Middle Market Growth - July/August 2019 by Association for Corporate Growth

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FROM THE EDITOR

Workplace Diversity Is No Longer Optional

KATHRYN MULLIGAN Editor-in-Chief, Middle Market Growth kmulligan@acg.org

iversity and inclusion have become common buzzwords in business circles, but what do they really mean? We chose to explore that question in this issue by looking at how middlemarket companies are working to broaden their talent pool. One source told me that her clients want to hire employees who represent a range of ethnic and cultural backgrounds—they just can’t find them. Maybe that’s true, or perhaps these organizations aren’t looking hard enough. Either way, companies that have built diverse leadership teams and taken a more inclusive approach to hiring are gaining an edge. Argenbright Holdings is one example. Our profile of the company (p. 20) includes the story of how Frank Argenbright, a serial entrepreneur, met Karan Ishwar, then a 27-year-old private equity professional working in India. Much of finance’s exclusivity can be attributed to the network effect—you hire people you already know, who look like you, who went to your university. But Frank wasn’t looking for a clone. He was seeking talent, and he found it. Soon after the two met, Karan moved to Atlanta to lead the M&A efforts for Frank’s security and services company, which is on track to hit $1 billion in revenue this year. Argenbright Holdings’ diversity strategy extends beyond its leadership team. Its HR staff calls on organizations like AARP, Veteran’s Affairs and religious groups and describes the skills it’s seeking. That’s harder than posting to a job board, but according to the company, building those relationships helps it find great candidates it might not otherwise meet. Companies with a homogenous workforce also risk missing out on great ideas. This issue’s Quick Takes profile (p. 17) highlights a young shoe brand named for its founder, Rebecca Allen, who left her career in finance after spotting a gap in the footwear market: Shoes available in “nude” shades only matched the skin tones of white customers. Allen, who is African American, saw a problem—and a market opportunity—that likely wouldn’t occur to a white entrepreneur. Now she’s building a business around it. As those stories show, inclusion isn’t about political correctness or checking boxes. When organizations have diverse representation on their boards and in their leadership and marketing departments, they gain a broader perspective on how to serve customers and mitigate risk. And now that competing globally is no longer optional, having a narrow point of view means missing out on a world of opportunities. //

MIDDLE MARKET GROWTH // JUL/AUG 2019

EXECUTIVE SUMMARY

Creating a More Inclusive Middle Market

ANGELA MacPHEE Chairman, ACG Global Board of Directors, and Partner, Baker Tilly

middlemarketgrowth.org

ultural movements like #MeToo and Black Lives Matter have shined a light on diversity, a topic that’s now top of mind for HR departments across industries, including finance. Diversity spans a range of dimensions, including gender, race, ethnicity, age, sexual orientation, educational background, geography and previous work experience. The finance industry’s poor track record on diversity is well-reported, but that’s starting to change as firms recognize that being more inclusive means adding talented people from all backgrounds. Through new programs and initiatives, ACG is playing a role in the industry’s evolution. Women are among the underrepresented groups in financial services. For the industry to attract and retain talent, women need the same access to strong networks, advancement opportunities and mentorship as their male colleagues. With its dedicated women’s groups and programs, ACG is helping to meet that need. During my nearly 15 years as an ACG member, I’ve seen the number of women at our events steadily increase—a positive sign of change to come in the broader industry. ACG has also been a place for young professionals to get a foothold in finance and advance in their careers. I started attending ACG events in my mid-20s, when I was the CFO of a steel company, and I found it to be a great place to learn and build relationships. I’m encouraged to see the age diversity in our association, driven in part by the 27 ACG chapters that offer young professional memberships. To support this trend, the ACG Global board recently restructured membership dues to help chapters reduce fees for young professionals. Beyond promoting diversity in a traditional sense, ACG is broadening the types of members it serves by adding new programming for those focused on corporate development. A number of ACG chapters have created peer networks for development officers. To complement those initiatives, ACG Global will hold its first national Strategic Acquirer Summit in Dallas on Nov. 4-5 with peer-to-peer networking and sessions on M&A best practices. More information is available on our website, acg.org. This marks my final letter as chairman of the board for ACG. As is the natural flow, on Sept. 1 my term will end and Martin Okner, president and COO of dpHUE, will assume the role. It has been a pleasure serving as your chairman, and I look forward to continuing my ACG involvement and watching the association evolve further to serve our diverse middle-market M&A community. //

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JUL/AUG 2019

DON’T MISS QUICK TAKES A More Inclusive Shoe Brand 17

A QUALIFIED OPINION Spotlight on Minority-Owned Businesses 18

POLICY POINTS PE-Fueled Growth by Congressional District 34

Cover and above photo by Gregory Miller

GROWTH STORY

IN THIS ISSUE From the Editor 1

Argenbright Holdings’ Cultural Capital

Executive

Serial entrepreneur Frank Argenbright is in his third act with Argenbright Holdings, a provider of services across three verticals: security, custodial and aviation. With its savvy M&A strategy, inclusive approach to hiring and longstanding client relationships, the organization has grown its workforce to 30,000 employees and is on track to hit $1 billion in revenue this year. 20

The Round 10

Summary 2 Executive Suite 8

Perspectives 14 Midpoints by John Gabbert 15 Growth

TREND

Mentorship Matters

Economy 42 The Portfolio 43 ACG@Work 48

Mentorship and sponsorship are regularly cited as tools for breaking the glass ceiling. MMG

The Ladder 54

asked women in the industry about how those relationships helped them advance in their

It’s the Small

careers, and what they’re doing within their

Things 56

firms to pay it forward. 28

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Kathryn Mulligan kmulligan@acg.org VICE PRESIDENT, COMMUNICATIONS

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How to Get Hired at a Private Equity-Owned Company

NEWS MMG WEEKLY The latest middle-

MMG spoke with Bob Ryan, a partner at Shields Meneley Partners, and Keith Goudy, managing partner at Vantage Leadership Consulting, about what it takes to get hired at a private equity portfolio company, how compensation is changing, and the strategies companies are using to attract talented leaders and employees alike.

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EXECUTIVE SUITE

Powering Innovation Through Software F How has access to technology

GREG PETRAETIS Title: General Manager, Mid-Market Business Company: SAP North America Location: Washington, D.C. Expertise: Drawing on more than 30 years of experience as a sales technology executive, Petraetis oversees the mid-market and partner business segment for SAP North America, the largest enterprise software company in the world. Eighty percent of SAP’s 435,000 customers are midmarket companies.

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benefited midmarket companies? It’s all about cloud-enabled solutions, which are now easily accessible to midmarket companies, allowing them to expand and grow quickly. This is a game-changer because it means midmarket companies can run similar to large enterprises—but with even greater efficiencies and innovation now that technology is easy to buy, deploy and use. At SAP, we’ve watched companies across industries accelerate their growth using technology that is meant to specifically address their industry segment. MOD Pizza, a chain of casual pizza restaurants, is one example. In 2016, the company was named America’s fastest-growing chain restaurant by Technomic, and today it has more than 400 locations across the U.S. and U.K. To support its aggressive growth, MOD adopted an SAP cloud technology that allowed the company to reduce redundancies in its business and sustain its growth. Because MOD hires about 200 employees a week, it also started using SAP’s human resources solutions to recruit, train, develop and manage its staff. F How can PE firms use

technology for operational improvements? Private equity investments account for 25% of the midmarket segment in North America and cover key growth sectors of the economy. By using technology solutions within their portfolio companies, PE investors can

increase the value of their investments by achieving operational efficiencies, streamlining business operations, enabling smart datadriven decision-making and improving cash flow. Using cloud technologies can help firms increase the short-term and long-term value of their holdings, regardless of their geographic scope. At SAP, our partners range from large global private equity firms like The Carlyle Group and General Atlantic to North America-focused firms like American Securities. F How does workplace diversity

impact innovation? I’m extremely proud of our commitment to a diverse workforce. SAP’s Autism at Work program is one of our initiatives, and as a father to a son on the autism spectrum, this is near and dear to my heart. We launched the program five years ago with a commitment to hiring, mentoring and developing people on the autism spectrum. To date, we’ve hired close to 200 individuals and find they have a unique set of skills to offer our organization, particularly in software development. This is what sets SAP apart from other technology companies: We’re making a difference while taking an innovative approach to running a business. In return, we bring that back to our customers. //

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THE ROUND

Chicago Teachers’ Pension Fund Raises Class of Diverse Managers By Benjamin Glick

ll pension funds have a responsibility to deliver strong returns for their pensioners and contributing employees, but some, like the retirement fund serving one of the largest U.S. school districts, have broadened their mandate further to promote diversity when choosing investment managers. At its meeting in late March, the Board of Trustees for the Chicago Teachers’ Pension Fund approved the allocation of $10 million to each of four private equity firms. The managers are the latest to receive funding through an effort by CTPF to diversify its portfolio by investing in managers certified as minority-, woman- or persons with disabilitiesowned business enterprises. These firms, known as MWDBEs, have received increasing support from CTPF since it began working with emerging managers in the early 1990s. To qualify for the MWDBE program, managers must be certified as defined by Illinois’ Business Enterprise for Minorities, Women, and Persons with Disabilities Act or certified in another state with similar criteria, such as New York and California. The CTPF board directed the fund to begin working with MWDBE investment managers around 1994. When CTPF started tracking the initiative, fewer than 7% of its assets

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were invested with such managers. By 2018, they represented 42%, or $4.5 billion of the fund’s $10.7 billion assets. CTPF remains a leader among pension funds that support MWDBE managers, beating out the pension funds of larger systems. By comparison, 10%, or approximately $12.2 billion, of New York City’s actively managed retirement fund assets— which includes its teachers’ pension fund—are currently committed to minority- and women-owned investment managers, according to the New York City Employees’ Retirement System. Fostering Stewards of Capital Increased competition has made it

difficult for small or new firms— including many MWDBEs—to gain a foothold in the private equity market. Meanwhile, declining interest by limited partners to develop new manager relationships has put MWDBEs at a disadvantage when fundraising. Diversity initiatives like CTPF’s aim to level the playing field, and proponents of such programs say limited partners benefit from working with MWDBE firms. MWDBE firms broaden the range of opinions, experience, perspective, expertise and skill in LPs’ portfolios, which can translate to strong investment returns, says Martie D’Apice, head of investor relations for private equity firm Estancia Capital Management.

“As a minority-owned firm, Estancia has enjoyed strong relationships with limited partners who value our diversity as well as our investment acumen,” D’Apice says. “We recognized that CTPF, with over 40% of its total fund assets with MWDBE firms as of 2018, shares those same values and we thought it would be a great opportunity to develop a partnership.”

inevitable. Following its 1994 debut, CTPF’s share of MWDBE managers declined throughout the rest of the decade, at one point slipping to 5.2%. But the program received a boost in 2004, when the Illinois legislature passed a law encouraging trustees across the state to invest with MWDBE and emerging managers. In February 2009, CTPF’s Board of Trustees revised and adopted a new

“ONCE WE GET THE IMPRIMATUR OF HIGHLY RESPECTED ORGANIZATIONS, SUCH AS CTPF, IT IMMEDIATELY GIVES US CREDIBILITY THAT WE ARE A WELL-REGARDED INSTITUTIONALQUALITY FIRM AND DESERVING STEWARDS OF CAPITAL.” MARTIE D’APICE Head of Investor Relations, Estancia Capital Management

In 2019, the Scottsdale, Arizonabased firm responded to a request for MWDBE managers by CTPF, which awarded the firm $10 million in investment capital. Receiving funds from CTPF has helped boost Estancia’s profile in the investment community, which is critical for raising additional capital, D’Apice says. “Once we get the imprimatur of highly respected organizations, such as CTPF, it immediately gives us credibility that we are a wellregarded institutional-quality firm and deserving stewards of capital,” she says. A Culture of Diversity and Inclusion The success of CTPF’s diversity initiative did not always seem

diversity policy that established quantifiable goals for MWDBE investment managers in specific asset classes. The fund has been beating those metrics ever since. In 2016, CTPF set its minimum investment targets for MWDBE firms at 20% of total fund assets and 25% for active assets. By 2018, the fund had far exceeded them. The fund had allocated 42% of total fund assets and 34% of active assets to MWDBE firms, and the share of equity assets, which include funds managed by private equity firms, was 56%—nearly double the 30% minimum. According to CTPF President Jeffery Blackwell, all manager applications are evaluated extensively and candidates are chosen based on merit. “[It took] dedication to the goals of diversity and inclusion and

hard work finding, identifying and building relationships with qualified MWDBE managers that meet the requirements of doing business with CTPF,” he says. Like all good investors, CTPF strives for a diverse portfolio, and its selection of fund managers is an outgrowth of that investment strategy. “Investing with MWDBE firms provides portfolio diversification across sectors, market sizes, market styles, geographies, etc.,” Blackwell says. After declining in the wake of the 2008 financial crisis, the fund’s assets have increased by nearly $1 billion since 2016. And according to CTPF’s investment policy, the fund’s private equity portfolio experienced strong growth between 2017 and 2018, increasing 6% to over $300 million, up from $281 million. While it does not have an official stance on socially responsible investing, CTPF’s board has passed resolutions to divest from its holdings in retail assault weapons manufacturers, private prisons and immigrant detention centers. The fund has also passed resolutions confirming the importance of investing in infrastructure, and it supported a lawsuit targeting pharmaceutical companies alleged to have created and perpetuated the nation’s opioid crisis, according to Blackwell. Moving forward, Blackwell envisions further growth of the fund’s diversity efforts. “CTPF’s culture is built around diversity and inclusion,” he says. “We are intentional in adding diversity to the portfolio and we will continue to encourage the hiring of diverse managers and employees who help us meet this goal.” //

MIDDLE MARKET GROWTH // JUL/AUG 2019

THE ROUND

ACG Chapters Embrace Young Leaders By Benjamin Glick

t a time when millennials are advancing in the corporate world, some ACG chapters have recognized the untapped potential of their young members and are recruiting them for leadership positions. Few chapters have added as many young professionals to their leadership ranks as ACG Detroit. Nearly 1 in 5 of the directors on the chapter’s board and almost half of its committee chairs have risen up through ACG Detroit’s NextGen program. In 2017, the chapter elected its youngest sitting president: Christopher Letts, a 34-year-old vice president of Morgan Stanley’s Pine Harbor Group. Letts was active in the chapter’s NextGen program, so it’s no surprise that advocating for young professional programs has been a major focus during his tenure. But at one point, Lett’s eventual election to president seemed unlikely. Despite the growing influence of millennials in the workplace, they initially met with resistance as they sought leadership roles in ACG Detroit, according to Letts. “At one point, millennial was very much a pejorative,” he explains, referring to the generation born between 1981 and 1996. When Letts joined ACG in 2011, there were few young professionals involved in Detroit’s chapter. At the Pine Harbor Group, Letts advises families about managing assets after selling their businesses, and he could see that ACG Detroit had a succession

middlemarketgrowth.org

E ACG Detroit President Christopher Letts

problem. “At the corporate or enterprise level, that might be fine,” he says. “But when it comes to organizations that rely on membership to maintain the existence of the organization and people start to retire, the organizations die.” To respond to the problem, the chapter created a dedicated seat on its board and tasked it with attracting young members. In 2013, it introduced NextGen, a program that offers a discounted membership rate for middle-market professionals under the age of 35 and connects them with networking, educational, mentorship and leadership resources. ACG Detroit soon began developing programming and organizing events

to draw new members, but after two years, its efforts weren’t having much of an impact. “It grossly underperformed our initial expectations,” says Letts, who was chairing the events committee at the time. But understanding why the strategy wasn’t working provided valuable insight. By selecting from within their own ranks, the ACG Detroit board had appointed a leader for the initiative who lacked experience engaging young professionals. The board opted to change its approach. Instead of leading the program from the top down, they elected to run it from the bottom up, according to Letts. “The board said, ‘Okay, why don’t we select someone

from the NextGen community who will bring in a representative voice and leadership style that the rest of our NextGen-ers will follow and engage with?’” In 2015, Dan Ellis, a director at Townsend Search Group, was selected to lead the new initiative. Ellis built out a steering committee and brought on a vice chairman. Together, Ellis and the vice chairman organized events that catered to millennial members. In one year, the number of NextGen members doubled. Since then, ACG Detroit’s NextGen membership has grown from around 40 to over 100. The young professionals’ increased involvement led many to take leadership roles within the organization and eventually paved the way for Letts to become president. The strategy to appeal to younger professionals has benefited the chapter beyond just membership growth. ACG Detroit has been able to tap into the “natural hustle” of professionals early in their careers, which has become a valuable asset for the organization, says Letts, who was awarded a Meritorious Service Award at ACG’s InterGrowth conference in May. “Because most of our NextGen-ers don’t have children and many of them are unmarried, there’s not a lot going on that would restrict them from volunteering hours with an organization like ACG Detroit.” Unexpected Success Detroit is among many ACG chapters that have developed a pipeline for young professional leadership, but not all organizations followed a similar path. Some, like ACG National Capital, didn’t set out with membership growth in mind. When the chapter

officially launched its NextGen program in 2014, it positioned the group as a way to attract sponsors, according to Katie Newland, the chapter’s executive director. The initiative was designed as a resource for existing ACG members and sponsors to help young professionals within their firms advance in their careers, but it was so well received that the chapter expanded it from a sponsor benefit to a program for all members. From the group’s inception, ACG National Capital let those involved direct its course. The young professionals were empowered to develop programming and build up a peer network, Newland says. “We let them generate the topics and the makeup of the group.” Each year, the NextGen group organizes five to six functions, which draw around 40 to 50 participants. But after five years, NextGen members have done more than just plan events. This year, three of the program’s participants joined ACG National Capital’s board of directors. Kristina Wilmer, a senior vice president of Global Commercial Banking at Bank of America Merrill Lynch, currently serves on ACG National Capital’s board of directors. She joined NextGen in 2015 at the recommendation of her manager. “NextGen gives you the ability to attend ACG meetings and conferences,” Willmer says. “I thought it was important to take advantage of it.” After a few months of attending ACG events, Wilmer hadn’t yet moved from passive attendance to active participation. But that changed when she heard a speech from ACG National Capital’s president at the

time, who encouraged members to get involved in the organization. “I thought that was a great idea,” Wilmer says. “He said exactly what I believed: that the best way to get involved in ACG is to do more than just attend the breakfast. Give time to ACG and you’ll get much more in return.” Wilmer began volunteering on the membership committee and became a full ACG member in 2017. Because of her involvement with the committee, the chapter invited her to join its board of directors in June 2018. Wilmer isn’t alone. Another NextGen alumni, Fatima Rahyab, joined the board of directors around the same time as Wilmer. Both continue to work with NextGen and help develop events to drive engagement. According to Newland, including the young professionals has helped strengthen the chapter’s programming and drive its strategic direction. Wilmer hopes to continue developing the chapter’s NextGen program and increase its value to young professionals at a pivotal time in their lives. “When I look at people within ACG who are much later in their careers than I am, the folks they’re doing deals with are the ones they met early on,” Wilmer says. “I also formed some really great relationships with people I met through NextGen, and that will pay dividends for years to come. //

MORE ONLINE To learn more about ACG’s young professional programs, visit acg.org/ networks/young-acg.

MIDDLE MARKET GROWTH // JUL/AUG 2019

PERSPECTIVES

PERSPECTIVES // On Diversity & Inclusion

“Embracing diversity and inclusion demonstrates an ongoing commitment to employees that fuels innovation and productivity. It also promotes a culture that attracts and retains talent. This is a potent combination to deliver an excellent client experience, drive employee satisfaction and deliver results for shareholders.”

WENDY STEWART Co-Head, Southeast Region, Global Commercial Banking, Bank of America Merrill Lynch, and Atlanta Market President, Bank of America

“The purpose of Mno-Bmadsen is to develop businesses for our future generations. We’re focused on performance today so we can reinvest that profit and continue to grow as a tribal entity, and diversify and grow the non-gaming assets of the tribe.”

TROY CLAY President and CEO, Mno-Bmadsen, on why the Pokagon Band of Potawatomi Indians set up an investment entity to buy operating businesses

“[A PE portfolio company] is one place where it’s good to have a little gray hair. They are not looking for someone that’s going to work for them for 30 years and then retire. They’re looking for someone that has expertise, that can start right away.”

BOB RYAN Partner, Shields Meneley Partners, speaking on the

Middle Market Growth Conversations podcast about the value of age and experience when running a PEbacked business

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WE’RE A VERY DATA-DRIVEN ORGANIZATION, AND THE DATA IS CLEAR. DIVERSE GROUPS PERFORM BETTER. IT’S IMPERATIVE [OUR STAFF IS] AS DIVERSE AS THE PEOPLE WE’RE TRYING TO SERVE. KATIE BURKE Chief People Officer, HubSpot Inc., on growing a global technology company

MIDPOINTS by John Gabbert

How Can PE Fix Its Gender Imbalance?

he U.S. private equity industry is dominated by men. That isn’t news, unfortunately, but the numbers are slowly improving. Women make up about 11% of upper-level PE executives within U.S.-based firms, according to PitchBook. That’s up from 8.8% in 2015, when we did a similar analysis. It isn’t a huge improvement, but anyone who follows private equity knows this industry changes at a glacial pace. Scrutiny from limited partner investors and the media may be helping to drive change, albeit slowly. Media outlets have generally focused on well-known PE names like Blackstone, KKR, The Carlyle Group and Apollo, and our analysis of firms by assets under management shows the largest have the highest share of women at the helm. At firms with at least $25 billion under management, 18% of decisionmakers were women. In the nextlower tier of firms (those with between $10 billion and $25 billion under management) that figure crept down to 14.1%. Firms with less than $10 billion under management hovered around 10%. To try to address the imbalance, many PE firms are looking to hire more women out of college. Carlyle is among them: Women will make up 63% of the firm’s incoming class next year. But adding more female college recruits doesn’t necessarily translate into more female executives over time. Turnover rates are high in finance, and many new hires do their “two years of service” before switching industries. Plus, there are numerous

factors that have contributed to the industry’s gender imbalance, ranging from bias and lack of advancement opportunities, to pay discrepancies and an unwelcoming work environment. Those issues certainly need to be addressed, even as firms increase the number of female associates. Newly formed investment firms face a different challenge when it comes to diversity. These PE shops generally have three or four brand-new executives at most, and in nearly all cases, the managers have worked together before—and because of the PE industry’s gender imbalance, they’re often all men. At the start, the founders’ sole focus is on surviving as an independent outfit. Diversity is a luxury most small firms can prioritize over time, but along with many other important considerations, it usually takes a back seat in the beginning. So what’s the solution? One answer may be to recruit experienced female operating partners. Climbing the ladder isn’t the only way to the top in private equity. PE firms hire operating partners for their experience leading companies, and adding women in these roles would lend another perspective on deal sourcing. Meanwhile, having senior-level women to mentor younger female recruits could be a way to help women grow within the firm. If the industry fails to become more inclusive, promising young women in private equity may choose another path—perhaps they’ll leave to start a company like their mentors did. But if private equity can make itself a space where women can thrive, the statistics will take care of themselves. //

JOHN GABBERT Founder and CEO, PitchBook

MIDDLE MARKET GROWTH // JUL/AUG 2019

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QUICK TAKES

New Shoe Line Makes Strides for Inclusivity

ude-colored flats and heels are a wardrobe staple for many women. They’re easy to pair with any outfit because they match a wearer’s skin tone. That is, unless you’re a woman of color. Rebecca Allen’s white colleagues regularly wore “nude” shoes to work, but when she went looking for a pair herself, she came up empty-handed. “It was just really frustrating. I scoured department stores, online boutiques, offline boutiques, everything,” says Allen, who is African American. While researching the market in 2017, she discovered that white women owned an average of three to five pairs of nude-colored shoes, while women of color “had maybe one pair that wasn’t actually even nude for them,” she says. She found that for some brands, nude shades made up a quarter of their sales. “When you look at some of these big incumbent brands, nude is really the bread and butter of their business,” she says, “but they’re only catering to a fraction of women who want to wear this style.” In addition to researching the market, Allen started working on a concept for a business and began testing products. At the end of 2017, she left her job as an investment manager to launch a company under her name. The Rebecca Allen line includes flats, pumps and a heeled sandal, each available in five shades of nude that “complement women from dark to light, particularly all my brown ladies,” according to a letter from Allen on the company’s website.

Photo by Cait Kelly

E Rebecca Allen shoes are available in five shades of “nude”

Prices range from $225 to $265, depending on the style. As a direct-to-consumer online brand, the company benefits from an immediate feedback loop that more established brands lack. The challenges of matching inventory to demand and getting new offerings into wholesale and brick-and-mortar channels are among the reasons Allen suspects large companies have been slow to offer more diverse lines of their own. Another reason is one many industries are grappling with. “The other side of this is the fact that a lot of these brands are still really missing diversity in the marketing room,” Allen says. “There’s really just a big empty spot at the table.” Without a broader range of perspectives at all levels of management, companies are failing to spot new opportunities in the market.

Allen used angel investment and support from friends and family to get started. She’s currently raising outside capital through a pre-seed round. To help drive sales, she’s fostering an online community and engaging with customers in person through shopping events and partnerships with complementary brands. She plans to make the brand accessible to a broader group of women by hosting shopping events in smaller cities, which are often overlooked by larger brands, and by offering shoes in extended sizes. For many of Allen’s customers, her line signifies more than just shoes. “There’s a piece of the brand that really makes women feel seen,” she says. “It’s more than just the product in and of itself. But obviously, the product has to be great too.” // –Kathryn Mulligan

MIDDLE MARKET GROWTH // JUL/AUG 2019

A QUALIFIED OPINION

Henry Childs II National Director, Minority Business Development Agency Henry Childs II is the national director of the Minority Business Development Agency, an agency of the U.S. Department of Commerce that promotes the growth of minority-owned businesses through the mobilization and advancement of public and private sector programs, policy and research. Childs spoke with MMG about the challenges faced by minority-owned businesses and new initiatives underway at MBDA.

“WHETHER WE’RE TALKING ABOUT PRIVATE EQUITY OR REAL ESTATE TRUSTS, HEDGE FUNDS OR MUTUAL FUNDS, THERE IS NOT A SINGLE FIELD WITH MORE THAN 5% OF ITS ASSETS MANAGED BY WOMEN- OR MINORITY-OWNED FIRMS.”

MORE ONLINE Find more interviews at middlemarketgrowth.org.

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Q A

What are the unique challenges faced by minority entrepreneurs? Access to capital is a huge challenge for minority-owned businesses. Less than 10% of venture-backed companies have a female founder. Just 1% of venturebacked founders were black; the same is true for Hispanic founders. The numbers aren’t any better for assets under management. According to a Knight Foundation report, just 1.1% of the $71.4 trillion assets under management is in the hands of women- and minority-owned firms. Whether we’re talking about private equity or real estate trusts, hedge funds or mutual funds, there is not a single field with more than 5% of its assets managed by women- or minority-owned firms. Lack of funding disproportionately impacts women of color. Women, particularly black women, are the fastest growing group of entrepreneurs. And women-led businesses are outperforming their male peers in many VC portfolios. But, according to a Project Diane study, since 2009, startups led by black women have only raised .0006% of the $424.7 billion in total tech funding. MBDA is addressing this issue by establishing an Enterprising Women of Color initiative to find creative ways to get capital in the hands of women of color.

Q A

What obstacles do minorityowned businesses face when seeking capital? A small percentage of venture capital-backed founders are minorities and the percentage of minorities in decision-making roles with venture capital is low. Entrepreneurs often raise funds from friends and family. However, African Americans and Hispanics have average net worths that are much lower compared with white Americans. This lack of capital and generational wealth can present significant obstacles. There is also a perception that funds managed by diverse-owned firms do not perform as well as non-diverse funds. This false perception that either minority-owned firms or investments in minority startups are riskier investments perpetuates the gaps in diversity. Data shows that diverse-owned firms typically perform as well as non-diverse firms.

Has the volume of private capital available today translated into more investment for minority-owned companies? I don’t think that it has, but there are several things happening this year that could change that. One is the opportunity zone legislation, which was established by the 2017 Tax Cuts and Jobs Act.

The law encourages investment in economically distressed communities, which is an excellent vehicle to connect investors with minorityowned businesses. To help investors make informed decisions, MBDA plans to create a database with a list of minority-owned businesses that a user can filter based on location or company size. It’s a critical piece that’s missing. Right now, even if a PE firm wants to invest in a minority-owned company, they often have trouble finding qualified minority-owned businesses.

Q A

MBDA recently celebrated its 50th anniversary. What’s ahead for the organization? I am laser-focused on two things: helping minority-owned

businesses get to size and scale, and advocating for the 11 million minority-owned businesses operating today. According to the U.S. Census Bureau, minority-owned businesses are growing at a much faster rate than non-minority-owned businesses, but only 2% of all minority-owned businesses have annual gross receipts of $1 million or more. My goal is to increase that number. MBDA plans to do that by leveraging technology, policy, strategic investments and data. If we get those three ingredients right, in five or 10 years we could be having a very different conversation. For the first time ever, MBDA is investing in a virtual business center. The platform creates a capability for

MBDA to provide greater services to the 11 million minority-owned businesses. Additionally, for the first time, MBDA is opening an Office of Policy, Analysis, and Development. The goal is for MBDA to be a onestop shop for data on minorityowned businesses. Lastly, I am very excited about MBDA’s global markets initiative. MBDA is moving to expand its global footprint. According to the 2007 Census SBO report, minority-owned businesses are twice as likely to export compared with non-minority firms. In addition, minority firms are more than three times as likely to have businesses generating 100% of all their sales in exports compared with their peers. //

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BY S.A. SWANSON

hile Frank Argenbright was attending an entrepreneurial program at Harvard Business School in the early ’90s, one of his professors told him he had “RLC.” Argenbright remembers asking what that meant. The answer: rat-like cunning. “He told me privately that I had a real gift for marketing, and some of my ideas in class were brilliant.” That’s a far cry from how Argenbright, 71, was perceived when he was younger. He has attention deficit disorder with hyperactivity and dyslexia, and based on those traits, “people considered you to be stupid,” he recalls. During his senior year of high school, Argenbright says his mother taught his history class. “And she actually failed me.” His track record as an entrepreneur tells a different story. Argenbright started his first company with $500. Twenty years and 23 acquisitions later, it was a $1 billion business. Then he launched a second company, which he grew to $300 million in revenue after 10 years. Now he’s in his third act, as chairman and founder of Argenbright Holdings. By providing services in three verticals—security, custodial and aviation—the company is on track to hit $1 billion in revenue this year. Argenbright Holdings has grown rapidly through acquisitions. Since its formation in November 2017, the company’s workforce has increased from approximately 6,500 employees to 30,000.

MIDDLE MARKET GROWTH // JUL/AUG 2019

After meeting in India, Frank Argenbright (left) hired Karan Ishwar (right) to lead his company’s M&A efforts

“ALL MY LIFE I’VE BEEN TOLD I CAN’T DO THINGS, SO I JUST PARTNER UP WITH PEOPLE WHO SAY, ‘LET US TELL YOU HOW TO GO DO IT.’” FRANK ARGENBRIGHT Chairman and Founder, Argenbright Holdings

When building his team, Argenbright says he looks for “quicker, faster, smarter” workers. He wants the company’s leaders and employees to avoid the pitfalls of groupthink, which is why Argenbright values employees who bring different perspectives with their ethnicity, gender or cultural background. That emphasis on diversity represents one of Argenbright’s long-held beliefs about how to run a company, says Karan Ishwar, Argenbright

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Holdings’ chief financial officer. “[Frank] noticed that if you bring in too many people who are too similar, everyone’s going to think the same, and they’re going to make the same decisions.” Argenbright’s observations are backed up by data. A report released last year by management consulting firm McKinsey & Co. found companies with the most ethnically diverse executive teams were 33% more likely to achieve higher profits than their peers.

EXTRASENSORY PERCEPTION “Rat-like cunning” is a valuable quality for any entrepreneur, but it’s not Argenbright’s only dealmaking superpower. Unlike most corporate leaders, he says he doesn’t read financial statements. “I don’t process numbers well, but I do understand the concept of numbers,” he says. Instead, he uses the “extrasensory perception” he says his ADD and hyperactivity give him.

If Argenbright is in a room with people hashing out a deal, he says he can carry on a conversation while listening to a separate discussion several feet away. “I know if they’re trying to take advantage of me, or if I’ve got more room to push for a better deal,” he says. Whether it’s attributable to RLC or extrasensory perception, Argenbright’s strategy seems to be working. He has completed more than 40 acquisitions during the past four decades as he’s grown his businesses. The first company he founded, Argenbright Holdings Limited Services, was listed on NASDAQ. It began as a security company and expanded into janitorial and aviation services, and it later added shipping and fulfillment offerings. He co-founded his second company, AirServ, in 2002 with Tom Marano, now the CEO of Argenbright Holdings. The company, which provides aviation services such as baggage handling and janitorial work, was purchased 10 years later by facility management giant ABM Industries. After the AirServ sale, Argenbright turned his focus to SecurAmerica, the security company he started in 2006 that would become one of Argenbright Holdings’ three platform businesses. From 2012 to 2013, SecurAmerica’s revenue grew from $60 million to $70 million— significant growth, but nowhere near the more than tenfold increase Argenbright envisioned for the next five years. To reach that aggressive goal, Argenbright needed the right team. “All my life I’ve been told I can’t do things,” he says, “so I just partner up with people who say, ‘Let us tell you how to go do it.’” He didn’t know it then, but Argenbright would soon find the right partner for the job, more than 8,000 miles away.

NEW COMPANY, OLD HISTORY While vacationing in India in March 2013, Argenbright wanted to meet with local security companies to explore acquisition opportunities. He was referred to a private equity firm that could make introductions. According to Argenbright, one of the firm’s

associates, Karan Ishwar, ARGENBRIGHT pulled him aside and told HOLDINGS him, “You could buy these [security] companies all Business: Security, custodial day long for 5x EBITDA, and aviation services, provided but they’re going to tell by three platform businesses you that it’s valued at 10x under the Argenbright Holdings EBITDA. I’m just telling umbrella you they’re going to try to Founder: Frank Argenbright cheat you.” That candor got Headquarters: Atlanta Argenbright’s attention, Number of employees: 30,000 so he invited Ishwar to dinner. They talked for Expected annual revenue hours and discussed the in 2019: $1 billion possibility of working together. After Argenbright returned to the U.S., he and Ishwar worked out an arrangement to have Ishwar study the business and ultimately run its M&A efforts. It was a risk for Ishwar, then 27, not only because it required leaving India for the United States. It also meant trading a career in private equity for security services, an industry not known for its innovation. “People were like, ‘Are you crazy?’” Ishwar recalls. In January 2014, he made his choice and moved to Atlanta. He recognizes the gamble Argenbright was taking by hiring him. “He took a chance on somebody who’s so young, coming from a completely different background, different culture, who’s never worked in the U.S.” When Ishwar joined the company, SecurAmerica focused solely on commercial security. Over the next five years, it made six acquisitions and added government security to its offerings. Argenbright Holdings formed in November 2017 during the acquisition of ERMC, which provides custodial, security and aviation services. In December 2018, the holding company acquired its third platform business, Delta Group Services, a provider of aviation services. Known as DGS, the company was previously a subsidiary of Delta Air Lines, which retains a minority stake. When it was acquired, DGS added 20,000

MIDDLE MARKET GROWTH // JUL/AUG 2019

Carter, Avison Young’s vice president of property management. It provides security services across Avison Young’s portfolio, including office buildings, mixed-use developments, retail centers and industrial buildings. Carter says SecurAmerica has the “ability to quickly adapt to our ever-changing world,” as her firm takes on management of new properties. Some customers are doing business with Frank Argenbright for the third time in the past 40-plus years, including Federal Express and Georgia Power. That’s part of how he was able to take a $70 million company and build a $1 billion holding company around it in about five years’ time. With his current business, he’s drawing on the success he’s had with his other ventures, he says. “It’s a new company with an old history.”

UNCOVERING ROCKS

E SecurAmerica employees, like Obaniyi Salami (above), guard the Buckhead Tower in Atlanta and provide security services at the building’s front desk (bottom right)

workers to Argenbright Holdings, bringing the total number of employees to 30,000. DGS now represents a little over half of Argenbright Holdings’ total revenue. Argenbright’s preferred acquisition targets are companies with hourly workers, recurring revenue (“$50 million to $100 million is sort of our sweet spot,” he says), and customers who sign three-to-five-year contracts. Among the clients in the aviation vertical is Atlanta’s international airport, where about 3,000 Argenbright Holdings employees work, handling duties such as pushing wheelchairs and fueling airplanes. Argenbright also looks for companies with long-term customer relationships. One of Argenbright Holdings’ acquisitions has had the same customer for more than 60 years, he says. For 13 years, SecurAmerica has been the preferred security vendor for commercial real estate company Avison Young, says Precious

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Those longstanding client relationships make acquisition targets feel more comfortable with Argenbright Holdings. According to Ishwar, “When they see how customers want to come back to us, it’s a strong message that they understand: ‘Okay, these guys treat people right, they know what they’re doing, and my business is in safe hands.’” Relationship building is essential fuel for Argenbright Holdings’ acquisition engine. “Any M&A department can get a list of businesses for sale at the private equity house,” Argenbright says. “With us, it’s like uncovering rocks.” That means finding entrepreneurs who haven’t yet put their company up for sale. From November 2017 to December 2018, Argenbright Holdings completed five deals, and four were initiated between buyer and seller without intermediaries. After identifying an acquisition target and approaching the owners, Ishwar’s team invests time with those entrepreneurs and provides a sense of Argenbright Holdings’ culture, its vision for the organization and how the seller’s company fits into that plan. He says that approach distinguishes Argenbright Holdings from many other buyers.

In Ishwar’s experience, it takes time to build relationships that make sellers feel comfortable. “It’s knowing that we’re not a financial investor who’s just going to come in and strip their business of a bunch of people, reduce costs—thereby reduce their quality of service—and then flip it in three years.”

few deals, but every single time we got outbid,” Ishwar says. “We decided to be disciplined and wait, rather than overpay and get hurt in the process.” Two years is a long time to play a waiting game, he says, “but we knew that we were doing the right thing.” During that period, the

BACK IN THE GAME Acquisition attempts haven’t always gone according to plan. Several years ago, a large competitor in the security market bought up more than 40 companies, according to Ishwar. He says the acquirer was backed by private equity and overpaid for the companies, which drove up market expectations. As a result, Argenbright Holdings couldn’t make a single acquisition in 2015 and 2016. “It was a painful period because we came close on a

“[FRANK] NOTICED THAT IF YOU BRING IN TOO MANY PEOPLE WHO ARE TOO SIMILAR, EVERYONE’S GOING TO THINK THE SAME, AND THEY’RE GOING TO MAKE THE SAME DECISIONS.” KARAN ISHWAR Chief Financial Officer, Argenbright Holdings

“YOU CAN POST JOBS ON DIFFERENT WEBSITES, AND WE DO THAT AS WELL, BUT I THINK BUILDING A RELATIONSHIP WITHIN THE COMMUNITY IS IMPORTANT BECAUSE THEY’RE MORE LIKELY TO COME TO YOU FIRST WHEN THEY HAVE GOOD CANDIDATES.” SUZANNE FOUNTAIN Vice President of Human Resources, SecurAmerica

E Inclusive hiring creates a more positive workplace, says Fountain

company focused on organic growth. Eventually, purchase multiples returned to more reasonable levels, Ishwar says. “Now we’re back in the game and we’re doing deals that are fairly priced for both the buyer and the seller.” He expects to close four or five deals in 2019, including a European acquisition. It’s part of Argenbright’s plan to build a global company, and employee diversity plays an important role in that strategy, Ishwar says. “When you bring in the best people, you also want to bring in people from diverse backgrounds to have on your management [team].” To encourage diverse opinions, Argenbright has sought executives from outside the security industry, like Ishwar and CEO Tom Marano, who

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previously served as vice president of sales and marketing for Coca-Cola and Apple. Industry outsiders aren’t the only sign of diversity. Of the seven people on the executive leadership team, three are people of color. Of Ishwar’s seven direct reports, four are people of color and three are women. Diversity is a priority for front-line workers too, says Suzanne Fountain, vice president of human resources for SecurAmerica and a member of the holding company’s executive team. At Argenbright Holdings’ annual human resources conference, where HR managers from its companies meet for three days, diversity is one of the main agenda items. Argenbright Holdings serves clients from a

BRIDGING MANPOWER AND TECHNOLOGY wide array of demographics, and it’s important to have workers who reflect that, Fountain says. “It fosters an environment where you have different backgrounds, different cultures, different ages, different everything.” To find those employees, the company emphasizes ground recruiting. HR representatives visit local community offices for organizations like AARP, Veteran’s Affairs or religious groups, and they describe the skills they’re seeking. “You can post jobs on different websites, and we do that as well,” Fountain says, “but I think building a relationship within the community is important because they’re more likely to come to you first when they have good candidates.”

SMARTEST IN THE ROOM Some business leaders want to feel like the smartest person in the room, but Argenbright seems more interested in hiring the brightest. “I have an obsession with getting the best people and turning them loose,” he says. That obsession helped him build his $1 billion holding company—but when that revenue figure was discussed in 2014 as a five-year goal, Argenbright says his previous CFO told him it wouldn’t be possible to reach without giving up equity. “I don’t do well with ‘apostrophe ‘t’s,” Argenbright says. “You know: can’t, shouldn’t, wouldn’t, couldn’t.” Ishwar showed him it was possible. “He came to me and said, ‘It won’t be easy, but we can do it,’” Argenbright recalls. “I did not have to give up equity, and Karan ran the whole process.” Argenbright has other challenging goals in mind, like reaching at least $5 billion in revenue by 2027. Ishwar will guide that process too, as he avoids uttering the dreaded “apostrophe ‘t’s” to his boss. “He is not only extremely smart,” Argenbright says, “but he has what very few people I know have: rat-like cunning.” //

focus on different topics and tech capabilities), the purpose remains the same: to explore how technology could improve Argenbright Holdings’ services. The company has invested “substantial time and resources” into some tech projects it can’t yet discuss, Ishwar says, but he expects Frank Argenbright is not a

the organization will benefit

maker of small plans, and that’s

during the next several years.

true of his vision for the next

Argenbright Holdings is also

several years. By 2023, he’d

in discussions with a leading

like Argenbright Holdings to hit

provider of security robots.

$3 billion in revenue—with a $5

“We are looking at doing some-

billion revenue goal for 2027—

thing with them,” Ishwar says.

and either take the company

The company hasn’t used

public or sell a minority stake

security robots yet because,

to raise money to build a larger

as Ishwar points out, “there

business.

are still a lot of issues with

He also has goals beyond

deployment.” One highly pub-

numbers. The company’s

licized (and comical) mishap

core verticals are in “dinosaur

took place in 2017, when a

industries,” according to

security robot was patrolling a

Argenbright, and he’d like to

Washington, D.C., office building

reimagine how they operate.

and fell into a water fountain.

For guidance, he’s turned

Regardless, the company

to disruption evangelists.

feels strongly that innovation

Argenbright has organized a

will play an important role

Silicon Valley brainstorming

going forward. “We believe as a

group, where his company’s

firm that the future of our busi-

leaders meet for a couple of

ness is going to be a happy

days with employees from tech

medium between manpower

firms. The most recent session

and technology,” Ishwar says.

was in March and included

It’s a future that will likely

a Google employee. “How

reflect Frank Argenbright’s

many security companies and

favorite saying, which suggests

janitorial companies do stuff

there are three kinds of indi-

like that?” asks Karan Ishwar,

viduals. “There are people who

Argenbright Holdings’ CFO.

make things happen, there

The brainstorming group

are people who watch things

has met annually for the past

happen and there are people

S.A. Swanson is a business writer based in the

three years. Although its

who wonder what happened,”

Chicago area.

composition changes each

he says. “The last two don’t do

time (reflecting Argenbright’s

well with me.”

MIDDLE MARKET GROWTH // JUL/AUG 2019

MENTORSHIP

MATTERS Women in finance discuss the role of mentorship and sponsorship in career advancement

BY BAILEY McCANN

entorship and sponsorship play important roles in career advancement for everyone, but they are especially important for women. An experienced guide in the industry can help a young professional navigate her career, and having someone in the room to advocate on her behalf can be the difference between the status quo and a promotion. Because these relationships can fill a gap for women who are excluded from the informal networks available to men, some firms are actively working to add formal mentorship programs and incorporate them into staff development. Watermill Group, a private investment firm in Massachusetts, is among the organizations creating a formalized process for mentoring its young professionals. “We view mentorship as a core part of our culture,” says Julia Karol, Watermill’s president and COO. “We set goals each year that our partners work toward, and we measure that success throughout the year. Mentorship is a required goal for each of our partners.” Watermill also leverages the institutional knowledge of its professionals who are nearing retirement. As they begin planning to transition out of the firm, those individuals often have more time to work with others, beyond the 30-minute monthly check-in that is common in mentorship relationships.

MIDDLE MARKET GROWTH // JUL/AUG 2019

Watermill’s approach reflects something echoed by the other women interviewed for this story. For formal mentorship programs to work, and indeed for any inclusion initiative to succeed, management has to lead the charge, set clear goals and actively work toward them. Mentorship fails when firms create wellintentioned but nonspecific programs that arise out of a diversity policy that doesn’t get the attention it needs. Having a robust mentorship culture internally also creates the ideal conditions for inclusive sponsorship. Sponsors play a different role than mentors, but the two relationships go hand in hand. While mentors provide guidance about learning the business or navigating office politics, sponsors are typically professionals in management roles who advocate for younger colleagues as they develop in the firm. Sponsorship can take many forms. It might involve including junior staffers in meetings, adding younger professionals to deal teams, or simply putting in a good word for someone. Unlike in the case of mentorship, individuals don’t usually ask to receive sponsorship. These relationships happen naturally. That makes it especially important to have a culture of inclusion in place to ensure that everyone in the organization has the opportunity to benefit. Rita Sola Cook, who heads up the commercial banking division for the Midwest region at Bank of America Merrill Lynch, recalls how she started “SHOWING UP AND an informal sponsorship BEING REALLY GOOD network within the bank IN THE JOB THAT that she called the “Power of Ten.” YOU’RE IN IS A GREAT The idea was simple: WAY TO GET PEOPLE Sola Cook identified nine TO START SPEAKING women in her firm and UP ON YOUR BEHALF.” began advocating for them casually. If someone was great on a client call, she RITA SOLA COOK sent an email to that womHead of the Midwest Middle Market Region for Global an’s manager. All 10 women Commercial Banking, Bank of in the group made an effort America Merrill Lynch to advocate for each other.

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Each woman also identified an additional nine women and began advocating for them too. The program has grown throughout the organization, and today there are Power of Ten groups throughout Bank of America Merrill Lynch across business lines. Sola Cook and Watermill’s Karol note that women can cultivate sponsorship by volunteering for project work and interacting throughout the organization. “Showing up and being really good in the job that you’re in is a great way to get people to start speaking up on your behalf,” Sola Cook says.

IMPROVING INCLUSION For firms that are truly inclusive, mentorship and sponsorship are just two components of a broader culture. A culture of inclusion can express itself through formal mentorship programs, but it’s also reflected in policies and practices that reinforce a feeling that everyone is treated equally. To show its commitment to inclusiveness, CohnReznick recently instituted a policy that its partners can’t speak on panels that aren’t diverse, says Claudine Cohen, a principal at the accounting and advisory firm. The partners also extend perks like flexible scheduling throughout the organization to make sure employees have equal access to benefits. “Our jobs require a lot of travel, and if the partners utilize flex time to balance family and other responsibilities, our whole team will see that it’s possible to manage your career and your personal life,” says Cohen, who serves as Northeast market leader for CohnReznick’s transactional advisory services practice. She adds that the firm requires that professionals at all levels of their careers be included in meetings, so they can start building skills and gaining experience early. “My view is, I want to start working with someone right away. If I haven’t gotten to them at the beginning of their career, in some ways it’s almost too late from a training perspective, because we want them to be involved.” Building a culture of inclusion also requires

“STATISTICALLY, WE WORK WITH MORE MEN THAN WOMEN, AND WE SHOULDN’T JUST LEAVE WOMEN TO MENTOR THEMSELVES OR ONLY INTERACT WITH MEN THROUGH SETASIDE PROGRAMS. THERE ARE MEN WHO ARE WILLING TO RECRUIT AND SUPPORT WOMEN.” CLAUDINE COHEN Principal and Transactional Advisory Services Northeast Market Leader, CohnReznick

addressing the significant representation and support gap in middle management at large firms, a common pain point for women. Lale Topcuoglu, senior fund manager at asset management firm JO Hambro, says there needs to be more focus on the middle of an organization. That should include not only mentoring, but also reinforcing inclusive hiring and promotions. “We really need to get tougher with middle management, especially if they aren’t willing to hire or promote on an inclusive basis. That’s where you see a lot of breakdowns in diversity.” Focusing on firm-wide inclusion could also help the relationships between men and women become more integrated. Many of the women we interviewed cited male mentors and sponsors who played crucial roles throughout their

careers. There’s a danger in focusing solely on women-only programs, they note, because it doesn’t help with the core issues of inclusion. “Men have to be part of the process,” Cohen says. “Statistically, we work with more men than women, and we shouldn’t just leave women to mentor themselves or only interact with men through set-aside programs. There are men who are willing to recruit and support women.”

“WE REALLY NEED TO GET TOUGHER WITH MIDDLE MANAGEMENT, ESPECIALLY IF THEY AREN’T WILLING TO HIRE OR PROMOTE ON AN INCLUSIVE BASIS. THAT’S WHERE YOU SEE A LOT OF BREAKDOWNS IN DIVERSITY.” LALE TOPCUOGLU Senior Fund Manager, JO Hambro

BUILDING A NETWORK There are a number of paths women can take on their own to tailor their mentorship experience, either in conjunction with a formal program at their firm or in lieu of one. Sola Cook has created a group she refers to as her “board of directors.” These aren’t necessarily mentorship relationships, but they offer additional outlets for learning, information sharing and encouragement. Nanette Heide, a partner at law firm Duane Morris and co-chair of its private equity practice, engaged a business coach to help her develop a clear plan for achieving her career goals. Compared with mentorship relationships, the work that individuals do with coaches is often more in-depth and tailored. “The coaching relationship is very specific and identifies action steps that you can take,” she says. “You’re creating an individual business

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plan. You’re also working with someone who is tasked specifically with helping you advance.” When it comes to networking, Heide says it’s helpful to have events and programming focused on women in dealmaking that don’t deviate into more general topics. “It makes the conversation that much easier when everyone is clear on the purpose, which is doing business together and building relationships.” She’s observed that follow-up meetings are more likely to stem from dedicated women’s events, compared with other networking settings. At Watermill, Karol has instituted a policy that tasks everyone in the firm with building networks of their own. Junior partners also go through ACG Boston’s Accelerator program, designed for rising leaders in the M&A community. Each year, the two-day program brings together a new group of 24 M&A professionals—including both men and women—looking to improve their leadership skills and expand their professional networks. Whether it’s through a coach, a personal board of directors or informal peer mentors, the women we spoke with suggested experimenting to find what works best. “It’s okay to start small, maybe one-on-one, and then expand out to groups or formal relationships,” Karol says. She suggests following up with a colleague after a meeting to acknowledge something interesting they said and ask if they can discuss it in more detail. “The worst that can happen is they say they don’t have time right now. Either way, you’ve shown a willingness to proactively engage and learn, and people generally respond to that.” JO Hambro’s Topcuoglu adds that once women start building relationships and advancing their careers, it’s important to pay it forward. “I think often mentoring gets shuffled aside by women as another thing on the to-do list because we all have demands—kids, life, laundry. But I tell people that if they work with just one person, that can be really helpful and it advances the goal of inclusion that we’re all working toward.” // Bailey McCann is a writer and author based in New York.

GET INVOLVED

E Panelists at ACG Minnesota’s 2nd Annual AIM: A Women’s Leadership Conference Looking to connect with women in middle-market M&A?

Upcoming Events

ACG chapters host around 90 women’s events each

ACG Boston

year, in addition to women’s lunches and programming

July 17 . . . . . . Women’s Connection Golf Clinic and

within their larger conferences. To learn more and get involved, contact your local chapter.

Networking ACG Orange County July 18 . . . . . . Women’s Summer Bash Event:

ACG Women’s Networks by Chapter ACG 101 Corridor: Women in Corporate Growth

Networking & Fashion Show ACG South Florida

ACG Atlanta: Women’s Forum

July 23 . . . . . Women Connect Mixer at Topgolf

ACG Boston: Women’s Connection

ACG New York

ACG Chicago: Women’s Network

July 29 . . . . . Women of Leadership Rooftop Networking

ACG Columbus: Women in Transactions ACG Connecticut: Women of Leadership ACG Dallas/Fort Worth: Women in ACG DFW ACG Detroit: Women’s Forum ACG Houston: Women’s Forum ACG Los Angeles: Women of ACGLA ACG Minnesota: Women’s Network ACG New Jersey: Women of Leadership ACG New York: Women of Leadership ACG Philadelphia: ACGWomen ACG Western Michigan: Women in Finance

ACG Houston July 31 . . . . . . Women’s Forum Handbag Happy Hour ACG Orange County Aug. 1 . . . . . . Women’s Lunch ACG Chicago Aug. 7 . . . . . . Women’s Network Presents: Shoot for the Sky ACG New Jersey Aug. 8 . . . . . . Women of Leadership Summer Networking Event ACG National Capital Aug. 29 . . . . . Women’s Summer Social

POLICY POINTS

Private Equity Creates Jobs in Districts of Key Legislators Data shows PE-backed businesses outperform in districts of House Financial Services Committee members

BENJAMIN GLICK Associate, Marketing and Communications, ACG Global

middlemarketgrowth.org

rivate equity-backed companies outperform the broader business community in much of the U.S., including in districts represented by new members of the House Financial Services Committee, recent analysis shows. The findings upend years of political messaging and create opportunities to educate lawmakers about the positive impact of private capital. Twenty-one new members joined the committee in January. In 19 of their districts—excluding Hawaii and Guam, for which data was unavailable—PE-backed businesses had higher sustained job growth than other companies, based on data from Growth Economy, a database that tracks job and sales growth of U.S. businesses. According to the data, PE-backed businesses experienced “sustained” job growth— defined by Growth Economy analysts as new job creation during two or more years in a five-year period—at a rate 16 times higher than the broader business community in those 19 districts. Recent analysis shows that of the more than 30,000 PE-backed companies in districts represented by new Financial Services Committee members, around 4,800, or nearly 16%, experienced sustained job growth

between 2012 and 2017, the most recent period covered by the data. In comparison, of the more than 20 million companies without PE financing in those districts, only 200,000— or about 1%—experienced sustained job growth. “Private equity-backed companies are one of the largest sustainers of job growth in the U.S. economy. Nobody else beats it,” says Gregg Cole, director of research and data innovation at the Business Dynamics Research Consortium at the University of Wisconsin-Extension, which partnered with PitchBook and ACG to develop the Growth Economy database. Nationwide Reach Private equity’s impact spans the United States and fuels growth in districts led by Democrats and Republicans alike. Unlike venture capital, which is concentrated in tech startups on the coasts and select metropolitan areas, PE-backed businesses are headquartered across the country. Of the five best-performing districts represented by a new member of the Financial Services Committee, three were in the South, one was in the West and another was in the Northeast. The top performer was Florida’s

“PRIVATE EQUITY-BACKED COMPANIES ARE ONE OF THE LARGEST SUSTAINERS OF JOB GROWTH IN THE U.S. ECONOMY. NOBODY ELSE BEATS IT.” GREGG COLE Director, Research and Data Innovation, Business Dynamics Research Consortium at the University of Wisconsin-Extension

5th Congressional District, which is represented by Democrat Al Lawson and includes portions of Tallahassee and Jacksonville. Of the district’s 51 PE-backed companies, 20 experienced job growth in two or more years between 2012 and 2017—a sustained growth rate of nearly 40%. Meanwhile, other businesses experienced sustained growth at a rate of 1.8%. Growth Economy data shows that between 2012 and 2017, businesses with private equity funding added more than 5,000 jobs in the district. Revenue from PE-backed businesses also grew rapidly during that period. Collective sales rose from less than $765 million in 2012 to nearly $2.3 billion in 2017. Even in districts whose PE-backed companies had relatively low sustained growth compared with other districts, private equity still had a positive impact on job creation relative to other businesses. In Michigan’s 13th District, which is led by Democrat Rashida Tlaib and includes a large part of Detroit and surrounding areas, 4.5% of private equity-backed companies experienced sustained growth during the 20122017 period. However, the sustained job growth at other businesses in the district was 1.8%.

Among PE-backed companies across the country, the most pronounced job growth occurred within middle-market companies, defined as those with annual sales between $10 million and $1 billion. Middle-market businesses created more than 21,000 jobs across the 19 districts, according to Growth Economy. PE-backed middle-market companies in Florida’s 5th Congressional District showed the strongest growth of the districts by adding 5,300 jobs between 2012 and 2017. During the period, job numbers declined for small businesses and stagnated at large enterprises, making middle-market companies the sole driver of job growth in the district. The Tip of the Iceberg Data from Growth Economy challenges the perception that private equity investors purchase companies to strip their assets, fire employees and flip the business, an image perpetuated by recent political campaigns. Private equity became a high-profile target during the 2012 presidential election, when candidate Mitt Romney was criticized by political opponents for his career at Bain Capital, the private equity firm he co-founded.

In his successful presidential race, Donald Trump distanced himself from private equity by promising to eliminate the preferential tax treatment given to carried interest, which compensates private equity and other investors. A number of congressional candidates in the 2018 midterm elections similarly took a stand against the financial industry, despite the positive contributions of private equity in their districts. “Despite what you’re hearing, private equity is growing jobs—a lot of jobs—compared to the rest of the economy,” Cole says. “And not only that, but it’s sustaining them as well, which is not what Congress is used to seeing.” Despite the campaign rhetoric, a new class of legislators on the Financial Services Committee creates an opportunity for organizations like ACG to provide lawmakers and their staff with accurate information about the impact of private equity investment as they shape financial policy. That makes it critically important to educate lawmakers about private equity-backed companies’ performance relative to other businesses, a narrative that runs counter to most political messaging. “It seems like the further we look at private equity job growth, the more growth there is. There’s a larger story about these companies that’s not being told,” Cole says. “This is just the tip of the iceberg.” //

MORE ONLINE Find updates and insight on policy issues at middlemarketgrowth.org.

MIDDLE MARKET GROWTH // JUL/AUG 2019

Sustained Growth in Districts of New Financial Services Committee Members Sustained Growth = Share of PE-backed companies that grew jobs in two or more years between 2012-2017

SUSTAINED JOB GROWTH ACROSS ALL 19* DISTRICTS: PE-BACKED COMPANIES

Ben McAdams (D) UT-04

15.8%

PE-BACKED:

ALL OTHER:

17.5% 2.3%

ALL OTHER COMPANIES Cindy Axne (D) IA-03

1.0%

PE-BACKED: ALL OTHER:

12.0% 1.7%

*Excluding Guam and Hawaii,

Katie Porter (D) CA-45

for which data was unavailable

PE-BACKED:

ALL OTHER:

13.0% 1.0% Lance Gooden (R) TX-05

40%

SUSTAINED GROWTH % FROM 2012-2017

PE-BACKED:

22.6% 1.4%

35%

30%

Sylvia Garcia (D) TX-29 PE-BACKED:

ALL OTHER:

14.3% 1.8%

25%

20%

15%

10% PE-Backed

All Other 0% 10 A)V (D n to 3 ex I-1 rW M ) ife (D nn ib Je la 1 aT I-0 id sh )W (R Ra l ei 06 5 St N-0 n )T ya VA ) (R Br R ( se an Ro 07 m le hn AJo gg )M Ri (D er ey nv sl De es 45 Pr CA na D) an 3 r( -14 Ay -0 te r NY N M Po D) z( D) tie s( rte Ka p Co illi oPh si an 4 ca O -0 De a i UT dr D) an s( ex m Al da 05 cA LM 5 )F n 0 (D X Be n )T so 16 (R w Hn La O de Al R) oo z( G le e za nc on La 29 XyG 04 )T on Lth (D )I ia An (D c ia ar G rc a ia 04 lv "G ASy uy )P Ch (D s" an su De Je 06 ne Lei )I el (D en 3 st Ca ad

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-12

ALL OTHER:

middlemarketgrowth.org

Ayanna Pressley (D) MA-07

Dean Phillips (D) MN-03 PE-BACKED:

ALL OTHER:

9.6%

2.1%

PE-BACKED:

ALL OTHER:

14.6% 2.9% Bryan Steil (R) WI-01 PE-BACKED:

ALL OTHER:

10.5% 1.9% Rashida Tlaib (D) MI-13 PE-BACKED:

ALL OTHER:

4.5%

1.8% Anthony Gonzalez (R) OH-16 PE-BACKED: ALL OTHER:

11.1% 2.3%

Alexandria OcasioCortez (D) NY-14 PE-BACKED: ALL OTHER:

11.1% 1.4%

Madeleine Dean (D) PA-04 PE-BACKED: ALL OTHER:

Jesus "Chuy" Garcia (D) IL-04 PE-BACKED:

Sean Casten (D) IL-06 PE-BACKED:

16.7% 2.1%

ALL OTHER:

10.8% 2.1%

ALL OTHER:

Jennifer Wexton (D) VA-10

8.7% 2.6%

PE-BACKED: ALL OTHER:

11.0% 3.2%

Denver Riggleman (R) VA-05 PE-BACKED: ALL OTHER:

John Rose (R) TN-06

16.7% 2.1%

PE-BACKED: ALL OTHER:

10.7% 1.7% Alma Adams (D) NC-12 PE-BACKED: ALL OTHER:

11.8% 2.2% Al Lawson (D) FL-05 PE-BACKED:

ALL OTHER:

39.2% 1.8%

Data provided by Growth Economy

MIDDLE MARKET GROWTH // JUL/AUG 2019

From left, Twin Brookâ&#x20AC;&#x2122;s Faraaz Kamran, Therese Icuss and Drew Guyette

Photos by Matthew Gilson

IN FOCUS TWIN BROOK CAPITAL PARTNERS

A Wealth of Experience With experienced professionals and deep relationships, Twin Brook Capital Partners is more than just a lender

ending to companies that are controlled by private equity requires a healthy amount of due diligence, but these companies also require a fair amount of flexibility. That’s especially true in the lower middle market, where lenders need to play a much more hands-on role with a growing company. The executives at Twin Brook Capital Partners understand that. With decades of experience and a deep network of relationships, they are well-equipped to work with sponsors and portfolio companies on even the most complex transactions. These qualities are valuable when the economy is healthy. In downturns, they can mean the difference between success and failure. Twin Brook was started by Trevor Clark, who previously founded Madison Capital Funding in 2001. In 2014, Clark saw an opportunity to combine his experience with the resources of Angelo, Gordon & Co., L.P., and Twin Brook became Angelo Gordon’s direct lending arm for the middle market. It didn’t take long for the new firm to establish itself. Focusing on companies with $3 million to $50 million of EBITDA (especially those with $25 million or less), it has since closed more than 327 transactions. Twin Brook now has over $9.6 billion in committed capital and has grown its staff to 60-plus employees.

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SUPPORTING SPONSORS Twin Brook’s eight partners have a combined 165 years of experience, and their backgrounds and personal networks enable the firm to go beyond lending. The firm sees itself as a financial partner—a role that is particularly valuable in the lower middle market, where Twin Brook does more than 90% of its deals. For Twin Brook, working with clients involves more than just capital, says Senior Partner and Chief Credit Officer Drew Guyette. “It’s a relationship. It means supporting the sponsor’s growth strategy.” In today’s market, money has become a commodity, and a crowded field of lenders makes it difficult to stand out. Fortunately for Twin Brook, that hasn’t been a problem. “What really differentiates us is execution, long-term relationships with private equity sponsors, and knowledge of a particular industry space,” says Faraaz Kamran, senior partner and head of the health care initiative at Twin Brook. Linden Capital, a private equity firm that Twin Brook’s executives have worked with on multiple engagements, can attest to that. “Our firm has been doing business with the senior management team of Twin Brook for over a decade,” says Brian Miller, managing partner and co-founder of Linden Capital. “We value

MIDDLE MARKET GROWTH // JUL/AUG 2019

“WHAT REALLY DIFFERENTIATES US IS EXECUTION, LONG-TERM RELATIONSHIPS WITH PRIVATE EQUITY SPONSORS, AND KNOWLEDGE OF A PARTICULAR INDUSTRY SPACE.” FARAAZ KAMRAN Senior Partner and Head of Twin Brook’s Health Care Initiative

E Twin Brook senior partners Faraaz Kamran (top) and Drew Guyette (right) bring deep experience to the firm

the relationship and have found them to be consistent and thoughtful in their partnership with us.” Every year, Twin Brook talks to some 550 private equity firms and it reviews about 1,000 new opportunities in the fragmented lower middle market. The firm historically says no to more than 97% of those opportunities, according to Guyette, but the sheer volume of deals gives Twin Brook a deep understanding of the market. In addition to the vast number of opportunities it reviews, Twin Brook’s system of tracking loans helps it spot problems and get ahead of them. “We’ve structured our approval process in a way that eliminates the ‘whiff factor,’” Kamran says.

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“WE WILL BE THERE” Barring a major problem discovered during due diligence, sponsors can count on Twin Brook to provide funding when needed. “That’s something that is extremely important to our clients. The day you need us to fund the deal, we will be there on the agreed-upon terms with the correct amount of money, not $5 million less,” Kamran says. “There’s no bait and switch, such as charging more at the last minute when a lender has the borrower over a barrel.” Twin Brook isn’t fazed when there’s a snag on a deal—often, someone at the firm has seen a similar challenge before. “When you get a curveball that’s stressing the borrower, it’s how you react to those situations that really proves the value of the lender,” Guyette says. “Some of our strongest relationships with clients have been forged in situations where the company was underperforming expectations.” In one instance, Twin Brook was funding a health care practice management deal when

two things went wrong at the same time. First, some of the physicians who sold their ownership stake became less productive after receiving their payout. Second, a tuck-in acquisition went south. Although Twin Brook knew the risks associated with practice management investments, there was no way to foresee that both of these things would happen simultaneously. Despite the bad news, Twin Brook reacted calmly. The team sat down with the sponsor and “went detail by detail, physician by physician, and worked out how to get from where we were to where we should be,” Kamran explains. After Twin Brook granted the sponsor a few quarters of relief from its financial covenant, the private equity firm was able to get the deal back on track. On other deals where challenges arise that require outside assistance, Twin Brook has plenty of contacts it can turn to for backup, Guyette says. “Twin Brook has this huge Rolodex of resources and consultants that we can draw on to help remedy problems.”

HUMAN CAPITAL: KEY TO TWIN BROOK’S SUCCESS Private equity firms rely on their lender for financial capital, but its human capital can be just as important. Although Twin Brook has a wealth of expertise in its senior staff, it also recognizes the need to invest in the next generation of talent. To that end, it has built a culture and a system designed to foster learning, both formally and informally. Underwriting is at the heart of Twin Brook’s training

NAVIGATING ROUGH ECONOMIC WATERS At a time when many economists are forecasting an economic downturn, the experience of Twin Brook’s seasoned management team may become especially valuable to sponsors. “We’re distinctive in that everybody on the investment committee and the vast majority of our team leaders and originators went through recessions together, specifically in 2008-2010,” Guyette explains. “Going through such times together taught us some best practices, so now we have a blueprint for these situations. That is a wealth of knowledge that can’t be replicated.” Linden Capital is among the firms that have benefited from the Twin Brook team’s experience in both strong and weak economic periods. “[Twin Brook’s] consistency has remained through different business cycles and we view that as an integral part of our relationship,” Miller says. Twin Brook’s blueprint could serve borrowers well as economic growth slows. If and when that happens, the success of a deal could hinge on the Twin Brook team’s experience and expertise. //

initiatives. “We think the best deal folks are born and raised through underwriting,” Guyette says. The firm’s training focuses not just on cash-flow lending, but also on Twin Brook’s philosophy. “Underwriting will continue to be our greatest center of growth, so it’s important to teach new hires that we view ourselves as more than lenders,” Guyette says. Among the professionals who have risen at Twin Brook is Therese Icuss, who started at the firm in 2016 as a vice president of underwriting. Today, she is co-head of underwriting, co-managing over 30 underwriters across five underwriting teams. In addition, Icuss helped develop a formal 12-week training program, which she now manages. The program takes new hires through every stage of the deal process and brings in third-party experts to talk about legal, accounting, insurance and other specialties. Still, there is no substitute for learning on the job, so Twin Brook’s senior team members are always available to help. “We have an open-door policy,” Icuss says. “All the partners and senior folks are very accessible to new associates. People here want to help each other succeed.”

MIDDLE MARKET GROWTH // JUL/AUG 2019

GROWTH ECONOMY

WISCONSIN // 1998–2017 Over the past two decades, jobs at private equity-backed businesses in Wisconsin grew at three times the rate of the broader business community. Meanwhile, sales at PE-backed companies grew at more than 12 times the rate of other businesses in the state. Following a slight dip in 2016, PE activity rebounded in 2017, reaching 75 completed deals valued at $3 billion. Among them was Leonard Green and Partners’ $1.5 billion buyout of Charter NEX Films, a maker of specialty films used in packaging.

SALES

SALES GROWTH % BY SEGMENT 0.4% 0.5% 7% 90.8% 1.2%

JOB GROWTH % BY SEGMENT 0% ACG WISCONSIN

9.1% 19.7% 20.6%

290.4%

SALES GROWTH IN PE-BACKED BUSINESSES

23.1%

SALES GROWTH IN ALL OTHER BUSINESSES

50.5% Small: Less than $10M in sales MM Seg 1: $10-50M in sales MM Seg 2: $50-100M in sales MM Seg 3: $100M-1B in sales Large: More than $1B in sales

JOBS

GROWTH IN PE-BACKED BUSINESSES

GROWTH IN ALL OTHER BUSINESSES

JOBS CREATED BY PE-BACKED BUSINESSES

53.1%

16.9%

24,953

MORE ONLINE See the impact of middlemarket private equity on your state at GrowthEconomy.org.

All stats are from PitchBook and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.

middlemarketgrowth.org

THE PORTFOLIO

Planning for New Lease Accounting Standards BY THE NUMBERS // From OPEX to CAPEX and everything in between

ith the effective date of the Financial Accounting Standards Board’s new lease standard quickly approaching, virtually all companies will be required to evaluate the potentially significant impact of the standard on their individual financial reporting posture. Set to take effect Jan. 1, 2020 for calendar Caleb Vuljanic year-end nonpublic entities, ASC 842 requires Partner, Dixon lessees to recognize an asset and liability on Hughes Goodman their balance sheet for all leases with terms LLP greater than 12 months, including operating leases. The new standard introduces an additional level of complexity with the changes in the definition of a lease: Certain arrangements previously considered leases may no longer be accounted for while others, such as implicit leases, are being reevaluated to determine if they qualify. The standard affects practically all companies that have a right to control the use of an identiDustin fied asset, which includes office space, vehicles Hamilton or other equipment. While industries that typiDirector, Dixon cally hold numerous equipment and real estate Hughes Goodman leases are expected to be significantly impacted, LLP entities with few leases will need to comply with the new standard and consider its implications. There are substantial challenges accounting teams may face as they begin implementation, “VIRTUALLY ALL including whether a COMPANIES WILL BE software solution should REQUIRED TO EVALUATE be implemented to assist with ongoing tracking THE POTENTIALLY and accounting of leases, SIGNIFICANT IMPACT obtaining a complete population of leases, and OF THE STANDARD the impact on internal ON THEIR INDIVIDUAL controls. FINANCIAL REPORTING The new lease stanPOSTURE.” dard may also have a

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significant impact on key metrics companies report to their investors as well as on the company’s debt covenants. Investors, analysts and lenders may need to reassess their models around key performance indicators, cash flow and capital expenditure. If decisions are made to migrate from a lease to a buy posture, the direct or indirect impact of ASC 842 may include commonly used financial indicators, such as leverage ratios, debt covenant ratios and borrowing costs, return on assets, regulatory capital requirements, book/tax differences, performance-based compensation/ EBITDA earn-outs and other metrics. Other areas potentially impacted include bonding capacity, credit ratings, enterprise value, gearing ratios, liquidity, purchase agreements and working capital. During the transition to the new standard, investors and lenders will continue to consider whether to treat the on-balance sheet nature of operating leases as capital expenditures and debt, or simply to adjust the leases to mirror current practice. While these changes do not directly change total cash flows, they may have an indirect impact as a result of changes in buying versus leasing. Entities should thoughtfully consider the impact new leases and/or amendments may have under the new standard, and how it may affect their financial results and accompanying disclosures, processes, controls and other areas of the business, as well as the impact on potential transactions. // Caleb Vuljanic is a partner in DHG’s Private Equity and Assurance Services practice. Dustin Hamilton is a director in DHG’s Private Equity and Transaction Advisory Services practice.

MIDDLE MARKET GROWTH // JUL/AUG 2019

THE PORTFOLIO

The Importance of Cross-Border Cultural Fluency GLOBAL VIEWS // How leaders can cultivate successful multinational teams

U Rob Wellner Senior Vice President of Sales, Velocity Global

nderstanding cultural differences becomes increasingly important as business continues to globalize, and nowhere is this more apparent than with international teams. But why do some teams thrive while others seem doomed to discord? Several things prove to be consistent. It turns out that the most successful leaders of multinational teams almost always embrace four key management techniques: They have a nuanced understanding of time and punctuality. Your team members in Latin America might understand meeting times or deadlines as general guidelines, not strict obligations. Similarly, Chinese culture often emphasizes waiting until the right moment to complete a task. Neither of these is bad for business, as they can actually produce superior results. However, they might be difficult for hard-driving Westerners. While new communication technologies de-emphasize the need for in-person meetings, collaboration remains advantageous. Explore practices that embrace continual conversation and establish expectations everyone can meet. They ensure everyone is heard. Many multinational team members are exasperated by the way others talk and collaborate. Communication is deeply cultural, so even questions of when to speak up in a meeting and when to stay quiet can expose profound differences. Different communication styles are inevitable. Be aware that certain team members may require different openings and opportunities. By assessing this across your team, you might discover a new way to communicate that offers space for everyone to chime in. They have a flexible approach to authority. Team members from more egalitarian cultures can confound those from hierarchical cultures. What seems like a fair, flat organizational chart to one person can seem utterly disorganized to

middlemarketgrowth.org

another. That being said, conduct your interactions with an awareness of what your team members expect. Learning to wear different authoritative hats is key. Don’t take an egalitarian sense of collaboration personally; the division of power can be a benefit. Likewise, clear authority to some can provide a sense of direction and empowerment. They don’t just tolerate different approaches—they leverage them. The innate differences on your team can produce inventive solutions that any one individual might never think of on his or her own. Use this to your advantage as much as you can. Some team members may dependably provide the ruthless practicality and organization you need, while others can discard preordained structures and innovate freely. Because these ways of thinking are so natural to them, you can tap into multiple viewpoints. Paying attention to how your team members solve problems in their native environments can be extremely insightful. As you continue to guide them down these individualized paths, combine their ideas to arrive at superior solutions. Embracing diversity isn’t simply about recognizing differences; it’s also about cultivating these nuances and giving them room to thrive. For today’s businesses, cultural fluency and flexibility are prerequisites to successful goal achievement. Your workforce might be changing, but if you play to employees’ strengths wisely, your business prospects can be as rich as ever. // Rob Wellner, Velocity Global’s senior vice president of sales, draws on 12 years of experience in capital markets to help organizations expand internationally, including using Velocity Global’s International PEO service to overcome challenges associated with global M&A. To learn more, visit VelocityGlobal.com/acg.

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THE PORTFOLIO

The Competitive Advantage of Buy-Side Advisers SOUND DECISIONS // An underutilized way for PE firms to reach owners

T Jay Aidikoff Managing Director, Valufinder Group

oday’s middle-market dealmaking environment is rife with challenges, including fierce competition and rising prices. At the same time, business owners who are overwhelmed by the volume of inquiries from prospective buyers are ignoring calls from strategic acquirers, private equity firms, hedge funds, family offices, bankers and brokers. In addition, according to industry sources, the percentage of lower middle-market deals that are being sold at auction is increasing. Further, according to a PitchBook report published last year, add-on acquisitions now account for more than half of all buyouts. It is interesting that a PE firm looking to sell a portfolio company won’t think twice about the decision to hire a sell-side investment banker to help market their business to interested buyers. But that same firm often won’t consider hiring a buy-side firm to position itself and its acquisition criteria in front of hundreds of potential sellers—even when the PE firm has a great story to tell. When nearly everyone has access to

“A WELL-EXECUTED ACQUISITION SEARCH CAN DELIVER A SUBSTANTIAL INCREASE IN TARGETED AND EXCLUSIVE DEALS FOR A PE FIRM.” money, this can be a critical misstep in today’s environment, especially when an owner is looking to find that unique and special buyer they can work with to reach their goals and protect their corporate legacy. Yet even as quality, reasonably priced deals have become harder to find, private equity firms have neglected an important resource for sourcing proprietary and targeted deal flow: buy-side advisory services. With the help of an M&A buy-side adviser,

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a PE firm can better position itself in front of owners. A good adviser will have a dedicated research team that can develop an exhaustive list of appropriate candidates in a given industry. The adviser’s marketing team will create a custom presentation that showcases the PE firm’s strengths and clearly explains why they’re a good fit for a target. Whether it’s the firm’s operating expertise, product line or services, its industry relationships or its track record, telling an owner a buyer’s compelling story for making a strategic acquisition is a powerful differentiator from other buyers who basically only have financial capital. In addition to providing a competitive advantage, buy-side advisers will help a PE firm establish a rapport with a seller. Buy-side professionals should have the gravitas, wisdom and the polite persistence to answer an owner’s questions, address an owner’s hesitation, and help them navigate the emotional roller coaster of selling their baby. A well-executed acquisition search can deliver a substantial increase in targeted and exclusive deals for a PE firm. It can help the PE firm put its best foot forward when communicating its strengths and reasoning, and it can expedite and streamline the process for quickly developing targeted and exclusive deal flow. PE firms shouldn’t be discouraged in today’s competitive environment nor change their goals. Instead, they should adapt by finding more effective and efficient processes to achieve their objectives. Seeking buy-side advisory services is a good place to start. // Jay Aidikoff is the managing director and founder of Valufinder Group Inc., a buy-side investment bank focused on the middle market. He has more than 40 years of experience and has originated and facilitated transactions valued collectively above $3.5 billion.

MIDDLE MARKET GROWTH // JUL/AUG 2019

THE PORTFOLIO

Highlights of New Opportunity Zone Regulations PE LAW // Additional guidance provided by the Treasury Department

I Irwin M. Latner Partner, Pepper Hamilton LLP

Thomas D. Phelan Associate, Pepper Hamilton LLP

n April, the Department of the Treasury released the second round of regulations related to the opportunity zone program. Some highlights include: More flexible exits and “churning.” Taxpayers who invest in a qualified opportunity fund (QOF) that is a partnership or S corporation (a tax “flow-through” entity) and who have held their interest for at least 10 years may elect to exclude from income the capital gain from the disposition of qualified opportunity zone property that flows through to the fund’s investors. This election should facilitate the use of multiasset QOFs by allowing the fund to dispose of certain assets directly, after investors have held their interest for more than 10 years. It should also allow QOF investors to recognize the 10-year appreciation exclusion without having to sell their interest in the fund. If a flow-through QOF disposes of qualified opportunity zone property before investors have held their interest for 10 years, income would flow through to the investors and be subject to tax under normal flow-through tax rules. This income would not impact the holding period or deferral on qualifying investments in the QOF, allowing for the disposition of unsuccessful investments (no gain) with potentially no negative investor-level impact. Further, disposition proceeds will not be treated as “bad” assets for QOF qualification testing if they are retained as cash or certain cash equivalents and reinvested within 12 months. Working capital safe harbor. The working capital safe harbor was expanded to include funds designated in writing for the development of a trade or business in an opportunity zone. The new regulations clarified that government delays—such as zoning approval—will not cause a failure to meet the 31-month time period to deploy funds under the safe harbor. An example

middlemarketgrowth.org

in the regulation also suggests the written plan or budget doesn’t need to identify the specific assets the business will acquire. Importantly, the safe harbor is only available at the underlying Qualifying Opportunity Zone Business level and not within the fund itself. Interests for services. Prior regulations left open the possibility that those who invested capital and also received an interest in exchange for services could have a qualifying investment with respect to their entire interest in the QOF. The new regulations clarify that if a taxpayer receives an interest for services rendered to the QOF, QOF tax benefits are not available for that interest. Triggering events. The new regulations address transactions that may trigger the inclusion of gain that a taxpayer has elected to defer upon an investment in a QOF. These rules include a clarification that a distribution on a partnership interest will not be considered an inclusion event if it is not in excess of the partner’s basis (including its share of the QOF’s liabilities). However, the new regulations suggest that debt-financed distributions made within two years of the initial investment may be treated as a disguised sale of the partnership interest and, thus, may be treated as disposition of a portion of the investors’ interests in the QOF. Active trade or business. The proposed regulations clarify that the ownership and operation (including leasing other than a triple-net lease) of real property is the active conduct of a trade or business. // Irwin M. Latner is a partner in the Corporate and Securities Practice Group of Pepper Hamilton LLP. Thomas D. Phelan is an associate in Pepper Hamilton’s Tax and Estates Practice Group.

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Build on Blockchain? MIDDLE MARKET TRENDS // Technology offers businesses speed and security

T Richard Burke Head of Corporate Products and Services, TD Bank

he term blockchain may conjure scenes from “The Matrix,” but the distributed ledger technology is slowly being incorporated into companies’ finance operations. Although some middle-market firms have already adopted distributed ledger technologies, including blockchain, there is still disagreement—and confusion—about how best to use it. The terminology doesn’t offer much clarity: While all blockchains qualify as a distributed ledger technology, not every distributed ledger is a blockchain. A survey conducted by TD Bank at the 2018 Association for Financial Professionals Conference reflects this uncertainty. Although 90% of survey respondents, which included corporate treasury and finance professionals, agree blockchain will have a positive effect on the payments industry, they are split on the technology’s top impacts. When it comes to the blockchain’s most powerful implications, 29% of respondents think the technology will create stronger audit trails; 22% said it will speed up payments; 21% believe it will improve efficiency of cross-border payments; and 18% stated blockchain will reduce fraud. Blockchain has several applications for middle-market companies, from communicating with their financial institutions to negotiating contracts. Currently, most of these operations are done manually, which can lead to lost or deleted files and copies, along with delays from mail delivery or from scheduling in-person meetings for signatures. Reducing these time-consuming processes is one way businesses benefit from blockchain. Because the technology adds new data as “blocks” secured by cryptography, each entry or change during a contract negotiation leaves a breadcrumb of information that must be validated by all parties. Using this method creates a chronological record of activities and

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adds efficiency because participants can work simultaneously. Faster Transactions, Fewer Risks TD’s survey also revealed a challenge: Faster and real-time payments are coming soon, but organizations still face obstacles when implementing them. One is not having the technology or capital resources to support these transactions. Another growing concern is payments fraud and cybercrime. In fact, 44% of corporate finance professionals cited fraud as their top operational challenge, up 14% year-over-year. As more middle-market companies rely on electronic financial records and transactions, it is no surprise that fraud and cybercrime are growing concerns. Enter blockchain. Preventing fraud is an area where distributed ledger technologies could benefit commercial finance. While no financial transaction is ironclad, blockchain leverages cryptography and requires parties to agree to something before it occurs— say, moving money from a bank account to pay a vendor. The requirement to have multiple approvers and the cryptographically secured result can make it difficult for fraudsters to engineer scams because they would need to impersonate several parties to do so. Blockchain’s biggest benefit is that it provides a “single source of truth.” Whether used for data collection and distribution, tracking contracts or sending payments, blockchain offers consistency of records. With more time and deeper knowledge, executives will find this “techie” concept offers a tangible boon to business. // Richard W. Burke Jr. is head of corporate products and services at TD Bank. He oversees treasury management services and commercial liquidity management.

MIDDLE MARKET GROWTH // JUL/AUG 2019

ACG@WORK

H ACG WESTERN MICHIGAN

ACG Western Michigan hosted Take a Seat at the Board of Directors Table, the first event focused on women on boards offered by the chapterâ&#x20AC;&#x2122;s Women in Finance initiative. Discussion centered around different types of board structures, reasons to serve, how to get in the board candidate pipeline, how to contribute to a board in a healthy way, and more. Pictured (from left) is Kathy Crosby, former CEO of Goodwill Industries of Greater Grand Rapids; ACG Western Michigan Executive Director Julie Metsker; and Womenâ&#x20AC;&#x2122;s Resource Center CEO Sandra Gaddy.

G ACG CHICAGO

ACG Chicago hosted its 10th annual Middle Market Manufacturing Conference, which drew around 180 attendees who gained industry insights at Morgan Manufacturing, an event space near downtown Chicago. Topics included workforce options, robotics, blockchain, tariffs and trade, and manufacturing investment trends. Pictured (from left) is Jason Carano, Plante Moran; Troy Berg, Dane Manufacturing; Michael Watts, Signode Industrial Group; Eric Dziedzic, The Peakstone Group; and Paul Peterson, Wind Point Partners.

middlemarketgrowth.org

E TEXAS ACG CAPITAL CONNECTION

The 16th annual Texas ACG Capital Connection was held in Dallas with more than 1,000 attendees. Organized by ACG’s three chapters in Texas, the event also included a women’s luncheon that highlighted accomplished women in M&A. Pictured (from left) are speakers on the luncheon panel: Dina Dwyer-Owens, Neighborly; Theresa Eaton, SCF Partners; Tiffany Kosch, CenterGate Capital; and Caroline Shettle, The Riverside Company.

H TEXAS ACG CAPITAL CONNECTION

The event brought together groups ranging from investment bankers to service providers and everyone in between. Groups had the opportunity to schedule meetings during the largest ACG Capital Connection in the Southwest, which included a keynote address featuring former Whole Foods CEO Walter Robb (right), who was interviewed by Grant Thornton’s Tony Banks (left).

MIDDLE MARKET GROWTH // JUL/AUG 2019

ACG@WORK

H ACG DENVER

ACG Denver hosted its annual Rocky Mountain Corporate Growth conference, which drew around 730 attendees. Underscoring its theme, “creating lasting prosperity,” the event featured keynote addresses from Billy Beane, EVP of baseball operations for the Oakland A’s and the subject of the book and film “Moneyball,” and Alex Honnold, the professional rock climber profiled in the 2019 Oscar-winning documentary “Free Solo.” For the first time, Day 1 of the conference included a Corporate Development Summit, which focused on best practices in corporate M&A. Pictured (from left) are panelists Harish Mysore, TeleTech; Matthew McGowan, Ausenco; Kari Wimmer, P2 Energy Solutions; and Ryan Koch, Covius Holdings.

ACG NEW YORK F

ACG New York hosted its 11th Annual Healthcare Conference. Held at the Metropolitan Club in Manhattan, the event drew 450 attendees and provided an opportunity to meet and network with leading health care private equity firms, advisers and other senior health care-focused professionals. Pictured (from left) are panelists Todd Rudsenske, Cain Brothers; author Dr. Robin Smith; Ankur Agrawal, McKinsey; and Andrew Adams, Oak HC/FT.

H ACG NEW YORK

Around 25 private equity firms that sponsor buyouts, recaps and growth financings of health care companies across a variety of transaction sizes, verticals and geographies hosted tables at ACG New York’s health care conference. Pictured (from left) are Pepper Hamilton’s John Jones and Solomon Hunter.

middlemarketgrowth.org

H ACG CUP NORTHWEST

ACG Portland and ACG Seattle hosted the third annual ACG Cup Northwest. Graduate and undergraduate finance students from 10 of the leading universities in Washington and Oregon participated in the case study competition. The winner was the team representing the University of Washingtonâ&#x20AC;&#x2122;s Foster School of Business. Team members Daniel Charbonneau, Joel Graves and Marie Kiekhaefer are pictured with Stephen Babson of Endeavour Capital (right), who presented the award. The eventâ&#x20AC;&#x2122;s keynote luncheon speaker was Chris George, CFO of the Jordan Brand, a division of Nike, Inc.

ACG RALEIGH DURHAM F

ACG Raleigh Durham held its 17th annual Capital Conference. Hosted at the Marriott Crabtree Hotel in Raleigh, the event drew 375 attendees. Steve Malik, CEO and president of the North Carolina Football Club discussed the economics of bringing professional soccer to the state. A group of attendees (pictured) participated in a curling outing, which has been a signature activity of the conference since 2015.

H ACG NEW JERSEY

ACG New Jersey held its fifth annual Corporate Growth Conference and Awards at The Palace at Somerset Park. The awards recognize four companies with annual revenues between $5 million and $500 million that exemplify innovation, excellence and corporate growth. Pictured (from left) are Lou Monari, Aon Risk and HR Solutions; Robert Garrett, Hackensack Meridian Health; MJ Jolda, ACG New Jersey; Laurel Whitney, PUSH Beverages; David Barnett, Corsis; Sally Glick, ACG New Jersey; Paul Sullivan, Acrow Corp. of America; and Michael Zedalis, Tingley Rubber.

MIDDLE MARKET GROWTH // JUL/AUG 2019

ACG@WORK

ACG TORONTO

Partnering with Aird & Berlis LLP, ACG Toronto hosted a three-part series on topics and trends affecting the middle market. The talks drew 50 attendees and numerous speakers. Pictured (from left) are Mike Fenton, ACG Toronto; David Olsen, PNC Bank; Marc Paiement, Novacap; Peter Samson, Ironbridge Equity Partners; and Randy Williamson, Aird & Berlis.

ACG TORONTO

In one talk, speakers discussed how the USMCA agreement will impact middle-market professionals, and they addressed the key challenges and opportunities associated with this agreement. Pictured is Alex Kotsopoulos, RSM Canada.

CONTACT Want to share photos from your recent chapter event? Email us at editor@acg.org.

middlemarketgrowth.org

With a schedule full of educational and networking opportunities, the Great Lakes ACG Capital Connection is the region’s premier event for buyers, sellers, lenders and middle market professionals. Each year, GLCC attracts over 1,000 of the top professionals in the M&A community. The conference is a collaborative effort between seven ACG chapters from the Midwest & Mid-Atlantic regions.  Connect with over 1,000 influential M&A professionals  Source new deals and opportunities  Learn industry best practices for growth, acquisitions  Network with fellow ACG members and more  Experience Detroit’s vibrant business community  Hear from renowned speakers and panelists

For more information, contact Sharon Kimble at skimble@acg.org

THE LADDER

TIMOTHY WENTINK has joined Twin Brook Capital Partners as a managing director focused on the firm’s health care lending business. Wentink joins the Twin Brook team with 13 years of health care-focused middlemarket lending experience. Most recently, he was a managing director on the Healthcare Leveraged Finance team at Madison Capital.

WALTER O’HAIRE has joined Stout as a managing director in the firm’s Valuation Advisory group, where he will focus on business development. He brings 10 years of experience assisting private equity clients in finding the right valuation services, and he has over 20 years of experience in M&A-related financial services. Prior to joining Stout, O’Haire was managing director of Valuation Research Corporation.

JEFF BOHL has joined InCloudCounsel, a legal technology company that automates and enhances high-volume legal processes, as chief financial officer. Bohl brings deep finance and operations experience in successfully scaling high-growth technology companies. He joins InCloudCounsel from H.I.G. Capital, where he served as managing director.

ANDREW GREENBERG has founded a new investment banking firm, Greenberg Variations Capital, which will serve clients engaged in one-off or lightly competitive transactions. Greenberg will serve as CEO of the new firm. He is also CEO and co-founder of GF Data and was previously a managing director with TM Capital Corp.

middlemarketgrowth.org

TRAM NGUYEN has joined Mayer Brown as a partner in its Corporate and Securities practice. Nguyen represents hedge funds, private equity funds, venture funds and other investment funds in all aspects of fund formation, fund structuring and capital raising. She is based in the firm’s Washington, D.C., office and spends time in the growing New York office. Previously, she was a partner at Paul Hastings.

STEVE TARDIO has joined EdgePoint, a boutique investment banking firm in Beachwood, Ohio, as managing director. Tardio brings over 20 years of experience in mergers, acquisitions and financing transactions with an emphasis in the consumer products, food and beverage, and printing/ packaging industries. Prior to joining EdgePoint, Tardio was a managing director at HT Capital Advisors.

DR. RAKESH KAPOOR has joined Edgewater Capital Partners as an operating partner. He will work with Edgewater’s investment team around advanced materials and components companies and will support Edgewater’s portfolio companies with strategic and value-creation activities. Kapoor previously served on the board of Fiber Materials Inc., an Edgewater portfolio company.

MORE CAREER INFO Watch for more career information in The Ladder monthly e-newsletter.

Duane Morris announced it has appointed DOMINICA ANDERSON to the firm’s executive committee. Anderson is a managing partner at Duane Morris and practices in its Las Vegas and San Francisco offices. She serves as a team lead for the Duane Morris Fashion/Retail/Consumer Branded Products industry group and is a member of the firm’s governing partners board.

RICHARD JACQUES has joined Bailey Southwell as vice president and will focus on the health care services sector. Prior to joining the boutique investment bank, Jacques was the vice president of development at Covenant Surgical Partners, a physician services company backed by KKR, where he led the firm’s acquisition strategy.

DOUGLAS EINGURT has joined BakerHostetler as a partner in the firm’s Atlanta office, where he will continue his work representing public and private companies in a wide range of transactions. Eingurt’s practice chiefly focuses on advising companies of all sizes on M&A and corporate finance transactions. He was previously a partner with Dentons.

LESLIE ZMUGG has joined Gordon Brothers as general counsel to lead the firm’s worldwide legal function. Zmugg joins the firm following a 20-year career at Caterpillar Inc., where she held senior-level roles including general counsel and secretary for Cat Financial, the company’s financial services arm.

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MIDDLE MARKET GROWTH // JUL/AUG 2019

IT’S THE SMALL THINGS

TRENDS IN DIVERSITY AND INCLUSION // Breaking Through

Women Continue Steep Climb According to a report of 279 companies employing

Going Gray, Not Away Workers over 50 are more engaged in their jobs

more than 13 million people, women remained

than younger employees, according to a study from

significantly underrepresented in the workplace

the AARP. According to the study, 65% of workers

in 2018. The representation of women at all

over 55 are considered engaged, while only 58

employment levels grew less than 2% per year

to 60% of younger workers are. The study also

since the annual study began in 2015, and even

found that nearly 80% of older workers indicated

contracted in some sections of senior management.

they would be interested in training related to

– Lean In and McKinsey & Co.

computers and other technology. – AARP

Better Together Companies with above-average diversity on their

Brands Take a Stand By 2020, members of Generation Z (those born

management teams reported 19% greater revenue

between 1995 and 2012) will make up 40% of all

from new or improved products and services, com-

consumers. To tap into this market, brands must

pared with companies with below-average diversity

adapt to their buying choices and social values.

on characteristics like gender, age, nation of origin

More than half of Gen Z-ers said a brand’s dedica-

and education level. Diverse organizations also

tion to social impact—such as through charitable

reported better overall financial performance and

giving or sustainability initiatives—is an important

EBIT margins that were 9% higher than their more

factor when they make a purchase.

uniform peers. – Boston Consulting Group

– MNI Targeted Media —Benjamin Glick

Ditching the Degree Rising tuition and decreasing value are calling into question the merits of a traditional college degree. As companies look to fill talent gaps while fostering diversity within their workforce to drive innovation, their hiring criteria is changing. In fact, 9 in 10 employers report they are ready to accept candidates with nontraditional credentials, such as certifications and online degrees from massive open online courses, known as MOOCs. – Society for Human Resource Management

Correcting Bias Blind Spots As more companies use software to sort resumes, they may unwittingly open themselves up to bias. Software is not designed to factor in representation, according to experts, which could unintentionally lead to more uniform candidate pools. Some advocacy groups, such as the Algorithmic Justice League, are petitioning software companies to identify and correct these biases. – Forbes

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