Middle Market Growth - July/August 2014

Growth MIDDLE MARKET

// JULY/AUGUST 2014

PRIVATE EQUITY PLUGS IN TO THE ‘INTERNET OF THINGS’ A QUALIFIED OPINION: BRENDA REICHELDERFER, SVP AND MANAGING DIRECTOR, TRIVISTA

I N N O V A T I V E

M U S C L E S

Moving Manufacturing Ops to the Cloud

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EXECUTIVE SUMMARY PAM HENDRICKSON // ACG Global Board Chairman and COO, The Riverside Company

From InterGrowth to Innovation

A

CG used many new approaches to engage our members at InterGrowth® 2014. In doing so, it really got us thinking about the topic of innovation. So we’re dedicating this entire issue

of Middle Market Growth to innovation and what it means for private equity firms focused on mid-sized companies.

This issue includes a wrapup of the highly successful InterGrowth event. Throughout the three-day conference, we were surrounded by great examples of innovation. From the fancy drape-and-light technology used in our rooms at the ARIA to the new networking app to 3-D printing demonstrations from GE Capital, we were constantly reminded of new ways to do things better.

Innovation is the key differentiator between market leaders and their rivals. Successful businesses respond well to current needs; exceptional businesses dominate their markets by innovating to effectively create products or services to meet future demand.

Innovation is marked by a small improvement or a major overhaul.

A 3-D printer making joints from soft tissue is a major innovation, but minor innovations can be just as important. As you read these articles, I encourage you to think about your business and how you can make innovation a part of your growth story.

Our cover story profiles Plex Systems, a software company that helps old-line manufacturers run their operations remotely using cloud computing, giving customers more flexibility and efficiency by eliminating servers at manufacturing plants and headquarters. West Coast-based Francisco Partners is the majority private equity owner behind the company.

Our story on the “Internet of Things” examines another hot trend for private equity firms: connecting everyday objects to the Internet, whether accessing your home thermostat from your mobile phone or using your car’s mapping technology to make use of real-time GPS traffic data.

We also hear from TriVista SVP and Managing Director Brenda Reichelderfer on how private equity firms can facilitate innovation at their portfolio companies, track investment dollars and measure results.

ACG board member Randy Schwimmer, author of the popular middle-market lending newsletter The Lead Left, shares his thoughts on innovation and market demand.

In a Q&A, Pritzker Group Private Capital investment partner Michael Nelson offers insight into how his firm drives innovation at its middle-market portfolio companies. Finally, we summarize Plante Moran’s annual innovation survey, which paints an optimistic picture of things to come.

These are exciting stories, and I hope they inspire you to think about the topic of innovation in innovative ways! //

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Special discounted pricing available for webinar and advertising packages.

EXECUTIVE SUITE DAVID BRACKETT // Founding Partner, GE Antares Capital

Q

HOW DOES GE ANTARES CAPITAL WORK WITH PRIVATE EQUITY FIRMS, AND HOW DOES ITS APPROACH DIFFER FROM OTHER LENDERS? DAVID BRACKETT: GE Antares is focused on providing flexible financing

structures to meet the needs of private equity-backed middle-market companies. Having long-lasting relationships with a significant number of the most active private equity firms in the U.S., we approach transactions as only the beginning of a deal, continuing to deliver value after funding.

Working with us, customers receive the breadth of knowledge from across greater GE. Experienced professionals from numerous GE businesses visit our portfolio companies and sponsor clients to share best practices learned from many years of experience in running and operating businesses. Finding new and better ways to serve our clients is a constant focus for us.

Q

AS ONE OF THE WORLD’S MOST INNOVATIVE COMPANIES, GE IS KNOWN FOR WORKING WITH STARTUPS TO BRING NEW IDEAS TO MARKET. HOW DOES GE ANTARES STIMULATE INNOVATION?

DB: GE Antares is in a unique position to facilitate collaboration between GE and middle-market companies. In the past, GE’s technology leaders, sourcing and licensing program managers had to develop their own networks of potential partners. Now, by working with GE Antares, researchers and scientists get near-immediate access to sophisticated investors and senior-level managers at companies with expertise that can help innovative technologies get to market faster.

Our private equity clients own more than 25,000 companies around

BIO //

the world. On one hand, we have line of sight into GE’s innovation

DAVID BRACKETT is a founding partner of GE Antares Capital, where he leads the investment group’s sponsor coverage activities and is a member of its investment council.

partnering needs, and on the other, we have these thousands of midmarket companies with valuable industry expertise and capabilities. From there, we can make connections between the two.

Today, successful innovation is rarely a self-contained activity. We recognize that making these connections not only benefits GE but also the companies we collaborate with, the private equity firms that own them and the market as a whole.

Continued on next page

EXECUTIVE SUITE DAVID BRACKETT // Founding Partner, GE Antares Capital

Q

HOW DO YOU IDENTIFY THESE COLLABORATION OPPORTUNITIES TO BRING NEW IDEAS TO MARKET?

DB: It’s all about effective matchmaking. GE Global Research and our industrial businesses share with us hundreds of manufacturing and technology challenges they are looking to solve. We screen those needs against the many thousands of middle-market companies owned by our private equity clients.

Once our team of scientists and commercial leaders identifies a potential fit, we work with the GE technologist to confirm interest in engaging with the privately held company. GE Antares’s sales team is then equipped to reach out to the private equity firm with a specific

To see an example of GE’s technology, click here.

collaboration opportunity. After initial discussions, confidentiality agreements are executed and the parties work together to develop new materials, new advanced manufacturing processes and new products.

Q

ARE THERE ANY RECENT EXAMPLES YOU CAN SHARE?

DB: In January, we announced our partnership with Aavid Thermalloy, an Audax Group portfolio company, to commercialize GE’s Dual Cool Jets (DCJ) technology. The technology, developed at GE Global Research, is an innovative electronics cooling solution that provides improved airflow in computers, telecommunications equipment, aircraft and LEDs. Aavid is licensing the technology to manufacture DCJ-based products for industrial and consumer use.

Currently, more than 20 other private equity-owned companies are reviewing GE technologies for license. We continue to develop new leads for collaboration opportunities with the middle market, and I think the best is yet to come. //

G L O B A L M & A D E A L F L O W. 3 6 H O U R S . O N E E V E N T.

O c t o b e r 1 5 – 1 6 , 2 0 1 4 | G r a n g e S t Pa u l’ s H o t e l | Lo n d o n , U K

S AV E T H E D AT E

S TAY U P D AT E D W W W. E U R O G R O W T H . O R G

#EUROGROWTH

Growth MIDDLE MARKET

// JULY/AUGUST 2014

GROWTH STORY

Plexing Muscles

Growth MIDDLE MARKET

// JULY/AUGUST 2014

PRIVATE EQUITY PLUGS IN TO THE “INTERNET OF THINGS” A QUALIFIED OPINION: BRENDA REICHELDERFER, SVP AND MANAGING DIRECTOR, TRIVISTA

I N N O V A T I V E

M U S C L E S

Moving Manufacturing Ops to the Cloud

After surviving the auto market collapse and promising to diversify, Ralco Industries Inc., an automotive components supplier, began making customized, lightweight electric wheelchairs—a design that allowed for thousands of unique combinations.

For help, Ralco turned to Plex Systems to create efficient parts-procurement and manufacturing systems.

Read more.

“THERE ARE 11,000 DIFFERENT COMBINATIONS FOR THE [WHEELCHAIR] FRAME...I DON’T KNOW HOW WE WOULD HAVE DONE IT WITHOUT PLEX.” // TOM GITTER, RALCO CHIEF EXECUTIVE

A publication of

ON THE COVER // Manufacturing in the Cloud.

Top photo by Craig Sherod

TABLE OF CONTENTS

PRESIDENT & CEO Gary LaBranche, FASAE, CAE glabranche@acg.org

VICE PRESIDENT, COMMUNICATIONS & MARKETING Kristin Gomez kgomez@acg.org

EDITOR-IN-CHIEF Deborah L. Cohen dcohen@acg.org

FEATURE

Private Equity Plugs in to the ‘Internet of Things’ The Internet touches nearly everything we own.

Learn how two private equity firms are betting on the business-to-business side of the “Internet of Things.”

Read more.

IN EVERY ISSUE

ASSOCIATE EDITOR Kathryn Mulligan kmulligan@acg.org

Executive Summary

DIRECTOR, CREATIVE AND BRANDING

Executive Suite

Brian Lubluban blubluban@acg.org

Face-to-Face The Ladder It’s the Small Things The Leadership

VICE PRESIDENT, CONFERENCES & PARTNERSHIPS Christine Melendes, CAE cmelendes@acg.org FOR ADVERTISING OPPORTUNITIES

DIRECTOR, STRATEGIC DEVELOPMENT

DEPARTMENTS THE ROUND

A QUALIFIED OPINION

• ACG InterBrenda Growth® 2014 Reichelderfer, Draws Record SVP and man Attendance. aging director • New Column: at TriVista, ex MidPoints amines innova by Randy tion practices Schwimmer. at PE firms.

• Survey: Read more.

Innovation Is a Priority.

Read more.

ACG@WORK • ACG Celebrates Launch of New Caucus.

• Rocky Mountain Corporate Growth Conference.

• Made in the Triangle Showcases Local Businesses.

Read more.

THE PORTFOLIO The latest middle-market trends and thought leadership written exclusively by a team of expert ACG Partners.

Read more.

Meredith Rollins mrollins@acg.org Custom media services provided by Network Media Partners, Inc.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2014 Middle Market Growth®, InterGrowth and the Association for Corporate Growth, Inc. All rights reserved.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

To learn more, please email events@acg.org or visit eurogrowth.org.

SAVE THE DATE

Join Global M&A Professionals for Networking and Dealmaking Save the date for the ACG EuroGrowth® 2014 conference in London on Oct. 15–16. This premier gathering of top middle-market dealmakers from around the globe provides an essential networking and deal-flow platform for those interested in the European marketplace and beyond.

ACG EuroGrowth 2014 offers unprecedented opportunities to interact with private equity professionals, intermediaries, lenders, advisers, corporate executives and development officers—all in just 36 hours.

Like ACG’s annual InterGrowth® conference, the event features the widely popular executive roundtable discussions and breakout sessions, each led by industry experts.

You’ll be privy to vital analysis, best practices and discussion on leading-edge middlemarket topics—including regulatory and lending environments, labor issues, cultural nuances of dealmaking in foreign markets and more! Mark your calendars today, and sign up for updates at eurogrowth.org.

“EuroGrowth brings together deal sources and investors from Europe, Asia and emerging markets across the globe unlike any other conference in the EU. You’ll connect with people that you’ll do business with for years to come,” says Hans van Ierland, CEO, HPE Growth Capital, and member of ACG Holland. //

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This summer, ACG chapters across the globe will host local events.

Check out what’s happening at your local chapter, register and join in on valuable educational and networking opportunities.

ACG Chicago’s 5th Annual Food Industry Growth Conference, The Westin Hotel Left: Conference attendees during the networking lunch. Right: Brand Building panelists, from left, are Sherman Wright, Commonground and ACG Chicago board member; Steven Silk, Smith Brothers; Paul Block, Merisant Company; and Kenneth Wegner, The Jel-Sert Company.

ACG 101 Corridor Chapter View Calendar

ACG Calgary Chapter View Calendar

ACG Central Texas Chapter (Austin and San Antonio) View Calendar

ACG Charlotte Chapter View Calendar

ACG Chicago Chapter View Calendar

ACG Columbus Chapter View Calendar

ACG Denver Chapter View Calendar

ACG Los Angeles Chapter View Calendar

ACG New York Chapter View Calendar

ACG Philadelphia Chapter View Calendar

ACG Richmond Chapter View Calendar

ACG Seattle Chapter View Calendar

ACG Toronto Chapter View Calendar

ACG Wisconsin Chapter View Calendar

Had a newsworthy chapter event?

Send a 150to 200-word summary and high-resolution photos to associate editor Kathryn Mulligan.

LEARN. ACT. JOIN.

We’ve built our family business over three generations. Thanks to capital and advice provided by private investors, we will keep the business growing long into the future. Our family is the story of middle-market growth.

We Are Private Capital.

Private Capital drives middle-market growth, fuels job growth and builds communities.

Get involved at www.middlemarketvoice.org

Private Capital, Public Good.SM

THE ROUND NEWS THAT MATTERS

Tap to view a slideshow of ACG Intergrowth®.

ACG InterGrowth® 2014 Conference Draws Record Attendance Premier middle-market investment conference attracts nearly 2,000 growth professionals ACG celebrated its 60th anniversary with record attendance at the InterGrowth® 2014 conference in Las Vegas at the five-star, five-diamond ARIA Resort & Casino.

“InterGrowth 2014 brought together a diverse group of global middle-market investment professionals,” says ACG InterGrowth 2014 Chairman Kenneth S. Berryman, director, CapitalSouth & Capitala Investment Group. “Last year, private equity firms in attendance were responsible for 32 percent of total deals closed; intermediaries supported more than $166 billion of deals closed, accounting for nearly 37 percent of U.S. capital flow.”

Peyton Manning, five-time NFL MVP, capped a powerhouse offering of keynote speakers.

Twitter Co-founder Biz Stone opened the three-day event with a thought-provoking presentation on the evolution of the market-changing social media platform. Rounding out the event was a CEO panel consisting of influential middle-market leaders: Hiter Harris, managing director and co-founder, Harris Williams & Co.; Stewart Kohl, co-CEO of The Riverside Company; and John G. Martin, president and CEO, GE Antares Capital.

Continued on next page

THE ROUND NEWS THAT MATTERS

Click here to see a video of Intergrowth®.

“InterGrowth continues to build on its momentum and serves as an important platform to inform and educate its members and the broader investment community about ACG’s strategic initiatives,” says Gary A. LaBranche, FASAE, CAE, president and CEO of ACG Global. “For example, this year the culmination of ACG’s public policy efforts led to the formation of the bipartisan Congressional Caucus for Middle Market Growth. The support of these legislators will help to educate Congress and the broader public about the economic contributions of middle-market businesses and the private capital that backs them.”

Other highlights of InterGrowth 2014 included: • Recognition of ACG Global’s three Official Sponsor of GrowthSM partners: Duane Morris

LLP, Grant Thornton LLP and Merrill DataSite.

• Announcement of ACG EuroGrowth® in London, England, Oct.15–16, 2014.

• A comprehensive thought leadership program, including a breakout session with Nina

Freedman, an examiner with the Securities and Exchange Commission’s Office of

Compliance, Inspections and Examinations.

• The successful introduction of the widely popular networking and scheduling app

InterGrowth CONNECT. • Honoring ACG’s past chairmen of the board and InterGrowth chairmen.

InterGrowth 2015 will be held April 13–15 at the Waldorf Astoria and Hilton Bonnet Creek

in Orlando, Fla. Learn more at intergrowth.org. //

THE ROUND MIDPOINTS BY RANDY SCHWIMMER

Innovate This!

Who invented the airplane? Depends what you mean by “invent.”

“Birdmen,” a new book by historian Lawrence Goldstone, describes how the Wright Brothers became so obsessed with litigating competitors, they neglected critical flight design improvements that would have ensured success. Others forged ahead with better Randy Schwimmer shares his perspectives in MidPoints each month. A former member of senior management and investment committees for two leading middle-market debt platforms, he is also founder and publisher of “The Lead Left,” a weekly publication about deals and trends in the capital markets.

models, draining the Wrights of their resources and sending Wilbur to an early grave.

Successful innovation isn’t just about getting there first. It’s about meeting market demand. History is replete with other examples—TV, the polio vaccine, the personal computer—of inventors failing to grasp basic business precepts and being overtaken by more nimble follow-on rivals.

Founder-led companies tend toward less bureaucracy, creating easier environments for new product launches. Once customer demand is established, however, sponsors or strategics can provide capital and processes for future growth.

But how do you fan the flame of innovation at those portfolio companies or corporate subsidiaries once they’re part of more rigid hierarchies? One veteran PE partner, who specializes in consumer brands, told me he asks his management team two questions: 1. What problem are you trying to solve; and 2. Do consumers actually want it?

Can one product be a potential game changer? “We don’t take existential risk,” he said.

“We prefer creating an umbrella brand to house different products. That stimulates ongoing innovation. Next, we ask our entrepreneurs, ‘What’s holding you back?’ We take from their plates anything that distracts from the creative process.”

Can innovation be measured? “We implement key performance indicators to track how each product is doing,” the partner said. “That grounds innovation in reality, and the feedback drives continuous improvement. Innovation becomes an iterative process.”

Another top investor agreed: “Find out what percent of revenue comes from new products,” he suggested. “Too high a number creates too much volatility; too low risks lower growth.” So what’s the difference between true innovation and good old-fashioned product development? “Everyone innovates!” the investor said. “Otherwise they’d be left behind.”

“Right now, the buzz word is ‘tech-nabled,’” one IT-focused partner reported. “Anything with that label is getting higher multiples. But we look closer to see if that’s really driving revenues, new customers or efficiencies. Otherwise, you’re overpaying.

“Innovation isn’t always coming up with something new,” he continued. “Sometimes it’s looking at the obvious in a new way. How many apples fell in the history of the world before Isaac Newton had his aha moment? And he didn’t have to invent the apple!”

No, Steve Jobs did that. //

THE ROUND Q&A WITH MICHAEL NELSON // Investment Partner, Pritzker Group Private Capital

BUILDING OUTSIDE OF BOUNDARIES

Investing in Market Leaders What is the focus of Pritzker Group Private Capital?

Michael Nelson: Pritzker Group Private Capital acquires companies in three sectors: manufactured products, services and health care. We typically acquire companies with values of $100 million to $500 million.

Our ideal company is a market leader with an excellent management team and a clear growth path, particularly if that path would benefit from follow-on capital. Because Pritzker Group has a permanent, private capital base, we tend to attract family and entrepreneurowned businesses looking for a stable partner that can help them innovate and build great companies for the long term.

The concept of building companies is part of our firm’s DNA. Both J.B. Pritzker and Tony Pritzker have a long history of building market-leading global companies for long-term success. They have established their credentials as successful business builders, Tony as an operator and J.B. as a technologist and dealmaker. We bring these aspects together to help our companies achieve their long-term growth plans and to take them to the next level.

Continued on next page

THE ROUND Q&A WITH MICHAEL NELSON // Investment Partner, Pritzker Group Private Capital How does the ability to innovate factor into your decision when selecting a new portfolio addition?

MN: We look to invest in market leaders with strong track records of innovation and growth.

We spend considerable time assessing a company’s history of introducing new, inventive products and services that allow it to create long-term customer relationships and abovemarket growth.

A great example of innovation is the introduction of a reduced weight, ultra-thin wall plastic package from our newest company, Technimark, which we acquired in April 2014. This new packaging product allows Technimark’s customers to reduce costs and offer a unique, environmentally friendly solution to the market.

Eventually, we want all of our companies to be billion-dollar-plus enterprises. They need to demonstrate that their markets have this potential and then create growth opportunities through innovation that result in new products or capabilities that allow them to reach that billion-dollar goal.

How does Pritzker Group help its companies innovate? In addition to capital, what kinds of resources do you deploy?

MN: First, our private, permanent capital base allows our companies to invest in developing new products and services that have longer-term paybacks. Pritzker Group can accept short-term earnings dilution in exchange for enhanced long-term opportunity. We also use conservative levels of debt, which give flexibility for our companies to invest in innovation and new product development.

Management teams run the day-to-day operations of our companies. However, we have a team of operating partners, senior advisers and an operations support group, as well as Tony and J.B., who encourage our managers to think outside the boundaries of their current businesses so they can develop into global market leaders. We spend our time thinking about long-term strategic growth, not planning for an exit.

Do you cross-fertilize ideas among your companies, and if so, can you provide an example or two?

MN: We absolutely do. Pritzker Group hosts regular CEO forums, in which all of our CEOs are encouraged to share best practices. We not only share ideas among Pritzker Group Private Capital companies, we also discuss new opportunities and innovations with the highgrowth technology companies in which Pritzker Group Venture Capital invests.

Continued on next page

THE ROUND Q&A WITH MICHAEL NELSON // Investment Partner, Pritzker Group Private Capital E-commerce technology is a great example of how we are working to share knowledge.

Many of the e-commerce innovations being developed by our venture companies are applicable to helping our later-stage companies better serve their customers. In today’s environment, customers are seeking online ordering, customer service and other technologyenabled capabilities regardless of whether it is a consumer-oriented business or a company selling an industrial product. Pritzker Group’s experience across the full spectrum of early and later-stage enterprises creates a unique platform for innovation and growth.

How do you measure an investment in innovation against the returns?

MN: Investing in innovation demands a long-term perspective. For example, one of our companies, Signicast, wanted to build a state-of-the-art, industry-leading facility for the production of highly automated, precision-casted parts. After four years of strong growth, Signicast needed the additional capacity this facility would provide and wanted to offer expanded capabilities to its customers.

While most private equity firms might look to monetize their investment after four years, Pritzker Group supported the $50 million facility expansion because it will further Signicast’s market-leading position and generate solid long-term returns. Because we’re unencumbered by the need to sell businesses and return capital to investors within specified time frames, we’re able to give companies latitude to make smart investments that will pay off over the long term.

When assessing a company, what types of screens do you use to evaluate a team’s ability to innovate?

MN: There are several key data points we use to evaluate a management team’s ability to innovate. First, we review the company’s history of new product or service introductions. Innovative companies have a robust pipeline of new products and strive to have a meaningful percentage of their revenues from products that are less than three years old.

Second, we conduct market checks with key customers, competitors and other market participants. Then, we assess a company’s profitability. Innovative companies create premium products and services customers are willing to pay more for, which in turn leads to greater profitability.

Finally, we test management teams and company cultures to see if they are receptive to new ideas and open to working in true partnership with us. That’s essential. You cannot be wedded to today if you hope to innovate for the future. // Pritzker Group Private Capital is a Chicago-based middle-market private equity firm with North American portfolio holdings.

THE ROUND NEWS THAT MATTERS

Click here to read an interview with the founding partner of GE Antares Capital.

3-D Printing: The Sky’s the Limit While the concept still feels new, three-dimensional printing, a process many of our members saw demonstrated at InterGrowth® 2014, has been around for more than a decade.

Unlike traditional manufacturing methods, it is an additive manufacturing technology: Rather than cutting away at a material, 3-D printers allow for organic creation. 3-D printing software instructs the machine where to lay material, whether plastic, steel or aluminum, to create a new structure from scratch.

3-D printing has caught on widely in recent years due in part to advancements in software and materials technology. GE, for one, has been investing in and using 3-D printing since the technology’s early days, says Christine Furstoss, the conglomerate’s global technology director for manufacturing and materials technologies.

“3-D printing is an exciting area because businesses are at the cusp of learning how to use it,” Furstoss says.

In its infancy, 3-D printing was used within GE primarily for plastic prototypes; because the early products it produced lacked geometric fidelity and durability, they weren’t ideal for end use, she says. All along, however, the philosophy behind the technology has remained constant: If you can think of it, you can make it.

Continued on next page

THE ROUND NEWS THAT MATTERS Over the years, GE has partnered with and acquired leading producers of 3-D printing equipment and technology to build its capacity and increase the sophistication of its output.

Precision-engineering firms Morris Technologies and Rapid Quality Manufacturing, which GE purchased in 2012, are two examples of strategic acquisitions that increased GE’s arsenal of 3-D printers and broadened the company’s technological expertise.

Furstoss estimates that today nearly 1,000 3-D printers are in use across the corporation.

The majority of these are deployed for rapid prototyping, enabling GE’s engineers to visualize a new component, create it and test it prior to wider production. A smaller proportion of printers is dedicated to higher-generation materials, such as metals and ceramics. In a move to build more technical capacity, GE in 2013 purchased the aviation business of Avio, an Italian maker of aviation components and systems with the largest additive manufacturing factory in the aeronautical industry.

3-D printing helps to overcome a major hindrance to traditional manufacturing, the time required to validate design, Furstoss says. Creating a single part using traditional manufacturing methods requires the creation of a mold and new tools prior to production. With 3-D printing, a part can be created in mere days, allowing for faster design and accelerated improvements to create better, safer products. A truly transformative technology, 3-D printing is revolutionizing the way companies like GE design and create new products with fewer constraints. // — Kathryn Mulligan, associate editor, Middle Market Growth

THE ROUND NEWS THAT MATTERS COMPETITORS COLLABORATING // Rivals Ford and General Motors worked together to meet a looming emissions deadline.

Innovation a Priority: Plante Moran Survey Innovation is increasingly important among businesses aiming to boost market share, expand their geographic footprint and diversify product lines, according to a recent survey by the accounting firm Plante Moran.

Fifteen percent more business leaders, or 94 of 100 queried, listed innovation as a priority compared with the previous year, according to the firm’s 2013 Innovation Survey.

The drivers to innovate, however, are changing. The economy, corporate finances and regulatory requirements were less important incentives in 2013 than in 2012, the survey found. Last year, improving quality and pursuing greater flexibility and capacity were stronger motivators for innovation than in the past, according to the survey, which polled 4,225 C-suite executives.

More companies are adjusting their organizational structures and strategies to encourage innovation and change. Plante Moran’s report shows, for example, how musical artist Kid Rock and his promoter, LiveNation, drastically changed the business model for Rock’s latest tour using steeply discounted ticket prices, a new profit-sharing arrangement and a sponsorship agreement with Jim Beam. Rather than focusing on the short term, Rock and his team are thinking creatively to engage more fans with the aim of increasing both profitability and brand longevity.

Continued on next page

Firms are also becoming more amenable to collaboration in pursuit of innovation. To comply with a looming emissions deadline, historic rivals Ford and General Motors reached an agreement to work together to develop new transmissions systems, allowing them both to save time and cut costs. While issues such as intellectual property and cultural differences were obstacles to collaborative innovation, the efficiency of joining resources to meet a common need was worth surmounting those challenges, the survey found.

The strongest reason for collaboration respondents gave, however, was to facilitate entry into new markets. Given the favorable growth prospects in emerging markets, in particular, companies are eager to expand outside the U.S. Forging an innovative, flexible alliance with an established firm in a specific region can help a middle-market company overcome barriers, such as language, culture and geography, while avoiding pitfalls common in international STRATEGIC THINKING // Kid Rock reduced ticket prices with long-term fan engagement in mind.

joint ventures.

In the race to remain competitive, executives recognize that innovation and creativity are essential: Respondents who said they incorporated innovation into their organizational strategy rose eight percentage points to 74 percent from 2012. Whether through a fresh business model, a new approach to product development or a flexible international alliance, innovation is now a vital element to thrive in the modern economy, the survey found. //

THE ROUND NEWS THAT MATTERS

AN INNOVATIVE C-SUITE

Creativity at the Top John Marshall, chief executive, JM Search Recruiting top-level executives for innovative companies isn’t easy. In traditional businesses, the objectives for incoming executives are generally straightforward; leaders of innovative companies, however, often enter situations with no clear blueprint for success. These companies frequently struggle to commercialize their products and services. Senior management must determine how to go to market and drive growth, while also maintaining an environment that fosters innovation and keeps the company ahead of the competition. Executives hired to lead must be able to think strategically and recognize opportunities that are not readily apparent.

To identify the right candidates for an innovative company, there are several important steps that should be followed.

Evaluate the Company Before launching a search, it is imperative to understand the company’s needs and goals to determine what the incoming executive must accomplish. Does the company need to develop new products or services, focus on existing product lines or expand into new markets?

Understanding these factors will help you construct the right profile for the leader you are looking to hire.

Continued on next page

THE ROUND NEWS THAT MATTERS Conduct Industry Analysis Once a candidate profile is developed, you can begin to identify similar companies that have experienced significant growth or desired outcomes due to innovative products, services or processes. While the company’s immediate industry is the right place to start, domain expertise is not always the most important requirement for a leader. In some situations, knowledge of target markets, success scaling a company within a certain revenue range or experience working with financial sponsors may be more important to the company’s success.

Identify Executives and Validate Capabilities After finding the right companies for sourcing candidates, the next step is to identify individuals within those companies who are responsible for setting and executing the strategic vision and building the infrastructure to support growth. Extensive due diligence—including confidential talks with a range of sources who have worked with the candidates—is essential to pinpoint the best individuals and verify their contributions to company success.

The success of high-growth companies can be incorrectly attributed to senior executives that happened to be in the right place at the right time. The CEO may not be the main driver of growth, so in conducting a CEO search be sure to identify and evaluate other executive leaders to determine who fits the desired profile.

Ultimately, innovation alone does not guarantee commercial success. Many innovative companies have failed because they were unable to commercialize their products or services. Putting in place the right leadership to capitalize on a company’s potential is crucial to achieving significant and sustainable growth. // JM Search is an executive search firm serving private equity and venture capital-backed businesses in the middle market.

THE ROUND NEWS THAT MATTERS Webinar Archive Past ACG webinars can be viewed here.

Click here to see ACG’s “The New Face of Retail” webinar.

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THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // IF IT CAN BE CONNECTED, IT WILL

U.S. private equity dollars invested in the Internet of Things totaled nearly $46 billion from 2005 to 2013.

Technology investments have outweighed those of all other categories, surpassing 30 deals each year since 2005, with a peak of 43 deals in 2012.

From 2005 to 2013, more than 400 deals were closed by PE and VC firms in the Internet of Things—providing everything from remote access to home heating to GPS traffic data for our cars.

Other big categories for investment in the space include energy, health care and business-tobusiness solutions.

Google’s 2014 acquisition of home automation firm Nest Labs for over $3 billion was the highest-valued purchase in the sector since 2012.

Blackstone Group’s $2 billion acquisition of home-security technology company Vivint in 2012 was among the megadeals in the space.

All statistics are from PitchBook for the middle market (deal values from $25 million to $1 billion).

Francisco Partners moves manufacturing ops to the cloud

PLEXING I N N O V A T I V E

M U S C L E S

BY SUSAN NADEAU

Photos by Craig Sherod

J

ust over two years ago, Ralco Industries Inc., an automotive components supplier, followed through on a management promise. After surviving the collapse of the U.S. auto market, and along with it the end of 60 percent of its competition, Ralco would diversify.

The manufacturer entered the medical device industry with plans for customized, lightweight electric wheelchairs, a far cry from its core metalstamping business. For help, it turned to its long-time manufacturing software provider, Plex Systems. Plex worked with Ralco to create an efficient parts-procurement system, organize its skilled workers, price the chair and, most importantly, set up a manufacturing system that could make each wheelchair according to user specifications, such as height or seat width.

“There are 11,000 different combinations for the [wheelchair] frame alone,” says Ralco Chief Executive Tom Gitter. “I don’t know how we would have done it without Plex.”

Plex provides manufacturers with cloud-based enterprise resource planning (ERP) software, “every module needed to run a manufacturing operation,” from quality control and production management to human resources, invoicing and accounting, says Plex Chief Executive Jason Blessing.

INNOVATIVE PARTNERSHIP // Petri Oksanen, principal, Francisco Partners (left); and Jason Blessing, chief executive, Plex Systems (right).

“WE HAVE A GREAT PRODUCT AND REFERENCEABLE CUSTOMERS—THE TWO MOST IMPORTANT FACTORS FOR GOING INTO A LEGACY MARKET AND DISRUPTING IT.” Jason Blessing Chief Executive, Plex Systems

ERP is not new, but Plex’s technology is transformative—shifting makers of everything from kettle corn to airplane parts to the cloud. Legacy systems are typically specific to each manufacturer, running on premises using cumbersome and maintenanceheavy computers. Upgrades to the system can be slow and require significant testing; meanwhile, changes to manufacturing specifications can be difficult.

Plex’s massive data center, its “cloud,” on the other hand, runs centralized software that manufacturers can access using the Internet. This makes for quick production changes and easy maintenance of information-packed databases. In addition, manufacturers don’t have to buy big computers or hire staff to maintain them. Another benefit, says Blessing: With a data center in California and a standby in Colorado, Plex can immediately switch operations to a different location, should a disaster strike.

In June 2012, Francisco Partners, a technology-focused private equity firm, announced it would acquire a majority position in Troy, Mich.-based Plex, drawn to the cloud-based technology that was helping just about every other industry, including financial services and logistics, gain efficiencies.

“We saw the opportunity to out-innovate the competition,” says Petri Oksanen, a Francisco principal and Plex board member. “We are the only scale player that does manufacturing in the cloud today.” Oksanen declined to provide financial details of the transaction.

At Ralco’s Auburn Hills, Mich.-based headquarters, Plex’s cloud technology connects all aspects of the mainstay automotive component business, which Gitter says still accounts for 95 percent of the business, though the wheelchair segment is growing fast.

Ralco runs 225 “modules,” or specific components, of the software system. This has increased productivity and efficiency astronomically, giving the company a competitive edge in areas such as managing production capacity and minimizing waste, both particularly important in difficult times, such as the automotive industry downturn.

Gitter says his company’s entire finished inventory turns over more than once a day—compared to the industry gold standard of 40 times a year.

“That can only be done if you know everything there is to know,” Gitter says.

In fact, he knows exactly where every component of every product comes from, who assembled it and when, who bought it and for what price, and how much it cost to make. Plex’s system saves “probably two dozen people chasing papers around,” Gitter says. Information is live and accessible online from anywhere, so production schedules can be tweaked, orders changed and staff called in as needed.

“I can be in Germany on my cell phone and control my plant,” he says.

Pointing to Nike, which sells customized sneakers from its website, Oksanen stresses that the manufacturing industry has changed and must now be more responsive to its customers.

“Manufacturers are looking for ways to up their game,” he says.

Plex’s founders have always had a keen interest in manufacturing.

When forming the company in the late ’90s, they opted against popular systems, such as those from SAP and Oracle, which relied on locally installed software. Many of those legacy providers now offer some form of a cloud-based system, but Plex was first and was the only complete system, Oksanen says.

In 2012, Plex’s previous shareholders, led by Apax Partners, decided it was time to sell. “Revenue had roughly tripled,” Oksanen says. “The business had done well.”

Francisco had its eye on what Blessing says is a $25 billion global manufacturing ERP market. Once in control of Plex, the private equity firm hired more experienced leadership, including a new CEO, chief financial officer and head of sales. In December 2012, it brought in another partner, Accel Partners, which invested $30 million and got a seat on the board. Francisco maintained its majority share.

CEO Blessing came on board in January 2013; shortly after, the company began recruiting heavily across the board, adding 119 employees to end the year at 365. Headcount jumped to 382 by the end of the first quarter of 2014.

Francisco also ramped up Plex’s research and development, making significant software improvements.

It helped Plex expand and improve its marketing operations, last year completely revamping the brand and exterior image of the company. This year, Plex will add to its North American sales force, with an emphasis outside the Midwest, Blessing says.

“We are still not where I want to be in terms of market awareness,” he adds.

But the capital infusion appears to be paying off. Plex added 59 new customers in 2013, raising the total to nearly 400, with 1,100 factories now running Plex software.

And opportunity remains abundant: Many manufacturers have not made significant investments since Y2K, Oksanen says.

DISRUPTING THE MARKET “No one has disrupted the market yet with the cloud model,” says Blessing, noting the cloud is less prevalent in manufacturing ERP than in other industries. “We have a great product and referenceable customers—the two most important factors for going into a legacy market and disrupting it.”

The chief issue holding back manufacturers is concern over security, according to Cindy Jutras, president of Mint Jutras, an independent research-based consulting firm specializing in analyzing the business impact of enterprise applications.

Security should always be a foremost consideration, Jutras tells manufacturers, but she adds that with a provider such as Plex, there is already a built-in safety net. The benefits of moving to the cloud are great, she says; manufacturers she has surveyed find cloud-based operations attractive primarily due to lower costs.

Another Plex client, craft beer brewer Green Flash Brewing Co., began using Plex in October 2013 to help with expansion. Green Flash is counting on significant savings.

“WE SAW THE OPPORTUNITY TO OUT-INNOVATE THE COMPETITION. WE ARE THE ONLY SCALE PLAYER THAT DOES MANUFACTURING IN THE CLOUD TODAY.” Petri Oksanen a Francisco principal and Plex Systems board member

“With the Plex model, we were able to get significantly lower cost of ownership over a 10-year period,” says Steve Goodger, the company’s CFO. “Plus, I don’t have to deal with the headaches. It allows us to focus on what we do best.”

And gone are the mountains of spreadsheets. “Plex has allowed us to be more process-oriented, which is going to let us scale our growth so much easier,” Goodger says, adding that the San Diego, Calif., company has plans for another brewery in Virginia Beach.

Plex’s Oksanen is counting on a lot more manufacturers seeing it that way.

“We are in the second or third inning of a long game,” he says. “I don’t want to commit to anything, but Plex is the type of company that one could easily see as a public company down the road.”

As for Ralco, its leaders knew back in 2001 that Plex—and the cloud— were the way to go. “We looked at 147 different system providers; it took us 18 months,” Gitter says. “The scary thing, and the key thing, was the technology. They were in the cloud before there was a cloud.” // Susan Nadeau is a Hartford, Wis.-based business journalist.

PRIVATE EQUITY PLUGS IN TO

T H E

I N T E R N E T

O F

THINGS

BY CARINA WIECK

FIELD MOBILITY // New tools, such as BarcodesInc’s scanners, enable businesses to better collect data and manage operations.

Turn on and tune in—from anywhere.

Whether we like it or not, Internet connectivity has permeated every aspect of our lives, from how we navigate our cars to how we shop, eat and share the details of our social activities. Pervasive access to the Web has also helped businesses gain efficiencies, better control their operations and facilitate communication with employees and customers.

According to a February 2014 report from the Pew Research Center, “experts say the rise of embedded and wearable computing will bring the next revolution in digital technology.”

This so-called “Internet of Things”—a proliferation of Internet links to everyday objects, such as phones, appliances and apparel, as well as industrial equipment of all types—promises great opportunity for investors large and small.

Here are just two examples of private equity firms betting on the business-to-business side of this innovative trend.

WHEN GPS TRACKERS AND OIL RIGS UNITE When Chip Davis, a managing partner with Houston Ventures, was introduced to remote-asset-tracking company Geoforce Inc., he says his firm was compelled to invest.

Founded in 2006, Dallas/Ft. Worth-based Geoforce uses GPS tags to help oil companies keep tabs on everything from hydraulic fracking tanks to 70 other types of equipment used in drilling. Because the technology relies on a Web-based platform, customer operations can be managed from anywhere at any time.

“It’s very helpful to know where the equipment is at all times because the use cycle on [fracking] tanks is short and new jobs pop up all over the world all the time,” Davis says. “Geoforce helps companies plan their next steps efficiently.”

Along with Palmetto Ventures, Houston Ventures took a combined growth equity position in Geoforce at the end of 2013, investing more than $10 million.

Prior to that, Geoforce had relied on seed capital from friends and family.

KEEPING TABS // Geoforce’s GPS tags track 70 types of equipment, including transportation vehicles.

Geoforce uses GPS to send information to a satellite that beams it to a desktop application similar to the consumer app “Find My Phone.” The technology tracks where a tank is, how close it is to available jobs and if it is compliant with current regulations—all valuable information for the tank owners and drilling companies’ job site managers.

“You can get a record that will prove where the GPS was at any given time,” Davis says.

Private equity capital is supporting Geoforce’s rapid growth; revenue has increased nearly 100 percent each year over the last five years. Geoforce’s first international subsidiary, Geoforce do Brasil, launched in 2013; it is already a leading force in the offshore Brazilian market.

Meanwhile, Geoforce has plans for additional expansion to support the global oil and gas industry with an immediate focus on the Asia-Pacific region and Europe. A portion of the PE funds will also be used to enlarge the company’s product development staff and its multi-national sales, marketing and customer support teams.

Davis says, “There’s so much opportunity in the energy space; there’s no need to branch out into any other verticals at this point.”

A BARCODE, A BARCODE, MY KINGDOM FOR A BARCODE Cortec Group, a New York-based private equity group, found a winner when it purchased Chicago-based BarcodesInc, whose products serve growing demand for the scannable data used by organizations ranging from the U.S. Postal Service to retailers and health care providers.

BarcodesInc’s product portfolio includes more than 15,000 barcode scanners, mobile-computing devices, identification-card devices, point-of-sale peripherals, barcode-label-and-receipt printers and other gadgets designed to help customers improve productivity and profitability.

The company sells direct to its customers through a comprehensive website, eliminating the need for third-party resellers and giving customers greater selection; its brands range from Honeywell to Zebra and Cobra.

“The [BarcodesInc] team has built a series of e-commerce sites so interactive and comprehensive that they allow customers to really do everything they need to do online,” says David Schnadig, a Cortec Group managing partner and ACG New York member. “This really streamlines the purchasing ability for companies with less complicated infrastructure requirements.”

CONNECTIVITY // BarcodesInc provides customers with digital data hardware solutions to improve productivity and profitability.

Cortec bought BarcodesInc, formerly owned by Thompson Street Capital Partners, at the end of 2012.

The e-commerce company has grown revenue at a rate of 25 percent per year since it was founded in 2005. To accelerate growth, Cortec added salespeople to interact with customers at the e-commerce site. It expects to hire 50 more in 2014.

Additionally, Cortec and the BarcodesInc management team revamped the company’s sales commission structure, giving top performers more upside potential. The changes have been positive.

“Since we rolled out this new sales compensation program in December, productivity has increased by 34 percent,” Schnadig says. “The bottom line is this is a disruptive model, and it’s been successful.” // Carina Wieck is a New York-based business writer.

‘INTERNET OF THINGS’ HELPS THE ARIA GO GREEN Attendees of this year’s InterGrowth® conference in Las Vegas experienced the Internet of Things in their hotel rooms at the ARIA Resort & Casino.

Upon entering a room, curtains open to let in daylight, signaling a personal welcome. Integrated technology allows each guest to set preferences for ambient lighting, room temperature and music—it even offers access to room service or the concierge, all with the use of a bedside tablet computer.

Besides customizing the guest experience, features like these help the hotel to save energy and manage costs. Integrated controls that automate blinds, for instance, allow each unoccupied room to maintain cooler temps without upping the air conditioning; meanwhile, technology that senses checkout or lack of activity can restore room temperature to a conservation mode.

“It not only improves guests’ comfort, but it also improves the efficiency of those rooms,” says Christopher Brophy, vice president of sustainability for MGM Resorts International, which owns the ARIA. Integrated technology features such as these have also helped the ARIA—and the broader City Center Complex it is housed in—boast status as one of the largest LEED-certified developments in the world, says Brophy, noting the building is 38 percent more energy-efficient than traditional hotels.

“From a pure technology standpoint, City Center, and ARIA in particular, are definitely ahead of the curve,” he says.

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A QUALIFIED OPINION BRENDA REICHELDERFER // Senior Vice President and Managing Director, TriVista

B

renda Reichelderfer is a senior vice president and managing director at TriVista, an operations consulting firm focused on middle-market companies.

She has more than 30 years of experience in general management, engineering and operations. In addition to her extensive P&L background, Reichelderfer gained operational expertise as plant manager, vice president of operations, director of engineering and chief technology officer.

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HOW CAN INNOVATION IN NEW PRODUCT DEVELOPMENT BE MEASURED BY PRIVATE EQUITY FIRMS?

T

ypically, a vitality metric is used to measure the amount of sales generated by product releases within a set period as a percentage of total sales. The trouble with this, and many other business outcome-related metrics, is that feedback is very latent. Development cycles can take months to years before you get even the first feedback point.

A Corporate Executive Board study illuminates this point by separating the great organic growth firms from the rest of the pack and determining whether those firms tended to focus on a different set of metrics.

The results were clear—To get more from your R&D investments, the leadership team needs to look at the health of your portfolio of projects and ask: • Do we have a balance of core and growth?

• Do we have a healthy balance across product lines?

• Are we treating great projects differently than mediocre ones?

• Do we have a product development roadmap to weed out projects that will waste our resources?

Photo by Brad Trent

A QUALIFIED OPINION BRENDA REICHELDERFER // Senior Vice President and Managing Director, TriVista

B

renda Reichelderfer is a senior vice president and managing director at TriVista, an operations consulting firm focused on middle-market companies.

She has more than 30 years of experience in general management, engineering and operations. In addition to her extensive P&L background, Reichelderfer gained operational expertise as plant manager, vice president of operations, director of engineering and chief technology officer.

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WHAT KINDS OF RESOURCES SHOULD PRIVATE EQUITY FIRMS PROVIDE TO HELP THEIR PORTFOLIO COMPANIES INNOVATE?

W

hen I begin working with a firm to enhance ROI on their R&D spending, the portfolio company often tells me that it needs to invest more in R&D. The truth is, until you identify the right projects, that’s a fool’s errand.

When we beef up (or implement) the Stage-Gate process, there are generally two areas that need a lot of work: • Removing the bureaucracy, while still developing robust business cases for new products and ensuring that projects align with strategic objectives.

• Paying attention in the early stages, prior to detailed design, to amping up the goals for differentiation in the product concept in a way that customers will pay for.

We have a whole tool set around customer-value innovation and voice-of-customer capture planning to discover ways to increase project value. So, bottom line, bring in resources to minimize waste in current R&D investment before you invest more; you may be able to invest less to achieve equal or better results.

Photo by Brad Trent

A QUALIFIED OPINION BRENDA REICHELDERFER // Senior Vice President and Managing Director, TriVista

B

renda Reichelderfer is a senior vice president and managing director at TriVista, an operations consulting firm focused on middle-market companies.

She has more than 30 years of experience in general management, engineering and operations. In addition to her extensive P&L background, Reichelderfer gained operational expertise as plant manager, vice president of operations, director of engineering and chief technology officer.

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ARE THERE WAYS PRIVATE EQUITY FIRMS CAN FACILITATE CROSS-FERTILIZATION OF GOOD INNOVATION PRACTICES AMONG THEIR HOLDING COMPANIES?

bsolutely. The best approach involves consistent training and implementation of innovation best practices at each portfolio company. When everyone has the same tools and speaks the same language, it’s easier to share expertise in processes, technologies and practices to accelerate performance.

Even if your group isn’t ready for new product development (NPD) process improvement on such a wide scale, you can still get a lot of mileage by ensuring each has a good NPD project portfolio management system to identify which projects have the most potential. Often, there are valuable resources within other portfolio companies that can be exploited to help drive these efforts forward.

Generally, I find once a good portfolio management process is in place, the 80/20 rule applies: 20 percent of the projects will deliver 80 percent of the results. Companies should focus on that 20 percent and seek help in deploying them, whether via competencies at other portfolio management companies or third-party firms.

Photo by Brad Trent

A QUALIFIED OPINION BRENDA REICHELDERFER // Senior Vice President and Managing Director, TriVista

B

renda Reichelderfer is a senior vice president and managing director at TriVista, an operations consulting firm focused on middle-market companies.

She has more than 30 years of experience in general management, engineering and operations. In addition to her extensive P&L background, Reichelderfer gained operational expertise as plant manager, vice president of operations, director of engineering and chief technology officer.

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IS THERE A STANDARD MODEL FOR INNOVATION THAT CAN BE APPLIED ACROSS A RANGE OF VERTICALS?

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believe there is. TriVista has outlined four major processes/tools known as Lean Product Development (LPD). Many portfolio companies already use one or two of the tools, but most haven’t put them all together to maximize their ROI and R&D. The tools/processes are: • A disciplined and lean Stage-Gate process.

• An NPD project portfolio management process.

• Customer-value innovation/voice-of-the-customer capture training.

• Removal of process bottlenecks.

By spending a day with the leadership team and key people involved in NPD, I can generally achieve two things: • An update on best practices and studies that convey what types of activities lead to better results in NPD. • Clarity regarding where process improvement efforts should be focused to further increase value for their R&D investment.

Photo by Brad Trent

A QUALIFIED OPINION BRENDA REICHELDERFER // Senior Vice President and Managing Director, TriVista

B

renda Reichelderfer is a senior vice president and managing director at TriVista, an operations consulting firm focused on middle-market companies.

She has more than 30 years of experience in general management, engineering and operations. In addition to her extensive P&L background, Reichelderfer gained operational expertise as plant manager, vice president of operations, director of engineering and chief technology officer.

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HOW DOES A PRIVATE EQUITY FIRM TRACK RETURN ON INVESTMENT IN INNOVATION?

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don’t think the majority of PE firms focus on ROI from innovation. However, with one of our mid-market strategic clients, we’ve deployed Lean Product Development (LPD) at each of its manufacturing portfolio companies over five years.

I typically engage with each firm over a six-month period and part ways when the team is clear they will get better returns on their R&D investment.

During a review of that five-year period for our client, I saw proof that each portfolio company improved its organic growth, and some even reversed market-share decline.

One company improved its project results in the first year of deployment—the value of the NPD portfolio increased more than 50 percent. It maintained those results while decreasing R&D investment, eliminating redundancies across its three design centers.

Our client recently exited the portfolio with positive outcomes. LPD played an important role in the confidential information memorandum, giving the new owners confidence in the health of their investment.

Photo by Brad Trent

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ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

DENVER

RALEIGH-DURHAM

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ACG GLOBAL

ACG Celebrates Launch of New Caucus on Capitol Hill A Washington staff briefing on the new Congressional Caucus for Middle Market Growth—“Middle Market 101”—drew more than 50 lawmakers and business leaders to Capitol Hill in May, as issues facing mid-sized companies gain the attention of lawmakers and the broader public.

The middle market’s role in U.S. economic growth was detailed by a notable panel of speakers, including Pam Hendrickson, global chairman of ACG and chief operating officer of The Riverside Company; Thomas A. Stewart, executive director for the National Center for the Middle Market; and Isabel Fernandez, chief commercial officer for GE Capital, Americas.

“The middle market has often felt left out when it comes to policy debates and considerations,” said Hendrickson in her introductory remarks. “We believe this forum Continued on next page

For more information about the caucus you can view the opinion piece “New Caucus marks a win for the economy” published in the Congress Blog

by The Hill. For questions about the caucus, contact Amber Landis, ACG director of public policy.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

Left: Rep. Brad Schneider (D-Ill.); Thomas A. Stewart, executive director for the National Center for the Middle Market; Pam Hendrickson, ACG Global chairman and COO, The Riverside Company; and Isabel Fernandez, chief commercial officer for GE Capital, Americas. will enable all of you to have a more comprehensive understanding of what we call the mighty middle market and how this segment benefits the entire U.S. economy.”

The caucus will help give voice to the more than 200,000 companies in the middle market that provide one-third of U.S. GDP, a sector that employs more than 44 million people and includes recognizable names like Caribou Coffee and Tootsie Roll. The caucus was formed by Reps. Steve Stivers (R-Ohio), Jared Polis (D-Colo.), Tom Rice (R-S.C.) and Brad Schneider (D-Ill.) in collaboration with ACG and the National Center for the Middle Market.

Middle-market companies are looking for assurances from Washington, said Schneider.

He called middle-market employers the sort of “prudent risk-takers” that Washington should support to help grow the economy and create jobs. Rice said he hopes his fellow lawmakers work to lessen the burden of regulations on mid-sized firms; they face more regulatory burdens than small businesses, which are exempt from many regulations, and giant multinational companies armed with big pockets and extensive resources.

The briefing was followed by a celebratory reception of more than 100 attendees, including members of Congress, business leaders and congressional staff. Stivers and Polis each described the significance of the caucus and encouraged their colleagues in the House to join as members. // —Amber Landis, director, ACG Public Policy

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG DENVER

ACG Denver Conference Draws Record Attendance This year’s annual Rocky Mountain Corporate Growth Conference achieved recordbreaking attendance due in large part to new features and program enhancements.

The conference introduced a Dealmaker’s Lounge for the first time, giving capital providers and intermediaries a single location to host meetings set up prior to the event. Enhanced programming included a luncheon keynote address from Gen. Stanley McChrystal, former commander of coalition forces in Afghanistan, along with a thoughtful discussion among a panel of CEOs focused on transformational leadership.

With 734 attendees, the conference achieved its highest registration numbers to date; one-third of attendees traveled from outside Colorado for the event. Signs are pointing to equally strong participation next year: According to a post-event survey of attendees, 95 percent of respondents indicated they plan to attend the Rocky Mountain Corporate Growth Conference in 2015. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG RALEIGH DURHAM

‘Made in the Triangle’ Highlights Local Businesses In an effort to showcase local businesses, ACG Raleigh Durham introduced a new event, Made in the Triangle, in conjunction with its 11th annual Capital Conference in April.

More than 35 local business owners and CEOs participated in Made in the Triangle, which highlighted the business climate in Raleigh-Durham’s Triangle area and facilitated meetings among executives, capital providers, investment bankers and M&A professionals who attend the chapter’s Capital Conference each year. A diverse group of businesses was represented, including Luna Pops, a maker of frozen desserts; Organic Transit, a producer of solar, electric and pedal-powered vehicles; and Lonerider, a Raleigh-based brewery.

ACG Raleigh Durham designed the joint event to address an unmet need: Each year the Capital Conference attracts middle-market professionals from around the country who are drawn to the area but until now lacked the opportunity to meet local business owners who have contributed to the region’s success.

The chapter plans to host the event again next year with the goal of tripling the number of expanding local businesses it highlights. //

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CONFERENCE September 23-24, 2014

The Ritz-Carlton, Charlotte www.acg.org/charlotte Registration opening August 1, 2014

Contact DealCrawl@acg.org for sponsorship opportunities

THE PORTFOLIO INSIGHT FROM THE EXPERTS

SOUND DECISIONS

MID-MARKET TRENDS

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IN THIS ISSUE SOUND DECISIONS Deal origination efforts are long overdue for innovation. Middle-market professionals need to turn to the Internet to save time and money when making deals.

MID-MARKET TRENDS Deal count was down by 27 percent last year, though there’s an estimated $1 trillion or more in uninvested M&A capital. So where are the sellers?

COMING SOON Check out the Portfolio section of the September issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Partners. To learn more about contributing to this section, please contact Meredith Rollins, (312) 957-4260 These articles are brought to you by ACG’s Global Partners.

THE PORTFOLIO SOUND DECISIONS // Henry Huang, Director of Product Development, Axial SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS

Ripe for Innovation: How Online Networks Can Benefit Your Deal Source Strategy

I

ndustry conferences, wine and dinner, the golf course—those are the networking venues in which deal connections have traditionally been made.

While face-to-face interaction is, and

Tools such as LinkedIn, Gust and Axial, for example, are particularly important in a market characterized by lopsided supply-demand and increasing fragmentation.

Reliance on these strategies alone has

always will be, critical for a successful

become incomplete as deal professionals

transaction, business development and

have begun to realize the power of new

deal origination efforts are long overdue

tools, such as deal networks, real-time in-

for innovation. In the same way that “tech-

formation sources and customer relation-

preneurs” and the venture capital com-

ship management systems.

munity have rallied around the Internet to

Tools such as LinkedIn, Gust and

help power their deal processes (think of

Axial, for example, are particularly im-

the crowdfunding process or the investor-

portant in a market characterized by

startup matchmaking site AngelList), so too

lopsided supply-demand and increasing

should middle-market deal professionals.

fragmentation, factors that have made

The private capital markets have long relied on manual, time-consuming and expensive methods of business development.

maintaining a competitive edge and network integrity more challenging.

By combining online and offline busi-

Dealmakers could spend countless hours

ness development efforts, deal profession-

and dollars traveling to in-person meet-

als can more efficiently find the signal

ings and industry conferences, gathering

through the noise that is prevalent in the

company and adviser data from historical-

middle market. Instead of tirelessly iden-

looking and on-demand databases—all for

tifying each new firm, its focus and its

just one deal.

strategy, dealmakers can now use online communities and deal networks to discover new relationships and identify potential investors. The cost of acquiring—and maintaining—each new relationship becomes simple and scalable.

THE PORTFOLIO SOUND DECISIONS // Henry Huang, Director of Product Development, Axial SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS In addition to increasing efficiencies, online platforms transform the data available for middle-market deal professionals. Instead of collecting and matching independent data points, online networks Henry Huang

offer distinct insights by compiling past activities, areas of focus, relationships and more. Such information is essential to staying ahead of the competition and identifying where opportunities are most present. Leveraging online tools to collect and more selectively act on this information is critical in an increasingly competitive middle market.

These technologies can also ensure that deal professionals are seeing the most

Deal professionals can access real-time data on transactions and company owner interest and intent online.

The middle market is where the indus-

relevant deals possible. By maintaining

try expects the majority of capital to flow

and developing an online presence, firms

this year. At the same time, rapid expan-

can build strong brands and greater aware-

sion and fragmentation of the market is

ness for the services and expertise they

resulting in costly efforts to organize and

provide. As a result, they can spend more

manage inbound and outbound business

time creating value and less time sourcing

development. To compete and thrive in

opportunities.

this environment, the most successful deal professionals must take advantage of information arbitrage and supplement their time spent offline with online platforms, harnessing the power of tools that can transform their business. // Henry Huang oversees product strategy, user experience, design and product management at online deal networking site Axial.

THE PORTFOLIO MID-MARKET TRENDS // Dan Shea, Managing Director, BDO Capital Advisors SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS

Good Deals Still Hard to Come By, but Pickup Seen in Coming Months

D

emand exceeds supply, and this has been the case for quite a while.

Financial and strategic buyers, armed with substantial capital, are eagerly pursuing deals. Unfortunately, deals have been hard to come by.

Indeed, deal count was down by 27 per-

It’s not a stretch to estimate there is currently over $1 trillion in uninvested M&A capital.

• First, the economic doldrums have

cent in 2013, despite the fact that U.S. pri-

worn on business owners. In fact, many

vate equity firms are sitting on $466 billion

of them see heightened risk in complet-

in uninvested capital and U.S. public com-

ing a deal. They are concerned that an

panies have about $300 billion in excess

economic shock of some sort could side-

cash at their disposal, according to data

line their efforts to sell, so they would

from Pitchbook and BDO Capital Research.

rather not invest the time and energy in

Adding in excess cash on private company

the first place.

balance sheets, it’s not a stretch to esti-

• Second, many business owners see

mate there is currently over $1 trillion in

their business as the best ROI opportuni-

uninvested M&A capital.

ty for their capital. Despite the appeal of

So where are the sellers? One would

wealth diversification upon a sale, they

think potential sellers would see an oppor-

often tell us that their after-tax proceeds

tunity to divest, given the evident demand,

may not yield an acceptable return, even

as well as the steady stream of solicita-

on a risk-adjusted basis. Holding on is,

tions many of them receive. Yet, they ap-

in essence, a better bet in their view, es-

pear to be very cautious, if not completely

pecially because they have come to know

uninterested. But why?

and trust the inner workings of their

As advisers to both sellers and buyers, and through our involvement in numerous M&A transactions across the country on a monthly basis, we are seeing three main themes emerge regarding the imbalance of supply and demand:

business and industry.

THE PORTFOLIO MID-MARKET TRENDS // Dan Shea, Managing Director, BDO Capital Advisors SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS • Third, as recently highlighted by our

Dan Shea

Higher prices and an improving econ-

colleagues at GF Data, the mindset of

omy appear to be a winning combination,

business owners seems to be chang-

causing business owners to rethink the

ing—they are more interested in stay-

aforementioned themes. The evidence is in

ing active in business later in life. The

the deal count for the first quarter of 2014.

freeing effects of virtual office technolo-

Our preliminary analysis indicates that

gies allow them to stay engaged while

closings were up nearly 17 percent during

taking more time for themselves, their

the quarter compared to a year earlier, ac-

families and other interests. These re-

cording to S&P Capital IQ and BDO Capital

mote options, paired with the first two

Research. Even more interesting, closings

themes, are resulting in business own-

involving a private equity firm, which ac-

ers holding onto their companies longer

counted for approximately 38 percent of

and longer.

the total, were up nearly 30 percent from

Meanwhile, buyers are responding to

the first quarter of 2013.

the challenging environment, in part by

This rise in activity, combined with

showing a willingness to pay more. The

the size of the collective deal pipeline

average EBITDA multiple increased by 0.7

here at BDO, gives us cause for optimism.

times EBITDA last year to reach an aver-

As such, we see a continuing uptrend in

age of 6.7 times (source: GF Data), and it

middle-market M&A activity in the

appears pricing will continue to increase.

coming months. //

It is now common to see private equity firms pay in excess of 10 times EBITDA

BDO Capital Advisors LLC, a FINRA/SIPC

for coveted properties. Adding fuel to the

member, is a separate legal entity and an af-

fire, business executives’ confidence in the

filiated company of BDO USA LLP, a Delaware

economy is rising, aided by momentum

limited liability partnership and national pro-

seen in key economic indicators, such as

fessional services firm.

GDP, industrial production, durable goods sales, inventories and others. We see this

Dan Shea is a Managing Director with BDO

in our BDO executive surveys and anecdot-

Capital Advisors LLC, a member of the Private

ally in our daily client work.

Equity Practice at BDO and a member of ACG Los Angeles. He can be reached at dshea@bdo.com.

THE LADDER ACG MEMBERS ON THE MOVE

Scott Linch

Scott Linch, partner-in-charge

Trinity Hunt Partners, a

of Dixon Hughes Goodman’s

Dallas-based private equity

Private Equity and Transaction

firm, has invested in Family

Advisory Services and member

Health & Wellness, an

of ACG Charlotte, was named a

operator of behavioral health

winner of M&A Advisor’s Annual

programs for young adults. The

40 Under 40 Recognition Awards

investment is the firm’s fourth in

in the Service Provider category.

the behavioral health sector in the past six years.

Cathryn S. Gawne of ACG

Cathryn S. Gawne

Tim J. Koch

Silicon Valley has joined

Shannon Buenik of ACG

Montgomery & Hansen LLP

Global was promoted to senior

as partner in its Menlo Park

director, chapter operations, and

office, where she will advise

continues to spearhead ACG’s

clients through her corporate/

transition to its new association

securities practice.

Shannon Buenik

management software.

Cherry Bekaert, a public

Brian Lubluban of ACG Global

accounting firm, has added

was promoted to director,

Tim J. Koch as partner, Michael

creative and branding; he

Coppa as senior manager and

oversees ACG’s design efforts

Brian T. Dermott as manager

for all events and programs.

within the expanding Transaction

Brian Lubluban

Advisory Services practice in the Kathryn Mulligan has joined

firm’s Charlotte, N.C., office.

ACG Global’s marketing and Post Capital Partners led the

communications team as

acquisition of the solid waste

associate editor of Middle

operations of Puerto Rico-based

Market Growth. She formerly

Waste Management, Inc. The

Kathryn Mulligan

worked as a conference services

new company, EC Waste, is

manager in the association’s

the leading waste management

events department.

provider in Puerto Rico.

To submit your promotions, job changes and other accomplishments, please send information and a color photo (hi-res 300 dpi or above) to Editor-in-Chief Deborah L. Cohen.

THANK YOU ACG GLOBAL PARTNERS ACG Global thanks the following Partners who play a critical role in supporting ACG’s mission of Driving Middle-Market Growth.SM OFFICIAL SPONSOR OF GROWTHSM PARTNER

GROWTH LEADER PARTNER

GROWTH CHAMPION PARTNER

GROWTH SUPPORTER PARTNER

For information on becoming an ACG Partner, download the ACG Global Partnership Program Prospectus or contact Meredith Rollins, mrollins@acg.org/312-957-4260 or Christine Melendes, cmelendes@acg.org/312-957-4277. ©2014 Association for Corporate Growth. All Rights Reserved.

IT’S THE SMALL THINGS INNOVATION TRENDS // Marching to the Beat of a Different Drum

1

ROSE-COLORED GOOGLE GLASSES It was recently reported that Google Glass, the wearable innovative Internet technology retailing for $1,500, contains only $80 in parts.

6

PATENTED SUCCESS Patent applications are way up. In 2013, 464,573 were reported, up from 291,865 in 2008—a 59 percent increase over five years.

2

CUTTING THE CORD Consumers now have four options to cut the cord from traditional cable TV services: Apple TV, Roku, Google Chromecast and the latest, Amazon Fire TV.

7

3

INNOVATE OR DIE Innovation is a priority for 94 out of 100 business leaders, 15 points higher than last year and indicative of a trend that more organizations tie innovation to sustainability and growth.

MANUFACTURING ON CLOUD NINE Many manufacturers are adopting cloudbased manufacturing applications. SaaSbased applications make up 22 percent of all manufacturing and distribution software installed today and will grow to 45 percent within 10 years.

4

SEE NO REASON NOT TO HAVE A CINO Chief innovation officers (CINOs) are fast becoming the latest must-have for organizations, with 43 percent of companies retaining a formally accountable innovation executive, up from 33 percent the previous year.

5

TOTALLY TUBULAR TRANSPORT Evacuated Tube Transport Technology is faster than jets and could take a passenger from New York to Beijing in just two hours.

8

SURFING THE CROWD Crowdfunding has become a legitimate and fruitful channel for sourcing capital for innovation. For example, DonorsChoose has raised $225 million for more than 400,000 classroom projects since 2000.

—Larry Guthrie, manager, communications and marketing , ACG Global

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Pamela Hendrickson* The Riverside Company ACG New York Term expires 8/31/2014

Bradford Adams* TM Capital ACG Boston Term expires 8/31/2015

Jason Brown Victory Park Capital ACG Los Angeles Term expires 8/31/2016

Robert Burns Lazard Middle Market, LLC ACG Minnesota Term expires 8/31/2014

Greg Cinnamon Kilpatrick Townsend & Stockton LLP ACG Atlanta Term expires 8/31/2016

J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2014

Mike Ehlert Capital One Leverage Finance Corp.

ACG Houston Term expires 8/31/2015

Roy Graham Corporate Finance Associates ACG Central Texas Term expires 8/31/2015

Brian Gilbreath Merrill Corporation ACG Nebraska Term expires 8/31/2015

W. Braun Jones III Outcome Capital, LLC ACG National Capital Term expires 8/31/2014

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Patricia King Bank of America ACG Tennessee Term expires 8/31/2015

Angie MacPhee RGL Forensics ACG Denver Term expires 8/31/2016

Brian Moll Polsinelli Shughart PC ACG Arizona Term expires 8/31/2014

Frank Mack Merk Capital Corp.

ACG Chicago Term expires 8/31/2014

Robert Napoli* First West Capital ACG British Columbia Term expires 8/31/2015

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Steven Peterson Brass Ring Capital, Inc. ACG Wisconsin Term expires 8/31/2015

Durant (Randy) Schwimmer Founder/Publisher, “The Lead Left” ACG New York Term expires 8/31/2014

Joel Rosenthal Schneider Downs & Co., Inc. ACG Pittsburgh Term expires 8/31/2014

Tom Washbush Bricker & Eckler LLP ACG Columbus Term expires 8/31/2015

Hans-Josef Vogel Beiten Burkhardt ACG Germany Term expires 8/31/2015

ACG HONORARY DIRECTORS //

Vice Chairman Doug Tatum Newport Board Group ACG Atlanta Term expires 8/31/2014 Chairman of Finance Stephen V. Prostor Citi Private Bank ACG New York Term expires 8/31/2014 Secretary Richard P. Jaffe Duane Morris LLP ACG Philadelphia Term expires 8/31/2014 Immediate Past Chairman Charles J. Morton, Jr.* Venable LLP ACG Maryland Term expires 8/31/2014 Chairman of InterGrowth 2014 Ken Berryman CapitalSouth Partners ACG Kentucky Term expires 8/31/2014 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global

Robert G. Coffey Alan B. Gelband

*denotes member of Executive Committee

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