Middle Market Growth - September 2015 by Association for Corporate Growth

Growth MIDDLE MARKET

// SEPTEMBER 2015

A ‘Sterling’

Education Approach to

Not Your Father’s Private Equity Firm

A publication of

NAVIGATING HOW TO USE THIS APP BOOKMARK

CONTENTS

Save an article to read later.

View the current issue.

LIBRARY

Easily search the issue for keywords.

Return to the library to view past issues.

Share an article via your social network.

COLORED TEXT

Colored text indicates a link.

NAVIGATOR

Navigate through the issue by page. Are you reading this on your desktop? Take Middle Market Growth on the go and download the app now from the iTunes Store, Google Play and Amazon Appstore.

INTERACTIVE BUTTONS

MORE Tap to read more or go to a website.

SLIDESHOW Tap to pop up a slideshow of images.

JOIN IN

PLAY

Join the conversation on social media.

Send an email to the email address listed.

Tap to play a video or audio.

READ ONLINE Read more content online.

NAVIGATE Tap buttons to navigate through a section.

CUTTING EDGE Pointing the way to success. Forward. Weaver helps manufacturing and distribution companies get their edge—and keep it. The largest independent accounting firm in the Southwest and a top-40 firm in the U.S. Get to know Weaver.

Austin • Dallas • Denver • Fort Worth • Houston Los Angeles • Midland • Odessa • San Antonio • Stamford

weaver.com

EXECUTIVE SUMMARY RICHARD P. JAFFE // Chairman, ACG Global and Partner, Duane Morris LLP

Out of the Gate

he September issue of Middle Market Growth focuses on the education vertical. We have a strong lineup of content addressing the investment landscape in this rapidly changing sector.

Before I introduce the content, as incoming chairman of ACG Global

I want to spend a little time talking to you about ACG’s upcoming fall agenda and issues on which we intend to focus our efforts. In November, many of you will head to Amsterdam for our third annual EuroGrowth® conference, where a wide range of international deal-makers and global M&A experts will gather for two intense, action-packed and exciting days of networking and thought leadership. You can find more details and register for this premier event on the EuroGrowth website. You can also expect to see education and advocacy remain a dominant theme for ACG as it continues public policy efforts to inform regulators, legislators and others on issues affecting the middle market and private equity in the post-Dodd-Frank environment: registration, SEC examinations, compliance, reporting standards and more. The Congressional Caucus for Middle Market Growth, of which ACG is a prominent proponent, is instrumental in supporting these goals. In my new position, I will continue to take an active role on these issues, including continuing to serve on ACG’s Private Equity Regulatory Task Force steering committee. These matters will remain high priorities in the coming months. Stay tuned to middlemarketgrowth.org for important updates on policy matters. Inside the magazine, you’ll find a feature on the investment strategy of Chicago-based Sterling Partners, one of many alternative investors focusing on the prospects of the dynamic education market. Sterling owns platforms such as The InfiLaw System, a group of for-profit law schools training students for successful legal careers; and PlattForm Advertising, a provider of enrollment management and marketing for higher education. An interview with Tony Miller, chief operating officer and partner with private equity firm The Vistria Group and former U.S. deputy secretary of education, offers an insider’s view of the myriad opportunities and challenges investors in the education sector face today. There is also a feature story that will help you become better informed about the changing landscape of business development companies, which are filling the so-called lending gap in the middle market, and their strategies for remaining competitive. I expect you’ll find this issue of MMG informative and thought provoking. On another note, please don’t hesitate to reach out to me in my new role as chairman. I invite ideas, comments, concerns and, yes, even contrary views! //

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left

No Parent Left Behind

“

hat did you learn in math class today, honey?” Picking up my 5-year-old from her second day of an after-school program this past spring, I hoped to hear about her

progress toward coding stardom and launching the next Uber. Or at least toward getting straight-A’s in kindergarten. Plopping into the car seat, she clipped her seat belt and made a face. “Numbers again,” she sighed. Numbers count more than ever today in education, along with science, technology and engineering. Born of our national fears of technical inadequacy, curricula have shifted from writing to ’rithmetic. No Child Left Behind’s legacy is that test scores are the ammo in a

BIO // Randy Schwimmer is senior managing director and head of origination and capital markets at Churchill Asset Management LLC, a middle-market senior debt provider. He is also founder/publisher of The Lead Left, a weekly newsletter about trends and deals in the capital markets.

global high-tech job war. Higher ed has adapted swiftly. What’s the most popular undergraduate class at Harvard? Not Shakespeare. It’s CS50, an introductory course in computer science held in a 1,000-seat auditorium that’s typically full. Nor is Harvard alone. At universities across the United States, students believe their future success depends on their grasp of computer technology—software, hardware and coding. This notion extends to the lower grades. Think feeder schools don’t know what motivates parents? The same performance anxiety that has

Content sponsored by

driven Type A families for years fuels the drive from kindergarten to the hottest tech jobs in Silicon Valley. From toddlers to teens, STEM sells. But for educators and parents alike, this obsession with technical training raises the question: What is the proper goal of education? Is it preparing workers-to-be for careers or offering broad-based learning to (as one writer put it) “foster critical thinking and creativity”? John Katzman has built a career helping families make good choices about education. The founder of The Princeton Review, and now Noodle, Katzman doesn’t think centralized control works. “Common Core presumes kids are widgets, interchangeable,” he told us. “We are at the foothills of neuroscience—how do you learn something?—yet we sacrifice each student’s passion to make our schools even more factory-like.” Continued on next page

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left “NUMBERS COUNT MORE THAN EVER TODAY IN EDUCATION, ALONG WITH SCIENCE, TECHNOLOGY AND ENGINEERING.”

Can you offer individualism to a nation of 70 million students? “We do it in many sectors of the economy,” Katzman replied. “We need to allow schools to differentiate and parents to choose the right curriculum for their kids. Features like an interdisciplinary curriculum, cognitive learning and cultural immersion. It’s about advancing the science of learning. It’s easy to say, here’s a five-year plan. It’s harder to create and maintain robust marketplaces.” What about this test-scoring obsession? Katzman is skeptical. “We’re measuring things with very little evidence that those scores correlate to the outcomes we care about.” Meanwhile, the moment of truth had arrived. Sitting down with her teacher (and in these kindergarten chairs I do mean sitting down), I read my daughter’s report card. There were 38 performance categories, each graded on a five-point scale. All were 3s. I was stunned. My child was average? “Three means ‘consistently meets expectations,’” the teacher explained patiently. “If your daughter had 1s and 2s, we would have to consider skipping a grade.” “But isn’t there anything she excels at?” I asked, exasperated, my Uber dream fading fast. “Absolutely!” the teacher replied triumphantly. “She excels in consistently meeting expectations.” //

Merrill DataSite

The global due diligence platform for every sector in the business landscape

info@datasite.com www.datasite.com

Growth MIDDLE MARKET

// SEPTEMBER 2015

Photo by Matthew Gilson

FEATURES

A ‘Sterling’ Approach Private equity firm Sterling Partners is taking a hands-on approach to education investing. By backing companies it believes in and collaborating with management, Sterling is building strong businesses and helping students succeed. Read more.

“THE GOAL IS TO BE ABLE TO MARRY MISSION AND MARGIN.” // SHOSHANA VERNICK, MANAGING DIRECTOR, STERLING PARTNERS

The Changing Face of BDCs Faced with multiple headwinds, business development companies are evolving in an effort to drive value for shareholders. Read more.

Connections Lead to Berkshire Deal The acquisition of a motorcycle accessories firm shows the value of relationships. Read more.

TABLE OF CONTENTS

PRESIDENT & CEO

IN EVERY ISSUE

Gary LaBranche, FASAE, CAE glabranche@acg.org

Executive Summary Growth Economy

VICE PRESIDENT, COMMUNICATIONS & MARKETING

MidPoints by Randy Schwimmer

EDITOR-IN-CHIEF

Kristin Gomez kgomez@acg.org

Face-to-Face Quick Takes

DEPARTMENTS

The Ladder

THE ROUND

B-Side

• 3i’s Menno Antal to Deliver EuroGrowth 2015 Keynote

It’s the Small Things The Leadership

• ACG President and CEO Gary LaBranche Offers 5 Takeaways from Dodd-Frank • Are Your Leaders Prepared for Growth? Read more.

READ ONLINE Read additional content on the MMG website.

A QUALIFIED OPINION Tony Miller, Founding Partner and COO of The Vistria Group, Examines the Opportunity for Private Equity in the Education Sector. Read more.

ACG@WORK • Toronto Toasts Fiscal Year-End with Craft Beer Panel • Connections and Craft Beer Draw Attendee Accolades in Boston • Networking Mixer Draws Crowd for ACG Western Michigan

2014 Apex Award, New Magazine, Journal & Tabloid 2013 Folio Eddie Honorable Mention, best digital edition 2013 Association TRENDS All-Media, monthly publication

• Dealmaking and Local Themes Dominate Minnesota Conference Read more.

THE PORTFOLIO The latest middle-market trends and thought leadership written exclusively by a team of expert ACG Global featured firms. Read more.

Deborah L. Cohen dcohen@acg.org

ASSOCIATE EDITOR Kathryn Mulligan kmulligan@acg.org

VICE PRESIDENT, EVENTS & PARTNERSHIPS Christine Melendes, CAE cmelendes@acg.org

DIRECTOR, STRATEGIC DEVELOPMENT Maggie Endres mendres@acg.org

BUSINESS DEVELOPMENT Albert Pereira apereira@acg.org

MANAGER, COMMUNICATIONS & MARKETING Larry Guthrie lguthrie@acg.org Custom media services provided by Network Media Partners, Inc.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2015 Middle Market Growth®, InterGrowth and the Association for Corporate Growth, Inc. All rights reserved.

6x Repeat Client. $515 Million GOLD Facility. Golub Capital is reinventing relationship lending. 80% of the 50+ sponsors we’ve worked with this year are repeat clients. And, we just closed our largest deal to date with a 6x repeat client—a $515 million GOLD* facility— which is a testament of our commitment to our partners. We combine best in class reliability with experienced professionals who are focused on establishing long-term partnerships. Because when you’re winning, so are we. It’s why our partners keep coming back. Again. And Again. And Again.

Big on relationships. Big on loans. * GOLD facilities are Golub Capital One Loan Debt (one-stop) facilities.

golubcapital.com

$515,000,000 GOLD Facility* July 2015

Administrative Agent Sole Lead Arranger Sole Bookrunner BEHRMAN CAPITAL

GROWTH ECONOMY THE IMPACT OF MIDDLE-MARKET PRIVATE EQUITY

TEXAS // 1995-2013 Texas has seen tremendous jobs and sales growth driven by private equity-backed middle-market businesses, including a job growth rate nearly four times that of other businesses in the state between 1995 and 2013.

+100+T

171.4% JOB GROWTH IN PE-BACKED BUSINESSES

43.1%

295%

ACG DALLAS/FORT WORTH

SALES GROWTH IN PE-BACKED BUSINESSES

ACG CENTRAL TEXAS

JOB GROWTH IN ALL BUSINESSES

105,638

12.5%

15.9% 21.9% 12.9%

SALES GROWTH % BY SEGMENT

KEY Small: Less than $10M in sales

5.1% 36.9%

SALES GROWTH IN ALL BUSINESSES

See the impact of middle-market private equity on your state at GrowthEconomy.org.

JOBS CREATED BY PE-BACKED BUSINESSES

JOB GROWTH % BY SEGMENT

44.6%

ACG HOUSTON

22.4%

MM Seg 1: $10-50M in sales MM Seg 2: $50-100M in sales

10.3% 32.8% 29.3%

MM Seg 3: $100M-1B in sales Large: More than $1B in sales

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

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CIPEF // The ninth annual China International Private Equity Forum brought together investors and Chinese companies seeking foreign capital.

CHINA INTERNATIONAL PRIVATE EQUITY FORUM For the ninth year, ACG co-sponsored CIPEF in Tianjin, China.

Immediate Past ACG Board Chairman Doug Tatum (left) with Wang Dongfeng, deputy secretary of the Tianjin Municipal Committee of the Communist Party of China.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This fall, ACG chapters across the globe will host hundreds of local events. Check out whatâ&#x20AC;&#x2122;s happening at your local chapter, register and join in on valuable educational and networking opportunities.

ACG St. Louis Emerging Leaders Happy Hour at Scape American Bistro Left: Joe Mantovani of Polsinelli (left) and Joel Hundelt of Mueller Prost attended the event. Right: A group of attendees network during the happy hour.

ACG Arizona Chapter View Calendar

ACG Atlanta Chapter View Calendar

ACG Brasil Chapter View Calendar

ACG British Columbia Chapter View Calendar

ACG Charlotte Chapter View Calendar

ACG Chicago Chapter View Calendar

ACG Holland Chapter View Calendar

ACG Los Angeles Chapter View Calendar

ACG Orange County Chapter View Calendar

ACG Philadelphia Chapter View Calendar

ACG Pittsburgh Chapter View Calendar

ACG Richmond Chapter View Calendar

ACG South Florida Chapter View Calendar

ACG Wisconsin Chapter View Calendar

Had a newsworthy chapter event? Send a 150to 200-word summary and high-resolution photos to Associate Editor Kathryn Mulligan.

“I am delighted that ACG is once again hosting EuroGrowth to help M&A professionals worldwide create cross-border opportunities–all in just two days.” Pam Hendrickson, COO, The Riverside Company

1 6 – 1 7 NOV E MB E R 2 0 1 5 M Ö V E N PICK HOTE L AMS TE R DAM CITY CENT RE AMS TE R DAM, NE THE R LANDS

W W W. E U R O G R O W T H . O R G

THE ROUND NEWS THAT MATTERS ACCESS TO EXPERTS // EuroGrowth offers insight from thought leaders. Register today at EuroGrowth.org.

3i’s Menno Antal to Deliver EuroGrowth 2015 Keynote Menno Antal, managing partner and co-head of private equity for 3i, will deliver the keynote address at EuroGrowth® 2015, ACG Global’s premier networking event for middle-market deal-makers focused on international M&A. Antal will offer details of 3i’s dealmaking strategy, including the buy-and-build plan used with Refresco Gerber, the leading European bottler of soft drinks and fruit juices for retailers and branded customers—now a €2.5 billion company—and the low-price, high quality approach that transformed Basic-Fit from a local Dutch fitness club into a pan-European phenomenon. Join more than 200 middle-market deal-makers Nov. 16-17 at the Mövenpick Hotel in Amsterdam for deal flow opportunities and thought-provoking sessions on topics ranging from emerging markets and cybersecurity to the landscape for lending in the European Union. For complete details of the event and to register, visit EuroGrowth.org. //

THE ROUND NEWS THAT MATTERS

GO ONLINE //

Find more coverage of current issues on the MMG website.

Five Things You Need to Know About Dodd-Frank and Private Equity By Gary LaBranche In response to the prolonged economic recession beginning in 2008, Dodd-Frank was passed to reduce systemic risk within financial markets and protect investors from future financial crises, a goal everyone agrees was commendable. However, in the five years since the law was adopted, it has become painfully clear that the act has failed to achieve all of its intended goals and has created some unintended consequences. An all-encompassing law, the act took a generalized approach to regulating complex capital markets, with little thought given to the consequences. Historically misunderstood, private equity is a perfect example of how Dodd-Frank’s generalized approach has been misapplied to an industry that, more than most, has served Americans by growing companies, creating jobs and supporting pension funds and endowments, plus those who benefit from them. As we mark the fifth anniversary of Dodd-Frank’s passage, let’s take time to review five ways the act has impacted the mission of private equity. These assessments are based on quantitative and qualitative data, compiled from ACG member input:

1. Dodd-Frank was rushed and missed the mark. In haste to pass a bill in response to the economic crisis, Congress did not acknowledge the different forms and merits of capital-market providers. Like venture capital, private equity represents committed funds; when there is an opportunity to invest in a company, a private equity fund must make a capital call to its investors. Venture capital and private equity are structured very similarly, yet only one—private equity—was swept into having to register as an “investment adviser” by Dodd-Frank. It is now subject to burdensome regulation.

2. Private equity does not add systemic risk. Private equity firms take an ownership position, provide capital to midsize private operating companies and help them grow. Yes, this translates to more American jobs and increased sales, and based on recent data from GrowthEconomy.org, the country has marked more than 760,000 new jobs from 1995 to 2013 because of private equity’s long-term investments in operating companies. Continued on next page

THE ROUND NEWS THAT MATTERS 3. Overregulating private equity does not give investors added protection. Dodd-Frank’s intention to protect limited partner investors is admirable. Most investors in private equity are foundations, public and private pensions and college endowments. As with any business, quality customer service and a happy end user result in repeat business. Regulating private equity has not enhanced the robust and highly rigorous due diligence process already performed by PE’s sophisticated investors before committing to a 10-year partnership. This due diligence is precisely why private equity outperforms most other investments over three-, five-, and 10-year periods.

4. Regulation has changed the structure of private equity firms, taking their eye off the ball. Dodd-Frank has caused small and midsize private equity firms to divert resources from investing activities to navigating the act’s complex regulatory framework. Instead of focusing on what private equity does better than any other investment class—providing returns for investors—private equity firms have been forced to spend roughly $100,000 annually on compliance. Like the grade school bully who took your lunch money, Dodd-Frank forced private equity to reallocate resources meant to generate returns for investors and their beneficiaries to complying with the act’s overregulation.

5. Dodd-Frank isn’t all bad. Despite several clear deficiencies, Dodd-Frank hasn’t been a complete bust. It reinforces a culture of compliance and disclosure—a positive step for the more than 1,000 middle-market private equity firms represented by ACG. Ensuring that limited partnership agreements, disclosure documents and corresponding communications are clearly written with transparency and accurate disclosure is good for everyone in the industry. It has benefited both fund managers and the investors in these funds. The fifth anniversary is an appropriate time for an honest and fair review of Dodd-Frank. While middle-market private equity firms would agree that a culture of transparency has benefited investors and enhanced best practices, this outcome could have been achieved without unduly burdensome regulations. It is time for Dodd-Frank to be fine-tuned to better fit the private equity model. Failure to do so will keep these firms squeezed by the burden of compliance, instead of focusing on innovation, growing jobs and providing returns to investors. That is not a legacy that former Sen. Chris Dodd, D-Conn., nor former Rep. Barney Frank, D-Mass., would likely want associated with his namesake act. // — Gary LaBranche, FASAE, CAE, is president and CEO of the Association for Corporate Growth. This article was edited from a blog post that first appeared in The Hill on July 20.

THE ROUND NEWS THAT MATTERS PRACTICAL ACTION // Building leadership capability can help businesses adapt to challenges ahead.

Are Your Leaders Prepared for Growth? By Dan Hawkins As investors or principals in the fast-growing middle market, do you believe your leadership is prepared for change? Will there be organizational constraints holding your company back? Organization development tends to be low on the strategic agenda for many midsize companies due to a greater focus on short-term returns, limited resources or the belief that talent-related investments are only for big corporations. As a result, many investors and boards are continuously stumped by leadership questions such as: • When the company founder moves on, is our No. 2 ready to lead the business? • As a high-flying, growth-oriented company, are we too dependent on one or two key leaders or entrepreneurs? • Are our superstars equipped with the skills to scale a business and someday lead a larger organization? • Can the startup CEO grow the business if she has never led an organization before? We know she has the IQ but what about the EQ, or emotional intelligence? • Is our leadership team strong enough to drive our strategy? • If we are selecting a new leader to take this promising business to the next level, how do we know he has the exact competencies required? Continued on next page

THE ROUND NEWS THAT MATTERS Leadership challenges are pervasive in the middle market, as short-term expectations and lack of focus create obstacles to a more strategic approach. Successful large-cap companies such as General Electric, IBM and P&G are just as focused on immediate financial returns as middle-market companies, yet they understand that leadership and talent are essential. As a middle-market decision-maker, you cannot dismiss planning and preparing your leadership.

How do we improve leadership readiness? At their core, middle-market companies tend to focus on near-term needs and unlocking value from talent decisions. Leadership development must be more immediate, less programmatic and not require long-term resource commitment. As powerful stakeholders, investors, boards and CEOs can address leadership requirements in several ways: • Improve assessment of leadership. Never subject your leadership decisions to chance, as the talent pool will never be as deep as those of the big corporations. Accuracy in selection is critical, and there are plenty of tools to evaluate EQ, IQ, personality, critical competencies and culture fit. • Ensure effective leadership transition planning. According to Fortune, more than 40 percent of executives moving into new roles fail within the first 18 months. Most failures are due to poor cultural and role assimilation. Once someone is identified to succeed in a leadership role, there must be careful planning and specific steps to ensure readiness before, during and after the change. • Integrate executive coaching. In today’s business world, any leadership development investments should yield quick returns. Seminars, interesting reading and workshop cohorts often have limited retentive value and the true impact can take years to see. One-on-one coaching is focused, real-time and data-driven. It is not a fad or reserved for failing executives— research demonstrates it can be extremely effective for promising executives. • Have the courage to upgrade. Keeping a struggling leader in a role is more inhumane than letting him go. Most leaders are competent and can contribute some value, but context is everything. A turnaround guru may not be right for a growth business or vice versa. When you have the wrong person in the role, be objective and professional, pay him well and move quickly. It can take years to recover from the impact of retaining a poorly performing CEO. // — Dan Hawkins, a seasoned business executive and former chief human resources officer, founded Summit Leadership Partners after 25 years in the corporate world. The firm helps business leaders implement strategy and improve performance by optimizing leadership.

THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // BACK TO SCHOOL

$650 MILLION

Embanet Compass, a provider of online learning services, was the target of one of the largest middlemarket corporate acquisitions in the sector within the last decade, when Pearson bought the firm for $650 million in 2012.

DEALS The Riverside Company is among the top private equity investors in middlemarket education businesses, having completed 27 deals in the last decade.

$575 MILLION

Active middle-market strategic acquirers of education businesses include media company Pearson; Chegg, a provider of online textbook rentals and homework help; and the publisher Houghton Mifflin Harcourt.

$405 MILLION The secondary buyout of Nobel Learning Communities by a group led by Investcorp, a manager of alternative investment products, was one of the largest private capital-backed middle-market education deals announced in 2015, valued at $405 million. All stats are from PitchBook.

Houghton Mifflin Harcourt bought the educational technology and services business unit of Scholastic in 2015 for $575 million, representing one of the year’s largest middle-market education divestitures.

“We’re seeing a lot more private equity deals involving education institutions with infrastructure already laid out to turn things around or looking for a strategic acquisition, rather than tech-focused education investments.” —Brian Lee, data analyst, PitchBook

The number of education deals involving cross-border investment by U.S. firms doubled between 2010 and 2011—from nine to 18—but fell to 15 in 2014.

Foreign investment in U.S. education companies is on the rise, increasing to 26 deals in 2014 from just two in 2005.

C RAC K IN G T H E C O MP L IANCE CO DE Become a Member of ACG’s Private Equity Regulatory Task Force

ACG’s Private Equity Regulatory Task Force (PERT) gathers together CFOs, CCOs and in-house legal counsel of middlemarket private equity firms nationwide. Together, they interpret and navigate the often complex compliance and regulatory issues affecting the industry. As a member of PERT, your firm will join a national network focused on shaping compliance best practices alongside federal regulators.

STERLING TEAM // From left: Shoshana Vernick, Jason Rosenberg and Kim Vender Moffat

A ‘Sterling’

Education Approach to

BY SUSAN NADEAU

Not Your Father’s Private Equity Firm

STERLING PARTNERS // Founded: 1983 Headquarters: Chicago Under Management: More than $5 billion Investment Focus: Education, business services, health care services Latest Fund: Education Opportunity Fund, launched April 2015 Website: www.sterlingpartners.com

he receptionist stands at a raised table in front of a bar-stool-height chair. Nearby, floor-to-ceiling windows offer an enviable view of neighboring skyscrapers; employees, most in jeans and casual wear, work at communal tables or long “computer bars” at the periphery. “This is completely atypical,” says Jason Rosenberg, one of seven managing directors at Sterling Partners, a Chicago-based private equity firm, referring to the culture of other firms. “The environment is more conducive to collaboration.” Sterling has more than $5 billion under management and decades of experience in health care, business services and education; companies in those sectors comprise the bulk of its portfolio. Despite its über-modern trappings, the firm is steeped in traditions—including entrepreneurism and good old-fashioned teamwork.

Sterling also has deep roots in educational investing, dating back to the 1987 acquisition of Sylvan Learning, well known in the market for standardized test preparation. Sterling has since recognized and developed a passion for schools of all sorts and, more recently, is betting on technology and services to help modernize educational institutions. “What we actually see is a wave of transformative businesses entering the phase where we would be a good participant,” says Chris Hoehn-Saric, a senior managing director.

START IT UP Sterling began in 1983 when four entrepreneurs invested in a technologybased medical records business. They sold it to a Blue Cross company and subsequently invested in Sylvan, a company that would prove to be Sterling’s successful foray into the education industry. Sylvan was built in part by acquiring other companies, giving the founders valuable experience growing and acquiring businesses.

“OUR STORIES RESONATE WITH THE FOUNDEROWNER ACROSS THE TABLE. WE TOTALLY UNDERSTAND WHAT IT'S LIKE TO HAVE TO MAKE PAYROLL.” Jason Rosenberg Managing Director, Sterling Partners

“We were entrepreneurial and young, but we had enough self-awareness to see that there were lots and lots of opportunities out there,” says Hoehn-Saric, one of the original four. Over the next decade, Sterling invested in some three dozen companies as what is now known as a fundless fund or independent sponsor, working with company founders and experienced CEOs before deciding that committed capital was necessary. “This was the pre-private equity world,” notes Hoehn-Saric. Sterling raised its first fund in 1999. “We institutionalized what we were doing in our private fund,” he says, adding that the model has remained essentially the same all along, for the most part acquiring family-run or ownerled companies receiving capital for the first time. The firm in April launched the Education Opportunity Fund, its eighth fund, focusing on the smaller-market education sector. It still hasn’t lost the entrepreneurial spirit; Rosenberg, for example, worked with a small tech startup before he decided to switch to private equity. He says he was rejected by almost all of the PE firms he applied to except Sterling, which valued his small-business acumen. In fact, most professionals at Sterling have entrepreneurial or operating experience, something the partners and CEOs say sets their firm apart. “Our stories resonate with the founder-owner across the table,” Rosenberg says. “We totally understand what it’s like to have to make payroll.”

EDUCATIONAL MERITS Sterling’s Education Opportunity Fund is a $200 million venture with investor USA Funds, a nonprofit corporation that guarantees student loans and carries out philanthropic work in education. The fund is based on what Sterling sees as a new era of growth in education-oriented investment. It’s the firm’s first sector-specific fund. Rosenberg and colleague Shoshana Vernick, another managing director, are devoted to building the fund’s deal pipeline.

BEHIND THE SCENES // Sterling looks for companies that provide services supporting education initiatives.

The higher education sector, in particular, is ripe for change, they say, as schools are under fire for high tuition, have smaller endowments and deal with cost structures that can be difficult to sustain. The sector also lags in outsourcing. That’s where Sterling can step in, investing in companies that offer integral behind-the-scenes services such as accounting and fundraising, student recruitment and retention, and even student performance tracking and job placement. “We play a role stimulating private sector activity in partnership with the public sector,” Vernick says. One example is PlattForm Advertising, which Sterling acquired in 2013 as part of its middle-market fund. PlattForm helps institutions with a range of services, from student recruitment and retention to the post-graduation job hunt. “Many universities today need more services in the enrollment management process than just generating interest,” says Steve Fireng, PlattForm’s CEO. “The competitiveness of recruiting students is stiff. It has gotten a lot more sophisticated.”

‘COMPUTER BARS’ // Sterling’s open office is conducive to collaboration.

PlattForm decreased the “cost per start,” or the price of recruiting a student, on average by 25 percent for its 250 clients using this service, Fireng notes, using digital advertising preceded by data analysis to make sure schools reach the appropriate audiences. And once institutions have students on board, the challenge is to keep them and help them succeed. “If you are investing in a school, you have to provide a great experience for your students and a great outcome on the back end in terms of student outcomes,” notes Rosenberg, a member of ACG Chicago. More recently, PlattForm launched a software solution sold to universities that allows students to create a portfolio of work spanning their college career. The number of students using the software has jumped to 31,000 from 6,700 in two years. “They walk away with their degree and a digital representation of what they have done,” Fireng says. He points out that there are 31 million adult students who started but didn’t finish college. They are a prime market, but they need special services to help them stay in school, such as online course options, which PlattForm helps with. “If you are going to take them on and then try to

handle them as though they are traditional students, they will leave,” he says. “They need different resources, in some cases more hand-holding.” In the next 10 years, 50 percent of all graduate degrees will be achieved online, an environment Fireng says is naturally more adaptive than a traditional classroom setting. “The whole notion you can’t get a good education unless you walk into a classroom is hogwash,” he quips.

EDUCATION PORTFOLIO PlattForm is one of 16 investments Sterling has made in the education sector since its founding. “I was enamored with their commitment to education,” Fireng says. Investments range from Spartan College of Aeronautics and Technology, which offers certificates and degrees in aviation maintenance and testing, and professional pilot training, to Tribeca Flashpoint College, a digital media arts school offering two-year degrees in game and interactive media, recording arts, graphic design and visual communication, among other areas. Kim Vender Moffat, a principal at Sterling specializing in middle-market education, is quick to pull out her phone and show a video of kids performing at a major music festival, all students of School of Rock, which Sterling Partners acquired in 2009. “We wouldn’t invest in a business that we wouldn’t feel comfortable referring our friends and family to,” says Vender Moffat. “I am proud to be in this sector,” she adds of her return to private equity after a stint with a consulting firm. “I have zero reservations.” Vender Moffat is a partner to the management team for strategic initiatives at The InfiLaw System, Sterling’s group of for-profit law schools launched with the purchase of the Florida Coastal School of Law in Jacksonville. She also serves on the company’s board. The schools cater to nontraditional students and recently began offering services to other educational institutions.

"WE WOULDN'T INVEST IN A BUSINESS THAT WE WOULDN'T FEEL COMFORTABLE REFERRING OUR FRIENDS AND FAMILY TO." Kim Vender Moffat Principal, Sterling Partners

“BECAUSE OF THE PRIVATE EQUITY INVESTMENT, WE WERE ABLE TO TAKE A LONG-TERM APPROACH TO OUR MODEL." Rick Inatome CEO, The InfiLaw System

Rick Inatome, CEO of InfiLaw, refutes current criticism of for-profit education. He points out that InfiLaw’s three law schools give opportunity to many students who would not be admitted to a traditional law school but are very successful at InfiLaw, and later professionally. InfiLaw looks beyond LSATs, using its own evaluation metrics. Some 80 percent of graduates ultimately pass the bar exam (significantly higher than the national average); Inatome notes that InfiLaw’s schools are four times more diverse than other law schools. InfiLaw schools spend about 3 percent of revenue on marketing, compared with nonprofit universities that often invest 25 to 30 percent. Instead, InfiLaw puts more dollars toward an expanded curriculum, including special writing classes and programs that mentor and guide students. “Our mission is inclusionary excellence. We are changing the color of the legal academy,” Inatome says. “Because of the private equity investment, we were able to take a long-term approach to our model,” he says. “There are very few law schools that would have had the ability to finance those kinds of losses.” In fact, Inatome sees private equity as the reason many students get a chance at law school. Initially, for a number of years, the company posted losses, Inatome says, as it opened new campuses and applied for accreditation. But Sterling, which acquired InfiLaw in 2004, had a strategic plan and was able to shoulder those losses, he says. InfiLaw’s fastest-growing business is now its services branch, which helps for- and nonprofit schools behind the scenes in career-services support, accreditation, recruiting and other areas.

COOPERATIVE CULTURE Sterling’s companies praise the investment firm for its role as an active partner, not just an investor. It’s not surprising, given the collaborative culture emanating from Sterling’s Chicago headquarters, where there are few private spaces. Glass-walled conference rooms can be reserved, but the mood is definitely collective. The operation is also paper-free, with fresh fruit and healthy lunch choices always available in the kitchen. Some of Sterling’s portfolio companies have adapted the open style. PlattForm’s Fireng, for one, appreciates the approach. “In some regards, they act as an operating partner with you,” he says, adding that he can pick up the phone and call Sterling’s founder if he needs to. “They can work with you hand in hand.” That’s the type of relationship Sterling hopes to maintain with companies it invests in through its new Education Opportunity Fund. “It’s palpable. You can feel the Sterling culture,” says Vernick, the managing director working to build the education fund pipeline. “The goal is to be able to marry mission and margin.” // Susan Nadeau is a business writer who splits her time between Hartford, Wisconsin, and Thessaloniki, Greece.

A look at the evolution of business development companies

The

CHANGING FACE of

BDCs BY KATHRYN MULLIGAN

FEATURED BDCs // Capitala Finance Corp.: NASDAQ: CPTA Golub Capital BDC: NASDAQ: GBDC KCAP Financial Inc.: NASDAQ: KCAP Medley Capital Corporation: NYSE: MCC Triangle Capital Corporation: NYSE: TCAP

hen General Electric announced in April 2015 plans to shutter its lending unit, capital providers were watching closely, eager to see the impact on middle-market lending, where GE Capital had established itself as a major player. Among those waiting for the effect on the market were business development companies, alternative investors that lend to small and midsize businesses. Many BDCs are publicly traded, and the headwinds of strong underwriting competition and downward pressure on yields have made it challenging to deliver value to shareholders and bolster stock prices. Well before GE made its announcement, business development companies had begun evolving in response to market forces.

BIRTH OF THE BDC BDCs were created in 1980 through an amendment to the Investment Company Act of 1940 intended to increase financing available for growing businesses. A BDC must meet diversification requirements across its portfolio and file periodic reports with the Securities and Exchange Commission.

Funds that elect to be regulated as a BDC may sell shares on public exchanges, giving them a permanent supply of capital to lend without the need to raise funds every couple of years. Unlike a private equity firm, a BDC is not required to return principal funds to limited partners within a fixed time period. Instead, it delivers value to shareholders through dividends—issued monthly or quarterly—distributing at least 90 percent of its taxable income every year. While the 1980 amendment opened the door for BDCs, trends within the banking sector largely contributed to their formation. Over the past two decades, commercial banks have been consolidating. As they’ve grown, their focus has shifted away from middle-market lending—generally noninvestment grade and nontraded loans—and toward larger deals. Simultaneously, various regulations have restricted leveraged lending by banks. Glass-Steagall, Dodd-Frank and Basel III are among the laws that reduced their ability to lend. Like many in the sector, Joe Alala III, chairman and CEO of business development company Capitala Finance Corp., sees those laws as an opportunity. “We potentially have a regulatory tailwind for multiple decades that will push leveraged lending into specialty finance,” he says. The numbers reflect the size of the opportunity. The U.S. middle market comprises nearly 200,000 businesses, whose revenue accounts for 33 percent of private sector GDP, according to the National Center for the Middle Market. Alternative lenders, including BDCs, have stepped in to fill the lending gap created as banks pull away. According to the Small Business Investor Alliance, today there are more than 84 BDCs, 57 of which are publicly traded. Since 2011 there have been 21 new BDC IPOs, and BDC loan balances have more than tripled since the start of the 2008 financial crisis. Ashton Poole, president and chief operating officer of Triangle Capital Corporation, a Raleigh-based BDC, notes the important role firms like his play in the market. “As banks and other lenders retrench and exit key markets, BDCs are increasingly able to provide much-needed capital to privately held companies,” he says.

“AS BANKS AND OTHER LENDERS RETRENCH AND EXIT KEY MARKETS, BDCS ARE INCREASINGLY ABLE TO PROVIDE MUCH-NEEDED CAPITAL TO PRIVATELY HELD COMPANIES.” Ashton Poole President and COO, Triangle Capital Corporation

A CROWDED FIELD

“IN TERMS OF ACCESS TO CAPITAL, A REGULATORY INCREASE OF LEVERAGE LIMITS TO 2-TO-1 WOULD GENERALLY BE FAVORABLE TO THE BDC COMMUNITY AND AUGMENT ITS ABILITY TO PROVIDE MIDDLEMARKET BORROWERS WITH COMPETITIVE FINANCING.” John Kim Managing Director, KCAP Financial Inc.

While trends in the banking sector have created immense opportunity, the proliferation of nonbank lenders has posed a challenge: Competition has made it increasingly difficult for BDCs to deliver strong returns. Unfortunately for BDCs, the 2015 sale of GE Capital’s assets didn’t open the field. In fact, the purchase of Antares Capital—GE’s private equity lending arm—by the Canada Pension Plan Investment Board may have created a more formidable player in middle-market lending and increased the level of competition, according to Jonathan Bock, an analyst with Wells Fargo who tracks BDCs. “It’s extremely hard to source attractive, directly originated credit. And it will likely be for a while,” he says. John Kim, managing director of business development company KCAP Financial Inc. and a member of ACG New York, hopes to see legislation passed to ease BDC leverage restrictions, which would help bring BDCs more in line with other specialty lenders. Hearings in Congress began in June to address the issue. “In terms of access to capital, a regulatory increase of leverage limits to 2-to-1 would generally be favorable to the BDC community and augment its ability to provide middlemarket borrowers with competitive financing,” Kim says. Regulatory change is uncertain, and many have adopted strategies to increase leverage while remaining in compliance with BDC rules. Moreover, BDCs are just one entity through which direct loans are made. Many firms also manage other vehicles on their platforms, including private funds. The asset management firm Medley Management Inc. exemplifies this approach. The firm has approximately $4 billion of investable capital, which it deploys across its business development companies—publicly traded Medley Capital Corporation and the public nontraded Sierra Income Corporation—as well as private investment vehicles.

AN EVOLVING ASSET Publicly traded BDCs raise equity through public markets and borrow against those funds. They’re restricted to a borrowing limit of no more than one dollar of debt for every dollar of equity. Strategies vary across BDCs, and many lend at multiple levels of the capital structure, including senior loans, junior debt and equity. As competition has increased, BDCs have taken differing approaches to drive returns. Nicholas Marshi, chief investment officer of Southland Capital Management, a fund that invests in business development companies, notes an increasing divergence within the sector. “BDCs have just gone into every little aspect of lending and that’s going to continue and deepen,” says Marshi, who writes about the sector on his website, “The BDC Reporter.” He notes the entry of BDCs into industries where they largely didn’t invest in the past, such as oil and gas, technology and real estate. Other forms of diversification are visible in BDC financing and leverage. Marshi estimates that about half of BDCs on the market have subsidiaries with Small Business Investment Company licenses from the U.S. Small Business Administration. A BDC-owned SBIC has access to low-cost, fixed-rate loans, with the ability to borrow $2 from the SBA for each dollar of equity contributed, up to a limit. Joint ventures, known as senior secured loan programs, have also gained popularity. In this arrangement, a BDC enters a partnership with another party, often an insurance company, to jointly invest in senior secured loans. Since the SSLP is not held on a BDC’s balance sheet, it can employ greater leverage than a BDC can on its own. Medley Capital Corporation is among the BDCs to form an SSLP. Typically, Medley makes loans in the $20 million to $125 million range. Medley’s CEO, Brook Taube, sees the SSLP as a way to invest in deals at the larger end of the middle market. “Through this partnership we’re able to target larger borrowers in the middle market and drive attractive returns for our investors,” Taube says.

BIFURCATION

“THERE ARE A LOT OF UNIQUE DYNAMICS CURRENTLY PLAYING OUT IN THE BDC SPACE. IT’S A VERY INTERESTING TIME.” Joe Alala III Chairman and CEO, Capitala Finance Corp.

A major form of differentiation happening today involves BDC managers’ approach to risk and their focus on shareholders. For over a year, a number of BDCs have seen their share prices fall below net asset value, or NAV—the value of their underlying assets minus liabilities. This is largely attributable to investment strategy as well as actions by management perceived to be harmful to shareholders, namely issuing shares at a price below NAV. David Golub, CEO of Golub Capital BDC, sees a bifurcation occurring in the sector. He points out that only a small number of BDCs continue to perform well—earning their dividend, increasing net asset value per share and trading at a significant premium to NAV—while the bulk of the sector does not. Wells Fargo’s Bock notes that today there are firms originating risky, high-yield loans, while others focus on lower-risk deals with modest returns. BDC stock prices are reflecting the divergence, as those with lower-risk profiles as a whole tend to trade at a premium to their underlying value. Meanwhile, BDC management fees are attracting scrutiny. Shareholders, particularly those with stakes in BDCs trading below NAV, are questioning whether the existing fee structure of many BDCs sufficiently aligns manager compensation with performance. As the focus shifts to BDCs’ varying management practices and approach to risk, investors will be able to make more informed choices. This is the best way for the industry to move forward and attract more investment, says Bock. “The differentiation is exactly what the market needs in order to get more efficient and better for an institutional client base, as well as for managers themselves,” he says. Capitala’s Joe Alala agrees the industry is in the midst of a transformation. “There are a lot of unique dynamics currently playing out in the BDC space. It’s a very interesting time,” he says. // Kathryn Mulligan is associate editor for Middle Market Growth.

Decades-Long

Connections Lead to

Berkshire Deal BY KATHRYN MULLIGAN

Relationships prove invaluable for one middle-market banker.

t’s no secret personal connections matter in middle-market dealmaking, yet few deals illustrate the importance of long-standing relationships better than Berkshire Hathaway’s purchase of a German motorcycle accessories firm earlier this year. At the intersection of the professional and familial relationships behind the deal is investment banker Jim Zipursky, who learned from a long-time European colleague that the business was seeking a buyer. Zipursky’s father, a decades-long acquaintance of Berkshire’s Warren Buffett, facilitated an introduction to the famed investor. Berkshire Hathaway ultimately agreed to buy the company for $452 million, a transaction announced in February. The business at the heart of the deal, Detlev Louis Motorradvertriebs— Louis, for short—sells an extensive line of motorcycle accessories, from clothing and helmets to repair parts, including replacement break pads, motor oil and mirrors.

STRONG ROOTS Founded in Hamburg, Germany, more than 75 years ago by Detlev Louis, a champion motorcycle racer in the 1940s, the company was inherited by Detlev’s wife, Ute, after he passed away in 2012. Ute had worked at the company for more than three decades, collaborating with her husband to build the business, including playing an instrumental role designing the clothing and accessories it sells. A closely held company, Louis grew to employ more than 1,500 people and generates roughly 270 million euros in annual sales, according to Bloomberg. With more than 70 stores in Germany and Austria, and a robust online business, Louis is an established player in its space. Following Detlev Louis’ death, however, Ute decided to sell the company, retaining Hamburg-based financial adviser Zypora Kupferberg to find a buyer. Kupferberg reached out to Zipursky, managing director of investment bank Corporate Finance Associates in the firm’s Omaha office. The two had known each other for more than a decade, having worked together on deals over the years. Based on the characteristics of Louis, Zipursky and Kupferberg had a buyer in mind—Warren Buffett’s holding company, Berkshire Hathaway Inc. “Zypora and I both knew immediately this should be something that Warren would be interested in for Berkshire, and he absolutely was,” Zipursky recalls.

WHAT WARREN WANTS

“WE KNOW WARREN LIKES MOATS. HE LIKES DEFENSIBLE BUSINESSES.” Jim Zipursky Managing Director, Coporate Finance Associates

Zipursky knew from experience what Berkshire Hathaway looks for in a deal—two family friends had sold their businesses to the conglomerate—and he recognized those features in Louis. The company’s steady growth and consistent profitability—despite the recent economic turmoil in Europe— were among them, as was its position as the dominant player in the European market for motorcycle accessories. Zipursky suspected these characteristics would appeal to Buffett: “We know Warren likes moats,” he says. “He likes defensible businesses.” Louis’ core products—including motorcycle jackets, gloves and motor oil—are relatively impervious to technological change, ensuring its offerings won’t become obsolete. The management team, which has been with the firm for more than 15 years, is important, too, since it will remain in place following the sale. Heavy investment in employee development and a commitment to product-line improvements have helped the company endure and grow over the years. Additional growth opportunities abound. Today, Louis’ retail stores are in Germany and Austria only. Meanwhile, its online presence is robust in Europe but limited in the United States.

DEEP CONNECTIONS Zipursky and Kupferberg enlisted a third party to make the introduction to Warren Buffett—Zipursky’s father, Morley. Morley Zipursky, who founded the Omaha office of Corporate Finance Associates and now serves as the firm’s chairman emeritus, first met Buffett in the 1950s through a neighbor, the publisher of the former Omaha Sun newspapers, which a young Warren Buffett purchased in 1968. Over the years, the senior Zipursky remained friendly with Buffett, showing him various transaction opportunities, none of which he pursued.

Last fall, Morley Zipursky reached out to Buffett about Louis, encouraging the investor to contact his son if he was interested in purchasing the business. Soon after, Buffett reached out to Jim Zipursky, setting the sale in motion. Louis wasn’t Buffett’s first motorcycle-related investment. In 2009 his firm provided a $300 million loan to a struggling Harley-Davidson. Meanwhile, Berkshire Hathaway owns Geico, the largest provider of motorcycle insurance in the United States.

‘KEEP IT SIMPLE’ Working with Berkshire was unlike dealing with other financial sponsors, Zipursky recalls, starting with Buffett’s request that he name his price. “For most investment bankers it’s hard because we like to market without price,” he says. “But not when you’re talking to Warren Buffett.” Zipursky describes the efficiency of Berkshire’s due diligence and legal processes, in contrast to the “thousands of documents and months of review” typical of working with other financial sponsors. As Buffett’s deputy Ted Weschler explained to Zipursky, “We tell our attorneys to keep it simple.” There’s also an implicit trust. Zipursky recalls the comfort of knowing the Berkshire team sticks to what it agrees to, and there are no surprises. He feels confident the Louis management team will remain in control and that the business will stay in its current location, as Buffett promised in a letter to Ute Louis. Weschler assumed oversight of the Louis deal after the initial outline was worked out with Buffett and, according to Zipursky, will likely become chairman of the company once the sale closes, pending European regulatory approval. Zipursky attests that the buyer was among the easiest he’s worked with. “Berkshire really does keep it as simple as it can for a half a billion dollar transaction,” he says. //

“BERKSHIRE REALLY DOES KEEP IT AS SIMPLE AS IT CAN FOR A HALF A BILLION DOLLAR TRANSACTION.”

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .® To d a y ’s f a s t - p a c e d m a r k e t r e q u i r e s a n e d g e . A C G G l o b a l P a r t n e r s prov ide y o u wit h t h e e x pe r t is e a n d be s t pr a c t ic e s n e e de d t o c l o se t he d e a l .

QUICK TAKES KATHERINE DOWLING // Managing Director and Chief Operating Officer, Luminate Capital Partners

Luminate Capital Spotlights Women-Led Tech Investing

ounded in 2014, Luminate Capital Partners is a private equity firm that makes control investments in software and softwareenabled services companies. The firm focuses on vertical applications, SaaS, back office and supply chain, marketing

automation, e-commerce, data and analytics, and software-enabled services.

What was the genesis of the firm? Katherine Dowling: (Luminate Founder) Hollie Moore Haynes

and I go back more than 10 years. We were both investment banking

BIO //

analysts in New York with tech banking backgrounds. We later did a

Katherine Dowling is a managing director and the chief operating officer of Luminate. Previously, she was was head of legal and investor relations at Thoma Bravo where she played a pivotal role in a $3.7 billion capital raise. Earlier, Dowling was an assistant United States attorney in the Northern District of California, where she focused on the prosecution of white-collar crime.

number of triathlon races together. More recently, when she left (private equity firm) Silver Lake, I had been talking to her generally about what she was doing. One day she said to me, “What do you think about joining me?” I jumped at the opportunity.

Can you talk about Professional Datasolutions Inc., your first acquisition?

KD: PDI was a carve-out we bought in April. Think of it as back-office software solutions for convenience stores. In the United States there are about 700 convenience store chains and PDI has about half of that share, somewhere close to 30,000 retail locations. We provide software for inventory management, petroleum pricing, labor management, everything you can imagine that is back office.

How does PDI fit in with Luminate’s overall strategy? KD: For more than 15 years Hollie was at Silver Lake, a tech-

focused private equity firm. She was one of the founders and the software investor for Silver Lake Sumeru, the firm’s middle-market tech investment team. At Luminate, we concentrate on software and software-enabled services exclusively, so it’s really just a continuation of what Hollie was already doing. Our investments are going to be in smaller companies, providing $20 million to $50 million of equity, plus more with co-investment. We’re looking at companies with up to $10 million in EBITDA and revenue from $10 million to $70 million.

QUICK TAKES KATHERINE DOWLING // Managing Director and Chief Operating Officer, Luminate Capital Partners

Why is mid-market software so appealing? KD: We like this portion of the market because we think there’s

tremendous opportunity. There are thousands of private software companies in this category. They’re generally at that point where they may

“THERE ARE THOUSANDS OF PRIVATE SOFTWARE COMPANIES IN THIS CATEGORY. THEY’RE GENERALLY AT THAT POINT WHERE THEY MAY BE TOO SMALL TO DO AN IPO, BUT A LOT HAVE UNDEREXPLOITED POTENTIAL.” Katherine Dowling Managing Director and Chief Operating Officer, Luminate Capital Partners

be too small to do an IPO, but a lot have underexploited potential. Maybe they’re founder-owned, maybe they have a mix of management players and they’d do well with some professionalization. Maybe the team hasn’t scaled, or maybe they’ve underinvested in marketing or haven’t quite figured out their product strategy and need a little help. These companies have been around anywhere from five to 20-plus years, and they may have some early shareholders, either venture or private equity owners, who have now done what they’re going to do and want to exit.

What are your thoughts about being part of a women-run PE firm in a male-dominated field?

KD: At this point I honestly don’t know whether it helps or hurts us. Being a woman certainly did not hurt Hollie in terms of getting deals and getting them closed. She’s been very successful at that. We’re not doing this because we are women and joining up. We just happen to be doing this together and we are both women. In doing it, we would like to do it right in terms of setting a culture where both men and women and people of all different backgrounds are those we hire.

You were previously a federal prosecutor in the white-collar crime unit. What are your thoughts on where the regulatory

environment is headed? KD: I think some regulation is great; I think too much regulation, or more importantly, misdirected regulation, can be overkill. Right now (regulation) probably just needs to be a little more focused than it has been. I worked with the SEC in my prior role as an assistant U.S. attorney and I have tremendous respect for the work it does. We have to be careful, however, not to have a one-size-fits-all regulatory approach that can place an unnecessary burden on firms while not really moving the needle on providing investors any additional safeguards or transparency. // —DLC

We are training the street... quite literally. Through our diverse global footprint, extensive professional experience, and intuitive learning methodology, we bring the fundamentals of finance to your fingertips. Over the past decade, TTS has become the training standard for finance and professional services firms, business professionals, and undergraduate and graduate students seeking careers in finance. By incorporating a mix of live instruction, class collaboration, and technical fundamentals, we teach you real-world applications of finance theory in a way that brings finance fundamentals to life. Training The Street â&#x20AC;&#x201C; Preparing Financial Professionals for Success

(800) 887-1320 trainingthestreet.com

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

BIO //

ony Miller is a founding partner and chief operating officer of The Vistria Group, a Chicagobased private equity firm that makes controlling

equity investments in midsize companies operating in the education, health care and financial services sectors. Previously he was the deputy secretary and chief operating officer at the U.S. Department of Education, a cabinet-level agency with an annual budget of roughly $77 billion and about 15,000 employees and contractors.

Photo by Matthew Gilson

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

GIVEN THAT EDUCATION REPRESENTS AN ENORMOUS SECTOR OF THE ECONOMY EXPERIENCING SIGNIFICANT CHANGE, HOW ACTIVE IS PRIVATE EQUITY?

ducation, the second-largest sector of the U.S. economy after health care representing $1.4 trillion in spending, is an increasingly active focus of early-stage venture capital, growth equity and private equity buyout investors. Moreover, the focus of private equity investors is more diverse today than it was 10 years ago when it was largely focused on a few areas in the education market, including for-profit colleges, after-school tutoring companies, charter schools and large academic publishers. There are a host of factors driving renewed interest by investors, including the increasing adoption of digital instructional content and more personalized learning; widespread acceptance of online learning; demand for more employer-relevant education and credentials; increased recognition by policymakers and consumers of the importance of quality early childhood education; and the globalization of demand for (and supply of) quality education.

Photo by Matthew Gilson

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

HOW DOES THE SIGNIFICANT INVOLVEMENT OF THE PUBLIC SECTOR AND PHILANTHROPIC COMMUNITY IMPACT PRIVATE EQUITY INVESTING IN THE SPACE?

o be a successful private equity investor in education, it is important to understand how the almost $1 trillion in combined federal, state and local government spending flows into and through the system, as well as the implications of the many legislative and regulatory requirements associated with these public funds. Investors must be able to assess where there is “stroke of a pen” risk that has the potential to disrupt the revenues of a portfolio company and/or dramatically increase compliance-related costs. The recent “gainful employment” regulation, which has adversely impacted many for-profit career colleges, is a clear example. On the flip side, an in-depth understanding of education policy and the regulatory environment can yield insights into new markets and/or growth opportunities (e.g., demand for information and services that can improve student job placement). Similarly, with annual charitable giving in education now totaling more than $50 billion, understanding the agenda of leading philanthropic organizations can also provide insight into unmet market needs (e.g., workforce readiness assessment and credentialing).

Photo by Matthew Gilson

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

HOW ARE GROWING CONCERNS ABOUT THE RISING COST OF COLLEGE AND EXCESSIVE LEVELS OF STUDENT LOAN DEBT IMPACTING EDUCATION INVESTING?

e’ve all read the headlines about student loan debt topping $1 trillion and have become aware that college tuition has been increasing faster than health care costs. Students, parents and policymakers alike have begun asking the question: Is college worth it? And notwithstanding the mismatch between perception and reality—the average annual net tuition cost of a public four-year college after grant aid is only about $3,120, and the average hourly wage for college graduates is twice that of non-college graduates—demands upon higher education to reduce costs, improve graduation rates and offer more flexible credentials that better match employer needs continue to grow. In the context of $655 billion spent annually on employer-provided training, federal job training and certifications, apprenticeships and other workforce training, these new demands are creating opportunities for private equity investors. Penn Foster, a company Vistria recently acquired, is a good example. Nationally accredited, Penn Foster is the largest provider of low-cost online programs for high school degrees, career certificates and career-oriented associate degrees. Its programs prepare students to acquire, thrive in and transition from entry-level jobs to long-term careers.

Photo by Matthew Gilson

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

ARE THERE MAJOR LEGISLATIVE OR REGULATORY INITIATIVES ON THE HORIZON THAT WILL IMPACT EDUCATION INVESTING?

he two most significant pieces of federal legislation impacting K-12 and higher education, respectively, are the Elementary and Secondary Education Act, known as ESEA, and the Higher Education Act, or HEA. Both are pending reauthorization by Congress. ESEA, reauthorized as the No Child Left Behind Act of 2001, informs the K-12 accountability systems used by states and local school districts across the country and affects learning expectations, student testing, and supplementary and intervention services. HEA governs the administration of federal student aid in higher education, directly impacting the funding (and the associated accountability) for the majority of colleges and universities across the country. Collectively, this legislation impacts $100 billion in annual federal funding associated with a range of programs, from Pell Grants for college students to financial assistance for school districts serving English language learners and students from low-income families. With every reauthorization of ESEA and HEA, there have been significant changes to the system that have had a broad and lasting impact in the market and provided opportunities and risks to private equity investors.

Photo by Matthew Gilson

A QUALIFIED OPINION TONY MILLER // Founding Partner and COO, The Vistria Group

SELECT ABOVE TO SEE Q&A

WHEN YOU CONSIDER INVESTING IN AN EDUCATION COMPANY, ARE THERE IMPORTANT â&#x20AC;&#x153;MUST HAVESâ&#x20AC;? YOU LOOK FOR?

here are a number of things we look for in any Vistria investment: a track record of sound financial performance, a solidly defensible competitive position and a highly capable management team that we can work with collaboratively to accelerate growth. When we undertake diligence on an education company, we also look for some additional characteristics we think are especially important. First, the company needs to have a clear understanding of the educational outcomes it is achieving. Customer satisfaction, while important, is not the ultimate measure of whether the educational product or service being delivered is working. The company also must have a commitment to regulatory compliance management and a set of underlying processes that can be scaled. With growing concerns among federal and state agencies about misrepresentations and/or inadequate documentation to support marketing claims, we want to be confident that our companies can thrive and further differentiate themselves under increased regulatory scrutiny. //

Photo by Matthew Gilson

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ Yo u on

can all

rely

aspects

operations,

ACG of

Global

M&A

taxation,

Partners

transactions, regulatory

trusted

including issues

advisers financing,

and

more.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

MINNESOTA WESTERN MICHIGAN

TORONTO BOSTON

TAP CITIES TO NAVIGATE TO ARTICLE

ACG TORONTO

Toronto Toasts Fiscal Year-End with Craft Beer Panel ACG Toronto in June tapped into one of the hottest segments of the food and beverage sector: craft beer. The event, titled “The Craft Beer Industry: Untapped Potential,” featured a panel of local experts, founders of craft beer import agencies and local craft brewery owners. Participants spoke to the ACG audience about the changing retail landscape, the rapid growth of the craft beer industry, opportunities to invest and market valuations. Panelists included Steve Beauchesne, CEO and co-founder of Beau’s All Natural Brewing Company, an Ontario-based brewery; Sean Fleming, senior adviser with MNP, a Canadian business advisory firm; and Chris Goddard, co-founder of The Craft Brand Company, an importer and branding agency for beer and spirit brands. The event was held in conjunction with the chapter’s Annual General Meeting, which brought together 60 attendees to wrap up another successful fiscal year for ACG Toronto. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG BOSTON

Connections and Craft Beer Draw Attendee Accolades in Boston Hailed by attendees as “the one event that deal professionals cannot afford to miss,” ACG Boston’s annual DealFest Northeast 2015 took place June 2-3 and featured DealFest— an evening of craft beer tasting and networking—as well as DealSource® Select—a day of prearranged meetings for an exclusive group of attendees. Close to 600 deal-makers from across the country gathered at Boston’s Cyclorama, a historic venue in the city’s South End, on June 2 to sample more than 40 of New England’s best craft beers and meet the region’s top private equity and investment banking firms, which co-hosted the event with ACG Boston. On June 3, an exclusive group of more than 280 deal professionals held brief, prearranged meetings at the Renaissance Waterfront Hotel Boston, which were scheduled through ACG Boston’s online networking tool. Attendees called DealSource Select “the gold standard for ACG Capital Connection® conferences” and “an extraordinarily efficient way to connect with individuals during the event.” //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE BUILDING BRIDGES // ACG and TMA members converged for the mixer.

ACG WESTERN MICHIGAN

Networking Mixer Draws Crowd for ACG Western Michigan ACG Western Michigan held a summer networking event in partnership with the local chapter of the Turnaround Management Association for the second year in a row to bring together members of the two groups. The event was held on June 23 at Rockford Construction, an indoor/outdoor venue in downtown Grand Rapids. With spectacular evening weather, access to a spacious deck, plus appetizers and drinks, the event was abuzz with introductions and conversation. “We really enjoy including other associations in these networking-specific events,” said ACG Western Michigan President Robert Stead. “This allows us the opportunity to share who we are as ACG and learn about other organizations with members who have like-minded interests.” TMA’s membership comprises turnaround management and distressed investing professionals, many of whom work within the middle-market M&A community. More than 120 attendees registered for the mixer, including ACG Western Michigan board members, young professionals and representatives from the chapter’s new Women in Finance initiative. ACG Western Michigan will join up again with TMA West Michigan on Sept. 23 for a breakfast program titled “The Michigan Automotive Industry: Current Trends and Insights.” //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE ON THE GREEN // The sold-out golf tournament was a highlight of the conference.

ACG MINNESOTA

Dealmaking and Local Themes Dominate Minnesota Conference ACG Minnesota’s Upper Midwest ACG Capital Connection®, held June 8-9, featured ample dealmaking opportunities, high-profile speakers, local brands and a new recreation event. Dealmaking was top of mind for the more than 500 attendees at the Minneapolis conference, including more than 60 private equity firms, hedge funds and mezzanine lenders that staffed tables during the Upper Midwest ACG Capital Connection. PE firms later had the chance to meet one-on-one with more than 20 intermediaries to discuss transaction opportunities. Intermediaries also hosted the conference’s opening reception in conjunction with 19 local craft breweries, spirit distilleries and hard cider producers. Among the event’s speakers was Chris Neugent, CEO of Minnesota-based MOM Brands Company—a cereal maker formerly known as the Malt-O-Meal Company. Glen Taylor, owner of the Minnesota Timberwolves and Lynx basketball teams and the Star Tribune newspaper, gave the event’s luncheon keynote address. A number of attendees participated in the sold-out golf tournament in conjunction with the conference—and this year, nongolfers had a competition of their own in the form of lawn bowling. Those interested should save the date for next year’s conference on June 6-7, 2016, in Minneapolis. //

16 – 17 NOVEMBER 2015 | MÖVENPICK HOTEL AMSTERDAM CITY CENTRE | AMSTERDAM

KEYNOTE ANNOUNCED! EU : C A S E S T UD IES IN EXC EP T IONAL GR OW TH

Menno Antal, managing partner and co-head of private equity, 3i

Menno Antal, managing partner and co-head of private equity with 3i, will share three powerful stories from his firm’s investment success in Europe, including market leader Refresco Gerber, specialty retailer Action and Basic Fit. Learn about: • The buy-and-build strategy used with Refresco Gerber that grew the €100 million company to a pan-European market leader of €2.5 billion. • How organic growth and seamless logistics built specialty retailer Action from a €200 million local company to a national player of €2.5 billion. • The low price, high quality strategy utilized with Basic-Fit that transformed the Dutch fitness club into a pan-European player in multiple European countries. Join more than 200 financial professionals and capital providers from across the globe for two days of deal flow opportunities and commentary from leading experts.

A D V A N C E R E G I S T R AT I O N I S N O W O P E N . S AV E M O R E T H A N € 2 4 0 T H R O U G H 1 1 N O V E M B E R 2 0 1 5 . W W W. E U R O G R O W T H . O R G © 2015 Association for Corporate Growth. All Rights Reserved.

THE PORTFOLIO INSIGHT FROM THE EXPERTS

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

IN THIS ISSUE MID-MARKET TRENDS IPOs: An Attractive Exit and Growth Option Going public presents an attractive exit and growth option for middle-market companies, and a good team of advisers can bring the expertise to make an IPO a success.

Automotive Retail Buyouts Through the Private Equity/Family Office Lens The automotive retail sector is ripe for consolidation, but there are a few things investors should understand before they acquire an auto dealership.

Leveraged Lending and the Regulatory Environment In the midst of increased regulation of leveraged lending, alternative capital sources are playing a greater role as the middle-market lending space evolves to match supply and demand for capital.

COMING SOON Check out the Portfolio section of the October issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Global featured firms. To learn more about contributing to this section, please contact Albert Pereira, (416) 560-6455. These articles are brought to you by ACG Globalâ&#x20AC;&#x2122;s featured firms.

THE PORTFOLIO MID-MARKET TRENDS // Darrick Mix, Partner and Head of Capital Markets, Duane Morris LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

IPOs: An Attractive Exit and Growth Option

n mid-April, Duane Morris convened a panel of experienced IPO participants at the ACG InterGrowth® conference in Orlando. The panel highlighted the opportunity going public presents as an attractive exit and growth option for middle-market companies. In fact, a transaction of $200 million or

A good team of advisers should bring experience and expertise to remove the uncertainty inherent in the IPO process.

There were a number of upsides to the

more is no longer a precondition to access-

IPO route: It was quicker and less disrup-

ing the public market, as demonstrated

tive for the company, and it generated

last year, when the median-sized offer-

valuable currency to retain key employ-

ing was $125 million. Critical ingredients

ees. The successful $100 million offering

are demonstrable growth and a credible

also provided two important lessons: start

growth outlook.

preparations early and make certain you

Our expert panel included Ted Hatfield,

have highly competent advisers.

co-CEO of Solebury Capital; Tom McGee, vice chairman of Deloitte; Kent Nelson, se-

Pursuing a dual track makes sense

nior managing director of Raymond James;

Pursuing a dual track of preparing for

and Jack Springer, CEO of Malibu Boats.

both an IPO and a strategic sale provides room to pivot if market conditions change.

Malibu Boats: Anatomy of a successful small company IPO

There are common elements to staging

Malibu Boats, a manufacturer of high-per-

document for a strategic sale is translat-

formance ski and wakeboard boats with

able to an S-1 registration statement re-

about $167 million in revenue when it went

quired by the SEC. The goal is to identify

public last year, offers an excellent case

the best alternative to maximize a com-

study. Initially, an IPO was not on the table

pany’s value.

given the firm’s size, but its strong market position meant it could command a higher multiple in the public market than in a sale transaction.

either option. For example, a marketing

THE PORTFOLIO MID-MARKET TRENDS // Darrick Mix, Partner and Head of Capital Markets, Duane Morris LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

Darrick Mix

Downsides: Being a public company is costly and attention-diverting

The art and value of secondary offerings

Increased compliance cost may be the

The measure of an IPO’s success includes

biggest downside to going public. Beyond

the performance of the initial offering as

quarterly filings, there is significantly

well as secondary offerings. There may

more work required for compliance, such

be tremendous value in exiting over time,

as corporate governance and certification

especially for a growing company. Part of

requirements around internal controls.

the challenge is to create sufficient liquid-

The key question is, “Are we ready to be a public company?” An IPO is just the first

ity to develop credible currency in the public market.

step. Gaining liquidity, enhanced brand exposure and acquisition currency may

Conclusion

be assets, but management also needs to

Ultimately, the factors that determine a

consider the potential downsides, includ-

good exit include choosing the right exit

ing higher costs and legal exposure.

strategy, shaping the right growth story, getting in front of the right investors and

JOBS Act is an enabler

solidly executing the business strategy. A

The Jumpstart Our Business Startups

good team of advisers should bring experi-

Act has been an important enabler for

ence and expertise to remove the uncer-

emerging growth companies with less than

tainty inherent in the transformational

$1 billion in annual revenue attempting

IPO process. //

to go public. Indeed, the majority of IPOs in the last two years were by emerging

Darrick Mix practices in the areas of

growth companies.

securities law, mergers and acquisitions and

The JOBS Act allows firms to confiden-

corporate governance. He represents public

tially test the waters by sharing informa-

and private companies in connection with

tion with qualified institutional investors

their capital-raising activities, including public

prior to a public filing, a proven benefit.

offerings and private placements of equity

It has also afforded the opportunity to

and debt securities, and advises on such

receive SEC staff feedback on accounting

issues as SEC regulations, compliance, public

and disclosure challenges amid rigorous

reporting and communications with analysts

timelines, and provided relief from bur-

and investors.

densome disclosure requirements such as Sarbanes-Oxley internal control audits.

THE PORTFOLIO MID-MARKET TRENDS // Tim York, Managing Partner, DHG Dealerships, Dixon Hughes Goodman

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

Automotive Retail Buyouts Through the Private Equity/Family Office Lens

T It is imperative to understand and embrace the challenges of a dealership acquisition to ensure a smooth, successful deal.

he automotive retail industry has a long history with privately held, family-run businesses. Last year dealership earnings and price tags reached record highs, attracting a new wave of investors.

Interest from PE firms and family offices

What investors may not know

Given the steady, attractive rate of

considering buyouts of automotive retail

returns, it is no surprise new investors

dealerships should consider:

are expressing interest in the automotive

1. Building manufacturer relationships.

Private equity firms and family offices

retail sector. Meanwhile, the industry is

Manufacturers prioritize brand repu-

ripe for major consolidation, furthering its

tation, sales and service performance,

growth prospects. The entry of Berkshire

investment longevity, and corporate

Hathaway’s Warren Buffett grabbed

structure and application processes

headlines, launching discussion about how

when approving purchase agreements.

the presence of new investors would affect

2. Partnering with the right dealership op-

dealerships. The addition of investors

erational executive. Consider hiring an executive experienced in operating mul-

introduces meaningful change to

tistore groups as the face of the acquisi-

the industry, including:

tion, or persuading the existing dealer

•• More options for dealer exits;

(if he has a good relationship with the

•• Potential increase in deal volume,

manufacturer) to remain and expand;

despite higher valuations; •• Potential increase in manufacturers’ right of first refusal.

3. Understanding how deals are priced. Dealership acquisition issues such as shifts in methods and terminology, franchise value and due diligence may be new concepts for a private equity investor.

THE PORTFOLIO MID-MARKET TRENDS // Tim York, Managing Partner, DHG Dealerships, Dixon Hughes Goodman

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS 4. Understanding how successful dealerships operate. Don’t overlook related

negotiators. Accordingly, they may en-

dealership functions such as wholesale,

ter a deal with a negotiating mindset.

distribution, service, manufacturing, Tim York

2. Negotiating. Car dealers are fantastic

3. Leveraging key manufacturer relation-

finance, insurance, etc. Knowing how

ships. Many dealers have the ability

the dealer makes money—often on the

to impact the approval required from

parts and service side—is also impor-

manufacturers with which they have

tant, as is learning how specialists such

longstanding relationships.

as lawyers, accountants, software consultants and others fit into the business. 5. Facilitating the dealer’s understanding

4. Polishing dealer financials. Ensuring the financial statements are buttoned up corroborates information regard-

of the investor. Dealers often need

ing expenses, margins, etc., while also

to gain understanding of capital

instilling trust in the buyer.

structure, cash and earnings requirements, etc. 6. Obtaining desired synergies. Identify

Final considerations Documents, due diligence and closing are

experienced dealership personnel and

important, and there are many “crumbs”

work with the manufacturer on issues

to be gained or lost in areas such as parts,

related to products, allocation and facili-

fixed assets, used vehicles, special tools

ties. Many groups want to centralize as

and deal jackets, and more. Investors need

many functions as possible, which can

to have a strategy that emphasizes:

be difficult as they expand.

•• Understanding the industry. •• Visiting different dealers’ locations and

Understand the dealer psyche It is beneficial for the investor to under-

connecting with employees; and •• Building relationships with experts

stand the dealer’s concerns:

who work with service departments,

1. Selling out. Many dealers interested

F&I groups, brokers and others in-

in selling wonder if they will sell out

volved in the operations. //

completely or retain some ownership. They need to understand the investor’s

Tim York is managing partner of Dixon

rules of engagement: who makes the

Hughes Goodman’s national dealerships

calls, which decisions are made by the

practice, where he strengthens ties to dealers

investor, etc.

and the industry as a whole.

THE PORTFOLIO MID-MARKET TRENDS // Paul Hespel, Partner, Pepper Hamilton LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

Leveraged Lending and the Regulatory Environment

The leveraged lending space is evolving to match supply and demand for debt capital in the face of regulatory pressures.

inancial institutions, institutional investors and liquidity providers to the leveraged loan markets are finding themselves increasingly subject to new regulation in the United States and abroad. Both global and U.S. regulators have focused in recent years on the lending and lending-related activities of these organizations, and the “cost of regulatory capital” for those who originate and distribute leveraged loans is higher than ever. In fact, GE Capital’s recent plan to shed

(1) a statement that a leverage level

its designation as a “systemically impor-

after planned asset sales in excess of

tant financial institution” demonstrates

six times total debt/EBITDA raises

the real effects of this increase in regula-

concerns for most industries; and

tion. Of particular direct and significant

(2) an increased focus on a borrower’s

impact are:

capacity to repay and ability to de-

•• The risk retention rules, due to take effect in December 2016, pursuant to which managers of collateralized loan

lever to a sustainable level over a reasonable period. If the parties involved in a leveraged fi-

obligations would need to retain “skin

nancing have tried to minimize regulatory

in the game”; and

oversight, they generally have either avoid-

•• The Interagency Guidance on Lever-

ed traditional bank products by focusing

aged Lending. Issued under the joint

on the high-yield and private-placement

sponsorship of the Office of the Comp-

markets, or have focused on nonregulated

troller of the Currency, the Federal

entities as the providers of debt capital.

Deposit Insurance Corporation and

In the large-cap syndicated debt mar-

the Board of Governors of the Federal

kets, this has translated into more transac-

Reserve System, the guidance intends

tions being arranged by nonbank entities,

to set guidelines for credit and under-

where lenders are high-yield debt or loan

writing policies for its regulated enti-

accounts subject to regular redemption by

ties. The guidance has several pieces

their holders. This could potentially cre-

that impact deal execution, including

ate a liquidity crisis since the short-term

THE PORTFOLIO MID-MARKET TRENDS // Paul Hespel, Partner, Pepper Hamilton LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

Paul Hespel

liabilities seem mismatched to the long-

customized to fit the needs of borrowers

dated loan assets. However, in the current

or issuers. Mid-market loans originated

environment (this article was written be-

by these capital sources tend to have com-

fore the planned Greek referendum of July

prehensive mandatory prepayment pro-

5, 2015), where the money supply is abun-

visions, robust affirmative and negative

dant, borrowers and issuers now enjoy

covenants and, most often, at least one or

more favorable terms, such as covenant-

two financial maintenance covenants. It

lite, “builder and grower baskets,” incre-

appears then that the private marketplace

mental facilities, equity cures and, more

has been able to impose some credit disci-

generally, a convergence of deal terms

pline, as the guidance on leveraged lending

between the leveraged loan and high-yield

aims to do. The leveraged lending space

debt markets.

will continue to evolve with regulatory

Because of increased regulation, in the mid-market debt space there has been

and other pressures to match supply and demand for debt capital efficiently. //

a proliferation of alternative capital sources, such as hedge funds, mezzanine

Paul W. Hespel is a partner in the Financial

funds, business development corporations,

Services Group of Pepper Hamilton LLP in

small business investment companies and

the firm’s New York office. He specializes in

other direct lending outfits—known as the

finance and restructuring transactions, with a

“shadow banking” industry. These capital

particular focus on transactional finance mat-

sources are essentially buy-to-hold inves-

ters, mezzanine and multi-tranche financings,

tors. In the absence of ample liquidity in

high-yield debt offerings, out-of-court restruc-

the middle market, they are more focused

turings and liability management transactions.

on credit quality and underwriting stan-

Hespel handles both domestic and cross-bor-

dards while also offering products more

der engagements.

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ ACG

Global

network,

Partners

providing

help

valuable

expand

your

connections

middle-market with

corporate

clients and a consistent source of deals for capital providers.

B-SIDE JOHN BLAIR // President & CEO, Ogle Schools

ACTOR I’D CAST TO PLAY ME… “I like Will Smith. I’m a fairly tall guy— he’s a tall figure, and I like his span of movies and his talent.”

JOHN BLAIR // Blair is president and CEO of Ogle Schools, an Arlington, Texas-based chain of cosmetology and esthetics schools with eight campuses across the state. He joined the firm in 2008, building on a career in the construction and education industries. Ogle announced earlier this year its acquisition by NCK Capital, a Dallas-based private equity firm.

“I GOT A DEGREE IN ECONOMICS AND AT FIRST THOUGHT I WANTED TO BE IN THE INVESTMENT BANKING WORLD.”

BUILDING COMPANY CULTURE… “In the last couple of years, when I made the shift from more of an operations guy to a CEO, I learned to embrace the mission, value and goals of the organization and to be the voice of it.”

STARTING MY CAREER… “In my 20s I really tripped into education and into a startup opportunity where I was able to try things and grow. I had a good mentor who gave me a lot of rope to enhance my leadership capability while I was still a young guy who hadn’t done much yet.”

OFF THE CLOCK… “I’m taking my boys to Dallas Mavericks games and Stars games, and really enjoying learning more about the father-son experience.”

BEAUTY SCHOOL LESSONS… “I’ve learned that hair, skin and nails are very artistic. They take a very creative mind—very different from where I started, with more of a logical, data-driven business mind, if you will.”

“IN MY CAREER I NEED TO FEEL LIKE I’M MAKING A DIFFERENCE.”

BEST PART OF THE JOB… “I like being on the ground. I like working with the people, with the teams, being out in schools, saying ‘hi’ to our customers—who are principally our students—and meeting a new group of applicants who are just starting.”

Content sponsored by

THE LADDER ACG MEMBERS ON THE MOVE

Shelby L. Davis

Shelby L. Davis has joined

HGGC, a Palo Alto-based

the middle-market banking

middle-market private equity

team of Capital One as senior

firm, completed an equity

vice president and relationship

recapitalization of Selligent,

manager. She will provide

a business-to-consumer

lending and commercial banking

marketing automation software

services to the firm’s middle-

provider based in Belgium.

market customers in the

The investment is designed

Mid-Atlantic region.

to help Selligent expand into new markets, including the

GulfStar Group, a Houston-

United States, and broaden its

based middle-market investment

technology platform.

bank, announced the expansion of its advisory practice to

Michael Teplitsky, a member

include oil and gas exploration

of ACG Chicago, was promoted

and production companies

to managing director by private

in financial and operational

equity firm Wynnchurch Capital,

distress. Managing Directors

which he joined in 2008.

Bryan Frederickson, a member of ACG Houston, and Eric

Michael Teplitsky

Teplitsky’s responsibilities range from deal origination and

Swanson will lead the effort.

structuring to due diligence,

Frederickson spoke with MMG

execution and monitoring.

about GulfStar Group and energy investment in a video

The Chicago Corporation, an

interview filmed in April.

investment bank, announced that it advised Vestal Manufac-

Alcentra Capital Corporation,

turing Enterprises Inc., a manu-

a business development

facturer of fabricated steel and

company based in New York,

cast iron products primarily used

provided an $11.75 million

in residential housing and mu-

second lien loan to Conisus

nicipal infrastructure construc-

Holdings, an Atlanta-based

tion, on its sale to Minneapolis-

provider of strategic medical

based Spell Capital Private

communication services to the

Equity. The business was sold

biopharmaceutical industry.

by majority shareholder MVC

The loan will refinance a portion

Capital, a business development

of Conisus’ existing debt and

company headquartered in

provide additional growth capital.

Purchase, New York.

THE LADDER ACG MEMBERS ON THE MOVE Carter Morse & Mathias, a

Shannon Buenik of ACG

Connecticut investment bank,

Global will assume the role of

announced that North American

senior director, governance and

Commercial Parts and Service, a

strategic initiatives. She will work

food equipment parts distributor

directly with the association’s

and field service company, was

Shannon Buenik

president and CEO, Gary

acquired by Parts Town, which

LaBranche, on new programs

markets and distributes OEM

and initiatives and will act as

restaurant equipment parts, in

liaison with ACG Global’s board

addition to providing field service

of directors. Previously Buenik

operations. The transaction was

was the association’s senior

backed by private equity firm

director of chapter operations.

Summit Partners. Carter Morse & Mathias served as NACPS’s

Bill Stanton has joined ACG

exclusive financial adviser.

Global as manager, partner relations, to oversee the

Amber Landis of ACG Global

fulfillment of partner benefits and

was promoted to vice president,

assist the director of strategic

public policy. She will continue

Amber Landis

Bill Stanton

development with ACG Global’s

to lead ACG’s efforts to engage

year-round partnership program,

with leaders in Washington to

as well as the InterGrowth

communicate the role and value

and EuroGrowth conferences.

of the middle market in the

Stanton previously worked as

economy. Landis will relocate to

manager, councils and volunteer

Washington, D.C., to open the

relations, at the American

association’s advocacy office.

Marketing Association. //

To submit your promotions, job changes and other accomplishments, please send details and a high-resolution color photo to Associate Editor Kathryn Mulligan at kmulligan@acg.org.

IT’S THE SMALL THINGS EDUCATION INDUSTRY TRENDS // That’s using the old noodle

MOOCS NOT FOR MOOKS

In 2014, the number of universities offering massive open online courses, or MOOCs, doubled to include 400 institutions. The number of cumulative courses offered also doubled, rising to 2,400.

The worldwide market for self-paced e-learning reached $35.6 billion in 2011. The five-year compound annual growth rate is estimated at about 7.6%, so revenue should reach some $51.5 billion by 2016.

EDUCATION GETS A GOLD STAR FROM PE

Private equity firm Sterling Partners (featured in our cover story) formed a $200 million Education Opportunity Fund in April, its first-ever sector-focused fund, primarily dedicated to partnership models serving the higher education market as well as technology-relevant businesses.

E-LEARNING EARNS AN ‘A’

MIND YOUR E-LEARNING BIZ!

IT’S OKAY TO BE FLIP ABOUT SCHOOL

PRIVATE SCHOOLS TAKE THEIR TITHE OF STUDENTS

One in 10 U.S. students in pre-K through 12th grade attends a private school, according to data from the U.S. Department of Education.

WATCH OUT FOR THIS E-LEARNING TREND

When looking for e-learning trends, the wristwatch is one to keep an eye on. Adidas has already bet on the consumer education trend with its miCoach Smart Run virtual coaching product for smart watches.

—Larry Guthrie, manager, communications & marketing, ACG Global

The estimated $107 billion corporate e-learning market is expected to increase roughly 13 percent annually until 2017, according to Roland Berger Strategy Consultants.

Teachers are finding the so-called flipped learning approach—which involves taking direct instruction and placing the onus on the individual learner rather than relying on group instruction—useful as well as effective. In 2012, 48% of teachers flipped at least one lesson; in 2014 that figure rose to 78%.

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2016

Brent Baxter Clayton Capital Partners ACG St. Louis Term expires 8/31/2017

Jason Byrd The Charter Group ACG Western Michigan Term expires 8/31/2017

Robert Brighton Shutts & Bowen LLP ACG South Florida Term expires 8/31/2017

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Steve Castino Vestal & Wiler CPAs ACG Orlando Term expires 8/31/2018

Mark Hollis Centerfield Capital Partners ACG Indiana Term expires 8/31/2016

Karen Grexa KeyBank Business Capital ACG New Jersey Term expires 8/31/2017

Jay Jester Audax Group ACG Boston Term expires 8/31/2018

Jay Hansen O2 Investment Partners ACG Detroit Term expires 8/31/2017

Scott Linch Dixon Hughes Goodman ACG Charlotte Term expires 8/31/2018

Karin Kovacic Alcentra Capital ACG Connecticut Term expires 8/31/2018

Don Lipari McGladrey ACG New York Term expires 8/31/2017

Mark Lehman Parsons Behle & Latimer ACG Utah Term expires 8/31/2018

Cassandra Mott Thompson & Knight LLP ACG Houston Term expires 8/31/2016

Mike McVey Hylant Group ACG Columbus Term expires 8/31/2018

Martin Okner SHM Corporate Navigators ACG New York Term expires 8/31/2018

Walter Oâ&#x20AC;&#x2122;Haire Valuation Research ACG San Francisco Term expires 8/31/2017

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Titus Schurink HPE Growth Capital ACG Holland Term expires 8/31/2018

Karen Tuleta Morgenthaler ACG Cleveland Term expires 8/31/2017

Mitch Woolery Kutak Rock LLP ACG Kansas City Term expires 8/31/2018

Thomas Turmell TMT Capital Partners LLC ACG Chicago Term expires 8/31/2018

Vice Chairman Jason Brown* Victory Park Capital ACG Los Angeles Term expires 8/31/2016 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Angie MacPhee* RGL Forensics ACG Denver Term expires 8/31/2016 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2016 Immediate Past Chairman Doug Tatum* Newport Board Group ACG Atlanta Term expires 8/31/2016

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband *denotes member of Executive Committee

ACG NEAR YOU ACG CHAPTERS ACG 101 Corridor acg.org/101

ACG Detroit acg.org/detroit

ACG Orlando acg.org/orlando

ACG Arizona acg.org/arizona

ACG Edmonton acg.org/edmonton

ACG Philadelphia acg.org/philadelphia

ACG Atlanta acg.org/atlanta

ACG France acg.org/paris

ACG Pittsburgh acg.org/pittsburgh

ACG Austria acg.org/austria

ACG Germany acg.org/germany

ACG Portland acg.org/portland

ACG Barcelona acg.org/barcelona

ACG Holland acg.org/holland

ACG Raleigh Durham acg.org/raleighdurham

ACG Boston acgboston.org

ACG Houston acg.org/houston

ACG Richmond acg.org/richmond

ACG Brasil acg.org/brazil

ACG Indiana acg.org/indiana

ACG San Diego acg.org/sandiego

ACG British Columbia acg.org/bc

ACG Kansas City acg.org/kc

ACG San Francisco acg.org/sanfrancisco

ACG Calgary acg.org/calgary

ACG Kentucky acg.org/kentucky

ACG Seattle acg.org/seattle

ACG Central Texas acg.org/centraltexas

ACG Los Angeles acgla.org

ACG Silicon Valley acg.org/sv

ACG Charlotte acg.org/charlotte

ACG Louisiana acg.org/louisiana

ACG South Florida acg.org/southflorida

ACG Chicago acgchicago.com

ACG Maryland acg.org/maryland

ACG St. Louis acg.org/stlouis

ACG China acg.org/china

ACG Minnesota acg.org/minnesota

ACG Tampa Bay acg.org/tampabay

ACG Cincinnati acg.org/cincinnati

ACG National Capital acgcapital.org

ACG Tennessee acg.org/tennessee

ACG Cleveland acg.org/cleveland

ACG Nebraska acg.org/nebraska

ACG Toronto acg.org/toronto

ACG Columbus acg.org/columbus

ACG New Jersey acg.org/newjersey

ACG UK acg.org/uk

ACG Connecticut acg.org/connecticut

ACG New York acg.org/nyc

ACG Utah acg.org/utah

ACG Dallas/Fort Worth acg.org/dfw

ACG North Florida acg.org/northflorida

ACG Western Michigan acg.org/wmich

ACG Denver acg.org/denver

ACG Orange County acg.org/occ

ACG Wisconsin acg.org/wisconsin

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ F r o m c o n s u l t a n t s t o C PA s a n d a h o s t o f o t h e r a d v i s e r s a n d specialists, ACG Global Partners guide the success of more than 90,000 professionals in the middle market worldwide.