Strategy
Search

Private Equity Professional

Private Equity's News Leader

There is a right and a wrong in the universe, and that distinction is not hard to make.
Superman

You are here: Home / Archives for News / Strategy

Strategy

Trump Administration Considers Opening $9 Trillion 401(k) Market to Private Equity Investments

by

The Trump administration is contemplating an executive order that would permit private equity firms to access the nearly $9 trillion U.S. 401(k) retirement market. This initiative aims to allow private equity firms such as Blackstone, KKR, and Apollo to offer investment options within 401(k) plans, potentially transforming the landscape of retirement savings in the United States.

The proposed directive would instruct federal agencies—including the Department of Labor, the Treasury, and the Securities and Exchange Commission—to assess the feasibility of integrating private equity into 401(k) plans. This move could potentially unlock significant new capital for private equity firms, which have been seeking broader access to retail investors.

While proponents argue that private equity can offer higher long-term returns suitable for retirement timelines, critics warn of increased risks, such as higher fees, leverage, and valuation opacity. Concerns also include the potential for reduced liquidity and the complexity of private equity investments, which may not be suitable for all retirement savers.

The Trump administration’s current considerations indicate a renewed interest in facilitating private equity access to retirement savings.

For private equity funds, gaining access to the 401(k) market presents a transformative opportunity. The influx of retail capital could provide a more stable and long-term funding source compared to institutional or short-cycle investors. It would also diversify their investor base, reduce fundraising volatility, and enable fund managers to deploy larger pools of capital over extended investment horizons. Additionally, consistent contributions from retirement savers could smooth out capital inflows and enhance fund planning. As traditional PE fundraising becomes more competitive, tapping into defined contribution plans offers firms a substantial growth channel and deepens their integration into mainstream investment ecosystems.

“Defined contribution plans are the next frontier for private equity,” said Jon Gray, President and COO of Blackstone, “The structure needs to evolve, but the demand is clearly there.”

The administration’s consideration of this policy change reflects a broader shift toward expanding investment options within retirement accounts, aiming to provide savers with access to a wider range of assets. However, the potential risks and complexities associated with private equity investments necessitate careful evaluation and implementation to ensure the protection of retirement savers.

In June 2020, the Department of Labor issued an Information Letter under the Employee Retirement Income Security Act (ERISA) concerning private equity investments as a component of professionally managed asset allocation funds offered as investment options in participant-directed retirement savings plans, such as 401(k) plans. The letter clarified that private equity investments could be included in such funds, provided that plan fiduciaries adhere to their responsibilities under ERISA.

Subsequently, in December 2021, the Department released a Supplemental Statement to address concerns that the Information Letter could be misinterpreted as broadly endorsing private equity investments. The statement emphasized that plan fiduciaries, especially those of small plans, may lack the expertise necessary to evaluate the prudence of private equity investments in designated investment options. It cautioned against the perception that private equity is generally appropriate for inclusion in 401(k) plans.

Despite these clarifications, the Trump administration’s current considerations indicate a renewed interest in facilitating private equity access to retirement savings. Industry executives predict that offering private equity funds to 401(k) retirement plans could attract substantial new assets. However, widespread adoption remains uncertain due to legal concerns and ongoing regulatory processes.

“We shouldn’t treat private equity as toxic or golden,” said Joshua Gotbaum, retirement policy fellow at the Brookings Institution, “it’s just another tool. What matters is how and when it’s used.”

The potential inclusion of private equity in 401(k) plans has sparked debate among financial experts. Some argue that private equity investments can provide diversification and potentially higher returns over the long term, aligning with the retirement goals of plan participants. Others caution that the complexity, higher fees, and illiquidity associated with private equity may pose significant risks, particularly for average investors who may not fully understand these investments.

As the administration continues to evaluate this policy shift, stakeholders across the financial industry, regulatory agencies, and plan sponsors will need to carefully consider the implications for retirement savers. Ensuring that fiduciary responsibilities are upheld and that participants are adequately informed about investment options will be crucial in navigating this potential transformation of the retirement savings landscape.

© 2025 Private Equity Professional | June 5, 2025

How to Control Healthcare Costs Throughout Your Portfolio With New Insurance Model

by

During the five- to seven-year window that private equity typically owns businesses, firms have a value creation plan to increase profitability so they can sell or take the company public. Those plans frequently involve go-to-market strategies or cost reductions like offshoring some business areas. But private equity firms often ignore one of the largest items on a P&L statement: employee benefits.

Improving the cost structure of employer-sponsored health insurance is incredibly effective in enhancing profitability, especially for middle-market PE-backed companies, but leaders are understandably wary of changes that might spark employee backlash or drown HR teams in administrative tasks.

Many companies in the portfolios of private equity and venture capital firms are struggling with health insurance costs.

Fortunately, there’s a new model — the individual coverage HRA (ICHRA) — that delivers quality, personalized healthcare for employees while giving the business control over insurance costs and eliminating the risk of double-digit renewals that can devastate a balance sheet.

Here’s how ICHRA can help control healthcare costs throughout your portfolio:

Why PE-backed companies are turning to ICHRA
From speaking with industry leaders, it’s clear that many companies in the portfolios of private equity and venture capital firms are struggling with health insurance costs. Perhaps the worst part of a traditional group health plan is the unpredictability.

Strong financial management is built on data-driven decision-making — accurately forecasting revenues and proactively anticipating expenses. But there’s no way to adequately prepare for health plan renewals. A company’s annual rate increase is tied directly to the risk pool of its group insurance. The plan may include 150 employees; if one of those employees or their dependents has a difficult diagnosis or requires specialized care, that will cause the overall group rate to skyrocket. All of the organization’s careful financial planning is now meaningless.

The new model is especially attractive to employers with a multi-state footprint.

These are the moments when a company most wants to be there to care for its employees — to help them through a challenging time and assure them they’ll be supported. But there’s a harsh reality to the situation: one employee’s health diagnosis can have dramatic consequences for the business. As the company’s costs skyrocket, the CFO has no choice but to shift costs and increase employee contributions. One person’s health status has an immediate financial impact on the other 149 people in the group plan.

The vast majority of companies don’t exist to choose health insurance plans. Why should a company that builds software or manages restaurants be making healthcare decisions for their employees? And why don’t the employees — each of whom has specific, personal health needs — have a say in the matter? With ICHRA, employers let go of group plans and instead provide an allowance to employees to buy health insurance on the individual market.

The playbook for applying ICHRA across a portfolio
ICHRA can save money for both employers and employees when the individual market is less expensive than the group healthcare market. PE firms who are not exploring the potential for an ICHRA win-win may be leaving money on the table. More importantly, ICHRA means that employers are no longer financially shouldering the burden of high-cost claimants. Employees can choose the quality coverage that best meets their needs — benefiting from a competitive market as carriers slash premiums to attract customers — while employers no longer nervously await their renewal.

Additionally, traditional insurers have strict participation requirements. If a carrier knows your company only has 5% enrollment, they’ll decline to quote because they assume only the poorest-risk employees are enrolled. ICHRA has no such requirements.

In addition to providing stability for the employer, ICHRA also provides flexibility to employees.

The new model is especially attractive to employers with a multi-state footprint. One-size-fits-all plans are a poor fit for those companies. PE-backed businesses growing quickly by acquisition are often bringing together different employers, and trying to harmonize group plans every time is a miserable exercise. Alternatively, businesses that use ICHRA simply fold the newly acquired company’s employees into their existing ICHRA plan and let them choose their insurance.

Finance and HR leaders sometimes worry that putting hundreds or thousands of employees on an ICHRA plan means they’ll have to hire people to handle the day-to-day management, but that’s not the case. Vendors like Take Command help employees find the right plan, then handle everyday employee inquiries and ensure the HR team is not dealing with every question. These vendors can also help companies proactively communicate the available plans and average costs.

Cost savings and employee freedom of choice
Business leaders understand the risk of having an employee get sick and require expensive care. As a result, employers often try to join a consortium and participate in larger group plans. The arrival of ICHRA means that companies can now join the largest imaginable risk pool — the more than 20 million Americans who purchase health insurance on the individual market. When spread out across that pool, an expensive diagnosis has no impact on the overall cost.

That stability allows financial leaders across a PE firm’s portfolio to finally set a predictable, consistent budget for health insurance costs. Many organizations provide employees with a monthly allowance — typically between $500 and $1,000 — to purchase an ICHRA plan on the individual market. When renewal season arrives, the employer can simply continue contributing the same amount, avoiding unpredictable cost increases.

In addition to providing stability for the employer, ICHRA also provides flexibility to employees.

Prototek, a PE-backed digital manufacturing company based in New Hampshire with more than 250 employees, experienced this firsthand. As the company expanded rapidly through mergers and acquisitions across nine locations in multiple states, it faced a steep renewal hike under its traditional group health plan — a challenge that threatened the company’s efforts to improve benefits for employees.

Jenifer Combs, Prototek’s director of human resources, was determined not to shift the burden onto employees. Instead, the company adopted ICHRA, maintaining its existing healthcare budget while even reducing out-of-pocket costs for some team members.

“We get to pick the dollar amount,” said Ms. Combs. “From a budget perspective — especially since we’re private equity-held — that’s key. You can base it on that and next year make an adjustment if need be. The beauty is that employees get control over both their coverage and costs.”

In addition to providing stability for the employer, ICHRA also provides flexibility to employees. Rather than providing too little coverage for some employees and too much coverage for others, the individual market allows employees to choose the right amount for their families. With ICHRA, employees choose the services and providers that matter most to them. Whether it’s keeping a family doctor they like or choosing a network with the hospital closest to their home, the individual market offers dozens of options to meet the needs of every employee.

One of the roles of a private equity firm is to outfit its portfolio companies with the right systems and tools. For businesses staring down sky-high renewals or trying to assimilate a newly acquired company into their own, ICHRA is a powerful tool that controls costs while giving employees back control of their healthcare. It’s a proven lever for value creation.

About the Author
Jack Hooper is the CEO and co-founder of Take Command, a Dallas-based SaaS company that offers health reimbursement arrangement administration. Jack is a founding member of the HRA Council and has served as Chairman of the Board. He is a graduate of the Wharton School of Business and has been featured in The New York Times, BenefitsPro, Dallas Morning News, Bloomberg, and more. His motto? “Health insurance was never meant to be this complicated.”

Contact Jack Hooper at jack@takecommandhealth.com

© 2025 Private Equity Professional | May 9, 2025

Janney Continues Acquisitive Ways with Buy of TM

by

Janney Montgomery Scott has agreed to acquire middle market investment bank TM Capital, a provider of M&A advisory services across the business services, industrials, healthcare, and consumer sectors.

TM Capital is led by CEO James Grien, has 17 managing directors and nearly 50 employees with offices in Atlanta, Boston, and New York City. TM Capital has completed nearly 60 M&A and private capital transactions from 2021 to 2022 with an aggregate $5.8 billion in value, and over 450 transactions with a combined value of $30 billion since the firm’s founding in 1989.

“We’re thrilled to join forces with Janney, a firm that shares our cornerstone values and vision. Janney brings us immediate scale and important resources to further enhance our client relationships,” said Mr. Grien. “Together, we offer a more diverse set of products and services across a combined eight industry verticals in which we have proven domain expertise. We’re looking forward to exceeding expectations and achieving new levels of success as part of the Janney team.”

The acquisition of TM Capital continues an acquisitive period for Janney’s Capital Markets Group and follows the July 2022 addition of 21 professionals from Boenning & Scattergood, including Managing Directors James Adducci, Christopher Chapman, Charles Crowley, Chad Hull, and Tony Latini; and the addition of several senior bankers this past year.

“We’re excited to welcome TM Capital to Janney,” said Joe Culley, the head of the capital markets group at Janney. “The tenured team brings nationally recognized experience in complementary and additive business lines to our existing investment banking practice, including greatly expanding our private equity client base. Their strong reputation will be an immediate value add to our business.”

At closing, TM Capital will continue to operate under its current brand with Mr. Grien and Jarrad Zalkin co-leading the business. Both Messrs. Grien and Zalkin will report to Matt Veneri, the head of investment banking at Janney.

“This acquisition showcases our strategic plan in action – two firms with shared values and similar cultures coming together to enhance their businesses and better serve their clients,” said Mr. Veneri, “The TM Capital team brings more than 325 years of combined experience and a mutual standard of excellence. We couldn’t ask for a better partner.”

Today, Janney’s Capital Markets Group has more than 200 professionals who provide investment banking, equities, and fixed income services to corporate, institutional, and municipal clients. Over the past 3 years, Janney has completed 283 capital markets and M&A transactions totaling more than $46 billion in value.

Philadelphia-headquartered Janney Montgomery Scott is a provider of wealth management, capital markets, and asset management services and is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

“We see a distinct opportunity to partner with boutique investment banking firms looking to scale, and we’ll continue pursuing acquisitions, lift outs, and strategic hires over the next several years,” added Mr. Culley.

Houlihan Lokey was the financial advisor to TM Capital on this transaction.

© 2023 Private Equity Professional | November 14, 2023

Align Launches Independent Sponsor Strategy

by

Align Capital Partners (ACP) has announced the launched of a new independent sponsor-focused private equity strategy, Align Collaborate.

ACP founded Align Collaborate in partnership with independent sponsor investors, Grant Kornman and Michael Kornman.

Prior to forming Align Collaborate, the Kornmans co-founded NCK Capital, a Dallas-based lower-middle market independent sponsor that invests in companies with $2 million to $10 million in annual EBITDA that are active in business and industrial services, specialty distribution, niche manufacturing, for-profit education, food manufacturing, and healthcare. The Kornmans closed five platform acquisitions across a variety of industries during their time at NCK Capital. Joining the Kornmans at Align Collaborate is Associate Scott Weiss who worked with them at NCK Capital.

Align Collaborate’s sweet spot is $5 million to $30 million of equity per transaction in platform companies that have between $2 million to $15 million of EBITDA.

“Based on our prior experience at NCK, we understand the importance of helping independent sponsors answer the inevitable seller question – where does your money come from?” said Grant Kornman. “We are excited to be part of the Align Collaborate strategy, where our goal is to provide speed and certainty to what often is the most important deal of an independent sponsor’s career.”

In November 2022, Dallas and Cleveland-headquartered ACP held an above target close of its third fund, Align Capital Partners Fund III LP, with $620 million of capital commitments. This fund invests from $20 million to $60 million in North American-based companies that have from $3 million to $15 million of EBITDA and enterprise values of up to $150 million. Sectors of interest include software and tech-enabled services, professional business services, industrial services, specialty manufacturing and specialty distribution.

“We recognized the need for value-added equity capital for independent sponsor transactions,” said Michael Kornman. “Under the ACP umbrella, we aim to offer not only greater certainty of funding, but a partnership approach that combines our direct experience leading independent sponsor investments with growth resources from the ACP toolkit.”

“Align Collaborate is a great complement to ACP’s flagship fund strategy and our collective commitment to helping lower-middle market businesses grow. Our new strategy will allow us to have a dedicated team and equity capital focused on serving as a true growth partner to independent sponsors,” said Chris Jones and Rob Langley, the co-founders and managing partners of ACP, in a released statement.

Align Collaborate is headquartered in Dallas.

© 2023 Private Equity Professional | October 3, 2023

The Rise of Independent Sponsors

by

Today, most entrepreneurs have recognized that growing their company’s EBITDA to at least $3 million opens greater exit opportunities to financial buyers that just don’t exist below that threshold. For many private equity sponsors, a well-run, diversified $3 million+ EBITDA business is big enough to consider acquiring either as a platform or an add-on.

One reason why $3 million+ is big enough today is that we generally see entrepreneurs switching from using business brokers to sell their business to using lower middle market investment bankers. As investment bankers generally have larger networks and more efficient processes, that translates to a more efficient marketplace where more potential buyers (both strategic and financial) will see the company. Getting to $3 million+ in EBITDA gets you on the bottom rung of the all-important lower middle market ladder.

Most importantly, getting to $3 million+ opens up your company to many more financial buyers which can lead to competitive bids and hopefully larger sales multiples. For many years, that meant financial buyers generally consisting of funded private equity only, and specifically funds raising from $50 million to $500 million.

I believe the most dramatic change in the past ten years is that we’ve seen a wave of new independent sponsors.

By definition, an independent sponsor does not have a fund, rather they’re “fundless”. Many thought the “fundless” label would stop independent sponsors from winning many deals. But that just hasn’t been the case. Why not? Surely, it’s the result of many factors but I would contend it’s mostly due to that long-standing truth, incentives drive behavior.

Independent sponsors have truly increased the number of buyers in the room for lower middle market transactions. 

Independent sponsors are incented to find a good company and get it under letter-of-intent at a good price, since they don’t have any management fees or carry from a fund.

Oftentimes, we see independent sponsors acting like a sales force for funded sponsors by winning the deal mandate then bringing in the funded sponsor to get the deal closed. Other times, they’ll get funding from wealthy family offices, bring in SBIC mezzanine funds, or pass the hat to family and friends.

Why are independent sponsors winning deals?
Some independent sponsors are targeted industry experts, making them credible with sellers. Some are adept at highlighting who key future investors will likely be, helping them gain that credibility. And frankly, some independent sponsors are just arguably better, more active, focused salespeople.

In short, independent sponsors have truly increased the number of buyers in the room for lower middle market transactions.

If you have any doubts about the impact of independent sponsors, check out the meteoric rise of the McGuireWoods Conference which is held yearly in October. The Dallas-based conference now brings together more than 1,000 independent sponsors from across the country.

About the Author
Joseph Gaffigan is the president of O2 Sponsor Finance and the former president and co-founder of TCF Capital Funding from 2012 to 2021 until TCF Bank was acquired by Huntington National Bank in June 2021. Mr. Gaffigan remained with Huntington as the president of its sponsor finance unit spinning out in January 2022 to join Old Second Bancorp to form O2 Sponsor Finance. Old Second Bancorp has $5.9 billion in assets and is headquartered near Chicago in Aurora, Illinois.

Chicago-headquartered O2 Sponsor Finance is a national provider of cash flow-based loans to lower middle market businesses with $10 million to $100 million in revenue and $2 million to $10 million in EBITDA. Typical investment sizes range from $5 million to $25 million with syndication capabilities up to $60 million. The firm focuses on supporting private equity sponsors, independent sponsors, and family offices in their acquisition or recapitalization of lower middle market companies.

© 2023 Private Equity Professional | June 9, 2023

Five Risk Management Techniques to Help PE Firms Navigate the Financial Markets Storm

by

Increased volatility in financial markets as a result of higher interest rates has revealed fault lines in banks and lenders, sparking concerns about liquidity among a wide range of investors, including private equity fund managers. The unpredictability of financial markets should serve as another reminder for financial sponsors to anticipate new perils and actively manage a broad array of risks.

Looking for potential exposures and addressing them ought to be an ongoing effort, but this exercise has spurred a greater sense of immediacy in the wake of recent U.S. bank failures and stress within European financial institutions. Without previous dedicated diversification strategies, many institutions were caught flat-footed and experienced huge challenges in managing cash flow and analyzing information from disparate sources. Makeshift treasury management systems based on multiple spreadsheets and scattered reporting proved to be inadequate and left many scrambling.

The challenges facing private equity firms in undertaking
risk assessments and managing transparency are far and wide.

Riding out a storm in financial markets involves not only diversifying funding sources and avoiding concentration risk with key liquidity providers, but also implementing the systems and processes that empower firms to manage cash flow, risk and diversification.

The heightened need to employ robust risk management practices as part of overall liquidity management takes on greater meaning for private equity funds. These investors face market conditions which no longer assure portfolio investments can be easily monetized and fundraising efforts continue to be difficult. It’s an environment in which fund CFOs are increasingly focused on liquidity and modern treasury management systems as part of their efforts to be nimble in a rapidly changing global economy.

The challenges facing private equity firms in undertaking risk assessments and managing transparency are far and wide. Many firms may have become accustomed to relying on one bank because working with multiple institutions requires more advanced tools and processes especially when it comes to managing funds in various markets and across multiple legal entities and currencies. Gathering information from multiple banking counterparties that can be readily scrutinized is also challenging, and most home-grown solutions aren’t suited to manage this level of complexity.

A financial wellness check to ensure that liquidity remains intact and available includes the ability to conduct a broad review of a private equity firm’s counterparties, ensuring that a fund is not overly exposed to a single bank, asset class or industry. It’s an effort that involves ongoing monitoring of financial markets for any signs of stress among counterparties and employing sophisticated tools to track ratings and exposure status in real time.

Five Risk Management Strategies
Private equity firms will want to consider the following risk management strategies as they look to anticipate, and mitigate, a range of risks that have surfaced in what promises to be a protracted period of elevated interest rates:

1 – Diversify Liquidity Sources
While many private equity firms have traditionally come to rely on one financial institution because having a single banking relationship has been simpler, market participants need to be aware of concentration risk within their banking relationships.

In the first quarter of this year, investors were reminded of the pitfalls of relying on a single bank or banking group for liquidity. Funds with too much concentration in one source could face significant liquidity shortfalls when a bank, or group of lenders, encounter financial difficulties and need regulatory intervention.

Financial institutions likely will continue to be tested by the sharp runup in interest rates so diversifying the pool of lenders or banks that serve as counterparties is a key risk management technique private equity funds will want to incorporate.

2 – Mitigate Exposure to a Single Asset Class or Sector
Managing risk through diversification also applies to markets and asset classes because the rapid jump in global borrowing costs has had a powerful impact on a wide range of investments. Fund managers should track exposure to avoid concentration risk in a particular asset class, sector, and geography.

Commercial real estate, for example, illustrates the dangers of having too much concentration in one asset class during a rising rate environment. Real estate funds have been hobbled by diminished liquidity tied to higher borrowing costs that have slowed property sales and have weighed on asset prices. Today, property owners have a tougher time financing commercial property loans because of the Federal Reserve’s rate increases and wider yield premiums, or spreads, on bonds pooling commercial real estate loans.

The challenges faced by participants in commercial real estate serve as an example of why it’s important for investors to diminish their exposure to a single asset class and broaden their portfolio’s risk concentration.

3 – Watch for Telltale Signs of Increased Risk Among Counterparties
Managing counterparty risk involves closely monitoring how counterparties are viewed by financial market participants. This means watching how securities issued by various participants trade in debt markets and keeping an eye on rating actions announced by credit rating agencies including Moody’s Investors Service, Fitch Ratings, and Standard & Poor Global Ratings.

Rating actions can reveal issues about the financial health of a counterparty that pose liquidity risks. And changes to yield premiums paid for a business’ debt signal how capital markets view a counterparty’s risk profile and how readily the counterparty can access funding.

4 – Consider Money Market Funds as a Safe Haven
For private equity fund managers who want a real-time view of cash holdings and a safe haven during volatile market conditions, sweeping excess cash directly into a money market fund or money market account is another risk management technique.

Ideally, any excess cash balances are automatically transferred into a money market fund or account, which provides an additional layer of diversification and liquidity.

Money market funds invest in short-term, low-risk securities such as government bonds and commercial paper. This is a relatively safe option for cash management that mitigates the risk of having too much cash sitting idle in a bank account and provides easy access to funds when needed.

Also, companies can potentially earn a higher rate of return on excess cash with a money market fund or account than they would in a traditional bank account.

5 – Manage Currency and Rate Risks with Financial Tools
The global effort to stamp out inflation with aggressive rate hikes by central banks has fueled volatility in foreign exchange and debt markets. Private equity firms can manage these sharp moves in financial markets with hedges in currencies and interest rates. This hedging of risk can be achieved through various techniques such as forward contracts, options, and interest rate swaps.

Hedging currency and interest rate risk helps private equity firms protect their portfolios from adverse market movements, mitigating the impact of sharp currency and interest rate fluctuations on their portfolio holdings. However, it’s important to note that hedging comes with costs and may limit potential gains. It is also crucial to strike a balance between risk management and investment returns.

Conclusion
Recent stress in the banking system has created fissures in global financial markets and broadened the scope of risks for private equity funds to consider and manage. A financial wellness check, for some, may be a new mindset that will require a multi-pronged approach to anticipate risk, bolster liquidity, and manage exposure to counterparties, assets, and markets.

The latest waves of volatility and concerns about liquidity likely won’t go away soon so it’s not too late to start reviewing counterparty risk and developing relationships with a wider pool of funding sources.

About the Author
Sol Zlotchenko is chief product officer and strategy lead for the private markets group at Hazeltree, a leader in active treasury and intelligent operations technology for the alternative asset industry.

Hazeltree’s treasury and portfolio finance technology solutions serve hedge funds, asset managers, private equity funds, private debt, real estate funds, infrastructure funds, pensions and endowments, and their service providers. Hazeltree is headquartered in New York City, with offices in London and Hong Kong.

© 2023 Private Equity Professional | May 9, 2023

PE’s Traverse into Supply Chain Technology Not Without Some Pitfalls

by

[Source: Getty Images]
Few, if any, observers have a better view into the impact of the supply chain crisis than private equity general partners. They see the wide-ranging impact across their entire portfolio of companies, across different sectors and end markets, and from different perspectives across the value chain. Many, for instance, may own manufacturers who are today being forced to figure out inadequate workarounds to solve for repeated raw material shortages, whereas other portfolio companies in retail may be confounded by inventory, logistics, and distribution gaps quickly becoming a governor on growth. But GPs are nothing if not opportunistic and, in every challenge, lies the next great investment thesis.

The supply chain crisis, in particular, has attracted an increasing number of sponsors now targeting companies able to solve these issues. And many are finding that the supply chain “niche” is far more expansive than some might assume, particularly among vendors equipped to help operators better manage the risk and complexity that characterizes procurement, inventory management, warehousing and transportation. Not surprisingly, investors are gravitating to tech and software segments within the broader supply chain space.

This is, in part, because investors recognize that cutting-edge technology will simply become table stakes to run and optimize increasingly complex supply chains in the future. Moreover, automation is no longer a choice – not when labor shortages and turnover represent equally acute risks in which no other workaround exists other than robotics and automation.

From an investment perspective, the stars have seemingly aligned for the supply chain segment, particularly those offering software or tech-enabled solutions.

Beyond the obvious demand for supply chain solutions, other longer-term tailwinds trace back to secular trends, not the least of which include the growth of omnichannel retail and direct-to-consumer strategies of manufacturers. These trends alone should fuel growth over the medium- and long-term time horizons. At the same time, policymakers increasingly recognize the country’s manufacturing base and supply chain as critical infrastructure that should fuel investment in new technologies for the foreseeable future. (The $52 billion CHIPS and Science Act puts a number on the extent to which Washington is prioritizing these areas today.)

From an investment perspective, the stars have seemingly aligned for the supply chain segment, particularly those offering software or tech-enabled solutions. The caveat, however, is that while digital transformation represents its own compelling catalyst in the segment, it’s also altering what “specialization” should look like in the sector. And past experience investing in more traditional supply chain companies may no longer be applicable to capitalize on the opportunity.

Strategic Activity Beckons PE Interest
To be sure, deal flow and investment activity in supply chain technology is as vibrant as it has been. Strategic activity – particularly from new faces in the supply chain space – speaks to the appetite among larger multinational companies keen to turn the challenges into a competitive advantage.

In retail, Walmart acquired peer-to-peer last-mile delivery platform JoyRun; American Eagle acquired shipper-aggregation startup AirTerra and “in-market” fulfillment-center operator Quiet Logistics; And, most recently, Amazon bought Belgium-based Cloostermans, a designer and manufacturer of mechatronics solutions used to move and stack heavy pallets and totes.

The biggest challenge across the supply chain – one that cuts across all companies and nearly every niche – is the need to drive productivity. 

This activity among strategics, of course, is not overlooked by private equity investors, who view the strategic demand as the final piece of a seemingly airtight investment thesis. Last year, according to PitchBook Data, financial sponsors secured 53 new investments valued at $20 billion. This surpassed the value of all deal flow over the previous three years in the supply chain tech vertical. Exit activity also surged as GPs secured 21 total realizations of supply chain technology investments worth a combined $13.5 billion.

Why Tech? Reduce Risk, Replace Resources
Again, the supply chain segment at large is quite vast and there is no shortage of opportunities outside of tech for sponsors to step in and address the gaps. KKR, for instance, acquired Hitachi Transport, the third-party logistics business of Hitachi, earlier this year for over $5 billion, while Sun Capital is pursuing a rollup of intermodal drayage and warehousing companies through its Total Transportation Services platform. (Drayage, for the uninitiated, refers to the transportation of freight from an ocean port and is colloquially referred to as “first-mile” transportation.)

[Source: Getty Images]
But the biggest challenge across the supply chain – one that cuts across all companies and nearly every niche – is the need to drive productivity. Simply put, operators, to compete or grow, must move goods and products more quickly and efficiently from manufacturer to end consumer and be agile enough to accommodate raw material shortages or labor disruptions as they occur. The labor crisis, for instance, has created a ripple effect in which warehousing and transportation have been among the most affected areas, cutting into on-time delivery rates, fueling higher input costs, and exacerbating supply shortages.

Technology that can either manage these risks or eliminate the “people” problem altogether should emerge as winners. Unfortunately, it’s not as simple as buying companies that claim to solve these challenges.

Software to Manage the Risks…
One of the challenges of investing in software is the paradox of choice that characterizes the solutions available to both operators looking to utilize technologies and GPs investing in them. “Control tower” software, for instance, can provide end-to-end visibility to track deliveries in real-time; forecasting tools, similarly, can help inform planning and budgets over short- or longer-term time horizons; while inventory management tools help companies track purchase orders, fulfillment, sales, and product levels.

Yet one glaring hang-up remains, especially given the objective of automation, which is that even the most advanced robotics very often require human intervention.

However, the solutions that stand out in today’s environment, are tools that allow operators to better manage their risk. Advances leveraging the cloud, AI and machine learning, as well as IoT capabilities, can provide insights and signals that wouldn’t otherwise be available. They can connect disparate segments across the supply chain, factoring in supplier locations, port data, geopolitical developments, and an almost limitless number of other inputs. These tools can give operators a view into the future to predict where disruptions are most likely to occur as well as the knock-on effects they can have on the business.

Robotics to Solve Them
In one sense, few areas across the economy have adopted automation and robotics more enthusiastically or effectively than certain areas across the supply chain. Yet, the technologies being deployed are quite dated in many cases, to the point that they’re relatively immature today. This point is underscored by the extent to which new advances in robotics have leapfrogged the industrial belt conveyors and automated sorting systems are still quite common in most warehouses and fulfillment centers today.

Yet one glaring hang-up remains, especially given the objective of automation, which is that even the most advanced robotics very often require human intervention. Even Amazon, a first mover and innovator, largely relies on “co-botic” solutions to ease manual roles rather than replace them outright.

Since Amazon acquired the maker of Kiva warehouse robots in 2012, the company has rolled out autonomous mobile robots to help move heavy objects; robotic workcells using advanced AI to lift and sort packages; and even ergonomically designed containerized storage systems that help fulfillment-center employees find and retrieve specific products.

Amazon Robotics develops software and manufactures machinery to automate the flow of inventory in Amazon fulfillment centers. [Source: Amazon]
The killer app in supply chain robotics, however, will be automation that replaces – instead of just assisting – labor. Enhanced productivity and sustainable efficiencies are just as critical, but technology that eliminates the threat of workforce shortages will help solve for a trend that poses an increasing risk for the foreseeable future.

Avoiding the ‘Thesis’ Trap
Private equity investors are quite familiar with a value trap – or assets that appear cheap but also carry significant, unseen risks that stand in the way of multiple expansion. The supply chain technology segment, however, represents something of a “thesis trap.”

Several secular trends, for instance, have conspired to create a truly compelling window for investors active in the space, characterized by a deep, pressing need in the market; powerful tailwinds in the form of government support and shifting consumer shopping behaviors; as well as accelerated transformation driven by advances in AI and cloud technologies, as well as robotics and additive manufacturing.

Ironically, this last point that underpins most investment theses also creates some pitfalls for investors. GPs may have an extensive track record across the industrials, transportation and supply chain verticals, but if they’re less familiar with technology and software investments, they may be ill-equipped to capitalize on the opportunity.

As the tech giants focus on building out their own suite of supply chain software, smaller vendors have to worry about falling on the wrong side of the “Beta vs. VHS” conundrum.

To be sure, supply chain technology investments require an entirely different playbook. This is true, not only to underwrite investments premised around growth versus asset values but also to effect value creation and realize the growth assumptions that informed an entry multiple. Other differences also emerge.

For instance, buy-and-build strategies, which can be effective, also demand a deep technical skillset to create a seamless suite of capabilities that are each compatible with the other and can be integrated into larger product lifecycle management (PLM) platforms. Moreover, with so many variables across the supply chain, system implementations can take longer than most might anticipate. If the solution doesn’t meet identifiable service level agreements (SLAs), investors will quickly discover recurring revenues aren’t always as predictable as promised.

Another go-to initiative – particularly in private equity’s middle market – is to build out a sales and marketing function. But this relatively simple initiative can be more nuanced and even less reliable for SaaS solutions that have a longer sales cycle, often require strategic trial periods, and rely on sophisticated up- and cross-selling strategies to boost annual recurring revenues (ARRs). Manpower, alone, is inadequate.

Finally, investors in nearly every sector are aware of the Amazon threat. In the supply chain technology segment, investors also must worry about Microsoft, SAP, Oracle and several other dominant incumbents. On one hand, these giants may represent a prospective buyer of any new technology. On the other hand, as the tech giants focus on building out their own suite of supply chain software, smaller vendors have to worry about falling on the wrong side of the “Beta vs. VHS” conundrum. (They may have a better competitive alternative, but without critical mass, their solutions will fail to gain any traction). And across such a global, interconnected landscape, this risk may be even more pronounced than in other sectors.

None of this is to say that the opportunity set is any less appealing. And outside of the software and robotics verticals, there are plenty of attractive niches across the supply chain that represent a compelling fit for specialists in the industrial manufacturing and transportation sectors. Supply chain technology, however, will require a more unique skill set.

That being said, the segment is ripe for investors well versed on the pain points and complexity across the supply chain and equally adept at digital transformation and growing great technology companies able to compete with the world’s largest vendors. It’s a perfect storm that can deliver outsized rewards, but it will require flawless execution to capitalize on the opportunity.

About the Author
Ken Koenemann joined North Carolina-headquartered TBM Consulting Group, an operations and supply chain consulting firm, in 2006. TBM’s clients include manufacturers, distributors, service companies, private equity firms and their portfolio companies. TBM specializes in operational excellence, supply chain management, human capital strategy, private equity value creation, digital manufacturing, and management system implementation.

Mr. Koenemann is widely recognized for his expertise in translating lean principles to supply chain and customer-facing processes in manufacturing and service organizations. Over the past three years, he has become responsible for growing the supply chain practice and driving TBM’s technology strategy, creating value-added technologies and services for client business operations. During his career, he has consulted with leading companies including Pella Corporation, Owens Corning, Dell, WIKA Instruments, Carlisle Companies, and Trinity Industries.

Mr. Koenemann is based in Las Vegas, Nevada, and can be contacted at kkoenemann@tbmcg.com.

Mid-Market Capstone Joins Huntington

by

Publicly traded Huntington Bancshares has agreed to acquire middle-market investment bank Capstone Partners.

Capstone’s investment banking services include mergers and acquisitions, capital advisory, financial advisory, special situations and restructuring. Capstone has more than 175 employees and is headquartered in Boston with additional offices in twelve cities including Denver, Chicago, Dallas, Detroit, Los Angeles, New York and Philadelphia.

“Twenty years ago, we founded Capstone with the goal of building a middle-market leader. Since then, we have been an innovative, growth-oriented firm, and we are excited about our future with Huntington,” said John Ferrara, Capstone’s founder and CEO. “Our combined capabilities will enhance Capstone’s full suite of products and services to private business owners and financial sponsors. We believe this combination puts us in a strong position to pursue continued market acceleration and deliver a superior experience for our clients, employees, and partners.”

Huntington Bancshares (NASDAQ: HBAN), with $174 billion in assets, provides banking services to consumers, small and middle-market businesses, corporations, and municipalities. The Columbus, Ohio-headquartered bank was founded in 1866 and has more than 1,000 branches in 12 states.

“The addition of investment banking and financial advisory services aligns with our capital markets strategic plan and better positions Huntington to serve the full range of needs of middle-market clients within our footprint, as well as those we serve on an increasingly national basis,” said Scott Kleinman, co-president of Huntington Commercial Banking. “The combination of Huntington’s brand and capabilities alongside a premier middle-market investment banking franchise with unique industry insights creates a differentiating experience for our clients.”

Huntington’s acquisition of Capstone is expected to close in the second quarter of 2022.

Keefe, Bruyette & Woods, a subsidiary of Stifel Financial, is the financial advisor to Capstone on this transaction.

© 2022 Private Equity Professional | March 8, 2022

Aterian’s Vander-Bend Adds Medical Device Veteran

by

Vander-Bend Manufacturing, a maker of metal products used in the medical device sector and a platform company of Aterian Investment Partners, has added Brian King to its board of directors as executive chairman.

Mr. King has a long and impressive medical device resume. He is the former president and CEO of private equity-owned Viant Medical, a provider of contract manufacturing services to the medical device industry. During his tenure leading Viant, the company quadrupled in size to $1 billion in annual revenues. Prior to Viant, Mr. King spent over a decade at Covidien, where he held positions of increasing responsibility including as group president of the company’s $2 billion emerging markets division and president of Covidien’s Asian operations.

Vander-Bend is a prototyper, developer, manufacturer, and assembler of large-format metal products used primarily in the medical technology sector. The company, led by CEO Greg Biggs, was founded in 1979 and is headquartered in San Jose, California with six facilities and 550,000 sq. ft. of combined manufacturing space.

Aterian acquired Vander-Bend in May 2018 and in December 2020 the company closed on the add-on acquisition of Swiss Precision Machining (SPM), a manufacturer of complex and tight tolerance consumable medical instrument components used in robotic surgery. SPM operates an 82,000 sq. ft. facility near Chicago in Wheeling, Illinois. The buy of SPM followed two earlier add-on acquisitions – TMK Manufacturing, a California-based provider of prototyping and machining services to medical technology companies (May 2020); and J.L. Haley Enterprises, a California-based fabricator of metal components used primarily in medical devices (January 2019).

All told, in its nearly four years of ownership of Vander-Bend, and in addition to the three add-on acquisitions, Aterian has also established and commercialized two new production facilities in Stockton and San Jose, California, completed substantial capital equipment expansion, and significantly invested in human capital throughout the organization. Vander-Bend now operates six facilities across the West Coast and Midwest and employs more than 900 people.

According to Aterian, the addition of Mr. King to the Vander-Bend board is highly strategic and will be instrumental to the future organic and acquisition growth of the business.

“Having Brian join the board as executive chairman is an exciting milestone for the business and a tremendous validation for Vander-Bend and everyone who works for the company,” said Mr. Biggs. “During my more than three decades at Vander-Bend, I’ve had the pleasure of being part of the company’s development from a single-site, family-run organization into an industry-leading, multi-site organization with nearly a thousand employees and unmatched capabilities, and yet all of us at Vander-Bend know there is still so much more we can accomplish. I am truly delighted to have Brian as a teammate on this unfolding journey.”

“We are thrilled to add Brian to the Vander-Bend team as executive chairman,” said Brandon Bethea, a co-founder and partner at Aterian. “When we decided to establish this position, Brian was immediately our first choice. He has a unique blend of differentiated strategic insight, deep industry experience as well as a demonstrated track record of success at each stop in his career.”

“I am excited to join the board of Vander-Bend,” said Mr. King. “Vander-Bend is a special company with a tremendous set of growth opportunities in front of it. Vander-Bend also has terrific people which is the hallmark of any great organization. Greg and his team’s passion for the business, paired with the Aterian teams’ enthusiastic support, is certainly infectious. I look forward to working closely with both Vander-Bend and Aterian as we focus on the company’s continued evolution into a world-class operation.”

Mr. King is a graduate of the United States Naval Academy, he holds a master’s degree in civil engineering from Penn State and has an MBA from Harvard University.

Aterian invests from $10 million to $100 million in middle market businesses with $50 million to $750 million in revenue and $10 million to $50 million in EBITDA. The firm’s latest fund, Aterian Investment Partners IV LP, closed in October 2021 with $830 million of committed capital. Aterian has offices in New York City and Coral Gables, Florida.

© 2022 Private Equity Professional | March 4, 2022

Same As It Ever Was

by

Private deal activity in the second quarter continued to return to congenial pre-pandemic conditions with a handful of notable permutations, according to GF Data’s just-released report.

The data tracking firm’s 243 active private equity contributors completed 81 transactions in the quarter meeting its deal parameters – Total Enterprise Value (TEV) of $10 million to $250 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA of 3x to 15x. Valuations averaged 7.2x, total debt averaged 3.9x, and senior debt averaged 2.7x.

“These headline numbers could have been plucked out of any period in 2018 or 2019,” said GF Data CEO Andrew Greenberg. “Valuations in aggregate have rebounded after three quarters in which pricing averaged in the high sixes.”

“The uptick reflects continued stagnation for distressed or out-of-favor businesses, while more favored sellers are capturing outsized results,” added Mr. Greenberg. “The “quality premium” – our measure of the reward in valuation applied to firms with attractive sales growth and margins – was 33 percent in the first half. This compares to an average of 15 percent across the entire GF Data universe, dating back to 2003.”

One aspect in which the market may be returning to pre-COVID form is in typical debt structure, said B. Graeme Frazier, IV, GF Data’s co-founder and principal. “In the prior two quarters, subordinated debt compressed to about half a turn of average capital structure. In the second quarter, subordinated debt accounts for .8x of the typical capital structure, more in line with past experience.”

“Our leverage report also provides an interesting referendum on perceived risk,” added Mr. Frazier. “For deals done with debt at or close to maximum leverage, total debt averaged 4.3x in the first half of 2021, no change from last year. Total debt jumped from 3.3x to 3.6x, though, on deals with debt at less than the maximum available. In other words, borrowers believing their capital structure is being constrained by their own judgment rather than market tolerance are choosing to be that much more aggressive in their capitalization decisions.”

“Despite operating through a continued pandemic, private equity LBO activity in the lower-middle market remains robust,” said Tim Clifford, the president and CEO of Abacus Finance Group. “While deal activity remains strong, the continued supply/demand imbalance resulting from the capital overhang in both debt and equity is ultimately driving up leverage and purchase price multiples in our market.”

GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders, and other users.  The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis. The pool of active contributors comprises 236 private equity firms, mezzanine groups and other financial sponsors.

Data contributors and other subscribers receive five products: (1) a quarterly report containing high-level valuation, volume and leverage data; (2) a quarterly supplement offering detailed information on debt and capital structure trends; (3) a semi-annual supplement on indemnification cap, escrow and other details; (4) quarterly industry drilldown reports; and (5) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.

For information on subscribing or on contributing data as a private equity participant, please contact Bob Wegbreit at bw@gfdata.com or 610-616-4607.

© 2021 Private Equity Professional | August 24, 2021

To search in site, type your keyword and hit enter