Joe DeLuca recently joined the Karma School of Business podcast to talk private equity. The operating partner with NewSpring Capital spoke with host Sean Mooney about the significance of building genuine relationships during crises, the evolution and adaptability of NewSpring’s value creation model and the unparalleled power of collaboration, drawing parallels from the Manhattan Project.
Their insightful conversation sheds light on the human-centric approach to business and the pivotal role of adaptability in the private equity landscape.
Here are some of the top takeaways from their conversation.
In the face of unprecedented challenges, such as the onset of the COVID-19 pandemic, DeLuca underscored the importance of human connection and understanding.
“I tried to understand what the people that were working at our business, just what was going on so that we could relate to each other,” he said. “Then I could ask of them, ‘Hey, OK, we really need to do X.’ And then there was some empathy and some relationship building in the first week that I just felt was really critical because it was all happening real-time.”
This sentiment is not just about business strategy but about genuine human empathy. By taking the time to understand the personal challenges faced by employees, leaders can foster a sense of unity and shared purpose.
“People are really what drive these companies,” Mooney added.
In an era where technology and automation are at the forefront, it’s a poignant reminder that at the core of every successful venture are the people who make it run.
2. Evolving Value Creation Model
Adaptability is a hallmark of successful businesses, and NewSpring’s evolving value creation model is a testament to this.
“We started several years ago with what we call the value creation team,” DeLuca said. “The concept was, ‘w’Well, let’s get somebody from each of the disciplines. Let’s have a finance person, a marketing person, an HR person, an IT person.’ You sort of get the idea. ‘And let’s have them on tap to call on them and add value where and when needed.'”
This shift from a broad, external expert-based approach to a more focused, strategy-specific model highlights the importance of being nimble and responsive to the unique needs of each investment.
“The biggest single use case we see in private equity is people,” Mooney said. “It’s every quarter, and it gets bigger and bigger and bigger.”
The emphasis here is clear: while strategies and models are vital, it’s the people who execute them that truly drive value and success.
The story of the Manhattan Project, as recounted in “The Making of the Atomic Bomb,” serves as a powerful metaphor for the importance of collaboration in achieving seemingly insurmountable goals.
DeLuca drew attention to the unlikely partnership between General Leslie Groves and Robert Oppenheimer.
“These guys pulled it off, and they were completely opposites,” he said. “They were like the stereotypes.”
This collaboration between two starkly different individuals underscores the idea that diverse perspectives can come together to achieve greatness.
“If you work with great people, you kind of understand the situation, come up with a plan,” Mooney said. “If you’re tenacious and you’re going to find a way, and I think that so much just reflects the whole conversation that we’ve had here today.”
The underlying message is clear: with the right team and a shared vision, any challenge can be overcome.
DeLuca’s insights on the importance of understanding and connecting with employees during challenging times, the adaptability required in the ever-evolving world of private equity, and the lessons drawn from historical collaborations, make his episode well worth a listen.
When you’re done listening, head to the main BluWave podcast page for more conversations with business leaders.
Private equity firms perform commercial due diligence (CDD) to evaluate the growth and profitability of a potential target acquisition.
A process that was once reserved for large cap funds with extra capital to spend on evaluating the soundness of the investment, CDD is quickly becoming a necessary standard operating procedure for all proactive PE funds.
“Each deal’s different and may require a different slate of providers to get the most out of each diligence phase or diligence stream,” says Keenan Kolinsky, head of research and operations at BluWave.
Private equity firms have discovered that in order to drive alpha in a sea of beta, smaller, more specialized commercial due diligence providers can provide them with more unique insights quicker.
What is Commercial Due Diligence?
Commercial due diligence is a systematic evaluation of a target company’s commercial viability before making an investment decision. It’s an extremely thorough process that, when done well, leaves no stone unturned before papers are signed.
“Commercial due diligence is a term of art for a market study. It’s typically provided by market strategy firms,” BluWave founder and CEO Sean Mooney shared on a recent webinar. “It is standard operating procedure by the best private equity investors in the world.”
It comes as no surprise, then, that CDD is consistently No. 1 due diligence category in the BluWave Activity Index.
That’s why the invite-only network of third-party resources is loaded with world-class diligence providers, such as Don Jenkins* of CommDil Inc.
“When you think about commercial due diligence, there’s often a fairly typical set of objectives,” Jenkins says. “Those will include understanding the market size, how big is the market, how is it segmented, what are the key segmentations or different types of businesses that constitute that market.”
From start to finish, it usually takes weeks, if not several months, depending on the target’s size and complexity.
Any consultant can provide intelligence on a target’s total addressable market, prospects for growth, competitors, risks and other vital information through initial industry research. But specialized consultants with pre-existing industry knowledge don’t have to waste their time to gain a sense for the industry.
Instead, they can provide a heightened sense of value by using their base knowledge to dig deeper and therefore provide more in-depth insights in the same amount of time.
These steps give investors a deeper understanding of the target company’s business model, financial performance, competitive landscape, and operational and legal risks.
A benefit of specialized commercial due diligence providers is their ability to get up to speed faster. Because they aren’t being run to with projects across various industries, their recent experience primes them to hit the ground running. Generalist firms, on the other hand, will run expert network calls to get smart on an industry.
“We have thousands and thousands of projects, tens of thousands of their quals built into this cognitive engine that we’ve built, and then we’re constantly checking with them on a capacity,” Mooney shared on the webinar of BluWave’s matchmaking process. “By the time the PE firms calls, we already know who they need, why they need it, what their quals are, what their availability is, and then have the ability to compel them to bring the A team to our clients.”
Kolinsky says there are several variable diligence factors to consider, “such as the target’s industry, the deal size, target technology or operational nuances, timing and more.”
BluWave supports private equity clients by connecting them with the diligence providers whose functional capabilities, expertise and experience account for these different factors.
Here are the four key steps the service providers in the BluWave-grade network take when performing commercial due diligence:
1. Comprehensive Market Analysis: Size
This is where the target company’s market position as well industry trends and growth potential are analyzed.
“We’ll be doing market forecasting, understanding the headwinds and tailwinds that affect growth,” Jenkins says. “We’re looking at trends that exist out there, whether it’s technology trends, regulatory trends, just other emerging competition.”
“It’s answering the fundamental question of, ‘What do we believe this business will grow at over our whole period and beyond?'” Joy said. “[The scope is] more 10, 20 years because just as important as the next five years’ growth is what matters just as much as the growth beyond that as you think about your exit and the exit multiple.”
2. Comprehensive Market Analysis: Total Addressable Market
Here’s how Scott Bellinger, BluWave’s head of sales, defines this step:
“Of the overall market, how much is currently addressable by the target? What else could they do to get into new markets and increase their total addressable market?” Bellinger says.
He added that businesses that already have a high penetration rate may need for new markets if they want to continue to grow.
Joy shed more insight on this stage in the webinar.
“By the time we close on a transaction, we have a really strong hypothesis around what are the value creation levers that we are going to pull over our whole period to create outsize market returns,” he said. “What adjacent markets should this target enter…and how do you capitalize on that?”
3. Competitive Analysis
Bellinger says there are key questions to answer at this stage: “Who does your business compete against? How are they viewed in the market against competitors? Who else has taken up market share? What’s the differentiation between your business and others?”
Jenkins agrees, and noted that this is a fundamental part of hits firm’s commercial due diligence exercises.
“Typically we’re looking at understanding the competitive landscape that the target company is competing against, and how they’re positioned in terms of share and their offering, and how they position themselves in the marketplace,” Jenkins says.
There are many ways this can be done, but getting first-hand information from clients and customers is essential to understanding the business. Expert third-party firms will not only know which tactics to use for specific industries, but also how to connect with the customers in a meaningful and insightful way.
We have recently seen many firms turn to more specialized providers due to the valuable insights gained.
In times where other PE firms are struggling to get the right information on the timeline they need, equipping yourself with unique data quickly will provide you with competitive edge.
“The deal process is laborious and it’s fatiguing, but really taking the time upfront to find the right group that will answer the critical questions that you’re really have to will pay dividends,” Joy said on the webinar. A lot of groups that’ll say yes to the project, but the ones that will provide real value is a lot smaller.”
The expertly vetted service providers in the BluWave network have performed countless commercial due diligence analyses for hundreds of PE firms.
“In private equity, one size does not fit all,” Kolinsky says.
We vet each resource before they’re admitted into the network, and again before connecting them to you. After your initial scoping call with our research and operations team, you’ll meet the two or three “best fits” within a single business day.
*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.
A leading financial services company was on the lookout for a VP of HR. With a strong presence across dozens of locations, the company had been experiencing rapid growth, boasting a revenue in the tens of millions of dollars. Its unique service offering, assisting financial advisors in setting up qualified retirement plans, had set them apart in the industry. As the company expanded, however, leadership realized they needed for a strategic HR leader. This new role was envisioned to not only manage the day-to-day HR operations but also to be a culture carrier and strategic partner in the company’s growth journey.
The Challenge
Local Candidate who Understands Industry Intricacies
The search for the right VP of HR was not just about filling a role; it was about hiring someone who could seamlessly integrate into the company’s culture and ethos. The ideal candidate would have experience in the financial services sector, with a deep understanding of its intricacies. A locally based candidate would be a bonus.
The company also emphasized the importance of industry experience, especially in online lead generation and financial services. With such specific criteria, the challenge was to find a candidate who would tick all the boxes.
How BluWave Helped
Knowing Exact-Fit Providers Ahead of Time
BluWave, with its extensive network and deep understanding of the professional services industry, took on the challenge. Recognizing the unique needs of the company, BluWave presented three exact fit HR executive search firms with a track record of placing top-tier HR leaders in the financial services sector. After the initial introductions, the PE firm selected the partner that would be the best fit for its situation and could understand how to align a candidate with the company’s vision and culture.
The Result
HR Executive who Fit Perfectly within Culture
With BluWave’s assistance, the financial services company was able to identify and onboard a VP of HR who not only met its technical and industry-specific requirements but also resonated with its company culture. This strategic addition to its leadership team has positioned the company for continued success and growth, ensuring that its HR strategies are aligned with its business objectives.
Client Type: Portfolio Company – Real Estate Search Engine
Service Provider Type: Interim CFO
The Need
Navigating Financial Transitions
A leading online real estate marketplace specializing in age-restricted communities was at a crossroads. With revenue of $15MM and a team of 50 employees and 20 contractors, they were gearing up to revamp their business model and set their annual budget. The challenges brought on by the pandemic had altered their sales funnel dynamics, and their existing financial model was due for an overhaul. Amid these shifts, the need for an interim CFO to steer them through this period became evident.
The Challenge
LeadGen Expert with Industry Experience
Operating as a unique platform in the real estate sector, the ideal candidate would be familiar with online lead generation. Real estate experience would be a significant advantage, too. Furthermore, understanding the intricacies of the company’s in-house developed front and back-end systems was crucial. With an ongoing annual audit and the recent onboarding of a new FP&A manager, the interim CFO’s role was to ensure a seamless transition without any operational disruptions.
How BluWave Helped
The Right Solution, Fast
BluWave swiftly grasped the distinct needs of the real estate marketplace. Tapping into its extensive network, BluWave introduced the company to a short list of seasoned interim CFOs. After introductions were made, the portco zeroed in on the candidate that brought to the table a rich experience in online lead generation and a profound understanding of financial modeling and budget building. The temporary executive was not only equipped to oversee the annual audit but also possessed the strategic vision required to reshape the business model in alignment with the company’s objectives.
The Result
Strategic Financial Revamp, Strong Foundation for Future
The interim CFO integrated effortlessly into the team. In the initial phase, she prioritized ensuring the smooth operation of the company’s financial functions. As the engagement evolved, the CFO transitioned from a full-time role to a part-time strategic advisor, offering the company the flexibility it sought. Under the interim CFO’s guidance, the company successfully overhauled its financial model, laying a robust foundation for stability and growth.
The interim executive you selected for us did great work. We would rate her as great overall.
The private equity deal market has been slow in 2023. There are signs, however, that that could change soon.
In fact, BluWave founder and CEO Sean Mooney believes PE is ready to “call a bottom” based on proprietary internal data. That means that firms must have their due diligence resources lined up ahead of the anticipated wave of deals this fall and beyond.
Mooney was recently joined by BluWave Head of Technology Houston Slatton and Hidden Harbor CP Partner Andrew Joy to discuss the intricacies of commercial due diligence on a live webinar.
Here are some of the top takeaways from their conversation:
Understanding Target Markets
The panel touched on how commercial due diligence is pivotal in assessing market conditions.
“The definition of commercial due diligence in my mind is a synthesis of all factors, both historically and in the future that affect the growth and the competitiveness of the target in that particular model,” Joy said.
This “synthesis” involves myriad factors, from end-market demand drivers to regulatory inputs and global competition. The goal is to understand not just the immediate future but to project growth and trends 10-20 years ahead.
“Commercial due diligence is a term of art for a market study,” Mooney added. “It’s standard operating procedure by the best private equity investors in the world.”
The competitive landscape of private equity demands a unique approach to bid strategies.
Mooney said private equity firms aim to see something unique in their investment targets that others don’t.
“One of the big trends is investment bankers are starting to put sell-side commercial due diligence studies in the data rooms,” Mooney said. “The incentive may be for private equity firms, ‘Oh, this is great, I can rely on the money that they’ve spent and I’ll just take their word for it.’ “But a newsflash is, if you’re buying the market study, you get to pick what it says so you can frame it.”
He added that that’s one of the reasons the private equity industry still uses its “own source of truth.”
Joy elaborated on other challenges PE firms are facing.
“I think as information and data has become more commoditized and more accessible, it’s becoming harder and harder to really find areas where you have a competitive advantage,” he said.
Finding that unique angle in a saturated market can make all the difference for a firm.
Choosing the Right Commercial Due Diligence Provider
The choice of a due diligence provider can make or break a deal.
Mooney emphasized the importance of team experience and relevance.
“When you’re vetting your group, I’ll show exactly how we do it. It’s ‘What is your experience in the defined industry you’re exposing? Which projects have you worked on in this industry?’ When did they work on it? Who is the team that worked on it?”
In the end, he said, it comes down to ensuring that the diligence team has relevant experience with the target, the market and the industry.
“I think it’s really finding the right team that has the most relevant experience and just knows the market cold,” Joy added.
Mooney also warned against trying to pull an up-market firm down to your budget. Because of scarcity of resources, this could mean they don’t put their best team members on your project.
As the PE world braces for influx of new deals, having your diligence sources lined up ahead of time is key. To learn more about how to prepare, you can watch the webinar on demand.
If you would like to hear about the commercial due diligence resources in the Business Builders’ Network, contact our research and operations team to scope your need.
Client Type: Portfolio Company – Food Ingredients Facility
Service Provider Type: Interim CFO
The Need
Expertise in Financial Management and Hedging
The CFO was leaving a B2B food ingredients portfolio company. The business, with significant operations in commodities and hedging, needed an interim CFO who could navigate the complexities of their financial landscape. This included managing large-scale hedging operations, understanding the impact of hedging on P&L and ensuring covenant calculations were accurate.
The Challenge
Hands-On CFO with Industry Expertise
The company’s operations were intricate, with 85 percent of their capacity for 2023 already booked and hedged. This created a significant exposure on their books, making expertise in commodities and hedging non-negotiable. Additionally, the ideal candidate would be someone who had experience in a private equity environment, understood liquidity and 13-week cash flow, and was more finance-oriented than purely accounting-focused.
How BluWave Helped
Short List of Industry Finance Experts
BluWave leveraged its extensive network to identify a short list of interim CFOs who not only had the required expertise in commodities and hedging but also had a track record in PE environments. The portco and its PE firm selected a candidate with more than three decades of experience, including roles in financial leadership and a deep understanding of the agri-commodity space. Their hands-on approach and willingness to be on-site, even if it meant frequent travel, made them an ideal fit.
The Result
Recipe for Sweet Success
With the interim CFO on board, the company maintained seamless financial operations, ensuring that their hedging strategies were effectively managed and that their financial reporting remained accurate. The temporary executive’s expertise allowed the CEO to focus on other critical aspects of the business, confident that their financial operations were in capable hands.
Client Type: Portfolio Company – B2B Data Management
Service Provider Type: Market Research Firm
The Need
Specialized Market Research for Master Data Management
A B2B data management portfolio company sought a market research firm to conduct an in-depth survey. Their objective was to delve into market awareness, trends in Master Data Management (MDM) and the perception of various brands in the software industry. With MDM being a pivotal enterprise software tool, understanding its market positioning was paramount.
The Challenge
Quality Insights Within Budgetary Limits
Having previously approached another market research firm, the company found their offerings too costly for the intended survey. The challenge lay in identifying a service provider with profound knowledge of MDM and the capability to target specific roles such as IT, Data Architecture Management and Data Cleaning, all while staying within the budget.
How BluWave Helped
Bridging the Gap with Expert Market Research
BluWave swiftly navigated its vast network to pinpoint a market research firm that not only had a deep-rooted understanding of MDM but also boasted expertise in conducting brand-centric surveys. The chosen firm’s proficiency in targeting the desired roles ensured the survey would resonate with the right audience, making them an ideal match for the portfolio company’s requirements.
The Result
‘Good Partner’ for Great Value
With the support of the handpicked service provider, the portfolio company executed a survey that furnished them with invaluable insights into market awareness, MDM trends and brand evaluations. The research was not only enlightening but also adhered to the company’s budgetary constraints, providing optimal value.
The service provider you selected was both affordable and a good partner for our portfolio company.
Client Type: Portfolio Company – B2B Legal Services
Service Provider Type: Business Intelligence, Analytics and AI Firm
The Need
Efficient Analytics for Transaction Lode
A portfolio company in the B2B legal services sector reached out with a specific challenge. They had an Excel dataset with three tabs, each containing 1 million rows of transaction data. Their objective was to create cohort analyses and slice and dice this vast amount of information. Given Excel’s limitations, they needed a more robust solution.
The Challenge
Large Datasets and Tight Deadlines
The company, which offers online legal services to SMB customers, had recently accessed a large transaction database that was cumbersome to manage in Excel. They needed to make use of the new data trove for an upcoming project on a short timeframe. Their previous go-to firm, which used Tableau for data visualization, was unavailable for immediate assistance.
How BluWave Helped
The Right Big Data Connections, Fast
Understanding the urgency and the scale of the data challenge, BluWave tapped into its network to identify a boutique business intelligence, analytics and AI firm with the expertise to handle large datasets efficiently. The selected firm was lauded for its ability to work at “deal speed,” ensuring that projects were completed promptly without compromising on quality.
The Result
Seamless Integration, Insightful Analysis
With the expertise of the selected service provider, the portfolio company successfully integrated their vast transaction data into a more manageable and analyzable format. The firm not only set up the database for easy manipulation but also provided rigorous analysis, offering valuable insights that were highly appreciated by the company’s management team during diligence. The entire process, from initial setup to detailed analysis, was completed within the tight deadlines, ensuring the company was equipped for its key upcoming project deadline.
Their analysis was rigorous, and a company’s management team found their work to be insightful during diligence. They operate at deal speed and frequently work late at night and over weekends to ensure clients receive quality work product on time. I’d highly recommend their services.
Matt Cole recently joined the Karma School of Business podcast to talk private equity. The managing director at SBJ Capital spoke with host Sean Mooney about data-based decisions, how he got his start in PE and much more.
Here are some of the top takeaways from their conversation.
When asked about his path to the world of private equity, Cole said his journey was atypical.
“Mine is a bit circuitous,” he said. “I feel like it’s a more well-trodden path now and people have to take certain steps and so forth and that was definitely not the case for me.”
Starting in investment banking, Cole transitioned into operations, focusing on understanding the intricacies of making a company successful. His entry into private equity was more opportunistic, stemming from a relationship with a colleague.
He emphasized the importance of his diverse experiences: “It was the right combination of experience that I had to bring banking and operating set of experiences to PE.”
2. Value Creation with a Human Touch
Value creation is at the heart of SBJ Capital’s approach. Matt emphasizes the importance of working closely with family and founder-owned businesses and understanding their unique challenges and opportunities.
“These are family- and founder-owned businesses. They are not looking for someone with necessarily the shiny bulge bracket Wall Street resume to come in and tell them what the next opportunity is with their company,” Cole said. “I think it makes a big difference both in actual experience to be able to say we’ve walked in your shoes and in demeanor and approach for how we present ourselves to these companies and we call them partner companies for a reason.”
For SBJ, value creation revolves around professionalization and accelerating growth. Cole, however, is quick to point out that they approach this with respect and understanding.
“We’ll never come in pretending to know more about that business after a few-month diligence period than the people that have been there for extended periods of time or started that business themselves.”
Cole also stressed the importance of being prepared and adaptable. He highlighted the significance of data in driving business decisions and the potential of emerging technologies like AI.
“Part of the value creation story that I didn’t touch on as much before is the use of data and how are you using data? How are you implementing systems?”
Mooney added the importance of sharing information within a company, especially in founder-owned businesses.
“A lot of times the senior member of the teams don’t even know the revenue of the business or certainly don’t know the full P&L or the balance sheet or the income statement,” he said.
Cole’s transition from investment banking to operations and his adeptness at navigating the complex terrains of the business world make his episode well worth a listen.
When you’re done checking out his episode, head to the main BluWave podcast page for more conversations with business leaders.
