Category: BluWave Insights

The 5 Key Ingredients To Building A Thriving Business

March 11, 2021 Sean Mooney

During my 20 years in private equity in New York, I learned quite a few lessons about what makes a thriving business and its people tick — for better or for worse. Some are driven by dollars and cents; some are motivated by a people-first philosophy that puts human beings at the center of decision-making. Many fall somewhere in between.

When I decided to spin out of the private equity world and start a company, I quickly realized how important it was to articulate my own philosophy. Otherwise, how could I lead others in any direction with a clear purpose?

Fortunately, my entrepreneurial craze turned out to be the right move, and four years later — with patience, grit, and an amazing team — we’ve exponentially grown and now serve more than 500 of the world’s top private equity firms. I believe this is in part due to a handful of “ingredients” — all of which reinforce one another and somehow ensure that we are getting back what we put in. Follow this recipe and your business will likely be the better for it:

Ingredient No. 1: Do good with good.

This is probably about as simple as it gets. I call it the “Karma School of Business”: Do good things with and for good people, and the world tends to take care of itself. It’s not necessarily the fastest path to Rome, but in my experience, this approach yields the highest percentage chance of long-term success.

The Karma School of Business principle is at the center of my company’s work, where we connect business leaders with service providers to help create a successful environment for both parties. We actively test the service providers we invite into our network for this mindset, and I consider it one of the key reasons why we have grown so quickly.

Ingredient No. 2: Work and learn hard.

Secretary Colin Powell said it well: “There are no secrets to success. It is the result of preparation, hard work, and learning from failure.” I built my career in an industry filled with many of the smartest people in the world. I most definitely was not the smartest person in most of the rooms I shared with peers. The thing that differentiated me was that I worked exceptionally hard, asked lots of questions, and sought answers from those who had already figured out the thing I needed to know.

The lesson here: Don’t recreate the wheel. Instead, ask a lot of questions, take time to learn how things operate, and then work tenaciously to make it happen.

Ingredient No. 3: Use the word ‘no.’

In our business, it’s our job to connect private equity firms with specialized third parties (e.g., boutique advisors, independent consultants, interim executives, etc.). If a resource isn’t the perfect fit, we tell them. “No” is always the best answer.

This is often hard to do, particularly if you think someone is otherwise smart, effective, and likable. But this doesn’t always mean they are the right person for the job. The trick is learning to say “No” in a self-aware and gracious way. I take a lot of time to explain how life is too short to put yourself in a bad position. To throw another quote in the mix, according to Warren Buffet, “It takes 20 years to build a reputation and five minutes to ruin it.” Your customers will thank you for saying “No” when it’s not the right situation and will remember you when it is.

The caveat to this ingredient: Do not be anti-everything. “No” can be the easiest thing in the world to say. But if you’re not being thoughtful, you can become paralyzed in the face of otherwise confidently manageable risk. Good people know the difference between an errant “no” and one that is applied with introspection and purpose.

Ingredient No. 4: Prioritize growth.

Whether you’re committed to personal growth or the growth of the business, this ingredient is vital to the health and longevity of any thriving business. The ability to learn, be agile, and always on your toes is often the difference between success and failure.

My dad had many wise sayings when I was a kid. One relevant one that comes to mind is, “The second you start to feel like you’ve figured the world out, you’re already falling behind.” Investing time and energy into constantly advancing knowledge and skills (for yourself, your employees, and your customers) will benefit you and your business in spades.

Word to the wise: Growth-oriented organizations are far more likely to retain their best employees. Your best people will eventually leave if they feel bored or stagnant.

Ingredient No. 5: Adopt a winning mindset.

When push comes to shove, at the end of the day, ingredients one through four are foundational for success. However, you still need to have a winning mindset to create a thriving business that matters. It’s imperative that you work to win for your customers, win for your stakeholders and win for your company and yourself.

To be clear, I’m not talking about a “winner takes all” mentality, where someone else is always losing. Healthy relationships are not transactional. They should be built around core commitments that are important and lead to the success of both parties.

A winning mindset means that you’re always looking for ways to ensure that both you and your peers end up ahead.

 

The 5 Key Ingredients To Building A Thriving Business originally appeared on Forbes.com.

The year of specialized work and continued recalibration

January 28, 2021 Houston Slatton

What better way to kick off 2021 than with some age-old wisdom from the most outstanding figure in medicine, Hippocrates: “Persons in whom a crisis takes place pass the night preceding the paroxysm (spasm) uncomfortably, but the succeeding night generally more comfortably.”

In other words, if last year was the “uncomfortable paroxysm” then this year should be markedly less so, as most of us have adjusted to the new normal. Yes, things are still a little shaky, but at least we aren’t at the height of the disruption. In fact, in many cases it seems companies are embracing the changes and shifting their hiring practices and organizational frameworks to include more remote workers.

According to a recent World Economic Forum report: “41% of companies plan to expand their use of contractors for task-specialized work” and as a result of the COVID-19 recession, “day-to-day digitalization has leapt forward, with a large-scale shift to remote working and e-commerce, driving a surge in work-from-home arrangements and a new marketplace for remote work.”

Another interesting insight based on a four-year projection by the authors, “by 2025, the time spent on current tasks at work by humans and machines will be equal. A significant share of companies also expect to make changes to locations, their value chains, and the size of their workforce due to factors beyond technology in the next five years.”

However, despite these shifts and focus on technology, it still holds true that “despite the current economic downturn, the large majority of employers recognize the value of human capital investment.”

As far as the future is concerned — namely for those willing to innovate, get creative, and adapt — opportunities abound. Furthermore, specialized workers and the demand for expertise will continue to grow as companies recalibrate. The intended result: workforces and an economy that comes back stronger, more resilient, and better equipped to adapt to future disruptions.

 

To read the full WEF “Future of Jobs Report” click here.

REDIRECTED How will people’s behavior change post-pandemic?

January 19, 2021 Sean Mooney

If someone asked who do you depend on to drive your business, how would you answer? The sales team? Marketers? R&D? Customer service? Contractors?  

In a mid-Covid world—as businesses continue to adjust to changing work environments, behaviors, and expectations—it is more critical than ever to pause and assess key drivers for future success. In other words: what actually matters. 

According to a recent article from Harvard Business Review, planning for a post-pandemic world means answering these questions honestly: 

  1. How does your business really make money?
  2. Who do you depend on to drive your business?
  3. What will people’s behavior look like after the pandemic?  

This third question is the most difficult to answer, but, with a thoughtful evaluation methodology, the authors outline how businesses can identify behavior types and subsequently predict (to a degree) behavior changes. Furthermore, they conclude: 

“By wargaming different scenarios and adding in the known behaviors, you can develop a playbook to adapt regardless of what comes to pass.” 

We don’t know what 2021 holds, but it’s nice to be reminded that human behavior is dynamic and malleable. Ultimately, companies who are willing to tune-in to what motivates and compels customers will win. 

For more insights, check out HBR’s “Creating a Post-Covid Business Plan.” 

In 2021 Focus on Healthy Communication, Collaboration, and Inclusivity

January 12, 2021 Katie Marchetti

Despite all the uncertainty and disruption still lingering from last year, 2021 offers ample opportunities for companies to refocus on what matters most: healthy communication and collaboration, an inclusive workplace culture, and ultimately greater productivity. While companies need to understand what will be different in the post-COVID era, they should also remember what will stay the same: the need for real human connection, whether it is mediated by technology or not.

 

#1 – New Ways To Assess and Engage With Employees

Office politics has always been a fact of life – employees have often been rewarded by who knows how to best navigate office politics versus who does the best work. We are now seeing signs that remote work can help companies reward employees based on merit and by giving traditionally overlooked colleagues more of a voice and having more objective processes to measure them. In some cases, the remote work era is even prompting companies to consider new employee performance metrics altogether.

According to a recent PwC survey of U.S. executives in the process of shifting to remote work, most companies are focused on “greater flexibility in work hours” (57 percent) to drive productivity. In effect, outmoded measures of employee performance – such as the number of hours an employee works – are becoming less important. Companies are instead moving to a more merit-based model: efficiency in completing a task, quality of work, and the ability to collaborate productively with colleagues.

While the trend toward evidence-based employee assessment was already underway before COVID-19, the pandemic has privileged some forms of interaction and evaluation over others. For example, a recent Deloitte report explains that remote work is “usually assigned by the outcome, instead of by task, enabling productivity assessment.”

The influence of office politics on managers’ perceptions becomes more limited as they make assessments based on concrete outputs versus subjective impressions. Although after-work drinks or trips to the golf course help colleagues build closer connections, these activities can also be exclusionary and give managers a biased attitude toward employees’ performance.

We will never get to a point where in-person interactions are completely supplanted by technology (nor should we want this to be the case), but managers should take this opportunity to determine if their assessment methods are as rigorous and impartial as they can be.

 

#2 – Balancing Productivity With “Organized Serendipity”

Many employees have proven that they’re capable of being just as productive at home as they are in the office – in fact, 94 percent of employers say productivity has been just as high or higher during the pandemic as it was before. Other surveys (such as this one conducted by the Boston Consulting Group) have found that a significant proportion of employees have maintained their productivity while working remotely. Meanwhile, 72 percent of office workers say they would like to work from home at least two days per week.

Although productivity has remained steady, employees haven’t been able to interact with their colleagues or clients/customers as naturally as before. Without chance encounters in the break room, close colleagues poking their heads around corners to say “hi,” and the occasional coffee meetup with a client, employees may feel disconnected. As we all know by now, this can eventually take an emotional and psychological toll. What can companies do to address this?

As offices remain closed and people continue to work from home, companies may consider creating what I call organized serendipity – getting people together in a structured but organic way to facilitate relationship building and creative collaboration. For example, at BluWave, we’ve launched a virtual, topic-driven event series to share best practices among our roster of PE fund clients. After a brief panel discussion, clients break out into discussions on sub-topics and network with each other using an interactive technology platform. The organization comes from cutting the groups by functional expertise, but the agenda is loose enough to allow for actual networking that does not feel forced.

On the employee front, while some are still working from home and others are socially distancing at our physical office, we host “Friday lunch hours” that gather everyone together to share a meal and chat about the upcoming weekend.

 

#3 – Making the Era of Remote Work More Human

“Zoom fatigue” – a term used to describe the lack of motivation for hopping on yet another video work call, joining a digitally-driven event, or getting together with family and friends virtually – is becoming a real threat to remote workforces. No matter how well we integrate remote work into our lives, we will never be able to replace the value of in-person human connection or shared experiences.

According to a recent survey by Slack, 45 percent of newly remote workers report that their sense of belonging has suffered since they began working from home. This is a powerful reminder that companies should focus on building authentic and consistent human connection into their remote work platforms.

Once it’s safe to do so, companies should swiftly prioritize in-person interactions. Even now, many companies recognize that it’s impossible to shift to 100 percent digital communication – a reality I’ve seen personally with private equity fund managers who still need to shake the hands of the management team before purchasing a company or stepping into the company’s facility. Once the threat from COVID-19 subsides, remote-focused companies should still give employees opportunities to interact with meet-ups, site visits, and other events that satisfy our need for human connection.

The original version of this article was published on Toolbox HR.

How to thrive with your lenders in 2021

January 5, 2021 Sean Mooney

As we roll up our sleeves and move full steam ahead into 2021, it is clear that many of the challenges of last year linger. In fact, many companies—particularly in the travel and hospitality sectors—still face unprecedented circumstances and continue to scramble from one problem to the next. This can often mean losing sight of long-term goals, and when it comes to your lenders and liquidity can quickly lead to major, even irrevocable, problems.

This is why companies should continue to proactively reach out to their lenders and other trusted partners during these times to enable them to become part of the solution. In my past experience as a private equity (PE) partner, I noticed that companies often waited until it was too late to contact their banks and others that could help. Their earnings had already retracted, their cash was depleted, and their options were constrained beyond repair. By the time they reached out, their lenders were often caught off guard and felt like they had no choice other than to go into crisis mode and do whatever they could to protect their loans. When this happens, owners of businesses are often left behind.

Companies need to play ahead and take action during times of crisis. If you don’t get ahead of events, they will get ahead of you. This mindset is not only critical for your internal operations, but also for your external partners – particularly your lenders. Bring your relationship bankers into the discussion early so they can help you help yourself. The sooner you get your relationship bankers involved, the more options they’ll have to maintain your equity, which is in all parties’ best interest.

Cultivate a proactive versus reactive mentality

After nearly 20 years in private equity, one of the most essential things I’ve learned during a crisis is that cash is king. If you’re not actively thinking ahead about your liquidity, it can evaporate in a moment’s notice and then your game is over. Your lenders are one of your most critical sources of liquidity during difficult times. If they feel like they are part of the solution, they will act with your (and their) best interests in mind and help you fund your operations. If they feel like you are constantly surprising or misleading them, they will clamp down and do whatever they can to salvage their loan with relatively little concern for your equity.

When I was in private equity, I developed a litmus test called the “three board meeting rule.” In the first meeting, someone says “I think there’s a problem” and the management team swears to resolve it. By the second meeting, little action is taken and someone more loudly says, “Okay, now there is really a problem.” During the third meeting, everyone is looking around at each other as things have gotten worse and worse and drastic actions then have to be taken. It pains me to admit that earlier in my career I was often the guy who waited until the third meeting. In retrospect, I never looked back on a decision and wished I took more time to address a critical need. We need to act between the first and second board meeting. Hope is not a strategy. The longer we wait, the fewer options we have.

According to a 2019 McKinsey report, companies that were more resilient during the Great Recession “prepared earlier, moved faster, and cut deeper when recessionary signs were emerging.” By the first quarter of 2008, these companies became nimble while their lower-performing peers were still adding costs. At the end of the day, crisis management is not all about cutting costs, though. It’s about maximizing cash. Cash is the fuel that gives you the options to stay afloat, repair your business, and course correct until the storm passes and calmer times return. Your relationship with your lender will play a meaningful role in your ability to maximize your cash resources.

Eliminating bias against perceived failure

Companies in crisis often have unhealthy internal dynamics that can prevent difficult but necessary decisions from being made. First, there can be a bias against taking action because that would require an admission of shortcomings. This leads to the diffusion of responsibility, which can cause a company to delay until it runs out of time and options. Second, companies’ leaders often convince themselves that they don’t need outside assistance – there’s a culture of autonomy that can develop when times are good, so these leaders insist that “we can fix it ourselves.” And third, even when companies recognize that they have a serious problem, they have meeting after meeting about it without taking concrete actions.

Partnering and building relationships across the board

In addition to cultivating strong relationships with lenders, do the same with other partners like private equity investors and third-party turnaround advisors.

Third party turnaround advisors have learned every lesson at least twice and can help you navigate your recovery with a much higher probability of success. Trusted outside advisors will cost you money, but they also bring a more objective perspective and institutional knowledge to the table, which can lead to more impartial and better-informed assessments of a company’s situation and how to deftly maneuver through challenges. Your lenders will also be comforted by you bringing outside assistance. In fact, if you don’t bring in your own advisor, they’ll likely eventually require you to use one of theirs.

Private equity investors are also a tremendous asset during difficult times. They bring capital, experience, and networks that will help you be more agile than your competition. Their portfolio companies typically view times of crisis through the lens of opportunity. PE investors have a powerful incentive to make sure their portfolio companies are doing everything they can to make the business as resilient as possible, especially in a crisis. Lenders view this affiliation and mindset positively and thus are more likely to step up for companies that are backed by PE investors than those that are not. This is why it’s no surprise that one of the reasons PE-backed companies perform better than their non-PE-backed peers amid economic contractions is their ability to take advantage of these relationships and secure capital more easily and affordably.

No matter what a company’s financial situation happens to be, the first step toward determining what needs to be done is an honest assessment of the challenges it faces. Then it’s critical to take informed action while working with your trusted partners to give you the greatest opportunity to survive and thrive.

The original version of this article appeared in CEOWorld Magazine in November, 2020.

With the long view, PE firms make steady partners through the ups and downs

December 17, 2020 Sean Mooney

When people think of the private equity (PE) industry, they often picture big Wall Street firms launching headline-grabbing takeovers of multi-billion-dollar companies. But this is a caricatured version of what PE firms actually do: forge long-term relationships with companies of all sizes across industries to help them scale and build value sustainably. In fact, according to the American Investment Council (AIC) more than 30,000 American companies (which employ 8.8 million workers and account for 5 percent of total U.S. GDP) have received PE investments, and these investments are a major engine of economic growth. Companies such as ServePro, RV Share, and EllieMae have all been turned around by private equity and are prime examples of PE’s power. 

PE-backed companies don’t just benefit from the capital provided by the firms – they’re also more resilient than their peers amid economic contractions like the one we face today. This is because PE funds not only have strong relationships with financial institutions, but also bring operational expertise, unique access to market data, and deep knowhow supporting companies throughout economic cycles. The resilience of PE-backed companies also makes them robust investment vehicles, which is why the private equity industry is a top-performing asset class in the United States.  

PE firms take the long view on companies in their portfolio, which makes them steady partners in times of crisis – as well as models for other companies that are doing their best to navigate COVID-19 and the economic fallout it has caused. Knowing the industry is a force for economic growth and stability, we should take a closer look at how it functions and what its nuances can teach companies of all types. 
 

The value of long-term relationships 

One common misconception about the PE industry is the idea that firms have strictly transactional relationships with their portfolio companies. In fact, PE firms typically develop long-term partnerships with their portcos—the average holding period in the industry was more than five years between 2012 and 2018. 

Drew Maloney is the President and CEO of the AIC – an advocacy organization which provides information about the private investment industry and its effects on the U.S. economy – and he explains that PE investors “provide capital, operational expertise, and access to wider networks and supply chains, which helps businesses grow or restructure.” While most people associate PE funds with financial investments, beyond providing access to capital, funds draw upon rich data (market studies, voice of the customer surveys, data analytics) to understand the trajectory of industries and quickly make objective, evidence-based decisions to support long-term growth.  

As Maloney puts it, PE firms are in the business of providing “long-term, patient capital.” However, any long-term business and investment plan has to acknowledge that circumstances can change rapidly. Maloney observes that PE-backed companies are “nimble, agile, and can move faster” than their peers, giving them a significant advantage when economic conditions change drastically and without warning. 

 

How the PE industry is handling COVID-19  

Earlier this year, BluWave released data which demonstrated that private equity funds have been proactively investing in their portfolio companies during COVID – not trying to cut expenses by slashing jobs and downsizing in other ways. This reflects my experience during past recessions – because funds have the long-term horizon in mind, they use their access to capital, technology, and specialized expertise to position their companies to thrive during periods of crisis while others go into defensive mode.   

Scott Plumridge is a Managing Partner at the Halifax Group, and he points out that PE firms provide “emotional, technical, tactical, and financial support to keep businesses on track” amid COVID-19. Plumridge believes the “pandemic is a great time to highlight the value of a functioning PE relationship for a lot of small to medium-sized businesses.” He says his firm has been providing critical information on best practices, forecasts and cash flow, contingency plans, and a wide range of other issues.  

According to Plumridge, the “hardest discipline” PE firms offer in the middle of a situation like COVID-19 is urging portcos to remain focused on a growth plan. As other companies have been pulling back, Plumridge points out that “We had multiple companies that launched new services or completed acquisitions.” Maloney echoes this point, explaining that companies need to be “thinking 10 years out and making decisions over the long term,” even during a period of economic uncertainty.  

 

Nothing is more important than human capital 

 Maloney outlines why PE has a solid record of helping companies through recessions: “During contractions, we have more flexible capital, which is one of the reasons PE had returns well above 10 percent during the last recession and are better positioned to ride out a downturn.” The data agree with him – an analysis of how PE-backed companies performed during the Great Recession found that they weathered the downturn better and recovered more quickly than their non-PE-backed peers.  

One reason for the higher performance of PE-backed companies is their access to financial capital. However, PE firms don’t just provide dollars. Maloney emphasizes that PE-backed companies benefit from the “wide networks and operational expertise” PE managers offer their portfolio companies. Plumridge makes a similar point: “Don’t try to do it by yourself. Seek out experts and build a team of diverse people and backgrounds. Get yourself a good set of advisors who will hold you accountable and who have a stake in your success.” 

Relationships like these are particularly important right now, as companies are confronted with one the worst economic downturns in living memory. The principles that make PE firms successful in recessions – staying calm, taking the long view, making data-driven decisions, accessing specialized advice and expertise, and searching for and quickly acting on informed growth opportunities – can guide all companies, whether they’re PE-backed or not.  

 

 

An interview with Blackstone Growth’s Ann Chung

December 14, 2020 Sean Mooney

It’s not every day you land a job with one of the world’s leading investment firms ($571 billion in assets under management), then one month later find yourself amidst a global pandemic—just as you’re getting acclimated. Enter Ann (Kim) Chung. In February 2020, Blackstone made this announcement welcoming her as a core part of their nascent endeavor, Blackstone Growth (BXG). As Ann puts it: “We are like a startup. Most of us at BXG are from outside the firm; we are a scrappy, entrepreneurial effort that’s rapidly growing.” A few weeks ago, in a rarefied interview, I captured her thoughts, feelings, insights, and predictions for how life in the investment world is shifting beneath our feet, while altogether keeping its “long view” fundamentals.

Katie Marchetti: What was it like joining as managing director for BXG, then immediately getting hit with the economic contraction?

Ann Chung: When I joined in February 2020, I was just beginning to work on integrating within a large firm [Blackstone]. Then Covid hit, and we all began working from home. Simultaneously, we were getting ready for a big LP event, and at the last minute had to flip it to a virtual format. This was the moment I thought: “Ok, this is going to be much different than what I expected.” At first, the firm was doing a lot of virtual meetings to maintain connectivity (over time it was pared back), and I was a little overwhelmed because I was still in the “getting to know you” phase with everyone—it’s different attempting to build a relationship over a video call. But Blackstone did a phenomenal job of checking in with me, with everyone, to make sure the culture was preserved.

KM: Did the pandemic change your initial investment focus?

AC: I was focused on consumer-based companies, and no one really knew what the consumer was going to do in the pandemic-driven environment. I basically thought I was going to sit around for a year, but within a few weeks the consumer began bifurcating rapidly; assets followed suit. Relationship-based, value-driven brands with loyal customers grew almost overnight. But the consumer traded down pretty quickly if they weren’t heavily invested (emotionally, economically) in a particular brand. In other words, the consumer chose the tried and true value option. This is why iconic, legacy brands like Kraft (and the P&G portfolio as a whole) did well, driven in part by the fact that grocery stores and retailers went back to basics.

In terms of deals, we quickly spotted winners in the consumer space and were very busy in April, May, and June. My first deal at BXG, with oat-milk company Oatly, closed in July. I thought we were going to get a breather, but we continued to get inundated with amazing opportunities, and as a result raised the bar on the types of deals closed.

KM: In your opinion, what makes a company “poised for high growth”?

AC: Companies poised for high growth have a proven ability to execute really well on their particular focus area. Essentially, this gives them “permission” to expand beyond the core product. I call this a “concentric circle” model. To use Oatly as an example, the company executed well on core milk products. They launched in high end coffee shops and proved to artisanal baristas why their product was better. This gave them permission to expand into grocery retail; now they produce ice cream, yogurt, and more.

KM: How has 2020 shifted your thinking about anything from your personal approach to daily life to your investment thesis? How will this affect decisions made moving forward into 2021?

AC: We have little kids (ages two and four), so when Covid hit it was suddenly extremely hectic. Every day felt like we were gearing up for battle. Over time we figured it out—lots of communication and flexibility. My husband was a godsend, and, because he’d been in his job for a while (and mine was new and all over the place), he did the brunt of housework and childcare.

The combo of all the disruption and the announcement of Oatly opened the floodgates. From late summer to early fall, I was on calls for 12 hours a day, working weekends, etc. When you’re working from home, it’s really easy to just schedule back-to-back calls. By Labor Day, I was back in the physical BXG office, so my husband and I had to find a new normal again. For most of 2020, I’ve had a lot of balls in the air, and I wasn’t able to give the right amount of attention to the right things. So for 2021, my goal is to carve out time to relax, spend quality time with my husband; and on weekends spend time exclusively with my kids.

Also, I’m trying to refine my own process for 2021, and not be tempted to look at other people. I’m trying to stay focused.

KM: What is one (or more) myths about private equity you wish would go away for good?

AC: There’s a pervading theme that investors are all super greedy capitalists. Certainly there are some who have a singular focus, but for the most part the people I’ve come across are focused on building businesses, not breaking them down and extrapolating every dollar. PE funds are generally good fiduciaries, and they aren’t making decisions solely based on the money.

To use Oatly as an example (again), part of our investment thesis was based on the CEO vision: Oatly can be a change agent for environmental sustainability on a large, global scale. The idea that a company can make money and do good. I think many funds are taking this holistic approach to investing, it just doesn’t get a tremendous amount of attention.

Lastly, I’m trying to open the aperture for future investments. I want our portfolio to be inclusive. As a team, we are working on laying the groundwork for these initiatives. As a thesis-driven growth fund, we are looking for all the players who can help support our thesis—and we believe this will come from casting a wide net, not by getting stuck in an echo chamber.

An interview with Hidden Harbor’s Chris Paldino

December 2, 2020 Sean Mooney

There’s a common misperception that private equity (PE) firms only make investments to maximize short-term profits, but this generally isn’t the case. Many PE firms develop long-term relationships with their portfolio companies (portcos), and the COVID-19 pandemic has been a reminder that these relationships can prove invaluable in times of crisis. Chris Paldino is a Managing Partner of Hidden Harbor Capital Partners, and he has more than two decades of PE experience across predominantly Business Services and Industrials industries. Chris understands the value of healthy relationships between PE firms and their portcos, and he recently took the time to chat with BluWave CEO Sean Mooney about how these relationships are sustained and what changes he’s seeing in the PE industry during COVID-19 and beyond.

Sean Mooney: What will the PE industry look like in 2021?  

Chris Paldino: Our economy will likely continue its recovery in 2021, although economic activity will still be depressed, particularly in certain industries. The stark contrast in performance across different end markets will likely create PE portfolios with more of a “barbell” profile than expected (which refers to having winners and losers with less in between). This has wide-ranging implications for industry participants that invest across the capital structure.

SM: What lessons have you learned during the pandemic?  
 
CP: The pandemic has forced many changes that have affected all of us to varying degrees and we have focused on supporting the health of our colleagues.  Quarantining and social distancing has created isolation while health concerns overlay fears about jobs and financial well-being. This combination results in increased stress and a lack of healthy interactions to counteract such stresses. This is why we have encouraged our employees to take more frequent vacations and tried to enable full disconnection from work during these times.  Relatedly, we have also highlighted the importance of managing mental/emotional well-being.

SM: How do you ensure that your portcos are creating value? What are you doing to support them?  

CP: We have an in-house operating team that works full-time with our portcos. Their job is to provide guidance and resources that accelerate each company’s progress on growth initiatives. This team differentiates Hidden Harbor from others in the lower-middle market and helps to deliver better, more consistent outcomes for our investors.

SM: What types of companies excite you the most? 

CP: We look for companies within business services and industrials with strong value propositions that are founder-owned or a division of a larger entity (corporate carve-outs). We believe these situations align with our in-house operational capabilities and hands-on approach to building value.

SM: What has been your deal sourcing strategy through the downturn? 

CP: We have used this time to more effectively convey Hidden Harbor’s key areas of industry expertise. To do this, we have expanded our roster of Executive Partners in focus industries and spent more time developing relationships with industry bankers.

SM: What attributes do you look for in leadership teams for your portfolio companies? 

CP: We tend to focus on hiring ethical managers who have proven experience executing on initiatives that will build value at a specific company. Colin Powell said it best when he advised to “hire for strengths, not lack of weaknesses.” Therefore, we develop a detailed list of experience and competencies for each candidate that are needed to drive identified areas of value creation. We then interview and grade relative to those competencies. This process helps us distinguish between candidates we like and those who are most likely to create value.

SM: How has 2020 shifted your investment thesis? 

CP: 2020 has been challenging and it has reinforced our view that our most important job is to support our management teams. There was no playbook for operating through a pandemic and, in many cases, there were no good solutions available. We are so thankful for the extraordinary efforts of our portfolio management partners who continue to work through this unprecedented situation. My hope is that 2020 provides an important reminder that value is created at the companies by talented individuals, not in the PE conference room. Anyone who thinks otherwise is looking at the world through the wrong lens.

SM: What’s one myth about PE you wish would go away for good? 

CP: There’s a perception that PE is solely focused on short-term shareholder gains. However, we believe that investing in businesses to promote long-term success is the only way to consistently build enterprise value. Consequently, we invest in people, processes, and systems that promote long-term growth and organizational health across our portfolio.

SM: What are your suggestions for outsourcing expertise? 

CP: I spend a lot of my time ensuring that our diligence processes focus on critical questions and that we have the right resources evaluating each of these important issues. We must be brutally honest about where we lack expertise and access experts who can guide us appropriately in these areas. Firms such as BluWave help us quickly identify resources to help across diligence and post-close value creation.

How We Did It: Targeted Survey Case Study

November 23, 2020 Sean Mooney

With COVID-19 drastically altering the healthcare landscape, our PE fund client needed to quickly understand the effects these changes were having on a healthcare provider of interest — and they needed to know across geographic areas spanning six states in two weeks. Based on our proprietary approach, from our selection of vetted candidates the PE fund hired a group of resources with the exact market experience they needed, as well as key relationships with manufacturers. The information gleaned armed the PE fund with the insights they needed to make an informed decision.

For the full story, read the case study here.

An interview with CapitalSpring’s Richard Fitzgerald

November 17, 2020 Sean Mooney

COVID-19 has fundamentally altered the way many businesses operate, and restaurants have been forced to make the most significant changes of all. Richard Fitzgerald is a co-founder and Managing Partner at CapitalSpring, a PE firm dedicated to the restaurant industry (companies in their portfolio include staples like Taco Bell and Dunkin’ Donuts), and he recently shared his insights about how his portfolio companies are responding to the pandemic and what his industry can teach us about navigating one of the biggest crises companies have faced in decades.

Sean Mooney: What do you see as the post-COVID future of the restaurant industry?  

Richard Fitzgerald: The National Restaurant Association recently reported that the restaurant industry has experienced 100,000 closures tied to the pandemic. Many of those are independent mom and pop businesses or concepts that come into the pandemic in a weak position. The industry has become crowded – growth in the number of restaurants has been outpacing growth in the population. In other words, supply has been exceeding demand, which could ultimately mean COVID-19 will be healthy for the industry because it corrects for the imbalance.

Post COVID-19, labor management will likely be easier, as higher unemployment will lead to easier hiring and lower turnover. It’s been hard for restaurants to grow in recent years, because rents have been high with fierce competition for good locations. More affordable locations will become available after the pandemic; meanwhile, a pivot toward delivery, drive-through, and off-premise services will take place. Fast casual restaurants (FCR) and quick service restaurants (QSR) will likely see continued growth, as they are best positioned for our “new normal.”

SM: What has CapitalSpring been focused on over the past six months?  

RF: Between March and June, we stopped looking at new deals and really focused on the portfolio. We talked to most of our companies every day for months. We didn’t know how long the headwinds would persist, so we wanted to fortify portfolio company balance sheets and ensure operations were as efficient as possible, and prepare for a severe and protracted downturn. We also worked closely with the portfolio to ensure off-premise capabilities were optimized, including creating temporary drive thrus and outside dining rooms with tents in parking lots and other stop-gap measures.

SM: What attributes do you look for in your companies’ leadership teams? 

RF: We’re always trying to find leaders who have solid track records of managing through certain environments and against specific goals. If we’re looking to back a company that will focus on acquisitions, we try to find someone who’s done that before. Matching up leaders’ experience and track record to the growth strategy of the business is a core priority for us.

Throughout COVID-19, we’ve had a lot of discussions with portco leaders about how they handled the economic crisis in 2008 and 2009, and the current crisis will help to inform relationships with portcos down the road. For example, we’ll be able to ask, “What did you do when you saw the news about restaurants being closed, people sheltering at home, and so on?” This is a new stress test against which we can evaluate people and companies. If managers did a good job through the pandemic, they’ve been battle-tested and will likely be reliable partners in future crises.

SM: How does CapitalSpring use third-party resources and expertise to fill gaps with their portfolio companies? 

RF: There are a lot of great resources out there that help improve decision-making around new site selection – for example, resources that can be used to identify the right location to build a new restaurant by leveraging AI to analyze large datasets of variables related to traffic patterns, site attributes, and local demographics. We also rely on third parties for supply chain and procurement analysis – everything from napkins and food to how restaurants can improve their facilities by reducing the cost of engineering and maintenance.

We work with a group that helps us look for efficiencies at the store level and optimize menus (there’s far more science behind this than most people realize). There are data analytics services that can tell restaurant owners how to implement a 3 percent price increase while minimizing reductions in foot traffic – for example, by changing prices on items that people purchase less frequently (think hash browns versus the Big Mac). We collect a lot of proprietary data with our portcos, but in some areas they don’t have the “depth of data” that third parties can provide.

SM: How has 2020 shifted your thinking about how you interact with portcos? 

RF: One major challenge is maintaining a healthy company culture while working remotely. I spend a lot of time just calling colleagues and checking in on them now. You don’t need to be as proactive about culture when people are seeing each other every day, but now it’s difficult to know who’s overwhelmed or who’s potentially dealing with stress at home.

SM: What is one myth about private equity you wish would go away for good? 

RF: There’s a pervasive idea that PE firms buy companies, strip them down, and try to sell them as quickly as possible to make a profit. In the vast majority of cases, this simply isn’t true – the industry often adds jobs, spearheads diversity initiatives, and brings focus on environmental, social, and governance (ESG) issues. PE firms also cultivate long-term relationships with their portcos – there are times when we’re lenders and times when we’re owners, but our role is always to put a company in the strongest possible position to succeed. That way, everyone wins.

REDIRECTED The Evolution of Sales and Marketing into a Growth Engine

November 10, 2020 Steve Tafaro

For small and early-stage companies, sales growth is essential: it is a leading indicator of future performance and represents the most important measure of value accretion. However, the marketing and sales practices employed by many organizations today result in a failure to meet growth objectives. And while CEOs continue to rank sales growth as a top priority, many are dissatisfied with the results. So why are the traditional practices no longer working?

Early-stage, small and mid-sized companies are trying to grow in a dynamic and hyper-competitive sales environment. The evolution in communication and access to information has dramatically altered how buying decisions are made. Websites are packed with information about a company’s products and services, while LinkedIn and other social networks allow consumers to tap into personal connections for references. While the Internet is often viewed as a selling medium, it has evolved into a buying medium – according to McKinsey, almost 70 percent of purchasing decisions are made at the “initial consideration” stage, which means many buyers aren’t even reaching the point where they interact with a salesperson.

When prospective buyers do engage, they expect salespeople to understand their unique concerns and offer viable options that address them. The ability to build interpersonal relationships with prospective buyers and help them make informed and confident buying decisions is essential, but it’s also where traditional sales methods fall short.

The role of marketing will continue to grow as new technologies emerge and buying behaviors evolve. This is why it’s more important than ever for your marketing strategies and sales processes to be tightly integrated and aligned with how your customers buy. With this in mind, here are some suggestions that you can implement to increase sales results:

#1—Focus marketing on creating demand 

Marketing should be less focused on presenting products and services and more focused on creating demand and solving problems. A company’s marketing messaging should arouse curiosity by showing prospects how others have benefited from its solutions and how those solutions can meet their unique needs. It’s not about the products or services themselves, it’s about the results and capabilities they offer.

For example, consider the difference between two marketing campaigns for a cloud-based productivity tool. The first emphasizes the product’s intuitive user interface, features and design elements, and so on. The second explains how the tool will increase communication and collaboration, which will reduce inefficiency and improve a company’s bottom line. Marketers should always emphasize the latter set of points: demonstrating how products and services can actually help customers instead of just how they function.

#2—Create a power index 

One of the most effective ways for companies to highlight the outcomes their products and services are capable of securing is the creation of a power index, which lists these outcomes in a logical order. After each outcome, prospective buyers are asked to assess whether they’re “underpowered” or “adequately powered” in that area by checking a box. This leads buyers through a process that provides them with a clear understanding of the results they can achieve with a particular product or service and helps them prioritize the results that are most meaningful to them. As buyers complete the power index, several interesting things happen:

They see the full array of results they can achieve, not just the ones they assumed. This demonstrates the value of the solution they’re considering.
If a manager has been asked to evaluate competitive solutions and hasn’t developed explicit criteria, the power index will become the basis for their assessments.
The sales team is able to see the “underpowered” areas to focus on.

When marketing and sales teams deploy power indexes, they create two-way communication with potential buyers by showcasing the value of their products and services while simultaneously learning about buyers’ unique characteristics and needs.

#3—Develop and implement a value-based sales process 

The most successful companies use value-based sales processes. These companies realize that a sale can only occur if a prospective buyer is either looking for a solution to a stated need or willing to discuss the fact that a problem exists. A value-based sales process relies on a system of steps to identify these problems and demonstrate how a product or service can help. Using the results of the power index, the salesperson’s objective is to help prospective buyers close the gap that exists between where their organization is today and where they need to be.

The value-based sales process is designed to help buyers: 1) diagnose the issues or gaps and identify causes for them, 2) explore how a product or service can resolve their issues, and 3) mutually define the value received by resolving the issue and closing the gap.

When companies implement a marketing and sales strategy built around creating demand, identifying customers’ needs, and explaining how their products and services can achieve concrete positive outcomes, they will turn this strategy into a powerful engine of growth.

How We Did It: Commercial Due Diligence Case Study

November 5, 2020 Sean Mooney

Our PE Fund client needed to understand the viability of a home furnishing e-commerce business. Tapping into our invitation-only Intelligent Network, we specifically vetted and introduced multiple best-in-class groups to match the client with a specialized third-party resource with extensive online retail experience. Within two days, we successfully paired the client with a group that was able to quickly deliver PE-grade results at an attractive price level.

For the full story, read the case study here.