Archives for September 25, 2020

Creative Destruction: How PE Business Development May Change Forever

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By Mark Gartner, Principal & Head of Investment Development, ClearLight Partners

“Every act of creation is first an act of destruction.” – Pablo Picasso

The pandemic is stress testing everything, and COVID-19 may finally kill several business development (BD) strategies already in decline. This isn’t great news because finding good deals at reasonable prices is still challenging, and the menu of remaining strategies to stay ahead of the competition has become limited. Just ask anyone who has submitted an indication of interest in a traditional auction process recently. It is not pretty.

Treat deal sourcing like a laboratory to crack the code on the next wave of
technology- and marketing-driven strategies

As it pertains to deal sourcing, investors that want to survive will essentially have two options. First, they can go back to the well of the old reliable origination channels (i.e. intermediaries, executives, independent sponsors, direct sourcing, etc.) and commit to becoming truly excellent at the strategy or strategies where they think they have a shot at doing so.  That’s one option.  The other would be to invest in and treat deal sourcing like an innovation hub.  A laboratory, if you will, to crack the code on the next wave of technology- and marketing-driven strategies that will entice the fish to jump in the boat, so to speak.  I believe that the best originators in the lower middle market will start to approach the private equity game through the lens of a lead generator with the content and lead capture techniques to match.  More on this later – first, we must pay our respects to the deceased.

RIP Old BD Strategies
Not everyone is going to like or agree with what I’m about to say here, but it’s high time that we pour one out1 for a few strategies that just don’t move the needle anymore. For starters, the game of staffing up one or more business development professionals to focus their energies on literally the exact same strategy every other private equity fund is employing is simply dead. The famous investor Sir John Templeton once said, “It is impossible to produce superior performance unless you do something different.” This is sage advice as we usher in business development 3.0 and say farewell to the following activities that are sort of like rocking chairs – they give you something to do but don’t really get you anywhere.

  • Conference circuit – With apologies to the ACG, it’s sort of an open secret that these events are generally not a great use of time for tenured business development professionals. And conferences will have ever-diminishing value as investment banks increasingly adopt CRMs and automatically include buyers that have expressed an interest in seeing their deal flow. Yes, there are exceptions to every rule, but the primary remaining benefits to conference attendance from my perspective are (i) allowing new business development professionals to get critically important in-person time with intermediaries that they have not yet met, and (ii) giving tenured business development professionals an opportunity to be seen and market themselves to the industry for whatever career opportunities that may produce. Outside of that, I would advise staying home, spending more time with your family, and focusing on strategies that produce deal sourcing alpha.
  • High volume or low value city visits – Another travel-based strategy with diminishing value is the approach of picking a city with a critical mass of intermediaries and setting up as many meetings as possible to remind investment bankers that you have a fund and want to do deals. While investment banks may be more inclined to take the meeting since you are going to be in town, the net result of most of these meetings is the same. In most cases, buyers leave with information that could have been gleaned from a phone call and investment bankers go back to doing something more productive with their time. The key here is quality over quantity and activities that produce real relationship development. Go see people in person, but be intentional about it, and go long form when you can, particularly if you can do so somewhere outside of the conference room.
  • Book collecting – Many (of course, not all) business development professionals are tasked with hunting down as many CIMs as possible. Their firms judge the success of their BD efforts by the percentage of the addressable market of teasers/books that they capture. While an understandable initial approach, as firms evolve their deal sourcing capabilities, they ultimately realize that a robust top of the funnel is worthless if you can’t advance those leads through the later stages of the funnel. This is where leveled up2 BD professionals earn their paycheck. Good business development pros will analyze every deal that comes in the door through what I’ll call an “angle matrix” and elevate those deals with relatively higher probabilities of closing. In other words, before any deal is analyzed based on its investment merits, a firm needs to first determine if they have an angle that will allow them to prevail. As a reminder, eligible angles include process dynamics (e.g. more intimate auction), executive resources to bring to the table, prior experience or investments in a related space, a previously developed investment thesis and geographic proximity. In the end, a thousand opportunities are simply academic if the firm cannot close on one of them.

…as firms evolve their deal sourcing capabilities, they ultimately realize
that a robust top of the funnel is worthless if you can’t advance
those leads through the later stages of the funnel.

Celebrating the Birth of New Strategies
All is not lost. Like a phoenix, or odyssey3 of phoenixes, the following strategies are emerging from the ashes of deal sourcing strategies past. Some have been around for a while with varying adoption, but with necessity being the mother of invention, get ready to welcome the following approaches to the world in a much bigger way.

  • Specialization – This one goes out to all the generalists. Enough is enough. Pick a small handful of sectors on which to focus and become excellent at them. When a firm focuses, the brand becomes synonymous with the industries you care about and relevant deal flow will start to find you. The classic rebuttal to specialization is that a secular decline in one or more of the industries on which you’ve decided to focus could blow up your strategy if the timing doesn’t work in your favor. Solution: pick sectors that are specific enough to be memorable, but that are broad enough to offer room for pivots if need be.
  • Thesis development – Investors that put in the work to get off of their heels and proactively call their shots by developing investment theses have advantages over more reactive investors. I’m always amazed by how much incremental deal flow arrives when I market specific sectors of interest to intermediaries and other deal referral sources. What’s also amazing is how long people remember that you’ve stated interest in a specific sector. I’ve had people call me years after I’ve ceased a search for deals in a given industry to ask if we are still looking. Thesis development also offers a sort of synthetic specialization to generalist investors to create advantages in sourcing and closing deals. The missing piece for a lot of firms, though, is knowing how to market their theses effectively.

Most private equity professionals could not articulate their firm’s
digital marketing strategy despite an insistence that their
portfolio companies have one.

  • Digital marketing for lead generation – If I could hold up one new deal sourcing strategy like a newborn Simba in the Lion King, it would be this one. Most private equity professionals could not articulate their firm’s digital marketing strategy despite an insistence that their portfolio companies have one. This creates a real opportunity for early movers to differentiate themselves with high quality content written for business owners that facilitates engagement. Despite an improving philosophy around PE website design that offers a more welcoming feel to business owners, funds still have a long way to go to make contacting them easier and less daunting. Hint #1: make it easier, not harder, for business owners to contact you. You don’t gain anything by being elusive. Post your e-mail address and telephone number on your website. My personal goal is to close a deal based on a lead that came in through a website form submission4. Hint #2: If you’re looking for a nudge in the right direction, look at management consulting websites for inspiration around content and website design – they are lightyears ahead of most private equity funds.
  • Own your local market – Yes, Virginia, private equity funds can still do proprietary deals. The way to do so is by leveraging geographic proximity to your firm, particularly in the era of COVID. All else equal, doing a deal with a local entity feels inherently more friendly, safer. Whether or not this is true is certainly debatable, but it does create an opportunity to avoid an auction process. In all likelihood, the buyer will not get a screaming bargain, because the valuation has to be sufficiently high to forestall an auction. However, the certainty of close improves dramatically. The hardest part about this approach is figuring out how to allocate the time/resources to best market yourself locally. Here are some ideas for consideration: membership in YPO or Vistage, providing regular content/interviews for the local business journal, sending personalized invitations to business owners to luncheons/events5, and partnering with law/accounting firms to deliver value-added in-person content (they have marketing departments after all).

Conclusion
Think like Gretzky: skate to where the puck is going to be. Indeed, there will be deals that get done through the old ways of doing things, but it doesn’t mean that this will last forever. If this stimulates any ideas or feedback, please call (949-725-6598), email ([email protected]), or comment on LinkedIn. Stay healthy my friends.

About the Author
Mark Gartner is a principal and head of investment development at Newport Beach, California-based ClearLight Partners. Mark rejoined ClearLight in 2014 to lead the deal sourcing function for the firm and has over 10 years of experience helping private equity funds find and close on investment opportunities.  Before rejoining ClearLight, Mark led deal sourcing for American Infrastructure Funds, a $1.5 billion private investment firm focused on investments in the energy, infrastructure, and real property sectors.

He previously was an associate and senior associate with ClearLight where he was a founding member of the firm’s investment development group and also assisted with transaction due diligence, execution, and portfolio company governance.  Before ClearLight, Mark executed sell-side M&A transactions as an analyst in Houlihan Lokey’s basic industrial group. Mark graduated with a BA in Economics and a Minor in Spanish from Duke University.

ClearLight Partners is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4 million to $15 million of EBITDA or operating profit and are operating in industries with strong growth prospects.

Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.

Footnotes
1 – The act of pouring an alcoholic beverage on the ground as a sign of reverence for friends or relatives that have passed away.

2 – “Leveled up” is video game speak for having attained sufficient strength and abilities with your character to take on more formidable adversaries.

3 – While I had initially used the word “flock” here, it turns out that the collective noun for multiple phoenixes is “odyssey”. As an aside, my personal favorite collective noun for a group of birds is a murder of crows. But what, you ask, shall we call a group of private equity business development professionals? How about a blazer of BDs (nod to Brendan Burke at Capstone Headwaters for this one)?

4 – For anyone who scoffs at this aspiration, remember the words of Arthur Schopenhauer, who said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

5 – One last tip, if you are nearby a racetrack that offers an exotic car driving experience, your conversion rate on invitations for such an event will be exceptionally high.

Private Equity Professional | September 25, 2020

Paul Hastings Sees Active IPO Market

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While the U.S. IPO market ground to a halt this spring due to the outbreak of the COVID-19 pandemic, beginning in May the market came roaring back, allowing companies with IPO plans in the pipeline before the start of the pandemic to access the market.

The summer resurgence has set the stage for an active IPO market in September and October, with COVID-19 increasingly a focus of disclosure and marketing. These conclusions are drawn from law firm Paul Hastings’ just published Going Public: The U.S. IPO Report, which examines data from 28 IPOs that priced in the first half of 2020 with base deal sizes over $75 million.

“In our semi-annual report we provide an in-depth look at the state of the U.S. IPO market. But while the report examines this particular period of market activity, our team is continually reviewing IPOs on a real-time basis and developing deeper analyses and period-over-period insights that give us valuable knowledge we can leverage in approaching and executing IPOs,” said Frank Lopez, co-head of the global securities and capital markets group at Paul Hastings. “The IPO market has made a major comeback this spring and summer—and we look forward to a busy fall. We anticipate that companies able to market their success during the COVID-19 pandemic are likely going to seek to access the market later in 2020 and into 2021.” Mr. Lopez is also a partner in the firm’s leveraged finance practice and is based in New York City.

Despite several mega-IPOs, medium-sized deals still prevail. Indeed, almost 45% of IPOs in the study were in the $100 million to $299 million range. However, the first half of 2020 has also seen a return of mega-IPOs over $750 million, with almost 30% of deals in this range in the first half of 2020, compared to just over 15% for full-year 2019.

Life sciences and biotech issuers, along with special purpose acquisition companies (SPACs), dominated the first-half 2020 IPO market, but broader sectors returned late in Q2 and into Q3. Even more than historical trends, life sciences and biotechnology IPOs, in which issuers raise smaller amounts of capital, dominated the market by deal count. While these issuers accounted for approximately 34% of deals in full-year 2019, they accounted for over 60% of deals in the first half of 2020.

According to Paul Hastings’ report, the SEC review process remains streamlined, but deals are taking longer to complete. While the SEC comment process remains streamlined, with an average of 3 comment letters and an average of 15 comments in the first letter in the first half of 2020, compared to 19 for full-year 2019, the time to market has increased by over a month. This increase is likely driven less by the SEC process and more by the market slowdown and volatility caused by the COVID-19 pandemic.

Q2 saw a return to secondary sales following no secondaries in Q1. While none of the IPOs in the Paul Hastings’ study from Q1 2020 had a secondary component, almost 30% of IPOs in Q2 contained a secondary component, leading to a total of 18% of issuers in the first half of 2020, compared to just under 30% of deals in full-year 2019. The prevalence of life sciences and biotechnology IPOs likely drove this decrease in secondary components since these companies can access the public markets at an early stage in their lifecycle when exits are less common at time of IPO for founders and early-stage investors.

Other Findings

  • Pricing rebounded, with half-year 2020 pricing exceeding pricing in 2019. Approximately 65% of IPOs priced above the midpoint of the range in the first half of 2020, compared to just under 50% in full-year 2019.
  • Sponsors may see the public markets as more attractive than private sales. Going into the latter half of 2020 and into the first half of 2021, we expect that there may be an uptick in IPOs by sponsor-backed companies, as the public markets may be deemed better options for valuation compared to the private markets, as we have started to see sponsor-backed deals return to the market in Q2 and into Q3 2020.
  • Virtual roadshows are the new normal. As financial markets professionals and issuers shifted to working remotely, the IPO preparation process and marketing process have gone virtual.
  • Two years of financial information has become the new normal—particularly for life sciences and biotechnology IPOs. 90% of emerging growth companies (EGCs) in the study relied on JOBS Act accommodations to present only two years of audited financial statements and two years of selected financial statements—underscoring that these trends are the new normal. (The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law in 2012 to encourage funding of small businesses in the US by easing many of the country’s securities regulations).
  • Despite some trends in Q4 2019 toward IPO issuers that were profitable, IPO issuers in the first half of 2020 largely were unprofitable, led by life sciences and biotech IPOs. Approximately 77% of IPO issuers in the first half of 2020 presented net losses on a GAAP basis, compared to 67% for full-year 2019.
  • Underwriting commissions are trending toward the historical norm of 7%, reflecting the decrease in high-profile IPOs where issuers had been able to negotiate lower fees.

Paul Hastings is one of the largest law firms in the United States, with over $1.2 billion of revenue in 2018. The firm is headquartered in Los Angeles with more than 22 offices located throughout Asia, Europe, Latin America, and the United States.

The firm’s securities and capital markets group serves clients that are active in the energy, financial services, technology, industrial, life sciences, and real estate sectors. The group’s attorneys have expertise with Sarbanes-Oxley, Dodd-Frank, JOBS Act, and stock exchange requirements, as well as compliance with Exchange Act-governed SEC reporting, proxy solicitations, and disclosure obligations.

For a full copy of Going Public: The U.S. IPO Report click HERE.

Private Equity Professional | September 25, 2020

Graycliff Adds Semiconductor Pro

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Daniel Rubin, an operator and investor in the semiconductor equipment industry, has joined Graycliff Partners as an operating advisor.

Mr. Rubin has more than 30 years of experience in semiconductor, display, renewable energy, and biotech equipment manufacturing. He has held numerous leadership positions with large semiconductor equipment companies including Ichor Systems, Integrated Materials, Celerity, and KLA Tencor.

Graycliff and Mr. Rubin have partnered on several transactions including Impakt, a California-based manufacturer of equipment used in the semiconductor and organic light-emitting diode (OLED) display industries. Graycliff invested in Impakt, with Mr. Rubin as CEO, in June 2016 and sold the business to Celestica (NYSE: CLS) for $329 million in November 2018.

Earlier, from September 2013 to December 2017, Mr. Rubin was an advisor and co-investor with Graycliff in Talon Innovations, a Minnesota-based maker of machined products, devices, and components, used by semiconductor equipment manufacturers. Talon was acquired by Ichor Systems (NASDAQ: ICHR) in December 2017 for $130 million.

“I have worked closely with the Graycliff team over the years and am impressed by their resourcefulness, dedication and expertise,” said Mr. Rubin. “I’m excited to cement my role at Graycliff and am looking forward to working with the team to drive growth and profitability across new and existing portfolio opportunities in a space I know well and in which Graycliff is a trusted and effective partner.”

In 2008, Mr. Rubin co-founded Synos Technology, a California-based maker of equipment used in the production of OLED displays. Synos was sold to Veeco Instruments (NASDAQ: VECO) in 2013. In 1990, Mr. Rubin co-founded Celerity, a maker of gas and chemical delivery subsystems used by semiconductor capital equipment manufacturers. In 2009, Celerity was acquired by Ichor Systems, then a portfolio company of American Industrial Partners.

With a focus on the $60 billion global semiconductor and display manufacturing industry, Mr. Rubin will assist Graycliff in sourcing and evaluating new investments and advising Graycliff’s portfolio companies.

“We are thrilled to formally welcome Dan to the team as an operating advisor,” said Duke Punhong, a managing partner at Graycliff. “Dan’s skills and expertise were integral to the more than 4x revenue growth we experienced at both Talon and Impakt and will be invaluable as we continue to evaluate opportunities in the semiconductor space.”

New York City-based Graycliff invests from $10 million to $50 million of control equity in companies with revenues of $10 million to $200 million and EBITDA of $4 million to $20 million. Sectors of interest include niche manufacturing, business services, and value-added distribution.

The firm was formed in December 2011 by the former investment team of HSBC Capital. In December 2019, Graycliff held a final closing of its latest buyout fund, Graycliff Private Equity Partners IV LP, at its hard cap with $350 million of limited partner commitments.

In September 2020, Graycliff acquired its first fund four platform with the buy of Gerard Daniel Worldwide, a manufacturer and distributor of wire mesh used in filtration, sound suppression, heat dispersion, and electrochemical applications.  The company, headquartered 50 miles northwest of Baltimore in Hanover, Pennsylvania, operates eleven manufacturing and distribution facilities in the US, Canada, and Ireland.

Private Equity Professional | September 25, 2020

KLH Buys Industrial Services Provider

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KLH Capital has acquired Insulations, a provider of industrial insulation contractor services, in partnership with the company’s management team.

Insulations specializes in insulation, fireproofing, heat tracing, painting and coating, refractory, scaffolding, and abatement services. The company’s customers are active in the liquid natural gas, refining, chemical, gas processing, power, pulp and paper, general industrial, and marine industries.

Insulations was founded in 1970 and is today led by owner and CEO David Branton, who joined the company in 1979. Mr. Branton will continue to lead the New Orleans-headquartered company and its more than 1,100 employees.

“We are glad to be working with the KLH team,” said Mr. Branton. “Our customers have complex needs and they depend on us to get our work done safely, on time, and on budget. This partnership ensures that we can meet those demands with the capital and support needed for the long-term.”

“David and his team have built an incredible business with a tremendous set of opportunities before them and we are excited to partner with them to support their growth plans,” said James Darnell, a partner at KLH.

Tampa-based KLH invests in niche manufacturing, value-added distribution and specialty services companies with revenues of at least $10 million and EBITDA of at least $4 million.

The buy of Insulations is the third investment in KLH Capital’s fourth fund, KLH Capital Fund IV LP, which closed in July 2019 with $200 million of capital.

Private Equity Professional | September 25, 2020