Middle Market Growth - July/August 2020 by Association for Corporate Growth

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Reliability and experience when it matters most 495+

transactions closed

$13.4 billion

commitments issued to date

94%

deals as lead/co-lead arranger

*Since inception in Q4 2014.

Reliability and experience when it matters most 495+

transactions closed

$13.4 billion

commitments issued to date

94%

deals as lead/co-lead arranger

*Since inception in Q4 2014.

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FROM THE EDITOR

Investing in a Better World

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

rom the start, Middle Market Growth has highlighted the people behind the deal. Instead of recounting recent transactions, we explore what happens after closing—including expansion strategies, operational improvements and technological innovations, and the leaders who drive those initiatives forward. That ethos is reflected in the photography that typically runs alongside our company profiles. You’ll see that isn’t the case for this issue, after stay-at-home orders put our photoshoots on hold. Still, the focus on people remains a central focus of our coverage. I’ve been heartened to hear from ACG members over the last few months about the ways they’re giving back, from producing protective gear to offering pro bono support to small businesses (p. 14). The coronavirus has dealt a blow to many companies that weren’t able to access federal aid for one reason or another, or for whom it wasn’t enough. Private capital will be a lifeline for some in the coming months. Watching the COVID-19 death toll rise, unemployment numbers tick up, and protesters march across the country after George Floyd was killed in Minneapolis, I’ve been thinking about what matters most to me, and what I value. It seems the business community is doing some soul searching, too. Writing for our website, Alex Sauter of investment bank MHT Partners cites data showing that investors committed $12 billion into funds with an environmental, social and governance focus in the first four months of this year. Clean energy has long been a component of ESG strategies and in this energy-themed issue of MMG, we explore the state of the solar power industry (p. 24). Falling production costs and renewable energy targets for utilities and municipalities have bolstered the industry’s growth. New research suggesting that air pollution contributes to COVID-19 mortality could serve as yet another reason to look beyond fossil fuels. The most enduring effect of 2020 is likely to be on the “S” of ESG. The health and economic blows dealt by COVID-19 have hit communities of color the hardest, and the virus and protests have shined a light on racial inequity. Impact investment funds aren’t a cure-all, but they can play a part in driving change. It’s hard to look for a silver lining in a year that has devastated so many. If there is one, it’s the emergence of greater empathy and awareness, and a desire to use investment dollars to build a better world. //

MIDDLE MARKET GROWTH // JUL/AUG 2020

EXECUTIVE SUMMARY

In-Person Events Pressed Pause, But ACG Didn’t

MARTIN OKNER Chairman, ACG Global Board of Directors, and President and COO, dpHUE

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f you’ve been following Middle Market Growth or watching ACG’s GrowthTV over the last few months, you know the editorial staff has been covering the many ways that midsize businesses have pivoted in response to COVID-19. Executives have worked tirelessly to rethink how they keep their organizations operating amid travel limitations, social distancing measures, and store and office closures. The Association for Corporate Growth was among them. Faced with restrictions on live events and public safety concerns, ACG chapters across the globe moved swiftly to expand their virtual offerings. Over the past few months, they’ve held programs ranging from online panel sessions to Zoom happy hours and one-on-one meetings. As this issue goes to print, ACG is hosting its first virtual Member Summit to bring together M&A professionals from across the entire network, regardless of where they’re physically located. The three-day event features live-broadcast panel sessions on topics ranging from the U.S. election’s impact on middle-market M&A, to strategies for supporting portfolio companies during unprecedented times. Attendees can also access a library of videos available exclusively to ACG members. The summit marks the debut of a new scheduling software from ACG that enables participants to schedule meetings anytime, anywhere over the three-day event. The platform provides a forum for ACG members to build relationships and discuss new deal opportunities at a time when M&A is alive and well. Deals are closing, and ACG members are playing an active role in getting them across the finish line. Several transactions announced in late May involving members of the ACG community reflect the current moment and hint at emerging investment trends. Turning Technologies, a portfolio company of Centre Lane Partners, acquired Knowbly, an online education business that specializes in creating digital learning materials. Meanwhile, Topspin Consumer Partners announced its investment in reCommerce, whose technology helps consumer brands sell products through Amazon. These are just two of the many deals moving forward. Of course, M&A transactions still depend on a powerful network, whether that’s maintained through in-person meetings or across a screen. A pandemic doesn’t change the fact that relationships matter in the middle market, and ACG continues to be the place to build them. //

COMMUNITY WORTH CONNECTING. VIRTUALLY. Join 15,000 of the top middlemarket professionals within the premier networking community. BECOME A MEMBER TODAY WWW.ACG.ORG

MIDDLE MARKET GROWTH // JUL/AUG 2020

JUL/AUG 2020

DON’T MISS QUICK TAKES Tank Testing 21

A QUALIFIED OPINION M&A in the Energy Sector 22

IN FOCUS Venable: Untangling Complex Regulations 38

IN THIS ISSUE COVER: GETTY/KAMPEE PATISENA; ABOVE: GETTY IMAGES/MALORNY

COVER STORY

From the Editor 1 Executive

Riding the Solarcoaster The COVID-19 pandemic is just the latest hurdle for solar energy, an industry that has experienced its share of ups and downs over the years. Some solar energy businesses that serve residential customers are now struggling to survive after crippling shelter-in-place mandates, while others that work with utilities and municipalities are taking on new projects as those customers seek to hit renewable energy targets. 24

Summary 2 The Round 8 Midpoints by John Gabbert 19 Perspectives 20 The Portfolio 42 ACG@Work 48

TREND

Zooming In The coronavirus outbreak shuttered businesses in industries once considered recession-proof, casting the M&A landscape in a new light. Buyers are reconsidering where to look for deals and, in some cases, doubling down on strategies that were validated by the crisis. 32 GETTY IMAGES/ANDRIY ONUFRIYENKO

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Members on the Move 53 It’s the Small Things 56

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MIDDLE MARKET GROWTH ONLINE PUBLISHED BY THE ASSOCIATION FOR CORPORATE GROWTH® EDITOR-IN-CHIEF

MMG CONVERSATIONS

Kathryn Mulligan kmulligan@acg.org PRESIDENT & CEO

Tom Bohn, CAE, MBA tbohn@acg.org

WEBSITE Visit middle

VICE PRESIDENT, ACG MEDIA

marketgrowth.org

Jackie D’Antonio jdantonio@acg.org

to read the latest issue and web-

DIRECTOR, CREATIVE & BRANDING

exclusive content.

Brian Lubluban blubluban@acg.org

For RaceDayQuads’ CEO, Managing Remotely Isn’t New Many business leaders were forced to manage operations remotely during the COVID-

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MMG WEEKLY Stay up to date on middlemarket trends, ACG events and industry news.

19 outbreak, something Tyler Brennan has done for most of the five years that he’s run RaceDayQuads, an e-commerce retailer of drone

MANAGER, CREATIVE & BRANDING

Michelle McAvoy mmcavoy@acg.org ASSOCIATE EDITOR

Benjamin Glick bglick@acg.org CHIEF OPERATING OFFICER

Matthew Hickman, MBA mhickman@acg.org

components. Brennan talks about managing a

DIRECTOR, STRATEGIC DEVELOPMENT

company from afar, the pandemic’s impact on

Kaitlyn Fishman kfishman@acg.org

RaceDayQuads’ supply chain and the regulatory challenges facing his industry.

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others at middlemarketgrowth.org.

trends and jobs in ACG’s monthly newsletter. Sign up at middlemarket growth.org/ subscribe.

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Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 membership@acg.org www.acg.org For advertising inquiries, call (312) 957-4260. Copyright 2020 Middle Market Growth®, InterGrowth® and Association for Corporate Growth, Inc. All rights reserved. Printed in the United States of America. ISSN 2475-921X (print) ISSN 2475-9228 (online)

ACG Houston’s Deal of the Year

DEAL

OF THE YEAR

Houston

event is focused on celebrating Houston’s booming middle-market deal community and honoring the deals and dealmakers who drive middle market growth – resulting in job growth, capital formation and the advancement of meaningful business relationships. Congratulations to this year's winners! To see the full list of finalists, visit acghoustondeals.com

AWARD JUDGES Carin Barth Co-Founder and President

DEAL OF THE YEAR AWARD WINNERS CONSUMER PRODUCTS & SERVICES

TECHNOLOGY & BUSINESS SERVICES

INDUSTRIAL, POWER & INFRASTRUCTURE

LB Capital Inc

Eric Bruce

Welcome Group, LLC Joint Venture with REIT

Senior Managing Consultant Briggs & Veselka Co.

The Majority Recapitalization of John M. Floyd & Associates by Hammond, Kennedy, Whitney & Company Plantgistix Acquired by A&R Logistics

Rocky Dewbre Former CEO Empire Petroleum Partners

Kenneth Guidry Past President and Retired Director

MIDSTREAM

Momentum Midstream Sale of Stake in UEO Midstream System to Williams Cos. and Join Venture Between Williams and CPPIB

OIL AND GAS < $ 500 MM

Combination of SCAN OAK LLC, successor by Merger to Scandrill Ltd., LP, and Voyager Acquisition LLC, a wholly-owned subsidiary of VYGR Holdings LLC

OIL AND GAS > $ 500 MM

Ajax Resources $1.25 Billion Sale of Permian Assets

PKF Texas

Michelle Suarez Partner Holland & Knight

Walter Ulrich

CROSS BORDER TRANSACTIONS

President & CEO Medical Bridges

Wellbore Integrity Solutions (WIS), an affiliate of private equity firm Rhone Capital, have entered into an agreement to acquire DRILCO, Thomas Tools, and Fishing & Remedial services from Schlumberger

THANKS TO OUR PLATINUM SPONSOR

Kelly Williams Director Milestone Capital

THANKS TO OUR GOLD SPONSORS

THANKS TO OUR SILVER SPONSORS ACG Houston is the region’s premier global networking organization for professionals involved in corporate growth, mergers and acquisitions,

acg.org/houston

equity capital, strategic alliances and other aspects of corporate development. ACG Houston hosts a variety of events throughout the year to provide our local business leaders an opportunity to gain visibility and connect with people and ideas to strategically grow companies.

GETTY IMAGES/METAMORWORKS

THE ROUND

Market Volatility Fuels Data Innovation in the Energy Sector By Benjamin Glick

he oil and gas industry has lagged behind other sectors in developing tools for data collection and analysis, but market volatility and declining crude prices are pushing energy companies to look for technological solutions. As recently as 10 years ago, the industry operated with about as much sophistication as it had in the previous century. Teams of engineers and technicians working out in the field would record estimates of well-production volume by hand—in what industry-insiders call a “greasebook”—and relay information to a central location by phone. For a large portion of the industry, that’s still the case. Cellphone service

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remains virtually nonexistent in many remote drilling locations, prompting some workers to report figures by pay phone, according to a story from the Houston Chronicle in November 2019. “The oil and gas industry is one of the slowest sectors to leverage data science and advanced analytics,” says Andrew Gillick, a managing director at RS Energy Group, a company that provides data analytics solutions and services to the energy industry. “Some geologists still practically use graph paper and an abacus to decide where to drill a well.” The industry’s aversion to keeping up with even modest data recording advancements was driven in part by immense profit margins.

That complacency may be coming to an end. In March, demand for oil shrunk due to the COVID-19 pandemic, while supply surged after negotiations fell apart between Russia and the members of the Organization of the Petroleum Exporting Countries over production cuts. Together, the developments led to a historic collapse in the price of crude, with commodity traders offering to pay buyers to take oil off their hands for a brief period in April. Oil markets have begun to recover since then, but prices are expected to remain at all-time lows. And with a recession now underway in the U.S., more energy companies are

embracing new data technologies. Some energy subsectors like shale, which relies on an extraction technique called hydraulic fracturing—or fracking—require a higher level of technical sophistication not seen in the wider industry, and set a promising precedent for innovation, including around data analytics. According to a report released by Microsoft and Accenture in February, 50% of respondents in the oil and gas industry surveyed before the COVID-19 outbreak said they plan

Shell employs about 70 people in a data analytics department, along with hundreds of contractors worldwide. Yet many of the 24,000 other oil and gas producers don’t have the manpower or resources to set up their own data analytics teams. Some are turning to the growing number of data services firms, like RS Energy Group, that offer an alternative to in-house expertise. RS Energy Group provides a wide array of data analytics tools, including machine learning algorithms and

“THE OIL AND GAS INDUSTRY IS ONE OF THE SLOWEST SECTORS TO LEVERAGE DATA SCIENCE AND ADVANCED ANALYTICS. SOME GEOLOGISTS STILL PRACTICALLY USE GRAPH PAPER AND AN ABACUS TO DECIDE WHERE TO DRILL A WELL.” ANDREW GILLICK Managing Director, RS Energy Group

to invest in big data and analytics in the next three to five years, up from 46% in 2017. Extracting insights from geophysical data, drilling logs, production rates and operational parameters like drilling speeds can help company managers make more accurate decisions and operate their businesses more efficiently. According to a report from Bain & Company, data analytics could increase fuel production by between 6% and 8%. Large oil and gas companies have moved fastest to improve their data collection and analysis capabilities. Chevron developed its Digital Oil Field System, which includes real-time well and facility surveillance and production tracking. Its competitor Royal Dutch

geological models for oil and gas companies and investors to evaluate their operations, follow M&A activity and survey the energy market. RS Energy Group was recently purchased by another data services provider, Enverus, in February. Both companies have reported a dramatic increase in client activity as investors and operators look to use data analytics tools and services in the wake of the oil sell-off and coronavirus demand crunch. Many energy companies are also tapping into artificial intelligence and machine learning to manage back office systems, flag fraud and billing errors, and help companies convert to paperless workplaces. Another way to benefit from data

is through predictive analytics. Data collected from sensors fitted to machines can be analyzed to prevent damage and breakdowns, reducing repair costs and downtime. Cognite, an industrial data company based in Norway, offers a product called Cognite Data Fusion that gathers data to monitor parts used for drilling, pumping and refining. It can identify needed repairs before those components break down. Cognite is implementing 3D modeling, robotics and photogrammetry— extracting spatial information from photographs—to make work processes more efficient and safer. In February, the company partnered with Norwegian oil and gas company Aker BP to explore the use of robotics systems. It will deploy Spot, the four-legged robotic dog that Boston Dynamics designed for managing remote operations and autonomous sensing across multiple industries. Francois Laborie, Cognite’s president of North American operations, expects energy companies in the future to use robots to collect production data remotely. Harnessing existing data that was difficult to access is merely the first step for the oil and gas industry. Laborie predicts the next phase of data innovation will involve collection systems that operate without human intervention, known as “autonomous data,” to offer even greater insights for oil and gas operators. “The next generation of systems will be about analyzing and optimizing the full asset or ecosystem,” Laborie says. “The insights provided on the operations open a huge range of opportunities, from safety to optimization and, of course, asset performance management.” //

MIDDLE MARKET GROWTH // JUL/AUG 2020

THE ROUND

Unionwear Draws on Manufacturers’ ‘Secret Power’

CG New Jersey earlier this year named Unionwear a winner of its Corporate Growth Award. The company, based in Newark, custom manufactures and embroiders union-made baseball caps, hats, backpacks, duffel bags, totes and messenger bags. Its president, Mitch Cahn, recently spoke with ACG Global CEO Tom Bohn for a video on GrowthTV about how Unionwear won ACG New Jersey’s award, the ways the company has pivoted since the start of the COVID-19 outbreak, and why presidential campaigns across the political spectrum order Unionwear products. This interview has been edited and condensed for clarity.

Tom Bohn: What led up to Unionwear winning ACG New Jersey’s Corporate Growth Award? Mitch Cahn: We were honored because we came up with a new way to sell manufactured products. Domestic manufacturers have a secret power, which is that we can make anything. That’s been manifest over the last few months when you saw companies that make curtains all of a sudden making hospital gowns, and companies that make cars all of a sudden making ventilators. The problem with being able to make anything is that it’s really hard to promote that—people want to see a distinct product that you sell. That leaves manufacturers with a very difficult choice. We can either invest in creating a product line, or we can ask our customers to create a product line. Both of those things are time-consuming and expensive, and they hemorrhage sales. What we did was take all of the iterations of our products and we put them in an online

middlemarketgrowth.org

store. We have over 100,000 different iterations of a baseball cap, with different colors and different components, and we created theoretical products for each one. After we put them in our online store, within about a year our sales tripled. Looking back, we can’t see any other way to sell product. TB: What has Unionwear done to pivot during this crisis? MC: We very quickly pivoted into protective equipment and aggressively went out to hospitals and other organizations that needed it. While face shields are very different from anything we sell, we had all the raw materials we needed to make them. We had clear vinyl because we make binders and portfolios. We had headbands because we make baseball hats, and we had foam because we make backpacks and laptop bags. We could just take our raw materials and craft some new products and sell them, and we were able to finance the change

and the growthy by asking customers to pay deposits up front. It all happened really, really fast. In less than a week, we had all our workers working on protective gear. TB: How were you able to keep operations running while also protecting workers? MC: It’s really been a challenge. We own our building and one of our tenants closed their business at the beginning of the crisis. We took their space over, so we were able to expand by 25%, which gave us some breathing room. We were only able to have about 50 people out of our 180 employees working. Once we took the other space, we were allowed to have another 50 people there, but that was still less than full capacity. Our No. 1 focus has really been safety. Anything that we need to protect our workers we can make ourselves. We can make table dividers and masks, we’ve been making gowns,

“CAMPAIGNS COME TO US BECAUSE WE’RE REALLY THE ONLY PLACE IN THE WORLD THAT THEY CAN BUY A UNION-MADE, MADEIN-AMERICA BASEBALL CAP OR BAG, AND CAMPAIGNS ARE VERY SENSITIVE TO SHOWING THAT THEY SUPPORT THE AMERICAN ECONOMY.” MITCH CAHN President, Unionwear

and we’ve been bartering with medical distributors for all the medical supply products we need, too. Another thing we did was to identify as many of our own employees as possible and other people in our city, Newark, New Jersey, who could sew from home. It amazed me to see how many people still sew—I thought sewing was a dying art. Right before the crisis hit, we were having trouble hiring because we couldn’t find people who wanted to sew. Then during the crisis, we put ads up on Facebook and we were overwhelmed with responses. We started to outsource work to home sewers, and we set up a drop zone at a separate entrance to our building where workers could drop work off and pick work up without encountering any other people. That enabled us to work at closer to full capacity. TB: You make all your products here in the U.S., but I would imagine your supply chain has to be global. How has that held up through all of this? MC: We know where a lot of the raw materials are. One of the things that’s kept us in business was that we’re able to move really quickly when something needs to be made from

scratch. That’s one of the advantages we have over imports. When someone wants a tremendous volume of a custom bag made, we know where to find vinyl or cotton—we know who’s sitting on it. When we saw the bottlenecks appearing in protective equipment, we started contacting those suppliers immediately and buying the materials we thought we might need over the next three or four months. There was one other timing issue that helped us, which is that this happened right after Chinese New Year. If you have any raw materials that come from China, you need to buy three or four months’ worth at the end of the year before and sit on them, because you never know how long it might take to get. We were already pretty well stocked with materials that come from China to begin with, although most of our materials don’t. We just had to keep in contact with our suppliers very regularly because someone who’s open one day may decide to close for two weeks the next day. TB: What role has debt or private capital played in Unionwear’s growth? MC: Presently, we don’t have any bank debt. We’ve been really good at

growing through cash flow and not biting off more than we can chew. We’ve been buying things very well on the dips. The primary way that we’ve grown is by buying the assets of bankrupt textile businesses. We’ve probably bought about 15 over the last 30 years, mostly in the Northeast. We buy all their assets and usually hire salespeople after they close. When companies close, they don’t shutter with zero sales—they close with fewer sales than they can support. If we can buy the assets for next to nothing, and pick up a salesperson and bring all that stuff to our facility in Newark, we’re able to grow that way. We’ve been able to grow without raising a lot of money. TB: At a time when politics is so polarized and everyone is in their own camp, how does a company like Unionwear end up selling products to campaigns of candidates as different as Bernie Sanders, Joe Biden and Donald Trump? MC: I get asked that all the time. But if I owned a coffeeshop, would people question that I serve both Democrats and Republicans? Campaigns come to us because we’re really the only place in the world that they can buy a union-made, madein-America baseball cap or bag, and campaigns are very sensitive to showing that they support the American economy. They want to make sure that anything with their logo on it says “Union-Made in America.” //

MORE ONLINE Watch this interview and others at acg.org/growthtv.

MIDDLE MARKET GROWTH // JUL/AUG 2020

THE ROUND

For Deal-Makers, Speed Dating Gives Way to Long-Distance Relationships By Benjamin Glick

he coronavirus pandemic has changed the way that people interact, and M&A professionals are no exception. For many homebound workers, learning to unmute a microphone and center a webcam joined wearing a face mask and staying six feet apart as necessary habits during the COVID-19 outbreak. Video conferencing platform Zoom saw its user numbers jump from 10 million to over 200 million between February and April, and the Association for Corporate Growth is adapting in-person events to fit the new virtual environment. But the shift to digital networking and dealmaking activities has raised questions about how best to build and maintain relationships online, the impact on dealmaking, and whether these digital spaces will have staying power once businesses reopen and travel resumes.

Covering the Basics After spending five years in investment banking as a vice president at Cascade Partners, Alex Drost launched a consulting business, Connection Builders, to help middle-market professionals develop their networks. Now, a little under a year since he started his new venture, the coronavirus outbreak is challenging the traditional networking model. Drost

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GETTY IMAGES/JDAWNINK

has learned to adapt his business and skills to the virtual sphere, and he’s helping others do the same. “I’m a huge believer that you have to adapt to your circumstances,” Drost says. “But then people ask, ‘OK, where and how do I do that?’” One of the first significant hurdles Drost encountered was persuading less technically savvy clients to accept working under entirely new conditions. “Change can be hard, but you have to embrace it,” he says. “If you don’t, you’ll get left in the dust.” Drost recommends investing in the right equipment, including computer hardware that can handle multiple video feeds, along with a decent internet connection, microphone and appropriate lighting. “You wouldn’t walk into a networking

meeting if no one could hear or see you,” says Drost, who also serves as a board member of ACG Detroit and chairs its NextGen group of young professionals. Interacting in a virtual meeting space can be harder than navigating a physical one. Even frequent digital event-goers may feel overwhelmed when too many attendees appear on screen at once. Some video conferencing tools offer ways to break large virtual gatherings into smaller ones, but even there, the rules of etiquette aren’t entirely clear. Drost has noticed how uncertainty over when and how to speak in a virtual space causes some users to disengage. Instead, he suggests they work their way into the conversation as best they can.

“I’M A HUGE BELIEVER THAT YOU HAVE TO ADAPT TO YOUR CIRCUMSTANCES. BUT THEN PEOPLE ASK, ‘OK, WHERE AND HOW DO I DO THAT?’” ALEX DROST Founder, Connection Builders

More options are popping up for those turned off by big virtual gatherings and breakout groups, as virtual coffee hours and other one-on-one meeting formats become more commonplace. “Find what works for you,” Drost advises. Despite their drawbacks, online meetings and conferences offer a notable advantage to participants: convenience. “It’s remarkable how much you can accomplish in a day when there’s no travel involved,” says Brad Armstrong, a partner at private equity firm Lovell Minnick Partners. Quality Over Quantity Thom Singer spends a lot of time thinking about networking. That’s what he’s done for more than a decade as a public speaker and author of multiple books focused on helping professionals build more productive relationships. Virtual networking events and social media offer ways to stay in touch in the absence of live events, but Singer warns professionals not to confuse virtual encounters with lasting and productive relationships. “Having a like, link, share or follow doesn’t mean somebody is part of your network,” he says. “Neither does meeting someone one time at a virtual happy hour. It just makes them someone you met once.” To combat the alienating effects of

social distancing, Singer advocates a process of online network building that places prioritization and personalization at its center, which he terms “social tightening.” Professionals may be tempted to blanket as many of their peers as possible with mass emails or messages on social media, but that can do more harm than good. Instead, Singer recommends focusing on a smaller group of contacts and sending at least three personalized messages per day. Another part of social tightening is finding time for one-on-one conversations. Attending online events like those provided by ACG chapters is still necessary, Singer says, but it’s important to follow up after the event to schedule a virtual meeting with new contacts as soon as possible. The New Normal It’s unlikely that virtual networking will replace face-to-face interaction entirely, but some aspects may carry over to the post-COVID world. ACG chapters have drawn attendees from across the country for their webinars and online networking events. Their speakers, thought leaders and sponsors are now able to reach a broader audience. Drost believes virtual happy hours and social events, in particular, will endure after the pandemic ends.

Although he’s based in Detroit, he recently attended an event organized by ACG Austin/San Antonio. “Fast forward to 2021 or 2022. Why wouldn’t you still host a 30- to 50-person [virtual] happy hour once a month?” he says. “We’re going to be able to connect with people from all over the country in ways we never could before.” Although online networking may have staying power, dealmaking activities are less likely to find a long-term home in a Zoom window. Meetings with company owners and fellow professionals have moved online out of necessity, but Lovell Minnick’s Armstrong expects them to shift back to an in-person format once restrictions are lifted. Interacting face to face can give an edge to investors who take the time for a site visit, he says: “Who gets the nod—the person that’s been there in person or someone else who’s checked in on video chat?” Even if video conferencing platforms continue to play a greater role in professionals’ lives, they’ll likely be additive, not a substitute for in-person interactions. “Face to face is always going to be better, because human beings are wired to be social creatures,” Singer says. “We’re not going to be able to replace that.” //

MORE ONLINE See a list of upcoming virtual events hosted by ACG chapters at acg.org/events.

MIDDLE MARKET GROWTH // JUL/AUG 2020

THE ROUND

The ACG Community Steps up During Crisis By Kathryn Mulligan

GETTY IMAGES/ SKAMAN306

ssential workers have put themselves at risk to treat patients, staff grocery stores and manufacture critical protective gear throughout the COVID-19 crisis, and their work has inspired ACG members to pitch in, too. Over the last few months, middle-market firms and their portfolio companies have supported the production of protective equipment, pivoted to making sanitation supplies and offered pro bono support to small businesses in an effort to help during the recent public health and economic crises. One of the earliest weaknesses revealed by the coronavirus outbreak was the shortage of personal protective equipment, or PPE, needed by medical professionals and other essential workers. Auto-maker General Motors was among the large manufacturers that stepped in to help produce PPE. GM converted a former transmissions plant into a mask-making facility, but it required specialized equipment

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“SETTING UP A BIG MANUFACTURING LINE LIKE THAT, IN THAT PERIOD OF TIME, IS UNHEARD OF, REALLY. IT’S EXTREMELY RARE.” JIM GAITTENS Managing Director, TVV Capital

to begin production. It turned to Dukane, a midsize manufacturer that makes plastic welding equipment. The company answered the call and delivered units in an unprecedented two-day window. “Setting up a big manufacturing line like that, in that period of time, is unheard of, really. It’s extremely rare,” says Jim Gaittens, managing director of TVV Capital, Dukane’s private equity partner. Gaittens currently serves as president of ACG Tennessee. The national effort to produce masks at scale required the right manufacturing equipment, but medical-grade masks presented another obstacle. N-95 masks are made with specialized materials known as

polymer fibers, whose production was threatened by plant closures and social distancing measures within manufacturing facilities that remained open. Faced with the challenge of continuing to supply its medical customers while also protecting workers, biopolymer producer Braskem America took a radical approach. Headquartered in Philadelphia, where its director of business development, Ian Rubin, is an active ACG member, Braskem America makes the primary raw material used by medical manufacturing customers to produce N-95 face masks, medical gowns and other gear. At manufacturing facilities in

two states, Braskem team members volunteered to live on site at their respective plants for 28-day-rotations in order to maintain production while staying isolated. Live-in teams worked 12-hour shifts to keep the plants running 24 hours a day, and production lines were shifted to accommodate increased output of medical-grade materials in high demand. Braskem provided the teams with sleeping accommodations, meals in on-site kitchens and increased wages. Teams of volunteers in Marcus Hook, Pennsylvania, and Neal, West Virginia, completed their 28-day rotations on April 19 and April 28, respectively. Another Philadelphia firm, Argosy Private Equity, whose professionals are active in ACG Philadelphia, cites six of its businesses that have manufactured medical products or provided services to the community. For example, Intech Aerospace, which provides interior maintenance services for the aviation market, has used its manufacturing capabilities to make face masks and gowns. Like N-95 masks, face shields were also in short supply due to COVID19, prompting Nottingham Spirk, a family office and engineering and design firm, to draw on its 48-year history of partnering with organizations on design and innovation. The Cleveland-based firm worked with researchers at Case Western University and local manufacturers to develop a novel approach for making shields at scale. The team realized that 3D-printing methods can take up to three hours to produce a shield. In April, they developed a faster, more cost-effective method that enabled them to produce up to 5,000 face shields per day through injection molding. Shields

GETTY IMAGES/JOE CICAK

“WE HAVE ALL THIS TECHNOLOGY, BUT WE DON’T REALLY HAVE THE METHODS TO CLEAN IT PROPERLY WITHOUT DESTROYING IT.” KATHERINE HILL RITCHIE Director of Strategic Development, Nottingham Spirk

produced this way are easier to sanitize and safe to reuse, says Katherine Hill Ritchie, director of strategic development for Nottingham Spirk and the chair of ACG New York’s family office committee. Nottingham Spirk’s manufacturing partner, Bliley Technologies, is selling the shields at cost to hospitals and other customers. Safety First Most regions of the United States have now reopened their economies or begun the process. Hand washing and sanitation will once again be the primary weapons for preventing the

spread of COVID-19 as businesses welcome customers back and residents come into close contact after months spent at home. Evolved By Nature, based in Medford, Massachusetts, is among the companies to pivot toward hand sanitizer production. It holds patents for its natural Activated Silk technology—a “green chemistry” platform— that can replace petroleum-based chemicals commonly used in the textile and personal care industries. In response to the coronavirus outbreak, Evolved By Nature began making hand sanitizer at scale, with the capacity for thousands of gallons per

MIDDLE MARKET GROWTH // JUL/AUG 2020

“IT’S A WAY TO HOPEFULLY MAKE THIS PROCESS A LITTLE LESS PAINFUL FOR EVERYONE INVOLVED.” TOM KIRBY PrepDD founder

GETTY IMAGES/KAMELEON007

month, according to Scott Packard, the company’s CFO and an alumnus of ACG Boston’s Accelerator program. All proceeds of hand sanitizer sold through the company’s website will be used to supply individuals and businesses in need. Unfortunately, not all products are as easy to clean as one’s hands. Smartphones, for example, can’t withstand the harsh chemicals of a hospital-grade cleansing wipe. Existing sanitation methods are imperfect, meaning electronic devices could introduce germs into hospitals, nursing homes and other establishments, contributing to the spread of disease. “We have all this technology, but we don’t really have the methods to clean it properly without destroying it,” says Nottingham Spirk’s Ritchie. Prior to the COVID-19 outbreak, Nottingham Spirk began working with Sterifre Medical to commercialize a new technology that could help combat hospital-acquired infections. The company’s patented system, called

middlemarketgrowth.org

Aura, is able to disinfect smartphones, tablets and fabrics, along with other hard-to-clean products. Users can insert their smartphone or other object into the Aura machine, which combines microspray hydrogen and cold plasma ozone within a sealed chamber. Together, the substances kill any bacteria or virus on the object, including in crevices or hard-to-reach places, with no damage to the device, according to Ritchie. “The hope is to have [the Aura machines] at every hospital station and nursing home,” she says. “Anything that comes in and out can go through this machine.” The Aura machine is pending approval by the Environmental Protection Agency and is expected to move into production this summer. Answering the SOS Call for PPP Not every organization is equipped to contribute a tangible product to help address the current public health crisis. Instead, some firms are using their strengths to assist companies as

they weather the economic destruction that’s accompanied the pandemic. Erie Street Capital, an independent advisory firm based in Chicago, saw an opportunity to help small businesses apply for loans through the federal government’s Paycheck Protection Program, which was passed as part of the Coronavirus Aid, Relief, and Economic Security Act. A group of Erie Street’s professionals, including Principal Jerry Graunke, began reaching out to businesses in the community with whom they have relationships, including barbershops, dry cleaners and a children’s play space. Erie Street dug into the Paycheck Protection Program, or PPP, details as soon as they were released. Many businesses reported challenges applying for PPP loans, due to confusion about the eligibility criteria and delays in the application and approval processes. Erie Street worked with 12 businesses, primarily in Chicago, to understand the forms and apply for

forgivable loans through the program. Graunke says most were able to qualify for loans. To help borrowers demonstrate that they’re eligible for loan forgiveness, another Chicago firm, PrepDD, has created an online checklist and documentation portal that businesses can use at no cost. PrepDD provides smart workspaces used by finance teams to simplify workflows, gather information and ensure document compliance. In April, it began offering a free six-month subscription to its PPP Forgiveness Checklist, which helps businesses track and store the documents needed to prove they’ve met the criteria for loan forgiveness. Users of the PPP Forgiveness Checklist can upload documents showing the use of PPP funds for payroll, employee benefits, utility payments and rent. They have the option to use PrepDD’s application to transfer documents directly to their bank. “It’s a way to hopefully make this process a little less painful for everyone involved,” says PrepDD founder Tom Kirby. The pain caused by the coronavirus outbreak is unlikely to subside entirely until a vaccine is developed and distributed widely. Until then, members of the ACG community are using their strengths to protect health care professionals and the broader public as it returns to work, and supporting small businesses as they anxiously await a recovery. //

PALLADIUM EQUITY AND PORTFOLIO LEAN IN TO LOCAL CAUSES Private equity firm Palladium

care institutions and their

Equity Partners and its mid-

front-line workers; the high

dle-market portfolio companies

rate of joblessness resulting

are showing support for their

from the pandemic has cre-

local communities through char-

ated food insecurity for many

itable donations to health care

across the U.S.

organizations and other groups

In Miami, a Hispanic

in need across the country.

food products distributor in

Employees of the firm,

Palladium’s portfolio called

which is active in ACG’s New

Quirch has donated over

York chapter, donated nearly

26,000 pounds of poultry and

$500,000 collectively to

seafood to three local food

three charities supporting first

banks in the greater Miami area.

responders and homebound

Another portfolio company, ALC

New Yorkers through programs

Student Transport Solutions,

such as Help Now NYC, the

has shifted its focus from trans-

New York City Department

portation solutions for students

of Education and Meals on

with special needs in order to

Wheels. Meanwhile, Palladium’s

help deliver meals to those

partners have pledged $1

students while they’re at home.

million to charities supporting

Palladium isn’t the only

local hospitals and schools.

member of the private equity

That philanthropic spirit

community to donate during

extends to Palladium’s port-

this time of crisis. Bain Capital

folio companies. Kar’s Nuts,

announced that its managing

a producer of branded trail

directors and employees

mixes and nut snacks based

have donated $40 million

in Madison Heights, Michigan,

to a relief fund dedicated to

has donated more than

supporting local communities

100,000 snacks to Detroit-

and employees in its portfolio

area hospitals and food banks.

companies affected by the

Kar’s has also initiated wage

coronavirus outbreak. KKR has

and pay increases to boost

pledged $50 million to a similar

morale and recognize workers

relief fund, and Apollo Global

who have helped the company

Management Inc. co-founder

continue to move forward.

Leon Black and his family have

Another Palladium portfolio

committed up to $20 million to

company, Mexican cuisine

a new fund to help New York

products manufacturer Del

City hospital workers.

Real Foods, provided meals to

Many others in the industry

500 front-line medical workers

have stepped up, too, reflecting

at the Children’s Hospital in Los

private equity’s commitment

VIDEO

Angeles to thank them for their

not only to keeping portfolio

Watch interviews with company leaders

efforts during the pandemic.

companies healthy, but to sup-

The coronavirus outbreak

porting the broader communi-

about what their businesses are doing to help at acg.org/growthtv.

has not only pressured health

ties where they operate.

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

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

MIDPOINTS by John Gabbert

Private Equity Takes Stock of the Market— From a Social Distance

hat will the “new normal” look like after the dust settles? It’s an impossible question to answer as the COVID-19 pandemic rages on. That uncertainty has kept most PE investors on the sidelines, even as some hints about the future have started to emerge. Of the deals moving forward, minority investments are drawing more interest than they have in the past. Making smaller bets with upside is the current game in town. Majority buyouts are a lot less common. There’s considerable risk to buying companies outright if investors aren’t sure of their health, and it’s even harder to assess their viability from a social distance. There’s also the question of which sectors will survive intact. Faced with similar levels of uncertainty 12 years ago, many investors opted to wait before buying, only to regret not jumping in sooner. How they proceed this go-around remains to be seen. Several months of quarantines and social distancing have prompted consumers to reexamine what’s important to them, and new spending priorities could offer clues for the recovery. Many of us are eager to return to restaurants and enjoy a night on the town. Millions of Americans really need a haircut and will appreciate their next concert or sporting event more than ever. Sectors that cater to basic and social needs will bounce back strongly. At the same time, some types of spending are likely to fall by the wayside, particularly as high

unemployment makes consumers more cautious about their purchases. That poses a dilemma for private equity: Investors might have the capital to help consumer discretionary companies, but they can’t be sure of broader spending habits going forward. Speaking of habits, many of us have developed new ones. E-commerce has surged out of necessity, and it has created new converts. That means more online spending even after the economy reopens. Investors will want to know how strong a company’s online presence is, and how effectively it can market itself to mobile users. They’ll also want to know how quickly those companies can adapt to sudden market pivots if another public health crisis emerges. Health care investing itself is set for a shakeup. Fear of infection has kept patients away from health care facilities; at the same time, elective and serious procedures alike have been put on hold as resources were directed elsewhere. Without being able to perform those procedures, health care providers can’t make money. There will be a serious need for capital infusions in providers around the country, along with a surge in investments in telemedicine. Changes are coming throughout the economy. We’ve formed new spending habits and are much more conscious of how quickly things can pivot. Companies have had to do the same. Private equity has an opportunity to help and capitalize at the same time, but they have a lot of data points to sort through before they start. //

JOHN GABBERT Founder and CEO, PitchBook

MIDDLE MARKET GROWTH // JUL/AUG 2020

PERSPECTIVES

PERSPECTIVES // Lessons Learned

“For someone that is not used to running something remotely and [now is] having to move to running it remotely, I would say, focus on your people first … have your people follow your systems, and then figure out what else you can do with the time you now have, since you’re not there doing the day-to-day. Start looking at metrics you’ve never looked at, and start delving into your competitors’ websites.”

TYLER BRENNAN, Founder and CEO of RaceDayQuads, sharing lessons on the Middle Market Growth Conversations podcast about how to run a business from afar.

“We don’t have the foot traffic that we once had because of the staying at home, but people want their cannabis. We believe it to be somewhat recession-proof because of that. We’re going to get through this.”

MATT HAWKINS, Managing Partner at Entourage Effect Capital, a cannabis-focused investment firm, explaining how their cannabis businesses are weathering COVID-19 without access to federal aid.

WHAT I HAVE LEARNED IN THE LAST FOUR WEEKS HAS BEEN GAMECHANGING FOR ME AND WHAT I’M GOING TO DO AS A LEADER. AND THE KEY THING THAT I’VE LEARNED IS THE IMPORTANCE OF PEOPLE BEING CONNECTED ON A MORE REGULAR BASIS.

“I personally think every company in America needs to take a look, reassess, and in some cases redesign their commercial engine and prepare it for a relaunch, because the future may look very different from the past.”

ART SAXBY, Founder and CEO of Chief Outsiders, discussing on GrowthTV why marketing will be central to business recovery after the pandemic.

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JANE MILLER, CEO of Lily’s, speaking on ACG’s GrowthTV in April about how COVID-19 has changed her leadership style.

QUICK TAKES

Tanknology Taps New Revenue Streams By Benjamin Glick

nderground storage tanks used by gas stations and other fuel suppliers are leading sources of groundwater pollution, an environmental and public health threat that one company is trying to mitigate through its testing and compliance offerings. Tanknology, an environmental services company headquartered in Austin, Texas, was founded in the late 1980s, around the time that Congress expanded the Environmental Protection Agency’s authority to set groundwater quality standards, through an amendment to the Clean Water Drinking Act. The company began by developing contamination tests and equipment to measure the structural integrity of underground fuel tanks. Exxon, Shell and Chevron were among its early clients. Tanknology continues to work with multinational oil companies, but it has since expanded its customer base to include major airlines, car rental agencies and convenience store chains like 7-Eleven and Circle K. As state and federal regulations for water quality have tightened over the decades, Tanknology has created new testing equipment and procedures to ensure its customers remain compliant. The company has licensed its brand and technology to independent businesses in 27 countries that adopt its testing methodology. According to Allen Porter, Tanknology’s president and CEO, the EPA and local environmental regulators can require that the average gas station undergo 16 or more

GETTY IMAGES/ROMAN NOVITSKII

environmental tests annually in order to avoid costly fines. Many of Tanknology’s clients, however, do more than the minimum, Porter says. Their internal environmental, social and corporate governance, or ESG, standards can be higher than requirements mandated by environmental regulators. “[Tanknology’s] clients want to ensure there’s no contamination of groundwater. They want to be good corporate citizens, and they do that by turning to Tanknology,” says James Parmelee, managing director at private equity firm Hamilton Robinson Capital Partners, which acquired a majority stake in Tanknology in September. Since the EPA amended the Clean Water Act in 2015 to better define the scope of federal water protection, site inspections became more stringent, causing more underground structures to get flagged. According to Porter, roughly 90% of the nearly 90,000 annual site inspections that Tanknology performs have identified

some form of structural deficiency that requires repair. EPA reports show that the number of new contamination sites continues to drop, Porter says, but the company faces a workload beyond its current capabilities. In April, Tanknology acquired CT&T, a fuel storage tank compliance company based in Cedarburg, Wisconsin, as part of its effort to keep up with the testing needs in the industry. According to Parmelee, Tanknology remains confident in its growth prospects. The company’s clients still require tests and inspections, even amid the COVID-19 pandemic. As its airline and car-rental clients are pinched, Tanknology has found another opportunity for new revenue by taking over some of its clients’ environmental compliance activities. “Our model is very scalable. We certainly believe that there’s opportunity for growth and for our managed services,” Porter says. “We’re very optimistic.” //

MIDDLE MARKET GROWTH // JUL/AUG 2020

A QUALIFIED OPINION

Philip Dunlap Office-Managing Partner, Balch & Bingham LLP Philip A. Dunlap is the office-managing partner in the Houston office of law firm Balch & Bingham LLP. His experience includes advising energy and energy services companies, private equity investors, privately held companies and startups on a wide range of corporate matters, including mergers and acquisitions, securities and financing. He recently corresponded with MMG about M&A activity in the energy sector.

“EVEN PRIVATE EQUITY INVESTORS WITH EXCESS DRY POWDER MAY NOT BE ABLE TO JUSTIFY MAKING THEIR TYPICAL INVESTMENT IF THEY CANNOT FINANCE THE TRANSACTION WITH THE RIGHT MIX OF DEBT AND EQUITY IN THEIR CAPITAL STACK.”

MORE ONLINE Find more interviews at middlemarketgrowth.org.

middlemarketgrowth.org

Q A

What types of M&A transactions are you seeing in the energy industry? The combination of worldwide stay-at-home orders and the steep decline in oil prices has caused most energy transactions to be placed on the shelf or terminated completely. However, as people begin to reengage in the market, I think certain types of deals will manage to get closed. Across all sectors of the energy industry (upstream, midstream, downstream and services), opportunistic buyers, particularly strategic buyers, will find a way to acquire distressed companies or assets from sellers who need cash to survive. This will lead to a consolidation of stronger key players in each of these industry sectors. In the upstream sector, we may also see large operators strategically selling assets in order to exit certain regions. As a counter to the doom and gloom of the upstream sector, the dramatic reduction in oil production has caused a corresponding reduction in byproduct natural gas production. As we get to the fall and winter, that reduction in supply should result in higher prices for natural gas, making deals in that space attractive to many buyers. As parties begin to negotiate potential transactions, the uncertainty

caused by the first half of 2020 is leading to more contingent and delayed payments in purchase price structures. Additionally, buyers are working through new diligence issues specifically arising from COVID-related issues. Buyers and their advisers are looking at the target companies’ PPP loan applications and forgiveness applications. They are also digging further into recent employment trends, including whether targets conducted layoffs or furloughed any employees during the stay-at-home orders.

How do you expect private equity investment strategies in oil and gas to change going forward? While strategic buyers with access to cash will most certainly be those opportunistic buyers discussed earlier, the lack of available debt may cause private equity buyers to wait longer in the market cycle before investing in energy. Even private equity investors with excess dry powder may not be able to justify making their typical investment if they cannot finance the transaction with the right mix of debt and equity in their capital stack. However, private equity buyers who have significant experience investing in

or managing distressed companies may continue to look at targets in the energy industry. Groups that focus on exploration and production (E&P) may not want to back brand new management teams or take chances in this space in the near term. I do expect those E&Pfocused funds to consolidate some of their portfolio companies in order to cut down on expenses. Private equity funds that have typically invested in midstream or oil field services will still work in this space, but they will be more cautious and disciplined in their investments. Oil field services companies that have some sort of proprietary technology or a unique space in the industry will continue

to be attractive. Any target that has demonstrated a good source of recurring revenue will also merit serious consideration from private equity.

QÂ AÂ

Will we see an uptick in M&A activity involving renewable energy businesses? The renewable energy market has been strong for several years, even before the current decline in oil and natural gas prices. While I expect this to continue to be a strong market and therefore a good target for M&A activity, I do not expect there to be a substantial uptick in M&A activity for the renewable energy sector. As federal subsidies for wind and solar projects phase out, the

attractiveness of this sector of the industry may not be as strong as it has been in recent years. As uncertainty related to government tax credits and subsidies continues (related both to the timing of these benefits and potential changes in the political environment), I expect that buyers who are familiar with this space will continue to be active, but we will not see significant growth in this sector in the near term. However, as major energy companies seek to diversify their portfolio and financial investors tire of the volatility in the oil and gas markets, I do expect the renewable energy sector to be ripe for growth with help from both strategic and financial buyers. //

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MIDDLE MARKET GROWTH // JUL/AUG 2020

Riding the Solarcoaster The ups and downs of operating a solar energy business

BY S.A. SWANSON

ver the past 30 years, the solar energy industry has experienced so much unpredictability, it even has a name: the solarcoaster. It’s never a boring ride, but this year has been particularly bumpy for some businesses. Last year, the outlook for 2020 solar growth was sunny. In 2019, the U.S. installed 13.3 gigawatts of solar photo voltaic capacity, up 23% from the prior year. Solar instal lations accounted for 40% of all new electric generating capacity added to the grid in 2019—more than any other energy source and the highest share in the industry’s history. Over the last 10 years, solar deployment has grown an average of 49% every year. And this year, the U.S. solar industry was on track to add nearly 50,000 more workers to the existing 250,000 jobs. The coronavirus pandemic has upended those pro jections. The Solar Energy Industry Association (SEIA) estimates that the U.S. solar industry could lose up to half of its workforce this year. Eighty percent of respondents to a recent SEIA survey say that business is somewhat or severely reduced. The survey was administered between March 22 and May 18 and included 300 respondents, who collectively represent businesses that employ more than 46,000 people.

MIDDLE MARKET GROWTH // JUL/AUG 2020

AT A GLANCE: U.S. SOLAR ENERGY Added Solar PV Capacity in 2019: 13.3 gigawatts Solar’s Share of New Electric Capacity Added in 2019: 40% Annual Solar Deployment Growth Over Previous Decade: 49%

GETTY IMAGES/JOHANNES KROEMER

But the 2020 solarcoaster hasn’t completely jumped the tracks. There are some bright spots for business. And a tale of two companies—both in the Midwest—shows how different customer segments within solar have the power to boost or bust revenue.

“ELECTRICITY IS ESSENTIAL. EVEN IF EVERYONE’S WORKING FROM HOME, THEY STILL USE A LOT OF POWER, AND UTILITIES STILL HAVE ALL THESE RENEWABLE GOALS TO HIT.” TYLER KANCZUZEWSKI Vice President of Marketing and Sustainability, Inovateus Solar

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DIMMING OUTLOOK Shelter-in-place restrictions and decreased business and consumer confidence immediately slowed commerce during the pandemic, and the renewable energy industry was no exception. The number of solar permits issued the week beginning March 30 was 32% lower than the first week of February. For work already in progress, solar project managers suffered an array of pandemic-related headaches. “I spoke to some folks in Illinois who are talking about putting their construction crews in tents, because they’re not sure they can stay in hotels,” says Tim Powers, research and policy associate at Inovateus Solar. He’s also heard from some solar companies that exercised force majeure clauses (related to events beyond human control) because challenges such as supply chain delays are pushing projects way behind schedule. About 80% of solar panels come from abroad, mostly from Asia. A study from research firm Wood Mackenzie predicts that if every step of the supply chain and project development came

to a complete halt for several weeks, the ongoing COVID-19 crisis could slow U.S. utility-scale solar projects into 2021. Powers’ company, Inovateus, focuses mainly on utility, municipal and commercial-industrial projects. It used to handle more residential work but has scaled that back in order to focus on larger projects, such as a 259,000-square-foot solar rooftop array it installed for an IKEA store in St. Louis. That shift away from residential work was fortuitous. Powers notes that residential business has plummeted industrywide. “They can’t do door-to-door sales,” he says. “And it’s harder to practice social distancing on a residential rooftop, compared to a project the size of a 100acre field.” Meanwhile, the federal solar tax credit is set to begin phasing out this year. That credit helped make solar energy more cost-competitive against other energy sources; it contributed to the industry’s growth among both residential and commercial customers by lowering their federal tax bills. If the credit isn’t extended, that could hurt residential sales even more. In 2020, homeowners, businesses or utilities that install solar power systems can claim 26% of their project costs as a credit on their federal tax return, down from 30% in 2019. The credit is scheduled to drop further, to 22% in 2021, and then to 10% thereafter for commercial pro jects—and to 0% for residential. The pandemic’s impact on other customer segments has been mixed. School closings, for example, have created a double-edged sword for the solar industry, Powers notes. “When you have kids there every day, you have to practice pretty strict guidelines with construction. When no one’s there, you can move ahead quicker,” he says. The downside: Any new school projects are likely to be delayed or put on hold until classes are back in session. Districts are focused on remote learning and plans to reopen safely. Installing solar panels isn’t at the top of their to-do list.

©SHEDD AQUARIUM/BRENNA HERNANDEZ

RAYS OF HOPE Although Wood Mackenzie has downgraded its 2020 forecast for global solar energy installation by 18%, Inovateus hasn’t experienced a decline of that magnitude. As of mid-June, its revenue hasn’t been impacted negatively. Based in South Bend, Indiana, the company has about 35 employees, and it isn’t planning any furloughs or layoffs at press time, according to Tyler Kanczuzewski, Inovateus’ vice president of marketing and sustainability. So far, the company has experienced only minor setbacks, such as a shipment of supplies coming from Italy that was delayed by a few weeks. Yet Inovateus isn’t entirely insulated from the pandemic’s effects. Commercial-industrial clients are holding off on solar projects due to budget constraints, and remote work has hampered productivity—strategic brainstorming over Zoom can’t match the energy of being with colleagues. Still, the company landed some deals during the pandemic that have bolstered confidence for the year ahead. They include a university project, a municipal project and a utility project. Located in Midwestern states, all three are slated to begin this year

E Inovateus installed solar panels on the rooftop of Chicago’s Shedd Aquarium in 2013

MIDDLE MARKET GROWTH // JUL/AUG 2020

and represent sizable construction projects for Inovateus. “For us, that’s a really good chunk of business,” Kanczuzewski says, adding that securing the three projects would be notable in a “normal year.” To land them in the midst of industry and economic turmoil is remarkable. Inovateus’ business with municipalities and utilities hasn’t been impacted much by the pandemic. “Electricity is essential. Even if everyone’s working from home, they still use a lot of power, and utilities still have all these renewable goals to hit,” Kanczuzewski says. According to SEIA, utilities held the largest share of photovoltaic capacity installed in the U.S. in 2019, representing 63% of all capacity installed during the year. (Also known as PV, photovoltaic systems convert sunlight to electricity using semiconductor materials.)

“IT’S A BIG COMMITMENT TO LEASE YOUR LAND TO A SOLAR DEVELOPER FOR 25 OR MORE YEARS.” TIM POWERS Research and Policy Associate, Inovateus Solar

In the wake of the pandemic, Kanczuzewski says the company heard rumors about utilities putting solar plans on hold for 2020, but that has not been the case so far. “It doesn’t mean it won’t happen at some point,” he says. “But we’ve responded to several [requests for proposal] in the last six weeks for utilities.” Social distancing rules might make large utility projects more challenging, however. These projects need lots of land, where hundreds of photovoltaic power-generating units are installed, and can require coordinating with dozens of landowners over hundreds of acres. Most reside in rural communities, with family property handed down through generations. Landowners might still meet in person with

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company representatives—at a safe distance— but if not, Inovateus will need to win their trust via Zoom. “It’s a big commitment to lease your land to a solar developer for 25 or more years,” Powers says. “You want to ensure that you’re working with a reliable, trustworthy company and that their partners are reliable and trustworthy.”

THE PANDEMIC’S BURN While this year’s solarcoaster ride has created small bumps for Inovateus, it’s been a gut-churning plunge for Rethink Electric, an electrical contractor based in Wood Dale, Illinois. The company does some miscellaneous electrical work, but 90% to 95% of its business is solar installation. About half of the company’s work comes from commercial installations, while the other half is residential. Only about 10% of business development is done in-house— the rest comes from large developers who subcontract to Rethink Electric. In January, the company had to furlough about 10% of workers. Mike Nicolosi, Rethink’s president and owner, had already anticipated a slowdown in business, due to state-level solar energy tax incentives that were expiring. Then the pandemic hit, requiring a larger furlough. For years, large residential solar developers have relied on door-to-door sales reps as their biggest source of business leads. After social distancing was implemented in many states, those leads disappeared overnight. The decline in leads will spark a drop in volume of at least 50%, Nicolosi predicts. That in turn eliminates sales and installer positions. At the start of the year, the company had 74 employees. By April, it had about 30. Without additional solar incentives from the state, Nicolosi says Rethink won’t be able to bring workers back, and it will likely need to cut more. “We’ll still stay in business, but we’ll be a much smaller shop,” he says. “If the funding doesn’t continue, we’ll probably be down to 10 to 15 people.” Doing business virtually has also hurt productivity. For the Illinois municipal projects his company is handling, Nicolosi says fewer than 5% of villages

G Large solar energy projects can require coordinating with dozens of landowners over hundreds of acres of land

PHOTO PROVIDED BY INOVATEUS SOLAR

cash flow was already underway. In construction, compensation comes after the final inspection, according to Nicolosi. “That means we’re building projects without getting the final inspection, without getting paid, which is more money we have to float during this time,” he says. When Nicolosi did financial planning during the fourth quarter of 2019, he thought his projections for 2020 were conservative. The pandemic swiftly made those forecasts obsolete. “I think that the revenue coming in, if we get 50% of what we were planning this year, I would call it a successful year,” Nicolosi says.

THE DAWN OF CLEAN ENERGY

“I THINK THAT THE REVENUE COMING IN, IF WE GET 50% OF WHAT WE WERE PLANNING THIS YEAR, I WOULD CALL IT A SUCCESSFUL YEAR.” MIKE NICOLOSI President and Owner, Rethink Electric

allow project approvals via email. Since in-person trips to city halls weren’t possible for much of the spring, the company has to print and mail copies of project plans. “The administrative cost of doing things on paper ... I mean, I can equate it to like six to eight administrative hours per project, just because they don’t want to go to email.” Inspections have posed a challenge as well. Nicolosi says he knows of two towns that have allowed his employees to communicate with the inspector through FaceTime as they walked through the solar installation. Other local officials have said they won’t proceed with final inspections until the stay-at-home order is lifted. Although Illinois began slowly reopening its economy in late May, the damage to Rethink’s

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The coronavirus has wreaked havoc for some solar providers, but underlying trends still suggest a bright future for alternative energy. Twenty-four states have joined the U.S. Climate Alliance and aim to reduce greenhouse gas emissions by at least 26% to 28% below 2005 levels by 2025. Many of those states have instituted programs that involve solar energy installations, generating new projects for companies like Inovateus. The industry has proven resilient, even in the face of headwinds. The Trump administration imposed tariffs on imported solar cells and panels in February 2018, prompting fears that the duties, known as Section 201 tariffs, would hurt the industry’s growth. Yet in 2019, during the second year of tariffs, the U.S. solar market grew by 23%, according to a report by SEIA and Wood Mackenzie. The pandemic has presented a new hurdle, but companies in the solar industry are using technology and new marketing strategies to adapt. Publicly traded Sunrun, one of the country’s largest solar companies serving the residential market, has employed drones, video conferencing and DocuSign electronic signatures to create a nearly contact-free process from sale to installation. In the spring, the company introduced a promotions program. New Sunrun customers can now have rooftop solar panels and Sunrun’s Brightbox home battery services for as little as $0 down and at a $1 monthly rate for the first six months.

GETTY IMAGES/ MUTHITA KHA MNTRI / EYEEM

California residents anticipate additional planned grid outages from utility PG&E to combat wildfires in summer and fall. That makes backup power appealing. In April, 60% of new Bay Area direct customers for Sunrun added battery storage to their solar packages. NextEra Energy—a large publicly traded producer of solar and wind energy—is bullish on batteries. “We increasingly see storage as an important standalone business,” said Jim Robo, chairman and CEO of NextEra, during the company’s first-quarter 2020 earnings call. He added that NextEra’s battery storage investments in 2021 are expected to exceed $1 billion. NextEra is also the parent company of Florida Power & Light, the state’s largest electric utility, which has set a goal of installing 30 million solar panels by 2030. Another sign of solar’s staying power is the recent investment activity by large private equity firms and asset managers. In January, Blackrock invested $850 million in Altus Power America Inc., which provides solar energy to U.S. commercial, industrial and municipal clients. And in May, the Interior Department

approved the Gemini Solar Project, a $1 billion installation—the largest in the country—which could power about 260,000 homes. Backed by private equity firm Quinbrook Infrastructure Partners and a unit of Berkshire Hathaway Inc. (NV Energy Inc.), the installation will sit on 7,000 acres of federal land and could employ up to 900 construction workers. The display of investor interest likely comes as cold comfort for businesses like Rethink Electric, which the COVID-19 pandemic has thrust onto a rocky patch of the solarcoaster’s track. Meanwhile, even businesses shielded from the worst impact of the coronavirus must contend with reduced tax credits and persistent tariffs. Still, demand for alternative power continues to rise, while new installations contribute to solar energy’s growing share of electric power capacity. Not every business will withstand the headwinds of COVID-19, but the solar energy industry overall looks poised for an upward trajectory—although not an entirely smooth ride. // S.A. Swanson is a business writer based in the Chicago area.

MIDDLE MARKET GROWTH // JUL/AUG 2020

The pandemic spotlights emerging targets for M&A BY JOANNE CLEAVER

GETTY IMAGES/ANDRIY ONUFRIYENKO

heories about the potential shape of the post-COVID-19 economic recovery span the alphabet—L, U, V, W and Z, along with their cousin, the Nike “swoosh.” The likely reality is that each sector will experience its own economic journey to a new normal. While travel and tourism, hospitality, oil and gas, and enterprise health care must fight their way back in their own ways, investors and company owners say that specialty sectors might enjoy a “J”-shaped recovery in which they not only bounce back but reach new heights. Not every business has suffered as a result of the coronavirus. Zoom and Netflix are two well-known examples of companies that prospered while everyone was stuck at home. Midsize companies that proved to be “essential” during the crisis and those with strong technology platforms are likely to be attractive targets for mergers and acquisitions. At the same time, those that took a beating but stand a good chance of recovering after the dust settles could be strong candidates for M&A, if they play their cards right. “As investors, we’re looking at companies that will take a hard hit but that will probably bounce back,” says Jeff Sands, a managing partner at turnaround firm Dorset Partners, based in Dorset, Vermont. Companies that trim their sails to get through the storm will earn investors’ trust and dollars,

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while those that try to outrun the gale will likely fail. “Some companies will try to hold on to the past,” he says. “But a few will find a way forward and survive.”

NO-TOUCH, HIGH-TOUCH The coronavirus pandemic put most new deals on ice as the disease spread across the U.S. this spring. But one sector that remained relatively active was technology, media and telecommunications, according to Michael Fanelli, a partner in the Transaction Advisory Services practice at accounting firm RSM US LLP. Deals involving companies that sell software, software-as-a-service and financial technology products accounted for the greatest share of M&A activity observed by RSM during the crisis, he said during an interview with ACG’s GrowthTV in May. For many businesses that have been slow to digitize, COVID-19 is the shove they needed to enter the virtual age, say investors and analysts. Interest in technology and related infrastructure is expected to continue among investors and corporate acquirers, even after the pandemic ends. The immediate migration to home-based work, daily online commerce and endless digital entertainment is a glimpse into the likely economic justification for the rapid rollout of 5G broadband, not to mention 6G, says Roald Nashi, a partner with the Washington, D.C., office of law firm Kirkland & Ellis.

While teleconferencing snafus spark jokes, the underlying message is that all those virtual meetings require expanded data storage and bigger, more reliable and resilient data pipelines in neighborhoods, small towns and rural areas, not just commercial districts. Major players will scoop up digital innovators to offer virtual work suites that mirror on-site work and that enable collaboration across organizations, he predicts, pointing to Verizon’s recent acquisition of the Blue Jeans network as an early example. Employees’ physical location has become less important across the board, thanks to the introduction of virtual technologies that support collaboration. Video conferencing and online meeting tools have the potential to upend entire business models and to shift the priorities of others, yielding new investment targets. “As people get more and more comfortable participating through video, that might change business travel and the meeting industry,” Nashi predicts. More video conferencing will lead to rising data consumption and transmission, which could prompt mobile operators to raise capital to invest in broadband infrastructure, including wireless and fiber optic systems. “One way will be by divesting some assets—potentially, data centers—and that might give private equity more opportunities to play,” Nashi says.

ANSWERING THE CALL Businesses across industries are moving toward software solutions to streamline operations, but not everything can be automated—in fact, the more automated e-commerce and customer service become, the more value customers place on a conversation with a human being who can troubleshoot problems that algorithms didn’t anticipate. Therein lies the burst of interest in customer contact centers (formerly known as call centers, when calls were the primary mode of communication). Centers with ready-to-help staff with specialized experience in insurance, financial services, retail and other sectors are especially attractive, says Michael Lamm, managing partner of Philadelphia-based Corporate Advisory

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“AS PEOPLE GET MORE AND MORE COMFORTABLE PARTICIPATING THROUGH VIDEO, THAT MIGHT CHANGE BUSINESS TRAVEL AND THE MEETING INDUSTRY.” ROALD NASHI Partner, Kirkland & Ellis

Solutions, a boutique merchant bank that focuses on health care revenue cycle management, debt collection and, yes, contact centers. With millions of confused Americans needing help with financial accounts, human resource questions and technical challenges, contact centers with experienced staff have become a hot commodity. It’s what staffers know, not where they sit, that delivers value to both corporate clients and consumers, according to Lamm. “You buy the capability when you buy call centers,” he says, explaining that the latest iteration of the industry has broken free from real estate. Even before the start of the pandemic, consolidation in the contact center industry was underway. In one example, TTEC Holdings, Inc., a publicly traded customer experience technology and services provider, acquired First Call Resolution for a reported $159.8 million in

MIDDLE MARKET GROWTH // JUL/AUG 2020

GETTY IMAGES/PETER DAZELEY

October. FCR operates nine customer experience centers in the United States, serving clients in a range of industries, including e-commerce, gaming, health care, retail and more.

HEALTH CARE GOES THE DISTANCE Contactless meetings aren’t just for customer service consultations or staff meetings. Increasingly, patients are meeting with their physicians over a screen, too. The spread of the coronavirus created even more demand for health care delivered remotely, known as telemedicine, as a way to avoid hospitals and the risk of infection. Medicare announced on March 6 that it would cover telemedicine, drawing virtual care further into the mainstream. Telemedicine enables diagnostics from a distance and connects health specialists with patients, regardless of where they’re physically located. Its growth depended on the evolution of regulations and payment systems, plus increasing comfort with technology among patients and doctors. Those elements were in place in the spring of this year, when the coronavirus pandemic sparked widespread use of telemedicine, says Ali Ardakani, managing director of Novateur Ventures Inc., a global

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advisory, investment and incubation firm based in Vancouver, British Columbia. “COVID-19 is going to do something we could not force ourselves to do: It’s going to force us to be efficient,” he says. With the option for remote appointments, on-site visits to a health care provider can be saved for higher-stakes evaluations. “You don’t need to go see the doctor every time you have an aching back,” Ardakani says. New deals involving telemedicine providers have closed since the start of the pandemic. Private equity firm New Capital Partners announced on March 30 that it was investing in TeleHealth Solution, a provider of virtual medical and health care support for patients in hospitals and senior living facilities, based in Charlotte, North Carolina. New Capital has a long history of backing virtual health care businesses. In 2005, the firm invested in Teladoc, one of the earliest telemedicine companies. In other cases, private equity-backed health care businesses have developed their own virtual health care capabilities in response to the COVID-19 outbreak. Vybe Urgent Care, for example, announced a new telemedicine service at the end of March. Vybe is part of investment firm NewSpring Capital’s portfolio. Adoption of telemedicine will be encouraged by insurance companies seeking savings to offset coronavirus expenses and as a way to manage medical practice risks. Ardakani expects fresh infusions of capital will support services related to telemedicine, including electronic records management, health applications and devices that patients can use at home to share health data with their doctors. Research by Markets and Markets, a market research firm, predicts that the global telehealth market will grow at a 16.9% compound annual rate, reaching $25.4 billion by 2025.

ON THE REBOUND Even as the coronavirus outbreak has boosted some industries, others face the disastrous effects of the economic turmoil wrought by the disease. That has thrust companies into

uncharted territory, but they nevertheless face a classic recovery arc, says Mark Simoncelli, senior vice president of Americas consulting for research firm Frost & Sullivan. First, businesses must take steps to keep the lights on, literally. Then, they have to plot how they’ll reset to keep customers. After that, they need to scope out their rebound, which involves identifying the best growth opportunities, including those that might not have existed save for the economic trauma. Selling all or part of the business will be one path for owners looking toward the next phase of growth. Private capital investors are already picking through the rubble for gems, especially diamonds created in the economic crucible, says Scott Bingham, leader of the U.S. Transactions practice for FTI Consulting. “Many of our clients have been interested in certain sectors for years, but the multiples have been too high,” he says, citing health care and pharma in particular. “For the past several years, investors have been doing roll-ups and buying distressed assets because they couldn’t afford down-the-middle assets.” One strategy likely to emerge out of this crisis, says Bingham, is blending assets that work in concert with each other—for example, pairing an investment in broadband technology with another in film or music libraries to support robust streaming services. “There will be better ways to combine things,” he says. The pandemic offers businesses a rare opportunity to reap fast returns from investing in digital upgrades—especially tools that equip managers with forward-looking metrics, says Simoncelli. He recommends looking at emerging trends and potentially buying assets or aligning with adjacent operations that can stabilize supply chains—for instance, acquiring specialty manufacturers of hard-to-source components, to minimize reliance on overseas suppliers. “Then it’s much easier to weather a storm like COVID and other seismic events,” he says. Telecommuting and virtual work invite exploration of automated tools and more expansive dashboards for all kinds of industries.

Ultimately, the urgency of responding to the virus lockdown forced many change-resistant executives to move faster than they thought they would or could, says Brian Kushner, leader of the Private Capital Advisory Services practice for FTI Consulting. A willingness to move forward and evolve is fundamental to survival, and it’s at the heart of the advice Dorset Partners’ Jeff Sands has for businesses: Be a cockroach.

“COVID-19 IS GOING TO DO SOMETHING WE COULD NOT FORCE OURSELVES TO DO: IT’S GOING TO FORCE US TO BE EFFICIENT.” ALI ARDAKANI Managing Director, Novateur Ventures Inc.

Sands has lived through a few recessions, including a searing experience in 2008 and sweeping personal and business losses in the wake of Hurricane Katrina. He knows that the flash of a bomb is only the first indicator. “The shock waves are going to keep coming,” he says of the head-on economic crash caused by the spread of the coronavirus and shelter-in-place mandates. Some businesses that succumb to the shock will be swept up by investors seeking turnaround or distressed opportunities. But until a clear shape emerges from the alphabet soup of recovery options and the U.S. economy begins its rebound, M&A deal-makers seeking healthier businesses will need to make their best guesses about which ones will weather the storm. To business owners, Sands offers these words of wisdom: “You need to say fully, 100%, ‘I am the cockroach. I am the one who will survive.’” // Joanne Cleaver has been covering entrepreneurship and business growth for over 30 years for national media, as both a staff and freelance journalist.

MIDDLE MARKET GROWTH // JUL/AUG 2020

H W. Bryan Rakes and Karen C. Hermann, Partners at Venable LLP

Illustrations by Tony Healey

IN FOCUS VENABLE LLP

Untangling Complex Regulations Venable guides clients through the modern regulatory world

ositioned at the nexus of the private and public sectors, Venable LLP, a Washington, D.C.-based law firm with nine offices across the country, has the expertise to guide clients through mergers and acquisitions and other complex financial transactions in an ever-changing and demanding regulatory environment. The firm serves its clients, including middle-market firms, in a cost-effective and timely manner. Clients are able to tap into the network of Venable’s 850 attorneys and other professionals, many of whom honed their expertise in settings that include the U.S. Senate, the Supreme Court, federal regulatory agencies, Fortune 500 companies, startups and global nongovernmental organizations. Venable’s agility and legislative expertise were on display earlier this year as the firm helped clients navigate the federal Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, which provides major financial support to companies impacted by the COVID-19 pandemic. Within 24 hours of the law’s passage, a team of Venable attorneys collaborated to summarize the legislation and distribute critical information to clients. “We were able to digest that legislation, which is more than 800 pages long, and distill it so our clients could get information out to their employees very quickly,” says Ronn S. Davids, a partner at Venable whose national corporate practice focuses on middle-market firms. “We brought all of our expertise to bear.”

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As the COVID-19 crisis unfolded, Venable attorneys proactively reached out to the firm’s clients to address various concerns—from how the pandemic would affect liquidity, to furloughing employees, to concerns over contract cancellations, supply chains and price gouging. Venable moved fast to set up a COVID-19 task force dedicated to helping clients navigate the effects of the pandemic. The group provides relevant alerts, webinars and other resources to address clients’ concerns.

TALKING THE TALK Venable was able to move quickly to support its clients through the coronavirus outbreak thanks to the experience and knowledge of its attorneys. That expertise is valuable in a pandemic, but it’s also instrumental to the day-to-day work of the firm’s professionals. “We sweat the small stuff and the big stuff,” says Karen C. Hermann, a Venable partner whose practice focuses on corporate transactions. “Every interaction is important.” Hermann has expertise in patent litigation and technology, and she clerked in the U.S. Court of Federal Claims, where all government contracts are disputed. That experience is helpful in her practice, which focuses on mergers and acquisitions, carve-out transactions, corporate reorganizations, strategic alliances and joint ventures. “I understand government contract law,” she says. “I understand industry and law at a level that’s deeper than the usual M&A lawyer. I can talk the tech talk, the government talk and the

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“WE WERE ABLE TO DIGEST THAT LEGISLATION, WHICH IS MORE THAN 800 PAGES LONG, AND DISTILL IT SO OUR CLIENTS COULD GET INFORMATION OUT TO THEIR EMPLOYEES VERY QUICKLY. WE BROUGHT ALL OF OUR EXPERTISE TO BEAR.” RONN S. DAVIDS Partner at Venable

M&A talk. The intersection of those areas is where I play best.” The deep expertise is helpful across all Venable practice areas, including its robust governmental practice, in which the firm’s professionals track legislation and advocate on behalf of clients. “In our D.C. office, we have colleagues who understand federal agencies and know who to call to get answers,” Davids says. The firm’s proximity to the Capitol and its contacts in government make it possible to move quickly. “We have staff who can walk over to the Hill when necessary,” adds Venable partner W. Bryan Rakes. “They have those relationships.” Venable’s ability to navigate inside the Beltway is helpful for serving not only its local clients, but also firms across the nation whose operations are impacted by federal policy decisions. “In some measure, Washington, D.C., will always influence what’s happening in the rest of the country,” Rakes says.

CONDUCTING AN ORCHESTRA Each of Venable’s attorneys brings valuable experience, yet often an engagement requires a multidisciplinary approach. In those instances, the firm is able to marshal the expertise of a range of attorneys as needed, according to

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Charles Morton, co-chair of Venable’s Corporate Group and a former chairman of the ACG Global board of directors. Although one attorney serves as a client’s primary contact, he or she has access to the knowledge of every other lawyer on the Venable team. “That attorney is like the conductor of an orchestra,” Morton says. “He or she understands the clients’ challenges and knows which of our 800-plus lawyers is best suited to handle a given situation.” That collaborative approach is reflected in the firm’s mergers and acquisitions work. Venable has about 100 attorneys devoted to M&A, with experience representing both buyers and sellers. “We always have someone who knows something about any question that comes up,” Hermann says. In one example, Venable helped a private equity client as it acquired a business with thorny licensing concerns at both the state and federal levels. To get the deal done in a tight time frame, Morton assembled 25 attorneys with expertise in real estate, finance and environmental regulation, among other specialties. As a longtime member of ACG’s dealmaking community, Morton appreciates the need to move fast on transactions.

“The ability to assemble multidisciplinary teams across regulatory areas is a distinguishing factor for Venable,” he says. “We do it efficiently and quickly.”

GOING A STEP FURTHER Collaboration isn’t limited to how Venable’s attorneys work together. It also characterizes how the firm engages with clients. “I like to think of myself not so much as their attorney as their trusted adviser,” Rakes says. “If one of my clients has to make a tough decision, I want to be one of the five people they call.” The same goes for Davids, who poses this question to business leaders he works with: What keeps you up at night? “That’s a great question to ask clients when you go out to lunch with them, in a moment that’s quiet and you have time to talk,” he says. Venable’s attorneys welcome it when clients bounce ideas off of them, even if it’s a business concern rather than a legal one. “It helps us to get to know their business, and it’s understood that we are not just about billable hours,” Rakes

says. “Providing an ear on a non-billable basis is something a lot of clients appreciate.” Venable’s professionals stand out by immersing themselves in their clients’ businesses, helping to resolve legal or regulatory issues and going a step further. “I want to anticipate my clients’ needs,” Davids says. “I provide information and advice beyond the question asked.” To stay up to date on the issues facing their clients, Venable attorneys also attend industry conferences, speak on panels and become thought leaders. Clients’ needs can vary based on their size, which Venable takes into consideration when designing a tailored approach. For example, many of the middle-market organizations that Venable works with don’t employ in-house legal counsel, prompting the firm to adjust its communication style. “We may be interacting with CFOs and CEOs,” Davids says. “We take the time to explain legal concepts to non-attorneys.” Recognizing that a midsize firm might not have the budgetary resources of a larger business, Venable also works to contain costs by aggressively monitoring each case to ensure it receives the appropriate amount of staffing. The firm is committed to ensuring clients have the resources and expertise needed in the modern legal landscape. In a fast-changing regulatory environment that’s increasingly complex, having the right legal partner is critical for navigating today’s business challenges—whether that’s acquiring a company with complicated IP, or navigating the fallout from a global pandemic. //

“[THE ATTORNEY] UNDERSTANDS THE CLIENTS’ CHALLENGES AND KNOWS WHICH OF OUR 800-PLUS LAWYERS IS BEST SUITED TO HANDLE A GIVEN SITUATION.” CHARLES MORTON Co-chair of Venable’s Corporate Group

MIDDLE MARKET GROWTH // JUL/AUG 2020

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Modest Growth Expected for Craft Brewers That Evolve SOUND DECISIONS // Beer makers should prepare now for post-pandemic restart

A Adam Stump Managing Director, Hilco Valuation Services

t the start of March, there were more than 8,000 active breweries in the United States. Based on market trends and forecasts leading into Q2 2020, it was likely that only 4% to 5% of those would have closed this year had the COVID-19 crisis not occurred. Now, faced with the ramifications of stay-athome orders, closure of on-premise locations and little or no revenue for an extended period of time, it is logical to assume that this percentage will be significantly higher. Data from the Brewers Association may provide some insights, starting with the fact that the majority of brewery workers have now been laid off. Given breweries’ costs, revenues and the level of state and federal aid at the time, nearly 60% of craft brewers indicated at the start of April that they would be forced to close their doors within three months if social distancing measures remained at then-present levels.

“WE BELIEVE THE BREWERS THAT WILL EMERGE IN THE BEST POSITION TO SUCCEED MOVING FORWARD ARE PLANNING AHEAD AND RESPONDING CREATIVELY TO THE CHALLENGES CAUSED BY THE PANDEMIC.” Over most of the past decade, there has been a divergence taking place in craft beer, as the number of new breweries far outpaced those closing—something that has not been as prominent in many other industries. Notwithstanding the shorter-term impacts of the current crisis, over the next five years Hilco expects to see a more mature pace of growth where openings and closings become more balanced and stabilized, leading to modest growth overall in craft

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beer. In the near term, however, given the widespread shutdown of on-premise services due to COVID-19, we are likely to see a disproportionately high level of closures. As an authority on asset valuation, monetization and advisory services, Hilco is in close contact with those across the craft beer, restaurant, retail and other related industries during this crisis. We believe the brewers that will emerge in the best position to succeed moving forward are planning ahead and responding creatively to the challenges caused by the pandemic. Proactive brewers are spending significant time and resources today planning their next steps by actively working through scenarios of how to adapt to operating at 50% of normal capacity or less, and the impact on their staffing needs and operating requirements. They are looking at how to modify previous purchasing levels and renegotiate contracts accordingly, and they’re talking to distributors and customers about retrieving draft kegs that were in place before the shutdown and refilling or returning them before reopenings occur, to ensure they maintain control of as many tap handles as possible and can capture vacant ones as competitors fail. These proactive brewers are exploring avenues for carrying their fledgling pandemic period takeout or curbside business forward. They’re also working with outside consultants to build on the initial stop-gap e-commerce and merchandise programs they put in place during the crisis. For those craft brewers that are able to weather the storm from a cash flow perspective and readily adapt, there are likely to be new opportunities for greater share of the market and expanded revenue channels moving forward. // Adam Stump is a managing director at Hilco Valuation Services. He can be reached at 847.528.3300 or astump@hilcoglobal.com.

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Developing an International Expansion Strategy GLOBAL VIEWS // Overseas growth is a marathon, not a sprint

N Nicole Sahin CEO and Founder, Globalization Partners

ew markets. Diverse revenue streams. High returns on reinvestment. Revitalized product development. “Going global” is a strategic maneuver opening the next chapter for many organizations seizing the moment to expand their global footprint. However, when setting the stage for a successful international expansion, businesses should remember growth is a marathon, not a sprint. International expansion strategies are multilevel strategic plans that businesses use to enter an overseas market, establish a growing presence, and become quickly profitable. When composed properly, these plans make growth more structured and sustainable. Below are some of the tips, practices and attitudes that help ensure short- and long-term success for international planning. Let your local team audit—and adapt. Copying and pasting domestic processes onto international ones and expecting identical results almost never works. Hire a high-quality local team member or two, tell them what you’re doing in the U.S., and let them adapt it for local markets to prevent “one-size-fits-all” expansion woes. Strike while it’s hot—but keep your reputation strong. As the saying goes, your reputation precedes you. A solid domestic foundation is the cornerstone of new initiatives and new efforts. Overseas markets will still have access to your core market impressions, your PR initiatives and the way your customers generally perceive how you conduct business. Your company carries a reputation with it wherever it goes. Make sure it’s a positive one. Just do it. First-movers are businesses with products or services that are the first of their kind in a new market. While the best foreign expansion strategies are adaptive and

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thoughtful—requiring nuance, commitment, detailed resource planning and buy-in from cross-departmental executives and stakeholders—there’s a point where you just need to take the leap and trust the local experts you hire. They’ll know the local market better than you ever could. Match your business model with your mode of entry. Business models are not monolithic. Processes that flow smoothly in your home country won’t necessarily translate into another. All this means an international expansion strategy must include an adapted business model that does two things simultaneously. For one, it should align with a foreign market’s projected value (i.e., why you chose to expand there). These reasons could include cost-effective production, an expanded customer base, refreshing a product’s lifecycle or even for the new market’s tax incentives, to name a few. The adapted business model should also align with that new foreign market’s actual culture and practices: A business model with these objectives is a business model that’ll work across international expansion. Having a plan with these objectives in mind will prepare you for a successful international expansion. // Nicole Sahin is CEO and founder of Globalization Partners, where it is her mission to make it fast and easy for companies to hire anyone, anywhere in the world. Globalization Partners simplifies global business by enabling companies to quickly expand into new countries without setting up branch offices or subsidiaries. Companies find the talent, and Globalization Partners puts that team member on its locally compliant payroll.

MIDDLE MARKET GROWTH // JUL/AUG 2020

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Cyber Due Diligence: A Must, Regardless of Environment SOUND DECISIONS // How a data security plan can protect your investment

W Kevin Carpenter Cybersecurity Due Diligence Leader, RSM US LLP

Nishi Shah Director, RSM US LLP

Ryan Duquette Partner, RSM Canada

hat do the acquisitions of Starwood Group by Marriott and Whole Foods by Amazon have in common? Both experienced cyberattacks shortly after the acquisitions were complete and failed to uncover data breaches that occurred before purchase. These companies are not alone. And if breaches can happen to behemoths, smaller companies with fewer protections in place are definitely at risk. According to RSM US’s 2019 NetDiligence Cyber Claims Study, of the more than 2,000 cyber insurance claims filed between 2014 and 2018, 96% came from small to medium-sized businesses with less than $2 billion in revenue. While certain industries that handle sensitive personal information, including health care, financial services and retail, may see a higher incidence of data breaches, no industry is immune. If security events disrupt business operations, customers stop doing business with the organization, which leads to a significant loss of revenue. Today, this trend is not unknown to deal-makers. Most investors have faced one or more cybersecurity incidents in their investment or portfolio companies. If the acquired company faces a security breach during the holding period, chances are the company will not command the desired multiple upon exit and will jeopardize the overall investment objectives. Cyber due diligence will help buyers and sellers alike in understanding the critical assets from a data, infrastructure and brand reputation perspective; which threat-actors may be motivated to damage the company; the quantified and prioritized cybersecurity risk associated with critical assets; the financial loss exposure from identified risks, including the regulatory penalties if a breach occurred; and the roadmap

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for addressing security concerns and the price of remediation efforts. Once you understand the value of your assets and have an idea of the threat-actors, it’s important to identify the different means through which they can damage the business. Finally, you should assess what controls the business has already implemented to manage those risks. There’s no question that cyber due diligence is paramount, but private equity firms need to make sure they are prepared to deal with threats and potential breaches on a go-forward basis as well. Immediately after closing the deal, the buyer should execute the plan developed through cyber due diligence and remediate those risks that could expose the company to significant losses. Unfortunately, cybersecurity is not a one-time investment that can then be forgotten. A trusted third party should be engaged to set up an enterprise-wide risk governance program to provide visibility into cybersecurity risk throughout the holding period. In today’s M&A environment, you cannot afford to have data security issues and attacks become distractors and delay closing. While it is easy to be overwhelmed by cybersecurity issues, prudent investors can avoid major financial losses with appropriate cyber due diligence and enterprise risk governance. // Kevin Carpenter is the cybersecurity due diligence leader for RSM US LLP. Nishi Shah is a director in the Transaction Advisory Services practice of RSM US LLP, specializing in cybersecurity due diligence. Ryan Duquette is a partner with RSM Canada’s Security, Privacy and Risk Consulting practice.

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Tips for a Stronger, Better, More Profitable Recovery SOUND DECISIONS // Donâ&#x20AC;&#x2122;t focus on a return to normal

T Kendal Ross Innovation and Development, Insperity

he COVID-19 pandemic of 2020 will forever be known for its global impact on markets and society. The outbreak has claimed lives and livelihoods, but it has also taught many lessons that will help businesses react to similar events in the future. Recovery from significant downturns is an exercise in strategic adaptation: Companies must look forward with a new long-term vision, reevaluating and resetting the firm with plans focused on achieving new heights. Beginning at the onset of disruption, leaders must seize the opportunity to reevaluate, renovate, remove weakness and fine-tune the company. Strategic adaptation considers customers, employees, capital needs, supply chain partners and productive capacity. Five Business Recovery Fundamentals to Consider Revisit your five-year strategic plan. Review the plan with detailed emphasis on a two-stage recovery period of the next six and 12 months. Did the lessons of the crisis cause you to rethink the business model, or reveal critical weaknesses or ways to fortify the firm? Establish new strategic goals, objectives, budgets and controls. Create necessary progress reporting for each key objective. Reconnect with customers. Hopefully, you have been in close communication with your customers during the crisis. If not, reconnect with them enthusiastically, sharing product and customer service improvements and perhaps offering special limited-time pricing or promotions. Remember, your competitors are courting the same customers and reacquiring lost customers is very costly. Reestablish key value chain partnerships. During decreased activity, you probably reduced your ordering of key inputs like raw materials.

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You may have turned down channel partnerships. Your suppliers and partners want you back. Work cooperatively with them to ramp your orders up to full production levels. Reengage employees. Hopefully, with federal relief funds and prudent management you were able to retain most of your workers. Avoid overcapacity and stress on recovery finances by timing the return of employees with your production expectations. Make the return to work a celebration. If your employees worked from home, their return from isolation will be a welcome relief, but others may be frustrated by what feels like closer supervision and rigid working parameters. Be patient, reassure them and rally them around a vision of a stronger, better company. Communicate changes, and respect and reward their endurance, tolerance and loyalty. Rearrange operating capital. You may have expended much of your financial reserves surviving the disruption. After careful construction of the ramp-up budgets, gauge your working capital needs. They will probably exceed previous run rates in the short term. You may need to seek a short-term infusion of capital to prime the pump. Additionally, you may be able to restructure existing debt to increase repayment flexibility. Be sure to investigate the availability of short-term, interest-free loans. This return will require your very best leadership skills, but it also may be a tremendous opportunity to make the emergent company better, stronger and more profitable. // Kendal Ross works in innovation and development for Insperity. He is also a professor at the University of Kansas, where he teaches management policy and strategy at both the undergraduate and graduate levels.

MIDDLE MARKET GROWTH // JUL/AUG 2020

THE PORTFOLIO

Financial Reporting for Oil and Gas Private Equity Funds BY THE NUMBERS // Understanding some fundamental characteristics

D Brian Matlock National Practice Leader, BKD LLP

etermining whether an oil and gas entity should be treated as an oil and gas fund under Accounting Standards Codification (ASC) 946, Financial Services-Investment Companies, or an oil and gas operating entity, can be a challenging endeavor, even for the most sophisticated accounting professionals and private equity funds. The initial determination of whether an oil and gas entity qualifies as an investment company should be completed upon the entity’s formation. An investment company must possess the following fundamental characteristics under ASC 946: It provides investors with investment management services. This is done through a management company structure. It commits to its investors that its business purpose is investing for investment income and/or capital appreciation. This is stated within the oil and gas entity’s private placement memorandum, limited partner agreement or member agreement.

“THE INITIAL DETERMINATION OF WHETHER AN OIL AND GAS ENTITY QUALIFIES AS AN INVESTMENT COMPANY SHOULD BE COMPLETED UPON THE ENTITY’S FORMATION.” It doesn’t obtain benefits from an investee that aren’t normally attributable to ownership interests or that are other than capital appreciation or investment income. This is viewed as realized gains versus sales of physical oil and natural gas. In addition to the fundamental characteristics, an investment company generally has the following typical characteristics: It has more than one investment. However, it’s very common for oil and gas entities to only

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have one investment but still be considered an investment entity. This is because the use of special-purpose vehicles and alternative investment vehicles is a very common structure for oil and gas entities. It has more than one investor. However, it’s quite common for upstream oil and gas entities to establish sidecar investment vehicles that contain a single investor. These entities usually do meet the requirements of an investment entity if the entity attached to the sidecar also meets the requirements of being an investment entity. It has investors that aren’t related parties of the parent or investment manager. It has ownership interests in the form of equity. This would include partnerships and limited liability companies. C corporations wouldn’t be allowed to use ASC 946. It manages substantially all of its investments on a fair value basis. This assessment should be done from the viewpoint of the investor, not management. An investment company will generally meet all of these typical characteristics. However, the absence of one or more of those typical characteristics doesn’t necessarily preclude an entity from being an investment company. If it has been determined that an entity qualifies as an investment company, the investment company must report all of its oil and gas investments on a fair value basis, which is generally desired for institutional investors. Fair value is defined by ASC 820, Fair Value Measurement, as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” // Brian Matlock is the national energy and natural resource industry leader for BKD LLP, mainly focusing on emerging oil and gas private equity funds.

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THE PORTFOLIO

Top 3 Asian Markets for Global Expansion in 2020 GLOBAL VIEWS // Where tech leaders see opportunity

V Rob Wellner Chief Revenue Officer, Velocity Global

elocity Global’s “2020 State of Global Expansion Report: Technology Industry” found that nearly a quarter (23%) of U.S. and U.K. technology executives identified Asia as their target region for global expansion this year. Executives agreed that a few Asian countries in particular stood out among their neighbors. Of the top 10 most promising global markets on the report’s Global Expansion Tech Index, Singapore topped the list, while Hong Kong took fifth place, and South Korea was number 15. In this article, we explore how each of these three popular Asian markets earned its ranking, the determining criteria, and the benefits of doing business in each of these top regions. The Best Asian Markets for Tech Companies Asia is the second-most desired region for growing U.S. and U.K. tech firms, placing behind Europe. According to the report’s Global Expansion Tech Index, tech executives ranked each destination based on the following criteria: GDP growth and inward investment (30%), availability of skills (25%), complexity of regulatory landscape (20%), connectivity (15%) and quality of infrastructure (10%). Singapore, Hong Kong and South Korea all ranked in the top 15 markets in the index, which makes them great options for tech firms—or companies in any industry—looking to establish a presence in the Asia-Pacific region. Singapore: In 2020, Singapore is the top country for global expansion. According to the report, 21% of U.S. and U.K. tech leaders named Singapore as their first choice for accessing top tech talent in Asia. But it’s not just talent drawing in tech firms. Singapore scored well across the board; the country topped all other destinations in terms of ease of doing business and outperformed all

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other Asian markets on the index in skills availability and innovation. Hong Kong: Despite social and political unrest, Hong Kong is the fifth-most desired global city for expanding U.S. and U.K. tech firms. Hong Kong places closely behind index-topper Singapore in terms of regulation and ease of doing business. But perhaps more impressive is Hong Kong’s foreign direct investment, which accounts for 23.8% of its GDP, topping even Singapore. South Korea: South Korea remains one of the easiest countries for conducting business, both in and outside of Asia. The World Bank listed it as the fifth-most business-friendly country in the world, and the third market in Asia, behind only Singapore and Hong Kong, respectively. Of the Asian countries listed in this report, South Korea places third in terms of knowledge availability, making it one of the most promising markets for firms’ tech talent searches. Companies reliant on exporting and importing goods find South Korea’s business-friendly laws and regulations beneficial. Whether in the tech industry or another sector, Asia offers growing businesses a great opportunity to grow their brand abroad. If you’d like to learn more about why these destinations outpaced others and how they compare to the rest of the world’s top economies for tech businesses, download a free copy of the report at velocityglobal.com/acg. // Rob Wellner is chief revenue officer for Velocity Global, a leading provider of global employment solutions. Wellner draws on 12 years of experience in capital markets to help organizations expand internationally, including using Velocity Global’s International PEO service. Learn more at VelocityGlobal.com/acg.

MIDDLE MARKET GROWTH // JUL/AUG 2020

ACG@WORK

LOGGING IN Meetings, educational events and in-person gatherings of all kinds have been hindered by the coronavirus outbreak. In response, ACG has adapted its offerings by hosting networking events and educational opportunities online, executed with the same level of quality members have come to expect from the organization over the decades. Here are just some of the ways ACG chapters have tailored their events.

GETTY IMAGES/AXLLLL

WEBINARS Shelter-in-place mandates haven’t stopped ACG chapters from offering a wide array of educational webinars and roundtable discussions featuring industry experts. Here are several examples of recent virtual programs hosted by ACG chapters: 2 ACG Cleveland held a virtual panel with its Women in Transactions group, which discussed how the global pandemic has changed the ways local businesses have successfully changed their operations in order to survive. 2 ACG Philadelphia launched its weekly “What’s Happening Now” webinar series, which has covered topics including the state of deal flow, due diligence, portfolio management and more. 2 ACG New York teamed up with ACG Chicago, ACG Denver and ACG Detroit to present a webinar series, including a session titled “Operational Considerations to Drive Liquidity,” where a panel of experts discussed the levers that operators can pull to have an immediate impact on their bottom line. 2 In its webinar lineup, ACG Los Angeles hosted “Reps & Warranties: COVID-19 and Beyond,” where a panel of specialists discussed the representations and warranties market, and how insurers have responded to COVID-19. 2 ACG Germany hosted a virtual lecture on the current M&A market in Europe. 2 ACG Toronto presented “How Is Cyber Security Impacting the Capital Markets Sector.” 2 ACG St. Louis held a virtual lecture series that included a talk with Kurt Hunzeker, president of the St. Louis Battlehawks XFL team. 2 ACG Minnesota launched its “Virtual Lunch & Learn” series, featuring expert speakers and a Q&A session. 2 ACG chapters in Florida—ACG Orlando, ACG North Florida, ACG Tampa Bay and ACG South Florida—teamed up to host a five-part virtual webinar series, “ACG Florida Insights.”

MIDDLE MARKET GROWTH // JUL/AUG 2020

ACG@WORK

NETWORKING As ACG members across the world observe social distancing guidelines, the ability to hold in-person meetings has hit a major snag. But these chapters are embracing the latest in virtual meeting technologies to provide their members—and sometimes the entire ACG community—a place to build and maintain professional relationships. ɋ ACG Austin/San Antonio hosted its Virtual Cinco de Mayo Networking Happy Hour, which drew members from across ACG chapters. ɋ ACG Detroit’s NextGen and ACG Western Michigan’s Young Professionals groups teamed up to organize a virtual networking event. ɋ ACG Dallas/Fort Worth surveyed its members for discussion topics for a virtual happy hour, where participants took turns speaking about how companies are moving forward and their outlook for the next few months. ɋ Attendees at ACG Los Angeles’ Small Group Virtual Networking meetup had the chance to connect with their peers for group conversation, Q&A and general networking. ɋ Sheltering in place, ACG Indiana invited its members to a virtual happy hour that included small-group speed networking sessions to stay connected with the M&A community. ɋ ACG Kansas City couldn’t meet in person for its ACG Capital Connection, but its members gathered for a virtual happy hour with breakout rooms so attendees could more easily connect.

DEALMAKING, AWARDS AND MORE How do you continue to source deals during a pandemic? To find out, ACG chapters went above and beyond in adapting their events for virtual audiences and experimenting with new online events. ɋ ACG Boston partnered with ACG Philadelphia to hold its first virtual ACG DealSource event. Private equity and investment banking firms from Boston, Philadelphia and New York had the chance to meet one on one to foster relationships and discuss potential deal flow. Following an overwhelmingly positive response, the chapters scheduled ACG DealSource events every week through the end of May and launched industry-focused, multi-chapter ACG DealSource meetings throughout June. ɋ Prolonged weeks of quarantine is enough to make anyone stir crazy. To break up the monotony and test the knowledge of its under-40 community, ACG San Francisco’s Young ACG Committee hosted a virtual trivia night. Players were eligible to win a “quarantine prize”—a DoorDash gift certificate. ɋ The winners of ACG Houston’s 3rd Annual Deal of the Year awards couldn’t gather in person to collect their prize, but the chapter went ahead with a virtual ceremony. The event is focused on celebrating Houston’s booming middle-market deal community and honoring the deals and deal-makers that drive middle-market growth.

middlemarketgrowth.org

UPCOMING VIRTUAL EVENTS ACG chapters are continuing to plan virtual events this summer. Here are just a few upcoming events. Visit acg.org/events to view a full list. ɋ ACG Toronto — Summer Virtual Networking — July 8 ɋ ACG Portland — July Virtual Networking — July 14 ɋ ACG San Diego — Virtual Breakfast: Impact Investing — July 21 ɋ ACG Minnesota — Virtual Summer Social Wine Tasting — Aug. 5 ɋ ACG Detroit — Coffee Talk Virtual Networking — Aug. 13 ɋ ACG Raleigh Durham — 2020 Capital Conference (virtual component) — Aug. 25-26 ɋ Great Lakes ACG Capital Connection (virtual conference) — Sept. 10 ɋ ACG New York — M&A DealSource & Value Creation Summit — Sept. 14-15 ɋ ACG Los Angeles — Virtual Business Conference 2020 — Sept. 15-17

MIDDLE MARKET GROWTH // JUL/AUG 2020

FIND YOUR IDEAL

CANDIDATE WITHOUT SORTING THROUGH HUNDREDS THAT AREN’T.

P O S T

Y O U R

J O B

O P E N I N G

T O D A Y.

J O B S O U R C E . A C G . O R G

MEMBERS ON THE MOVE

Gridiron Capital, an investment firm headquartered in New Canaan, Connecticut, announced that TRACY STRECKENBACH has joined as an operating partner. In her role, Streckenbach will be a resource to Gridiron portfolio company teams and to the firm’s Centers of Excellence. Prior to joining Gridiron, Streckenbach served in roles that include partner, investment committee member, board member, CEO, COO and CMO across a diverse range of industries.

Global law firm Morrison & Foerster announced that SOPHIE ALLEN has joined its London office as a partner in the Tax Department. Allen brings to the firm extensive experience advising on the U.K. and international tax aspects of private equity and M&A transactions. Her practice focuses on providing tax-related advice in the context of cross-border investments and divestments. Morrison & Foerster also welcomed MITCHELL PRESSER as a corporate partner in the firm’s New York office. Presser joins the firm as a partner in its Mergers and Acquisitions and Private Equity Investments and Buyouts practices and will serve as co-chair of the firm’s Global Corporate Department.

STEWART B. DAVIS, M.D., has joined middle-market investment bank Dresner Partners as a managing director in the firm’s Healthcare Group. Davis brings diverse experience as a serial entrepreneur and founder, investment banker, board member, medical director, consultant and educator. He will be based in the firm’s Boca Raton, Florida, office. Prior to joining Dresner Partners, Davis most recently served as executive in residence with the Medical Technology practice he founded at Locust Walk, a boutique life sciences investment bank in Boston.

BRIAN REESE was hired as CEO of The Retrofit Source, an Atlantabased designer and e-commerce retailer of premium automotive lighting solutions and a portfolio company of Kian Capital Partners. Reese is a veteran automotive industry executive and former CEO of Race Winning Brands, a manufacturer of racing and high-performance parts sold to automotive and powersports markets. He has over 20 years of experience fueling premium brands with innovative products and serving customers in the automotive aftermarket.

NICOLE VIPPERMAN has joined Capitala Group, a capital provider to lower middle-market businesses, as vice president of compliance. Vipperman brings 25 years of experience in the financial services industry, with the past 15 years in compliance roles. Prior to joining Capitala, she was the chief compliance officer for Hollencrest Capital Management. Vipperman will be based in Capitala’s Charlotte office.

MIDDLE MARKET GROWTH // JUL/AUG 2020

Vantage Leadership Consulting announced that MARY BECKER will work with the firm as its client partner for business development. Becker brings more than 25 years of global consulting experience, including expertise in coaching and leadership development, to Vantage, which works with organizations to identify, onboard and develop world-class leaders. Becker was most recently a vice president of business development at Lee Hecht Harrison.

TODD HATCHER has joined Katten Muchin Rosenman LLP as partner in the firm’s Transactional Tax practice. Based in Katten’s New York office, Hatcher specializes in tax planning on bankruptcy and insolvency restructurings and has helped both debtors and creditors navigate the complex tax issues that can arise in challenging economic times. Hatcher is working with the firm’s private equity and M&A teams. Prior to joining Katten, Hatcher was a counsel with Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Law firm Katten Muchin Rosenman announced that BRET T. DISKIN has joined the firm’s Corporate practice as a partner in Chicago to focus on private equity and other M&A transactions. Prior to joining Katten, Diskin was an attorney at Sidley Austin LLP, working in the Chicago office with a stint in London for nearly two years.

The DAK Group, a middle-market investment bank specializing in M&A, business sales, restructuring and other strategic advisory services for middle-market business owners, announced that YONI PFEIFFER has joined the firm as an associate on the deal team. Prior to joining DAK, Pfeiffer was an investment banking analyst at Raymond James, where he advised middle-market clients on M&A transactions across the industrials, technology and business services industries.

Pritzker Private Capital has named JEFF CARLSON as director of technology, a newly created position. The firm also announced the formation of a technology group, a strategic initiative to continue to deepen the firm’s technology resources and expertise, and to further enhance PPC’s operations and value creation capabilities for its family of companies. As head of this group, Carlson will oversee PPC’s IT team and will provide strategic and tactical guidance to PPC’s companies across this function, including cybersecurity protections, risk management and regulatory compliance, workforce tools and operational enhancements. Carlson has served as director of information technology at Pritzker Group since 2014.

MORE CAREER INFO Watch for more career information in the Members on the Move monthly e-newsletter.

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THANK YOU SPONSORS ACG Access Sponsors

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IT’S THE SMALL THINGS

TRENDS IN ENERGY // Charging up

A Breath of Fresh Air One of the major barriers to a carbon-neutral electric

Shielding New Power Tech As electric power systems around the world

grid is learning how to store energy created by solar

increasingly embrace transformative concepts such

and wind when the sun isn’t shining and the wind

as decentralization, automation and digitization,

isn’t blowing. To overcome this problem, Toronto-

their efforts are also expanding the surface area

based Hydrostor is planning to use excess electricity

for cyberattacks. According to a new report from

created by renewable energy sources to run com-

Navigant Research, global smart grid cybersecurity

pressors and trap the pressurized air in a container.

spending is expected to grow from $1.8 billion in 2017

To recover the energy, the trapped air is run through

to nearly $3.2 billion in 2026. —Navigant Research

a turbine that generates power. The company has received late-stage venture capital backing from oil and gas equipment-maker Baker Hughes and is

looking to scale up its technology. —Quartz

Oil Exporters Look to the Sun Amid the rout in crude prices, some of the Middle East’s biggest oil producers are pushing into solar energy. Saudi Arabia, which currently has about

Policymakers Back Hydrogen

500 megawatts of renewables capacity, is target-

Hydrogen has long been touted as a clean alter-

ing a 120-fold surge to 60 gigawatts by 2030, with

native to fossil fuels. Now, as major economies

most of it in solar. Private power developers, which

prepare green investments to kickstart growth after

can tap international funds at low interest rates,

the coronavirus shutdown, advocates see a chance

are helping to cut financing costs and lead to even

to drag the niche energy source into the main-

cheaper power. —Bloomberg News

stream. Officials in the European Union are incorporating hydrogen power in their long-term plans to eliminate carbon emissions by 2050. —Reuters

Reactor Gets Ready to Shine Three decades and $23.7 billion later, the International Thermonuclear Experimental Reactor

COVID-19 Strikes Distributed Power Plans

in France is close to harnessing the sun’s power

Economists from The Brattle Group noted the

here on Earth. With construction starting in 1988,

monthly average electricity usage from major U.S.

the 25,000-ton fusion power reactor is set to be

utility companies dropped 8.7% in March—due in

flipped on in 2025. If successful, the machine could

large part to the coronavirus lockdown. As the appe-

lead to a clean-energy renaissance. —Wired

tite for electricity dims, so too may plans by states in the U.S. to shift power dependence from single-source energy producers like coal-fire, nuclear

Electric SUVs Signal Electric’s Arrival While electric cars have become commonplace on

and hydroelectric to smaller, distributed producers

roads across the U.S., some say their arrival in the

like wind and solar farms. —Environmental Leader

mainstream will be heralded by trucks and SUVs powered by electric batteries. Electric car brands like Tesla and Rivian are expected to release large vehicle models in 2021. Rivian has a deal with its investor Amazon to build 100,000 delivery vans through 2030. —The New York Times

—Benjamin Glick

GETTY IMAGES/REAL444

[

Global business has changed. Human capital needs in M&A have not.

]

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PANTS Weaving, cut-and-sew, yarn manufacturing - we’ve got a team for that. At Hilco Global, we’ve appraised more than $20 billion in assets for over 100 apparel and textile companies. And that’s just in the past year. We can help you become Asset Smarter at www.HilcoGlobalAssetSmarter.com. Contact Gary Epstein at 847.418.2712 or gepstein@hilcoglobal.com

VA LUATION + MO N E T I Z A T I O N + A D V I S O R Y

The Rocky Road to Recovery in the Tech M&A Market All tech acquirers are feeling the hit from the coronavirus pandemic. As companies large and small deal with the economic uncertainty surrounding the pandemic, tech M&A activity has dropped sharplyâ&#x20AC;&#x201D;resulting in a very quiet and conservative market, especially for Private Equity. This report utilizes data from the 451 Research M&A KnowledgeBase and insight from a team of analysts specializing in technology financial markets.

This report is brought to you by S&P Global Market Intelligence and 451 Research

The world has begun taking the necessary steps to slowly and safely reopen businesses that abruptly closed as a result of the coronavirus. Certain businesses are open again, while others remain shuttered. Some activities are still offlimits, while others are permitted. Despite all the careful plans, uncertainty still lingers heavily on the minds of the public. Financial buyers, particularly those that are active in the technology M&A market, are acutely aware of that uncertainty as the technology M&A market isn’t headed for a quick recovery.

The true significance of the disappearance of these previously all-consuming acquirers to the overall tech M&A market is demonstrated most clearly when PE firm activity is compared to their rival strategic acquirers. For the most part, these companies have stayed in the market, while PE firms have stepped out. This is because the tech industry hasn’t been hit anywhere as hard as other industries. In fact, some tech sectors, such as security and workforce collaboration, have rebounded remarkably and have restarted their M&A activities in a significant way. For instance, information security vendors Rapid7 and CyberArk both announced their largest-ever acquisitions in April 2020.

According to 451 Research’s M&A KnowledgeBase— a valuation database of nearly 60,000 tech acquisitions plus proprietary intelligence on private companies from inception through liquidity—the number of deals announced by private equity (PE) firms in recent months has slumped to a multiyear low. Including both platform purchases and bolt-on acquisitions, buyout shops announced just 61 transactions this past April and the same number again in May, a 40% decrease from January. (See Figure 1).

However, despite activity from big-name buyers like Apple, Facebook and Microsoft, the total number of tech transactions in May 2020 plunged more than 20% from May 2019 due to hard-to-find financing for PE firms, who aren’t shopping like they were a year ago.

Figure 1: Number of PE Acquisitions Jan. – May 2020 40%

120

34% 100

33% 30%

30%

25% 23%

35%

25% 20%

15%

10% 20

106

Jan–20

Feb–20

Mar–20

Apr–20

May–20

Total Deal Volume Source: 451 Research’s M&A KnowledgeBase, S&P Global Market Intelligence. Includes disclosed and estimated values. As of June 3, 2020

As % of Tech M&A

Monthly Global Tech/Telecom Acquisitions Jan. – May 2020 $50

312

$45

304

350

325 271

$40

300

247

250

$35 $30

200

$25 150

$20 $15

100

$10 $5 $

$30

$43

Jan–20

Feb–20

$13 Mar–20

Apr–20

May–20

Source: 451 Research’s M&A KnowledgeBase, S&P Global Market Intelligence. Includes disclosed and estimated values. As of June 3, 2020

This trajectory was certainly not what was anticipated based on past activity. The 451 Research M&A KnowledgeBase shows that in the pre-coronavirus days at the start of 2020, buyout shops accounted for one of every three tech deals —twice the level they held five years ago. Record amounts of investable capital held by a record number of PE firms steadily pushed their share of the tech M&A market to unprecedented heights in recent years.

The sharp and severe downturn in the M&A market for PE also follows a sharp and severe downturn in the market for PE’s favored currency, leveraged loans. According to S&P Global Market Intelligence’s Leveraged Commentary & Data—a provider of leveraged loan market news and analysis—the benchmark index for leveraged loans plummeted 12% this past March. That stands as the second steepest drop in the 23-year history of the index.

COVID-19 has broken that trajectory. In just a three-month span, the outbreak and accompanying economic contraction has lopped a full 10 percentage points off PE’s share of the overall tech M&A market. Buyout shops were down to just one of every four deals in April 2020, according to the M&A KnowledgeBase.

Leveraged Commentary & Data also noted that the S&P/LSTA Leveraged Loan Index rebounded nearly 5% in April, which is its biggest monthly advance since the market was recovering from the Credit Crisis a decade ago. Even with gains in recent months, however, the index was down 9% for the year, as of April 2020. Until sentiment increases in the financing market, it’s unlikely that buyout shops will be able to pick up their pace of acquisitions.

S&P / LSTA United States Leveraged Loan 100 Index – Index Value 98

88 83 78 73 Jun–04–2019 Jun–12–2019 Jun–20–2019 Jun–28–2019 Jul–08–2019 Jul–16–2019 Jul–24–2019 Aug–01–2019 Aug–09–2019 Aug–19–2019 Aug–27–2019 Sep–04–2019 Sep–12–2019 Sep–20–2019 Sep–30–2019 Oct–08–2019 Oct–16–2019 Oct–24–2019 Nov–01–2019 Nov-11–2019 Nov–19–2019 Nov–27–2019 Dec–05–2019 Dec–13–2019 Dec–23–2019 Dec–31–2019 Jan–08–2020 Jan–16–2020 Jan–24–2020 Feb–03–2020 Feb–11–2020 Feb–19–2020 Feb–27–2020 Mar–06–2020 Mar–16–2020 Mar–24–2020 Apr–01–2020 Apr–09–2020 Apr–17–2020 Apr–27–2020 May–05–2020 May–13–2020 May–21–2020 May–29–2020

Index Value

S&P / LSTA United States Leveraged Loan 100 Index – Index Value

As of June 4, 2020

A turn toward bolt-on deals Even with the recent M&A market disruptions, PE firms have been shown to gravitate toward bolt-on deals, which lower the effective price they’re paying in their purchases of platform providers. Bolt-on deals, which bring new expertise, products and services into companies sponsors have previously bought, are likely to become an even more important part of PE firms’ deal flow in the coming months, as opposed to platform acquisitions, made with the intention of operating as standalone businesses.

2019, sponsors paid a 25% discount on the multiple for bolt-on deals. Meanwhile, earlier this year, that discount had diminished to just 3%. Under normal circumstances, the lack of discounts would slow the pace of bolt-on deals. After all, such acquisitions are done to reduce the pro-forma multiple paid for the platform. Premium pricing diminishes the rationale for bolt-on deals and, in theory, should steer PE firms away from them. But now, debt is not as available for bigger buyouts. Not to mention, platform deals will be harder to steer through an investment committee, now that identifying and understanding the possible future revenue of a target company is not as clear as before this pandemic.

Use of that strategy has expanded, however, which has increased pricing for additive deals, and has limited the ability to turn to bolt-on transactions to relieve pricing pressure. As those smaller acquisitions get more expensive, it is possible that this strategy could impact pricing at the top of the market as well. In other words, sponsors might not be willing to pay as much for platform deals if they can’t tuck in smaller assets at a discount.

Even with these contaminating elements to the market, players in the tech M&A market must continue their business operations. Buyout firms have capital at their disposal to put to work, and portfolio companies to tend. Bolt-on deals enable them to do both activities. Since the shelter-in-place orders began rolling out across the US in mid-March, PE deal volume has been on the decline. The share of bolt-on deals, however, is up by two percentage points.

Just days before the full weight of the coronavirus came down on the US economy, bolt-on purchases accounted for a record share of total PE tech acquisitions. The competition for bolt-on deals pushed deal prices up to the point where they were nearly on par with platform deals. In 2018 and Private Equity Acquisitions Global purchases of tech targets by PE firms and their portfolio cos. $160

1400

1201 $140 $120

1200

944

1000

771

$100

800

FPO 681

$80

501

$60 $40

1178

452

593

426

410

400

307

200

$20 $

600

$32

$40

$41

$67

$55

$136

$97

$102

$143

$101

$22

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 (as of 6/3)

Total Deal Volume ($bn)

Total Volume

Source: 451 Research’s M&A KnowledgeBase, S&P Global Market Intelligence. Includes disclosed and estimated values. As of June 3, 2020

In 2019, bolt-on deals accounted for 58% of all tech PE purchases—the highest ratio of platform to bolt-on ever recorded by the M&A KnowledgeBase—and they are on pace to make up nearly two-thirds of PE transactions.

But as the difference in price between larger and smaller assets narrows, it could cause PE firms to reduce the valuations for their bigger deals in the future.

An increase in PIPE deals With big buyouts on hold, PE firms have trickled into PIPE (private investment in public equity) deals. The widespread drop in equity prices that began in February gave sponsors the opportunity to pick up minority stakes in public tech companies at steep discounts. And while those deals should continue to flow, the recovery among tech stocks will tighten the faucet on the amount of these deals.

Yet, valuations for public tech company stocks have largely recovered, leaving fewer discounted targets for PIPE deals. But many tech vendors—especially those vendors with direct ties to travel, retail, restaurants and other industries hit hardest by COVID-19—are still trading at a discount. Nutanix, Yelp and Zuora, for instance, lost one-third or more of their value during the first three months of the pandemic.

Buyout funds have consistently put up two or three $1bnplus tech acquisitions per month over the past four years. According to the M&A KnowledgeBase, sponsors have done at least 25 of these deals every year for the past four years. Now the lack of predictability in company financials and the tightening of debt markets has brought that trend to a halt. 451 Research data shows that no fund has announced a 10-figure tech purchase in a two-month stretch that began in mid-March.

Even with fewer targets, the largest buyout funds have few other places to invest, and record amounts ready to go. According to Preqin, a provider of financial data and information on the alternative assets market, the lingering assets in buyout funds stood at $769bn in early May, roughly one-third higher than at the onset of the last recession. Even in this uncertain market, financial buyers need to move forward.

As PE firms stopped perusing new tech transactions, some firms have reallocated their funds toward buying minority stakes in public tech vendors. Since the beginning of April—when the S&P 500 Index registered about 25% lower than it was six weeks earlier, a handful of PIPE deals have printed, including: –

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Charlesbank Capital, Great Hill Partners and other investors put $535m into Wayfair as that company grappled with concerns about its profitability and a broader decline of its public stocks. However, a rush of home-office furniture orders has already doubled its share price since the PIPE. Apollo and Silver Lake Management injected $1.1bn into Expedia after the pandemic nearly halted all global travel, which drove the travel provider’s shares down 42% in March alone. Silver Lake also invested $1bn in Twitter in February. Francisco Partners invested $225m in Eventbrite to help the event management and ticketing company through a period where its reason for existing— in-person events—did not exist.

Moving forward in an uncertain M&A market After months of staying at home, the global economy is slowly reopening. Some restaurants and businesses are opening their doors in a limited capacity, sports are starting to be played before an empty stadium, and even handfuls of traders have returned to the New York Stock Exchange for business. Despite this, the tech M&A market mostly remains in lockdown and in need of a path forward. Much like PE firms, investment bankers saw a drop in their pipeline as a result of COVID-19. According to a banking survey conducted by 451 Research in April 2020, nearly two-thirds of respondents (63%) said they have less work in their pipeline right now than they did a year ago. When asked what they expect to be the most needed investment banking services that would occupy their time for the next year, about 85% of respondents to the survey said they expect to be “substantially more” or “somewhat more” busy helping client companies work through the severe operational and financial problems caused by the outbreak, rather than helping them get ahead. Similarly, we expect PE firms to be occupied with helping portfolio companies navigate through the recession. PE firms purchased a record number of tech companies in 2018 and 2019. This year, they’ll fall well short of those levels.

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Brenon Daly, Research Vice President Brenon Daly oversees the financial analysis of 451 Research’s Market Insight and KnowledgeBase products, having covered more than a quarter-trillion dollars’ worth of deal flow for both national publications and research firms. Scott Denne, Senior Analyst Scott Denne is a Senior Analyst with 451 Research, where he helps direct the firm’s coverage of technology mergers and acquisitions. Prior to joining 451 Research, Scott spent six years at Dow Jones, covering venture-backed startups.

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