback is not an option, sponsors don’t always pursue other opportunities.

“I do think looking critically for value in leased real estate is underutilized,” says Edward Otocka, senior managing director, private equity specialist at New Yorkbased net lease investment advisory firm STNL Advisors. “Most conversations are around a sale-leaseback when the business seller also wants to sell his or her real estate, so I believe there is a lack of awareness.”

Consider All the Angles

For various reasons, a sale-leaseback arrangement isn’t always an option. A business owner might not want to sell the property, for example, or the real estate might be owned by a third party. In such cases, sponsors may negoti ate a deal that doesn’t look at all the angles. For instance, if a sponsor signs a lease with the property owner, it can materially increase the property’s value. The

“We work with the sponsor to assess what the property was worth pre-acquisition, and what it would be worth as we near the end of the lease negotiation,” Otocka says. “A sponsor can often enhance asset value by 2x through their acquisition, and they should be participating in this value creation, whether that’s a profit share if the real estate is sold, or through some other means.”

Another common missed opportunity comes during lease negotiation. By analyzing local market rents, vacancy rates, new developments and other factors, a partner like STNL Advisors can assess the cost of rent and determine whether it’s best to relocate to a less expen sive facility. The sponsor can either move the company or, more often, negotiate lower rent, often at a 15%-40% reduction.

In other cases where a sale-leaseback isn’t an immediate option, it may be possible to negotiate for it to occur at a later date.

For example, if a business seller wants to sell the real estate, but the tenant cannot afford rent payments at market rates, the sponsor can look at putting a purchase option in the lease. If the sponsor improves the business, it can exercise the option in the future and execute a saleleaseback transaction.

Regardless of the circumstance, having a trusted partner that understands real estate nuances can help ensure spon sors maximize value in the deal.

“The best practice is to hire an advisor who is an expert in this area, so he or she can look at real estate every time private equity sponsors buy a company,” Otocka says. “That way, private equity sponsors will know if there is potential actionable value or not.” //

STNL

How to create value when a sale-leaseback is not an immediate opportunity

Practice

How to Navigate the New World of Hybrid Work

BRIAN DAMES Executive President, Safeguard Global

Working from home was a perk few companies offered before the COVID-19 crisis, but now a hybrid arrangement is one of the most predominant work modes. That’s partly because employees prefer it.

According to the 2021 Accenture Future of Work Study, 83% of 9,000 workers surveyed worldwide said hybrid work offered the best of both worlds.

Hybrid work gives employers more opportunities to attract top talent, yet it requires some adjustment on the part of companies that must adapt to this new era.

“Hybrid work will predominate, but remote will increase over time,” says Brian Dames, executive president of Austin-based Safeguard Global, a payroll and outsourcing services provider.

He adds that technology has made it easier to access talent all over the world. “There are so many people on this planet who have a lot to offer, but a few years ago, it was impossible to find where they were and to offer them opportunities,” he says. “Now, all that has changed.”

Broader Hybrid Work Definition

Most people think of hybrid work as full-time employees with flexible work schedules where they work from home sometimes. In fact, hybrid work can be defined more broadly, by adding gig and contract workers into the mix, Dames says.

He adds that some positions are best suited to individu als, like gig and contract workers, who can work remotely. This is particularly true if the company has offices globally.

Also, in a hybrid work world, managers should find out how the team wants to work and then balance that against the needs of the business, Dames notes.

While some high-profile business leaders have come out strongly against working from home in any capacity, it’s not where the market is going, he says.

Younger workers in particular are highly interested in hybrid work, and if managers want to attract top talent, they will have to adapt.

“Gen Z will not even talk to you if they can’t go remote and be flexible,” Dames says. “You can throw all the money you want at them, but they don’t care. Those businesses that don’t adapt to hybrid and fully remote work will feel it.”

Communication Is Key

Managing a hybrid team requires new skills. Since employees are not in the office as much, Dames recom mends that managers commit to communicating regularly with their teams.

It’s also crucial to gather workers together sometimes, so they see each other face to face in social settings. While employees want to work from home, they also like to socialize with their teams occasionally, he says. Now that many COVID-19 restrictions have loosened, it’s easier to do that, so managers should think about how to gather employees in-person from time to time.

“I think we all have to adapt and evolve in a lot of ways, but people still want to get together and see each other,” Dames says. “So, the trick is to find the right balance for everyone.” //

Safeguard Global

Gen Z will not even talk to you if they can’t go remote and be flexible. You can throw all the money you want at them, but they don’t care. Those businesses that don’t adapt to hybrid and fully remote work will feel it.

A Value Network for Middle Market Growth

NICK MAGLARIS Vice President, Midmarket Strategic Initiatives, SAP America Inc.

Q: Why should a private equity firm work with the SAP Midmarket Strategic Initiatives Team?

A: SAP has a unique advantage in the marketplace, where 60% of all M&A transactions are touching an SAP system. The SAP Midmarket Strategic Initiatives Team set out to serve the needs of the operating partner by integrating industry best practices, and by utilizing portfolio com panies’ data and a consolidated view of the technology solutions that they run. Every investment needs to achieve its target growth rates and meet its IRR by leveraging these assets and the people who can execute the strategic vision. The team’s consortium interlocks advisory services and technology with a unified offering and allows for an effec tive force multiplier approach without putting any organi zation’s employees at risk.

Q: Why is building a network of trust important for private equity firms and advisory organizations?

A: It’s not about the next deal but about building trust to achieve initiatives at scale and create real business impact. Advisory organizations are growing at an incredible rate in response to the demand that private equity has provided. Firms are looking to reduce their inefficiencies, create new routes to market and establish a platform for further

acquisitions and growth. This is an entry point for an advisory organization to be able to support across mul tiple lines of business, from financial planning to digital transformation.

Q: What is the future direction of the SAP Midmarket Strategic Initiatives Team?

A: The customer is at the center of our go-to-market strat egy, and the people who are within the value network are the most critical resource. The current economic climate is forcing firms to find a way to re-evaluate their invest ment strategy and ensure returns on those investments. It is the people and their expertise that we leverage to execute upon that investment strategy. We have access to over 1,000 individuals across 30 advisory organizations participating in the SAP Technical Advisory Program and 13 SAP M&A Ambassadors working collaboratively. We continue to see the force multiplier approach grow at scale, allowing for new routes to market based on trust and execution. //

A consortium of over 1,000 individuals across private equity, advisory and SAP Mergers & Acquisition Ambassadors delivers shareholder value throughout the investment lifecycle

The current economic climate is forcing firms to find a way to re- evaluate their investment strategy and ensure returns on those investments.

Performance Reporting on Your Investments

How to optimize reporting and planning processes using technology

JONATHAN ESSIG Managing Partner, SimpleFi Solutions

purpose-built applications to manage performance report ing, cash requirements, planning, etc. Not only do the best professionals leverage technology, but as a company stake holder, it is important that your valuable data is not just an Excel “database” but a system with controls you can trust, regardless of who is publishing the reports.

Q: Why did you found PlaniFi? And what is it?

Q: How is SimpleFi helping companies manage monthly planning and reporting requirements?

A: Whether your company is pre-revenue or an established industry leader, accurate and timely monthly reporting and business planning is key to effective management. Many times, this key function is taken for granted, leading to misstatements, lost or missing data, bottlenecks or worse. Internal captive staff may not have adequate experience to define processes, technology and redundancies required of this key business function.

We help companies by bringing SimpleFi’s industryleading planning and reporting processes in a flexible man aged-service approach. We define and document your pro cesses to make it simple for either your internal resources or our team of experts to manage month over month with no gray area.

Q: How does technology help?

A: Leading FP&A (financial planning and analysis) func tions require well-defined processes to set the framework, followed by a team of experts to manage this function for you monthly. We know that. And we know that the top-tier experts are really good at leveraging technology to shorten the time to report, automate repetitive tasks and provide a central, secured, trusted repository for reporting. The tool of choice of these leaders is not Excel alone but rather

A: Our team has been automating FP&A processes for over a decade. Much changes industry to industry, but a lot of the framework for performance management of sales, prof itability, cash flows, people costs and capital deployed stay the same. So why are companies still starting from scratch building applications to meet these requirements, company by company?

As our company moved to the cloud, we took the oppor tunity to build a platform as a service, with prepackaged applications for all the common business cases we have seen in more than 200 deployments. Our PlaniFi platform contains common business planning and monthly reporting scenarios you can deploy within weeks. For large, complex organizations, our technology platform provides a much better starting point to decrease time spent and cost con figuring or optimizing your monthly processes by 30%-50%.

Q: What is the underlying technology for your platform?

A: As we moved to the cloud, we partnered with and eval uated all the enterprise performance management (EPM) vendors. Ultimately, we found SAP’s cloud technology to be the best home for our platform. And we found SAP’s partner ecosystem to be very supportive of our mission. In addition, the decision to invest on top of SAP’s technology stack provides SAP customers and non-SAP customers alike with our industry-leading content backed by SAP’s robust automation, modeling and analytics as the frame work.

//

ERP Is Critical for Early-Stage Growth

GAVIN MAITLAND CEO, Fleming CFO

RALPH HESS

Executive Vice President, Marketing and Sales, Navigator Business Solutions

Navigator Business Solutions

A: They’re very sophisticated with their lines of business, but they haven’t always thought through their financial processes. They tend to lack forward financial vision, they’re unprepared for the reporting requirements that come with outside investment, and their financials often aren’t user-friendly.

They frequently have financials that give them a quarterend statement, balance sheet and cash flow. But they can’t get any useful information from it. So we guide them toward a cloud ERP (enterprise resource planning) system that helps with growth and puts in place solid financial reporting, processes and analytics.

Q: What about QuickBooks? Why go straight to ERP?

A: We sometimes take startups to QuickBooks first, but at a certain point they need something bigger. These are a few criteria we always use to assess if they are ready for

an ERP solution: IPO or outside investment plans, trans action volume, multiple locations or subsidiaries, and multicurrency.

If a company is going to raise capital on the public markets, having an ERP in place is essential; it gives the internal controls and the visibility and reporting soundness much better than QuickBooks. ERP also brings investors an extra level of confidence, and they can standardize financials around a common ERP platform.

ERP handles higher transaction volumes, too, and gives segmentation of duties as a company scales.

Q: Why is ERP needed for multiple locations?

A: QuickBooks isn’t very good for businesses with multiple locations, such as a manufacturing site away from a main office. You need the scalability and integration of ERP for that. ERP also is essential when a startup buys another company or opens a subsidiary, because you’ve usually got consolidated financial statements to prepare every month from having more than one entity.

It gets more complex if multiple currencies are involved. When doing a consolidation in two or more currencies, Excel will only take you so far. QuickBooks doesn’t do that at all, and it handles multicurrency situations poorly. So suddenly, you’re talking about ERP.

Q: Which ERP systems are right for startups in your experience?

A: Select one of the big four players because they are tried and tested, and choose a small business solution such as SAP Business ByDesign that gives an upgrade path to the larger systems.

Equally important is picking the right implementation partner. You want someone who takes the time to under stand your business, because they are going to give sug gestions on configuration and help with adjustments and solving any problems as the business grows. //

Q: You help startups prepare their financial processes for growth. What do you typically see when you start working with a new company?

Key Takeaways

HELP WANTED

Companies’ demand for workers in industries like health care and IT went into overdrive during the pandemic, and analysts say staffing demand is likely to continue for the foreseeable future. Staffing companies that have the systems in place to screen and hire nurses or skilled knowledge workers are well-positioned to take advantage of this need. Meanwhile, private equity investment in staffing and recruiting companies is also on the rise. “Hire Power,” p. 18.

CUT IT OUT

Dealogic reported that 9,155 corporate carve-out trans actions worth $2.3 trillion were announced globally last year, thanks in part to an expanding economy, rising com pany valuations and eager private equity buyers looking to make up for lost time. But today’s slowing economy and volatile stock market have the potential to keep the carve-out party going, as corporations focus on their core businesses and look to shore up their balance sheets. “Picking up the Pieces,” p. 40.

K-P-IS THIS WORKING?

Just because a company underdelivered against its key performance indicators doesn’t necessarily mean there’s a problem, according to panelists at ACG’s Operators’ Summit. Depending on the company’s growth stage, it may fall short of some KPIs while hitting the target for others and ultimately course-correct down the line. Either way, leaders can extract valuable insight, which could mean revising the plan for how to reach a com pany’s goals. “Giving KPIs Purpose in an Uncertain Market,” p. 14.

CATCH UP QUICK: From PE’s interest in staffing businesses to emerging models for teams of operating partners, here are a few of the highlights from this edition of Middle Market Executive.

BETTING ON QUBIT

Former U.S. Secretary of Commerce and current inves tor Penny Pritzker points to quantum computing and its commercial applications in manufacturing and technology as among the innovations she’s most excited about for their disruptive potential. Also on the list: sustainability applications for technology, cloud migration and innova tive software solutions. “Open for Business,” p. 10.

PRACTICAL MAGIC

Asked how leaders should identify where outsourcing can make the biggest impact, a panelist at ACG’s Operators’ Summit pointed to the “magic number”—year-over-year revenue growth divided by the money spent on sales and marketing. Whether it can supplement business development or “top of funnel” work on the way to the sale, an outsourced service that advances that magic number is one to prioritize. “Where, When and How to Outsource,” p. 52.

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