Category: BluWave Insights

At a time when companies are in desperate need of capital (and every other form of support they can get), the private equity industry has assumed a larger role in the U.S. economy. That’s why now is a good time to take a closer look at private equity – how it functions, the ways in which it’s misunderstood, and how it can help companies get through one of the most difficult economic downturns in decades. Drew Maloney is the President and CEO of the American Investment Council (AIC), and we’re delighted that he was willing to speak with us about how his industry works, how PE firms are responding to COVID-19, and what other companies can learn from private equity.  

Sean Mooney: What role does PE play in the U.S. economy?  

Drew Maloney: Private equity plays a significant role in the economy – the industry invests in more than 30,000 companies in every state and district, directly employs 8 million workers, and provides capital, expertise, and supply chains to help companies grow and restructure. PE investments also provide significant returns to retirees throughout the country, making retirements more secure.  

During economic distress like this one, flexible and patient capital is more important than ever for businesses to stay open and continue to employ their workers.  

SM: What are the biggest misconceptions about the industry?   

DM: At AIC, our primary mission is to educate policymakers about success stories. In the news cycle, conflict sells. But the majority of PE deals are successful. The fact is that private equity investors are deeply committed to the success of their portfolio companies. In addition to the reputational risk of failed investments, they’re required to have “skin of the game” and invest in the funds that they manage. 

PE firms invest in businesses of all sizes, but particularly in the middle market. Many of these businesses don’t get the attention of the big splashy public companies, so the public doesn’t necessarily hear about the value that private equity is able to create in their portfolio companies. It’s incumbent on the industry to explain how we’re helping companies get through COVID-19 and making the economy stronger. We have to define ourselves or others will define us. 

SM: How did the private equity industry perform during the Great Recession? 

DM: PE-backed companies are better positioned to ride out a downturn – during the last recession, for example, they generated returns well above 10 percent per year. For one thing, they’re much more nimble, agile, and can move faster. For another, they have operational expertise, access to capital, and extensive networks, which eases the burden on managers and allows them to take the time to create lasting value. This is what I describe as long-term, patient capital. 

SM: How is the PE industry responding to COVID-19?   

DM: PE managers are working to save and strengthen the businesses in their portfolio. As liquidity dried up earlier this year, private equity managers made PIPE deals with public companies, invested in debt instruments in dislocated markets, and made equity investments in businesses that needed capital to ride out the pandemic. They also contributed to their communities, donating hospital beds, spearheading back to school initiatives, and providing resources to teachers and parents.  

For example, we recently launched a new Back to School initiative because we know so many families are trying to navigate this unprecedented school year. If you visit our website, you can learn how private equity-backed companies are helping make school safer and more accessible for students, teachers, and parents.   

SM: What can non-PE backed companies learn from the PE industry, particularly during COVID-19?  

DM: First of all, they need to have the flexibility to react to a rapidly changing marketplace. They should always think ten years out and try to make decisions over the long term. It’s also important to avoid panicking – tap into your networks, develop a plan, and be prepared for an environment of uncertainty for the foreseeable future.

Private equity is a widely misunderstood industry – from the common belief that Private Equity firms snatch up companies just to strip them down and sell them to the lack of awareness about the pivotal role PE plays in the modern economy. Gretchen Perkins is a partner who focuses on business development at Huron Capital, and there’s nobody better to correct the mistaken assumptions about her industry and give us a glimpse into the current state of PE. Gretchen was kind enough to answer a few of our questions about the state of her industry, the effects of COVID-19 on her firm, and what she envisions for the future. 

Sean Mooney: Tell me a bit about Huron Capital’s investment focus. 

Gretchen Perkins: We’re a middle market PE firm that implements a buy and build strategy to grow businesses. We focus on business services, consumer goods, and specialized industrial companies in the United States and Canada. We have both a control buyout strategy and a non-control equity strategy.  

SM: What are a few of the biggest myths about the PE industry? 

GP: The single biggest myth about PE firms is that we buy companies and sell them in pieces to make our money. The PE industry is a significant job creator across the U.S. – over the past ten years, PE-backed businesses created more jobs and secured more sales than other companies. There’s a reason college endowments, pension funds, insurance companies, foundations, and nonprofits invest in PE – it has been the single leading asset class over the past 20 years. There are billions of dollars flowing into PE because of the returns and the fact that the industry creates more value and is less volatile than other investment vehicles. 

Despite the perception that PE firms always take over and try to sell companies quickly, the PE industry plays a long-term game. Firms generally want business owners to stay and maintain equity in the business – they don’t just take over.   We want to make the companies substantially better over time because it’s the best interest of both our firm and our stakeholders. 

SM: What was your firm’s initial response to COVID-19? 

GP: We acted several weeks before everything started shutting down to increase support for our portfolio companies. For example, we developed a Rapid Response Playbook focused on the implementation of safety protocols and developing guidelines for remote work. There are 7,000 employees at our portfolio companies, and their safety is our top priority.  

SM: How do the prospects for recovery look?  

GP: When the crisis hit, we immediately started doing 13-week cash flow forecasts, and we’ve discovered that things aren’t as bad as we initially thought it could have been. Now we’re focused on implementing our Restart Playbook, which is designed to take a close look at business operations across our portfolio and help companies emerge from the crisis even stronger and more adaptable. We’re doing everything we can to help our portfolio companies navigate COVID-19 and the economic aftermath, but our management teams are rising to the occasion. This should serve as a reminder that in the current state of PE, firms are more interested in finding effective partners they can work with to build great companies over the long run than ineffectively micromanaging the companies in their portfolios.  

SM: What types of businesses are you focused on investing in and growing now?  

GP: We’re looking at add-on acquisitions to companies that can thrive during the crisis – insurance companies, for instance. We are also looking into food and beverage businesses that have proven to be COVID-19 resistant. But what we’re most interested in are companies that have solid leadership teams and growth potential – these are the partners that will help us move into the post-COVID-19 era in a stronger position than ever.

This is an unprecedented time for private equity firms and their portfolio companies. As the economy begins to show signs of a tenuous post-COVID-19 recovery, there is no telling how the business landscape will be impacted. But one thing is clear: PE will be a major factor in the recovery. Devin Mathews is a partner at ParkerGale, and he generously took the time to discuss his firm, perceptions of the PE industry, and what investment trends we should be keeping an eye on right now. 

Sean Mooney: Tell me about ParkerGale’s history and investment philosophy. 

Devin Mathews: ParkerGale was founded in 2014, though the founding team worked together running the technology group at another private equity firm. We only do tech buyouts (not venture capital or growth equity) and always take a majority control position. We only buy in two ways: directly from bootstrapped founders or as carve out divisions from larger companies. Both of these strategies have similar dynamics – good businesses that need some care and attention. We focus on owners who are at an inflection point with all their wealth tied up in the business – we help them greatly reduce their personal financial risk and take their businesses to the next level. 

SM: Why would an owner want to partner with ParkerGale?  

DM: Quality, not quantity, is our ambition. At the end of the day, founders bring us in because they believe we’re going to respect the businesses they’ve built. We’ll change things, but the employees will still feel like it’s a great place to work. We place a heavy emphasis on culture and developing people at our portfolio companies, and even though our expectations are high, we recognize that we have to provide the necessary resources to meet those expectations. 

SM: What are a few of the biggest myths about PE? 

DM: For starters, not all PE firms are created equal. There are different types of PE firms out there: some are more transactional, while others are more hands-on and operational to help companies build long-term success.  

Also, it’s important to recognize that private equity is the economy – it’s not a niche asset class anymore. There are twice as many private equity-backed companies as public companies. This is all the more reason why PE firms have to focus on improving the image of the industry and showing others that our success as an industry is determined by the long term success of the companies we own. This industry cannot thrive if our companies fail.  

As an industry, our reputation isn’t great. People sometimes expect all of us to be MBA jerks, with low EQ and high intensity. While much of that is well-deserved, we try to show people we’re human, empathic, and prepared to listen. At ParkerGale, we talk a lot about vulnerability, transparency, and trust. That’s really the only way to get results in our experience. 

SM: How has COVID-19 impacted your firm?  

DM: We are all getting older around here and have invested during booms and busts before. We all subscribe to the great Howard Marks quote that “you can’t predict – you can only prepare.” So we don’t make predictions. We just get up every day and execute alongside our management teams.   

SM: What types of businesses are you focused on investing in now?  

DM: We look for software companies that are hard to hurt – that means they have sticky products, no customer concentration, no vendor concentration, and good profit margins. They’re also in segments of the market where VCs aren’t pointing their money cannons, which usually ends up poorly. When we get involved, the companies are customer-centric and profitable, but may not necessarily be doing the things they need to do to secure long-term viability. There are tens of thousands of companies in North America that fit our criteria, and we need to invest in one or two per year. We operate at the small end of the market – we’re providing the first institutional capital that any of these companies have had.  

SM: What’s your take on the future of PE investment?  

DM: Within the next six months, will founders say “I’m too old for this sh*t” and want to sell even if it’s at a price less than the top of the market? Or will they wait for the market to come back enough to get them the price they need to walk away? Just imagine you’re a founder in your sixties and you’ve been through way too many ups and downs already. Do you have the stomach to hang on a few years or is it time to find the right partner that helps you walk away and enjoy retirement? My sense is that it will be a mix of the two, but as I said earlier, we don’t try to predict. So we’ll just prepare for whatever comes our way.