Middle Market Growth - May 2013

Growth Middle Market

// May 2013

SunTx Capital Forms London Broadcasting Co. to Bring Quality TV to Texas Markets

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executive summary Chuck Morton // Partner, Venable LLP, and ACG Global chairman

What’s In a Name?

T

here are times when a name tells the entire story. There are other times when a name provides no clue as to what an organization is all about. ACG leaders have occasionally struggled

with what we intend to convey in our name. Some have even suggested that we abandon the Association for Corporate Growth in favor of the more vanilla and thereby malleable moniker of ACG. With the launch of Middle Market Growth (MMG) last month, ACG’s new suite of digital publications, we aim to emphasize that as the voice for the middle market, we are committed to our mission to drive middlemarket GROWTH. Why do we focus on growth? Growth, particularly middle-market growth, is too often an abstract notion that fails to animate. We assume when we talk about economic activity everyone understands we are talking about the difference between hope and despair, security and insecurity, a bright sense of the future and foreboding. In short, I believe today there is false hope that the prosperity of the past will continue despite major roadblocks to sustain future economic growth.

I fear we are losing our shared confidence in tomorrow. I hear friends and neighbors talk of our children’s lives being more difficult than our own. They seem resigned. This sentiment was echoed earlier this spring during the ACG Middle-Market Growth Policy Summit held in Washington, D.C., where we heard over and over from speakers, including members of Congress, industry leaders, and attendees alike of their shared loss of confidence in our economic future.

The Association for Corporate Growth knows the importance of growth. We believe that tomorrow will be better than today. We find support for that confidence in our expanding membership and significant data that prove the middle market is a major driver of the U.S. economy and beyond. In fact, this spring ACG released Driving Growth: The Impact of Private Capital, where for the first time the true impact of private capital investment is shown via statistical reports. The data demonstrate that in 425 of the 435 U.S. congressional districts, private capital is making a difference.

In each issue of Middle Market Growth, we will trumpet the importance of growth and share the reasons why we are so confident. Through consistent news of major M&A deals, impressive growth stories and inspiring lessons from seasoned PE pros, MMG is helping the middle market tell its story. In sharing that story we will help to ensure that tomorrow is better than today.

What’s in a name? At the Association for Corporate Growth, the answer is “everything.” //

WEDNESDAY, 8 MAY 2013 TRANS-ATLANTIC SIMULCAST: LONDON–NEW YORK

INSIDE THE MIND of the LIMITED PARTNER

HOW DO

middle-market

PRIVATE EQUITY FUNDS look to align their interests with LPs– CAPITAL COMMITMENTS, Euro vs. U.S. waterfall,

DO

middle-market

FUNDS HAVE

the operational capabilities to

CREATE NEW

VALUE?

COMMUNICATIONS?

AT OUR SIZE, CAN MIDDLE-MARKET PRIVATE EQUITY really move the needle FOR US?

CAN

sector specific M I D D L E - M A R K E T funds

boost returns through vertical integration?

Duane Morris LP Institute presents its inaugural trans-Atlantic simulcast, originating in New York and London, which will provide an inside look at the drivers of LP investing strategies in middle-market private equity on both sides of the Atlantic.

Join us for a fast-paced exchange of views from LPs, GPs, gatekeepers, placement agents and advisors.

NEW YORK | 12:00 p.m. to 2:00 p.m.

Sentry Centers | 810 Seventh Avenue (between 52nd and 53rd Streets)

LONDON | 5:00 p.m. to 7:00 p.m.

ETC Venues | 200 Aldersgate (near St. Paul’s) The New York program will include a light luncheon; a networking cocktail reception will follow the London program.

Click here to register.

For more information, contact Ellen Auwarter. www.duanemorris.com

Growth Middle Market

// MAY 2013

growth story

Tuning In SunTX Capital Partners is proof that good business relationships from the past fuel new business opportunities that lead to future growth. It all started when Ned Fleming, CEO of SunTX, reached out to longtime colleague Terry London, former CEO of Gaylord Entertainment, to form the successful London Broadcasting Company.

Read more.

“We had a shared vision of how to treat people and appreciation for the people who are doing the work.

For SunTx, the key asset to any acquisition is the leadership and their values.” // ned fleming

Growth MIDDLE MARKET

// MAY 2013

SunTx Capital Forms London Broadcasting Co. to Bring Quality TV to Texas Markets

TUN NG N A publication of

ON THE COVER // SunTX teams up with entertainment veteran Terry London to create a thriving media company.

Photo By Tom Hussey

table of contents in this issue President & CEO Gary LaBranche, FASAE, CAE glabranche@acg.org

Vice President, Communications & Marketing Christine Melendes, CAE cmelendes@acg.org

Editor-in-Chief Kristin Gomez kgomez@acg.org

feature

Private Capital, Public Good™ ACG took to Capitol Hill this spring to educate Congress on business growth and economic stability that is contingent on policy that fosters investment.

With 1 in 20 employees working for a private-capitalbacked company, it is clear policymakers need to know about this vital sector of the economy.

Read more.

in every issue Executive Summary Face-to-Face

Manager, Creative and Branding Brian Lubluban blubluban@acg.org

vice president, strategic development

The Ladder

Ellen Moore emoore@acg.org

It’s the Small Things

vice president, chapter operations

The Leadership

Leslie Whittet, CAE lwhittet@acg.org Custom media services provided by Network Media Partners, Inc.

departments the round ACG releases Driving Growth book, tips on how to advocate for the middlemarket and other news.

Read more.

a qualified opinion Attorney Andrew Apfelberg, president of ACG LA, gives his view on middle-market growth and dealmaking challenges.

Read more.

acg@work Find out about recent ACG chapter events and mark your calendar for upcoming ones.

Read more.

the portfolio Realities of government contracting, trends from SuperReturn and how the new healthcare law provides a major opportunity for PE. Read more.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2013 Middle Market Growth, InterGrowth 2013 and the Association for Corporate Growth, Inc. All rights reserved.

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Face-to-face Connect to your next deal

Bringing the Global M&A Ecosystem Together Join middle-market dealmakers Nov. 12-13 in London for the ACG EuroGrowth® 2013 conference. ACG EuroGrowth provides a unique opportunity for all ACG members to engage with the European market. Like ACG’s annual InterGrowth conference, EuroGrowth features exclusive networking events for private equity professionals, intermediaries, lenders, advisors, corporate executives and development officers.

The inaugural EuroGrowth also will include an ACG Capital Connection™ to efficiently connect with dealmakers in the U.K. and across Europe. To learn more, please e-mail events@acg.org or visit www.acg.org.

“At ACG’s EuroGrowth 2013, middle-market dealmakers are brought together to experience dynamic content, notable speakers and connect to the right people to ensure They don’t miss out on this global deal flow.”

Charlie Johnstone, ECI Partners LLP

Visit www.acg.org for an up-to-date list of events in your area.

Face-to-face Connect to your next deal

Finding Financing in Europe The U.K. is the “most favorable country in Europe for financing purpos-

ACG Maryland’s 2nd Annual Deal Forum

es, primarily because of its long history, precedents in the court system

Join more than 300 dealmak-

and the way that the commercial code is structured,” explains Bank

ers in Baltimore’s Inner Harbor,

of America Merrill Lynch’s Alister Bazaz. To learn more about how

June 10-11, for this high-energy,

to structure a company to leverage financing-friendly environments

deal-fostering, educational and

in Europe, view this video conversation with Mergers & Acquisitions

networking event. Deal Forum

editor-in-chief Mary Kathleen Flynn at a recent conference on cross-

provides opportunities to connect

border M&A, hosted by Mergers & Acquisitions and Bank of America

with a target audience in the low-

Merrill Lynch.

er middle market with cash flow of $3 million to $15 million, value of $10 million to $125 million, and sales under $150 million.

Tap to watch video of Maryland event.

Face-to-face Connect to your next deal

chapter events May 7, 2013 Deal of the Year Awards Arizona Biltmore Resort Phoenix, Arizona More info May 10, 2013 ACG Edmonton Network— Oil Sands Tour Suncor Facilities Edmonton, AB Canada More info May 14-15, 2013 ACG Mid-America Corporate Growth Conference Chase Park Plaza St. Louis, Missouri More info May 14, 2013 ACG Louisiana 6th Annual Awards Dinner The Roosevelt New Orleans, Louisiana More info

May 16, 2013 Ninth Annual M&A ACG DealSource™ and ACG Capital Connection™ Metropolitan Club New York, New York More info

Visit www.acg.org for an up-to-date list of events in your area.

May 29-30, 2013 ACG Boston Growth Conference Featuring ACG Capital Connection™ and ACG DealSource™ The State Room Boston, Massachusetts More info

June 4, 2013 ACG Detroit 6th Annual M&A Conference The Detroit Athletic Club Detroit, Michigan More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Kristin Gomez. Be sure to include the name of the event, time, date, location, cost and link to register.

Face-to-face Connect to your next deal

chapter events June 13-14, 2013 2013 Mid-South ACG Capital Connection™ Marriott Downtown Louisville, Kentucky More info

June 6-8, 2013 China International Private Equity Forum (CIPEF) 2013 Tianjin, China More info June 13, 2013 Manufacturing & Logistics Conference Bank of America Tower New York, New York More Info

June 14, 2013 ACG Atlanta’s Georgia Fast 40 Intercontinental Hotel Atlanta, Georgia More info

Visit www.acg.org for an up-to-date list of events in your area.

June 17-18, 2013 ACG Minnesota Capital Connection™ Hyatt Minneapolis Minneapolis, Minnesota More info June 20, 2013 4th Annual Healthcare M&A Conference Hyatt Regency Chicago, Illinois More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Kristin Gomez. Be sure to include the name of the event, time, date, location, cost and link to register.

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 Ellen Moore, emoore@acg.org/312-957-4274. ©2013 Association for Corporate Growth. All Rights Reserved.

the round News that Matters ACG Driving Growth Book Makes History At this spring’s Middle-Market Growth Policy Summit, ACG released Driving Growth: The Impact of Private Capital on the U.S. Economy, a book that graphically depicts data from GrowthEconomy.org for each congressional district. The book compares sales and job growth data of private capital-backed companies vs. other companies in the U.S. economy, 1995-2010, organized by state and by congressional district.

“Private capital investment is growing companies and jobs in every state and in more than 425 congressional districts,” ACG Board Chairman Charles J. Morton, Jr., a partner at Venable LLP, said during the event at the U.S. Chamber of Commerce in Washington, D.C. “Driving Growth reveals that private capital-backed companies, especially in the middle market, are the engines of sales and job growth.”

ACG’s goal in publishing Driving Growth is to bring more transparency and visibility to the role and value of private capital investment. It was printed and distributed to all members of Congress, all U.S governors and selected media and academics. It is available free via PDF download.

A sampling of the data included in the book: California—District 12 (Rep. Nancy Pelosi) • Private capital-backed companies grew jobs by 184.5 percent, while all companies in

the district grew jobs by 8.2 percent • Private capital-backed companies grew sales by 190.6 percent, while all companies in

the district grew sales by 12.9 percent

Connecticut—District 4 (Rep. Jim Himes) • Private capital-backed companies grew jobs by 106.3 percent, while all other

companies in the district grew jobs by 16.5 percent • Private capital-backed companies grew sales by 173.0 percent, while all other

companies in the district grew sales by 25.5 percent

Now comes the most important part: Please consider following up with your elected federal officials to ensure they received Driving Growth from ACG. Share with them your concerns about issues facing middle-market investment.

Outreach from constituents is one of the most impactful ways to implement change in the public policy arena. Consider offering a tour of a portfolio company, an in-office meeting in your district, or simply sharing a “growth story”—all are powerful ways to help communicate the key message: Private Capital, Public GoodSM. //

Tell Us Your News // Middle Market Growth wants to know what’s happening in the middle market around the world.

Please share your news in 250 words or less, along with a color photo (300 dpi or greater) if available, with editor Kristin Gomez.

the round News that Matters Get Involved: Tips on How to Advocate Speaking with a member of Congress can be an intimidating experience. Here are some tips to help you successfully interact with elected officials: What To Do

What Not To Do

• Know the Facts: ACG’s recently released

• Don’t Talk (Even Joke) About Political

report, Driving Growth: The Impact of Private

Contributions in Exchange for Legislative

Capital on the U.S. Economy, has informa-

Action: It is never appropriate to discuss

tion for each state and congressional dis-

making political contributions or raising

trict, making it easy to provide quantitative

money for an elected official if he or she

data on how private capital investment is

takes an official action. Statements like “If

helping a particular district.

you support Issue X, I’m sure you’ll raise

• Follow What Is Happening: Keep abreast of what is taking place in Washington.

ACG’s Middle-Market Growth Policy Agenda

money” or “Here’s a check because of your vote on Bill Y” will hurt your cause rather than help it.

provides a helpful overview of some of the

• Don’t Be Overly Partisan: With Demo-

key legislative and regulatory issues relevant

crats controlling both the White House and

to middle-market private capital investment.

Senate, and Republicans in charge of the

• Extend an Invitation: Invite your member of Congress to speak at an event or invite them to your firm or corporate headquarters.

When arranging the visit, keep in mind that the member’s staff plays a critical role in the legislative process and can be trusted advisors of the member. It often is just as helpful to speak with staff instead of the member.

• All Politics is Local: When meeting with a member of Congress, emphasize your own experience and the role middle-market investment is playing at the local level. Capital investment is relevant everywhere, as ACG’s data shows. Your story can help make this point and clear up any misconceptions.

House of Representatives, it’s important to have strong relationships on both sides of the aisle. Even if you don’t agree with every position your local representative or your state’s senators have taken, consider reaching out to them. With so many misconceptions about what private capital investment is and does, every touchpoint with Congress is helpful.

—Scott E. Gluck, Esq., Venable LLP

To learn more about how to get involved, please contact Christine Melendes, CAE, vice president of communications and marketing for ACG. You can also read more about ACG’s legislative efforts in this month’s issue of Middle Market Growth.

the round News that Matters Mark Your Calendars: Inside the Mind of the Limited Partner

May 8, 2013 //

In the inaugural trans-Atlantic simulcast of the Duane Morris LP Institute, originating in both New York and London, you will hear from leading authorities drawn from the entire investment decision chain—LPs, GPs, gatekeepers, placement agents and advisors.

New York and London

“Inside the Mind of the Limited Partner” is designed as a fast-paced exchange of ideas for CIOs from all corners of the LP universe—public pension funds, corporates, insurance, endowments, sovereigns, family offices and more. With market-defining perspectives from both sides of the pond, “Inside the Mind” will deliver interactive, state-of-the-industry thinking on the global competitive landscape, emerging trends and key influencing concepts for the asset class. Register today!

New York Convene 810 7th Avenue (between 52nd and 53rd Streets) Registration: 11:30 a.m.

Program: 12:00 p.m. to 2:00 p.m.

Light luncheon will be served, with networking reception to follow.

London ETC Venues 200 Aldersgate (near St. Paul’s) Registration: 4:30 p.m.

Program: 5:00 p.m. to 7:00 p.m.

Networking cocktail reception to follow.

THE ROUND NEWS THAT MATTERS

THE PULSE ACG JobSource® is an online job board geared toward helping middle-market private capital professionals identify and apply for open M&A jobs. In addition, employers and recruiters seeking to fill middle-market jobs can access qualified candidates through online job postings.

ACG JobSource posts range from

WHICH INDUSTRIES DO YOU THINK HAVE THE GREATEST POTENTIAL FOR GROWTH IN THE NEXT 12-18 MONTHS AND WHY? RESPONSES “Manufacturing, tech and life sciences, and sustainable agriculture, due to a rapidly increasing younger population in countries such as China and India. The younger demographic will drive the demand for development and production of hi-tech mobile devices and innovation in the health/wellness and medical fields, spilling over into sustainable agriculture.”

Carlos Martinez Audit Manager, Cherry Bekaert LLP

entry-level positions and internships to C-suite executives.

“Energy and environmental services…any company servicing that Tap for more information.

industry, including those companies that assist with environmental/ regulatory requirements, will benefit accordingly. This will be a decades-long trend.”

Data Analytics – A Bottom-up Approach to Financial Due Diligence When: May 14, 1 to 2 pm CDT This webinar, brought to you by leaders from BKD LLP describes how a bottom-up look at financial performance can help you mine and use transaction-level data to more effectively analyze risks associated with lower middle-market M&A transactions.

If you missed one of ACG’s webinars, check out the archived recordings.

John Lee Senior Managing Director, Griffin Financial Group, LLC “Trucking, transportation and logistics. Manufacturing and consumer products will stay steady, but commercial and residential construction will continue to grow. Construction materials & supply will require additional transport.”

Jeff Pangburn Vice President, First Merchants Bank, Indianapolis For more responses and to join the conversation, visit the ACG LinkedIn group.

ANSWER THIS HOW IS REGULATION CHANGING THE WAY YOU CONSTRUCT DEALS? Send your thoughts to Middle Market Growth editor Kristin Gomez. Watch for select responses in the next issue.

the round News that Matters

International DealMaking More entries and fewer exits in Latin

Korean private equity buying heats up as

America private equity

conglomerates look overseas

Private equity investment into Latin America

South Korean private equity firms will see

is on the rise, but mature portfolio compa-

more buying opportunities this year, buoyed

nies are starting to accumulate as investors

by ample firepower from their newly raised

wait for more ideal exit conditions, accord-

funds and a pullback from domestic invest-

ing to mergermarket data and industry

ments by the country’s conglomerates,

sources focused on the region.

industry sources said.

Read the full story online.

Read the full story online.

Venezuela unlikely to see foreign invest-

Chinese SOEs likely to turn to JVs,

ment surge following Chavez’s death

smaller buys as they seek access to

The passing of Hugo Chavez is not ex-

Canada’s oil sands, sources say

pected to result in a wave of reforms or an

State-backed Chinese oil and gas compa-

immediate increase in deals, but market

nies are likely to seek joint ventures in lieu of

observers are keeping a close eye on the

acquisitions in the face of tighter Canadian

energy space in the home of one of the larg-

restrictions on foreign investors, said several

est oil reserves in the world.

industry sources in China and Canada.

Read the full story online.

Read the full story online.

Succession issues in Australia’s frag-

Analysis: Spanish renewable sector regu-

mented agriculture sector spurring deals

latory changes could lead to M&A

for ‘aggregators’

Recent regulatory changes in the Spanish

Deal making is on the rise for “aggregators,”

renewable energy sector could lead to mar-

industry players who roll up small farms into

ket consolidation alongside.

scaled plays in Australia’s fragmented agriculture sector, industry experts said.

Read the full story online.

Read the full story online.

These articles on international deals are provided by mergermarket.

To find more stories like this, please subscribe or inquire about a free trial at mergermarket.

110

the round News that Matters

vertical view // Media In 2012 the top state for media deals was California, with Illinois coming in second and New York third.

54% 7%

1

#

From 2008-2012 New York had 110 completed media deals, California 108, Illinois 40 and Texas 34.

10%

10% of all media deals in 2012 were in broadcasting, radio and television, 54% were in media and information services (B2B), and only 7% of all deals were in movies, music, entertainment industries.

In 2012

$5.23 billion

Number of exits increased in 2012 to 52, up from 16 in 2009.

in capital was invested in online marketing

Corporate acquisition of media increased in 2012 from 2010 and 2011.

In 2012 the median buyout size was

39 deals in online marketing happened in 2012, down from 45 in 2011.

$56 million Major deal sectors for this vertical include broadcasting, radio and television, information services, media and information services, movies, music and entertainment, publishing and social content.

All stats are from PitchBook for the middle market (deal values between $25 million and $1 billion).

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On the Air // Terry London (left) and Ned Fleming, partners in London Broadcasting Co.

Tuning In

By Danielle Fugazy

SunTx teams up with entertainment veteran Terry London to create successful media company

Photos by Tom Hussey

Strong Signal // LBC was launched in 2007 and made its first acquisition a year later, paying $25 million for a Texas TV station.

I

t’s all about relationships. While many firms and people in and around the private capital industry talk a big game about relationships, not everyone actually lives it. The ones who do, however, like Ned Fleming, SunTx Capital Partners’ founder, certainly seem to be rewarded.

The Texas-based private equity firm’s success with platform company London Broadcasting Company (LBC) all started with a business relationship that began many years ago.

It was 1989 and Terry London, CFO of Gaylord Entertainment, was leading the company’s bid to buy Major League Baseball team the Texas Rangers. Gaylord, an owner and operator of TV stations based in Nashville, Tenn., also owned a CBS station in Dallas that was broadcasting Rangers games. London was Gaylord’s representative for the transaction and knew that owning the team would be a solid strategic acquisition.

Just before the deal was signed, another bidding group usurped it.

The new group, which was headed by George W. Bush before he became president, bought the club and Gaylord settled for a 10 percent stake in the team.

“It was a highly fragmented market and Texas is a good place to invest. It’s the 12th-largest economy in the world and it’s growing.”

Ned Fleming SunTx Capital Partners’ founder Click to view SunTx Capital Partners’ website.

Ned Fleming, an associate with investment firm Cardinal Investment Co., played an integral role in bringing the Bush-led acquisition to fruition. And although Fleming and London were on opposite sides of the table at the beginning of the negotiation, it started a professional relationship that grew into something bigger than either man could have foreseen at the time.

In 2000, after nearly 25 years of working at Gaylord, London resigned. Around the same time, Texas-native Fleming also embarked on something new and launched SunTx. Naturally, Fleming was keeping his eyes peeled for good investment opportunities. However, instead of waiting for an opportunity to come to him, Fleming created an opportunity around London. He knew that at Gaylord, London had achieved great success throughout his career and any new opportunity would garner success if he was involved.

With London’s deep expertise in the media space—he led Gaylord in its ownership of TNN (The Nashville Network), CMT (Country Music Television), Cencom Cable and other major market television and radio stations and television production companies—and with Fleming’s business acumen, a plan was hatched to acquire and operate Texas-based media properties.

“The combination of SunTx and Terry London is compelling. It’s increasingly rare to find people like Terry and the folks at SunTx. It’s refreshing and we knew this would be a strong investment,” says Timothy Wegener, managing director of private investments for Thrivent Financial, a limited partner in SunTx’s latest fund and direct co-investor in LBC. Thrivent is a Minneapolis-based Fortune 500 financial services company with approximately $2 billion in fund commitments and $600 million in direct investments.

Mixed Media // LBC offers a mix of original content and programs from station affiliates. It also owns three companies that produce TV, film and music content.

LBC was launched in 2007 with London as president and CEO, and one year later the new company made its first acquisition—KYTX-TV CBS 19, a Tyler, Texas, television station—for $25 million. Since that first acquisition, the company has added eight more stations in Texas (see chart). LBC now develops content for its stations as well as other stations in Texas. In addition, it offers content from station affiliates that include NBC, ABC, FOX, CBS, MeTV, CW and MundoFOX. LBC also owns three companies that produce original television, film and music content—41 Entertainment, BE Music and AMP Music.

“We had developed a good relationship over the years, decided on a strategy and then executed,” London says.

Going Beyond Business The business thesis behind LBC was simple, yet strong. As SunTx and London scouted for media opportunities in Texas, they saw a spot for investment in the small-to-mid-market television station business. “It was a highly fragmented market and Texas is a good place to invest,” says Fleming, who serves as chairman of the board at LBC. “It’s the 12th-largest

SunTx Capital Partners Founded: 2001 Funds: • SunTx Fulcrum Fund $230 million, closed in 2004 • SunTx Capital Partners II $256 million with approximately $150 million of additional capital in co-investment sidecar funds, closed in 2010

economy in the world and it’s growing. LBC has been able to grow market share in the industry each year, improve margins and value.”

Today, LBC reaches more than 10 million people or 40 percent of the state’s population and operates in seven of the 19 television markets in Texas. London and LBC received a Broadcaster of the Year award from the Texas Broadcasters Association in 2011. Additionally, 2012 was a record year for LBC in terms of revenue generation and cash flow.

Fleming couldn’t be happier with how the LBC deal has worked out, but he isn’t surprised by the company’s success. SunTx is very selective about who it backs. London had all the attributes that Fleming and SunTx look for in a CEO. “Terry understands media, but it’s more than that,” Fleming says. “We had a shared vision of how to treat people and appreciation for the people who are doing the work. For SunTx, the key asset to any acquisition is the leadership and their values. It’s been a pleasure to work with Terry. Once you build the right foundation the rest will work out.”

Investment Strategy: Invests in lowerto-middle-market companies with operations in the SunBelt region of the United States Select Portfolio Companies: • London Broadcasting Company • Construction Partners, Inc. • Interface Security Holdings, Inc. • Carolina Beverage Group, LLC

“You maximize return by investing in people and allowing enough time for the operating strategies you put in place to kick in and make a difference.”

Terry London president and CEO, London Broadcasting Company Click to view London Broadcasting’s website.

Both men care about their employees and want the entire team to benefit from the company’s success. “I like to meet the people behind the camera,” says Fleming, adding that everyone at SunTx, including the executive assistants, partakes in the firm’s profit pool.

London echoes Fleming’s sentiments. “You maximize return by investing in people and allowing enough time for the operating strategies you put in place to kick in and make a difference,” he says. “We also try to have an impact in the communities where we broadcast.’’

London and Fleming have worked hard to ingrain LBC in the communities it serves. Fleming stresses that being good stewards in the community is the right thing to do, and increased ratings and market share are simply a bonus. For example, childhood obesity is a significant problem in one area where LBC operates. In response, LBC teamed up with local partners to run public service announcements during popular programs that advise

parents of available resources in their community for keeping kids active and healthy. The company also has set up numerous programs to help the military families who live at Fort Hood, the largest Army base in the country.

During one such program, called Camo Santa, the station runs promos to encourage members of the community to donate toys during the holiday season. The station collects the toys and delivers them directly to Fort Hood.

Future Prospects In addition to working with the community, LBC looks for other ways to innovate. For example, LBC’s station in Tyler teamed up with a local newspaper to give viewers increased access to news coverage. “Newspaper circulation is shrinking in Tyler, Texas, so we teamed up with the Tyler Morning Telegraph.” Fleming says. “Their reporters provide on-air reports on our newscasts and they advertise our stations in their newspaper. It’s a mutually beneficial relationship.”

LBC will continue to look for ways to grow. Organic as well as strategic acquisitions are still on the table. To date, most of the add-on companies have been found without a broker’s help, coming instead from London’s extensive network of strong relationships. Although for most private equity firms there is a set time when they look to cash in and get out, Fleming says SunTx hasn’t put an exit timeline on LBC. “We plan to continue building out this platform. There are still many more opportunities for profitable growth,” he says.

“We plan to continue building out this platform. There are still many more opportunities for profitable growth,” Ned Fleming says.

In fact, LBC is getting into the music content business and developing new shows for syndication. London is grateful for the latitude SunTx gives LBC to grow the company. “They help us with our plans, but give us the freedom and capital to implement the plans. SunTx really understands the value proposition and the growth that can be achieved,” London says.

“They have patience, which is a great quality in a partner. They understand the financial results will come if you do things the right way.” // Danielle Fugazy is a freelance writer and contributor to Middle Market Growth magazine. She may be reached at dfugazy@fugazygroup.com.

In The Studio // A look inside the broadcast booth at the London Broadcasting Studios in Dallas.

London Broadcasting Company// A Dallas-based media company operating 17 television channels and seven websites in Texas, making it the largest mid-market broadcaster in the state.

Principal: Terry London, President and CEO. Launched: 2007 Serving: 9.9 million Texans in 3.6 million households, representing 41% of the Texas population.

Dallas- fort worth Abilene

tyler waco-temple-bryan

san angelo

beaumont-port arthur

corpus christi

Go to full, updated list of LBC Television Stations.

Location in Texas Tyler

Station Name CBS (KYTX)

Date of Acquisition February 2008

Purchase Price $M $25M

Tyler

CW (KCEB)

November 2009

Not disclosed

Waco-Temple-Bryan

NBC (KCEN, KAGS)

January 2009

$26M

Beaumont-Port Arthur

ABC (KBMT)

July 2009

$25M

Beaumont-Port Arthur

NBC (KUIL)

November 2009

Not disclosed

Corpus Christi

ABC (KIII)

August 2010

$31.3M

Dallas-Fort Worth

Independent (KTXD)

December 2011

Not disclosed

San Angelo

FOX (KIDY)

December 2012

Not disclosed

Abilene

FOX (KXVA)

December 2012

Not disclosed

Market Share: LBC is the largest mid-market broadcaster in Texas and the fifth-largest in the state overall.

LBC also owns • 41 Entertainment • BE Music and Entertainment • AMP Music which produce original television, film and music content.

ACG Unveils First Middle-Market Growth Policy Agenda

ACG Advocates for the

Middle Market

By Gary LaBranche, FASAE, CAE, President & CEO of ACG

T

his spring, the Association for Corporate Growth took to Capitol Hill to educate Congress on how existing business growth and economic stability depend on pro-growth investment policies and regulation. This marked ACG’s second foray to Washington, a result of a strategic plan adopted by the Global board of directors, which included a goal of expanding the voice of middle-market private capital investors and company owners.

The second ACG Middle Market Growth Policy Summit was held March 7 at the U.S. Chamber of Commerce in Washington, D.C. During the Summit, ACG released the Middle-Market Growth Policy Agenda, which laid out ACG’s positions on a series of crucial legislative initiatives and regulatory actions that directly affect investment in and growth of middlemarket companies.

“ACG is committed to advocating on behalf of middle-market companies about the contributions that private capital makes to an economy that is still reeling from the 2009 economic crisis,” says Charles J. Morton, Jr., ACG Global chairman and partner, Venable LLP.

Call to Action // Sen. Joe Manchin, D-W.Va., speaks to attendees about the U.S debt crisis at the ACG MiddleMarket Growth Policy Summit.

“The story of the middle market is one of economic growth, and that is a story worth telling.”

TIME TO CHANGE THE NARRATIVE The advent of the financial crisis drew significant attention to private capital investment. Not all the attention was accurate, and the voice of middle-market investors and company owners was largely missing. ACG has set out to change that and foster a new narrative beginning with the announcement of the policy agenda. The agenda is ACG’s official position on relevant policy topics that touch ACG’s members, but it’s just one step of many to help lawmakers understand how middle-market investment drives growth, creates jobs, and stimulates the economy.

“In conjunction with the announcement of this agenda, we are planning a much more proactive communications strategy with regard to the elected officials responsible for the making and shaping of policies that affect our membership,” says Gretchen Perkins, partner, Huron Capital Partners and co-chair of the ACG Middle-Market Voice Committee. “The story of the middle market is one of economic growth, and that is a story worth telling. The Summit was a launching pad to develop support and build coalitions around the main cause of helping our economy not only recover, but once again thrive.”

Gretchen Perkins, partner, Huron Capital Partners and Richard Jaffe, partner, Duane Morris LLP, (right) co-chairs of the MiddleMarket Voice Committee.

Voices for The Middle // Pam Hendrickson, COO of The Riverside Company and vice chairman of the ACG Global Board, with Rep. David Schweikert, R-Ariz.

Why the Middle Market Matters ACG members include professionals from private equity firms, corporations and lenders that invest in middle-market companies, as well as from law, accounting, investment banking and other firms that provide advisory services.

“The middle market is the principal engine of the U.S. economy. Its businesses produce more new jobs than large or small businesses. With 43 million employees, the vitality of the middle market is critical to the health of American families, communities and the economy,” says Richard Jaffe, partner, Duane Morris LLP, and also a co-chair of the ACG Middle-Market Voice Committee.

Everyone is touched by private capital and the health of this industry is directly tied to our fiscal vitality and strength as a nation. “As the leading organization for middle-market professionals, ACG will work to inform and educate policy makers and shapers at the local, regional and national levels of the impact private capital investment plays on the U.S. economy,” says Christine Melendes, CAE, ACG vice president of communications and marketing. // To learn more or to get involved in ACG’s policy efforts, contact Amber Landis, manager of policy communications.

The Issues // These issues are among those that impact middle-market investment, capital access and growth. ACG will provide leadership and advocate for policies that support the middle market’s ability to thrive: : Comprehensive Business Tax Reform (CBTR) “ACG will aggressively represent the voice of the middle market in the process of comprehensive business tax reform as it directly impacts capital investment and formation.”

Deductibility of Interest on Corporate Debt “ACG believes that debt financing is critical to business expansion, acquisitions, investment, inventory, and cash flow management and provides an important form of needed funding. ACG opposes efforts to eliminate the long-standing deductibility of interest as a normal cost of doing business.”

Dodd-Frank “The Dodd-Frank financial reform law mandates 447 new rules, only one-third of which have been finalized. ACG will seek to replace or eliminate areas of Dodd-Frank that do not work and do not achieve their intended goals, and assist and monitor rule-making to ensure clarity and fairness to middle-market investors.”

Clarify JOBS Act Regulations “ACG will focus on Rule 506 (solicitation of accredited investors) to ensure clarity and fairness for middle-market investors. Some have voiced concern about the SEC’s pace of rule development and potential to misinterpret legislative intent.”

Support Privacy of Private Company Information “ACG strongly opposes any measure to make public any private, confidential information on both constitutional grounds and as a practical matter of business sense. Disclosure would unfairly penalize law-abiding firms, resulting in the forced publication of proprietary information and resulting loss of competitive advantage, directly impact corporate valuation and subject private investors to unwarranted exposure.”

Enterprise Value (EV) Taxation “ACG believes that applying Ordinary Income treatment for EV is inconsistent with tax treatments of other businesses.”

Business Investment Company Modernization Act “ACG supports the expansion of the SBIC credit facility as proposed in HR 6504, which increased the SBIC family of funds limit from $225 million to $350 million.”

Investment Advisor Oversight Act “ACG opposes the creation of an SRO as an additional requirement as it presents additional costs and administrative burdens on middle-market advisors and broker dealers.”

EB-5 visa program “ACG supports bilateral investment treaties to ensure that American investors are treated fairly overseas and foreign investors in the U.S. adhere to the same rules as U.S. investors.”

1202 Exclusion “ACG supports the 1202 Exclusion as a risk incentive and will encourage future considerations to extend, or make permanent, this exclusion.”

To download a full copy of the agenda visit www.acg.org.

You can also read about ACG’s new book, Driving Growth: The Impact of Private Capital on the U.S. Economy, in this issue.

a qualified opinion Andrew Apfelberg Attorney at law for Greenberg Glusker Fields Claman & Machtinger LLP, and president, ACG Los Angeles

A

ndrew M. Apfelberg acts as outside general counsel at Greenberg Glusker and advises clients, particularly in the middle market, on significant transactions such as mergers and acquisitions, private equity and other financings, joint ventures and licensing. He has particular expertise in the manufacturing and distribution, health and beauty, new media and technology industries. He also serves as president of the ACG Los Angeles chapter.

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In your experience, where do you see the most areas of growth?

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he industries we have seen at our firm with the most amount of recent growth include manufacturing and distribution, food and beverage, branded consumer products and technology/new media. An additional overlooked growth area relative to major transactions is the work done in the months and years before going to market. Frequently, companies are focused on short-term profits or day-to-day operations and miss the chance to add significant transaction value. For instance, when negotiating an agreement with a client, companies should consider short-term concessions in order to get a multiyear contract or reduce customer concentration. Long-term, reliable cash flow will be valued much higher by a buyer or a PEG. On the flip side, heavy customer concentration (especially if the customer has bad credit) has killed many deals or shifted consideration at the closing to a holdback or earn-out.

Photo by Edward Carreon

a qualified opinion Andrew Apfelberg Attorney at law for Greenberg Glusker Fields Claman & Machtinger LLP, and president, ACG Los Angeles

A

ndrew M. Apfelberg acts as outside general counsel at Greenberg Glusker and advises clients, particularly in the middle market, on significant transactions such as mergers and acquisitions, private equity and other financings, joint ventures and licensing. He has particular expertise in the manufacturing and distribution, health and beauty, new media and technology industries. He also serves as president of the ACG Los Angeles chapter.

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With a struggling economy, what are the biggest challenges you’ve seen in a recent deal or transaction and why?

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he two biggest challenges I have seen lately have been a lack of liquidity that forces a buyer to come up with all or a significant majority of the cash required for a deal, and due diligence pitfalls. While the capital markets have opened up quite a bit in the last year or two, that is particularly so for larger or “grade A� companies. For the rest, capital can still be scarce or expensive and, thus, we have had to get creative.

As to the latter, we are in an environment where people do not want to make mistakes. That could be because many PE funds are coming to an end of their life or that the job market is still weak. Regardless of the cause, I now see much more protracted and detailed due diligence (which is a challenge in terms of time, cost and chances of success) and less willingness of a buyer to take certain things on faith (i.e., in the form of a representation/warranty) or deal with it via indemnity or a holdback.

Photo by Edward Carreon

a qualified opinion Andrew Apfelberg Attorney at law for Greenberg Glusker Fields Claman & Machtinger LLP, and president, ACG Los Angeles

A

ndrew M. Apfelberg acts as outside general counsel at Greenberg Glusker and advises clients, particularly in the middle market, on significant transactions such as mergers and acquisitions, private equity and other financings, joint ventures and licensing. He has particular expertise in the manufacturing and distribution, health and beauty, new media and technology industries. He also serves as president of the ACG Los Angeles chapter.

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Right now there is a lot of pending regulation that could affect the private equity community. Do you see these causing challenges for future deal making and, if so, in what ways?

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believe that such regulation, along with market and other forces, will lead to a consolidation in the PE industry. That will result in larger funds with a lot of buying power (but probably only able to do big deals), regional funds (who can be strong players in their area but not elsewhere) and specialist funds (folks with a niche of a specific industry). That leaves many middle-market companies orphaned or with a smaller group of potential financial buyers. This could result in lower multiples or increased power in strategic buyers.

Photo by Edward Carreon

a qualified opinion Andrew Apfelberg attorney at law for Greenberg Glusker Fields Claman & Machtinger LLP and president, ACG Los Angeles

A

ndrew M. Apfelberg acts as outside general counsel at Greenberg Glusker and advises clients, particularly in the middle market, on significant transactions such as mergers and acquisitions, private equity and other financings, joint ventures and licensing. He has particular expertise in the manufacturing and distribution, health and beauty, new media and technology industries. He also serves as president of the ACG Los Angeles chapter.

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It’s a global economy, and more people are looking beyond their borders to make deals. In your practice, are you seeing significantly more international transactions and opportunities for growth? Where?

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ertainly the Southern California M&A and finance markets have benefitted from foreign investment. Investment banks, accounting firms and attorneys that have affiliations with their counterparts in other jurisdictions have a serious advantage. This is one major benefit of ACG having gone global and a reason I am so much in favor of continuing such expansion. My firm has an affiliation with the World Law Group, which is made up of regional law firms all over the globe comprising locals, not expats. That has been a critical element in learning the true lay of the land and getting deals done. Aside from the deal community, almost all of my branded consumer products clients have started distributing in Europe, Asia and South America. I am spending a lot of time vetting potential vendors and negotiating distribution agreements. Many of these same clients engage in celebrity endorsement/sponsorship and investment. That sort of branding is the most powerful if done right.

Photo by Edward Carreon

a qualified opinion Andrew Apfelberg attorney at law for Greenberg Glusker Fields Claman & Machtinger LLP and president, ACG Los Angeles

A

ndrew M. Apfelberg acts as outside general counsel at Greenberg Glusker and advises clients, particularly in the middle market, on significant transactions such as mergers and acquisitions, private equity and other financings, joint ventures and licensing. He has particular expertise in the manufacturing and distribution, health and beauty, new media and technology industries. He also serves as president of the ACG Los Angeles chapter.

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How has your membership and involvement in ACG helped your business through the years?

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have been blessed to have friends, colleagues and mentors pave the way for me at ACG. That allowed me to quickly get to know members of the deal community I had not previously come in contact with and to become a “known commodity� with them. Getting on the board and heading committees permitted me to develop deep relationships with the most active members of the chapter and show them what I am about through my conduct and my character. Becoming the chapter president amplified that a hundred fold. In 2011, our chapter started a monthly Deal Spotlight, where we highlight transactions that are worked on by multiple ACG members. Since that time, three deals I have worked on were featured. There are a lot of other members who can say the same thing.

ACG allows you to connect in a profound way with the bestin-class in the deal community and those are the folks who want to do business together.

Photo by Edward Carreon

acg@work chapter news from around the globe

Omaha Los Angeles

Washington, DC Dallas

tap cities to navigate to article

Learn more about ACG’s global chapters.

Los Angeles Save the Date for ACG LA Business Conference For the past 16 years, ACG LA has hosted the nation’s elite thinkers and world leaders at its annual business conference. Speakers have included former President George W. Bush, former Secretaries of State Condoleezza Rice and Colin Powell, and former Sen. Christopher Dodd, among other luminaries and leading CEOs. This year, ACG LA will proudly host former President Bill Clinton at the conference on Sept. 17-18.

For two days, you can join the most influential dealmakers, CEOs, world leaders and professionals at the Beverly Hilton Hotel in Beverly Hills, Calif. This premiere event gathers individuals from the business, corporate and finance community with professionals from the deal community—investment bankers, private equity groups, transaction attorneys, accountants and other service professionals. Attendees also get to experience world-renowned speakers and content-rich vertical industry sessions.

For more information and to register, please visit www.acglaconference.com. Space is limited.

Tell Us // Middle Market Growth wants to highlight ACG chapters around the world. Share your recent events or member news in 250 words or less, along with a color photo if available, with editor Kristin Gomez.

acg@work chapter news from around the globe Nebraska ®

ACG Nebraska on the Value of Membership

Texas ®

ACG Nebraska chapter member Lew Trowbridge spoke recently

ACG Capital Connection a Success

about his experience with ACG membership. Trowbridge is execu-

The 10th Annual Texas Asso-

tive vice president, chief financial officer and treasurer for Blue

ciation for Corporate Growth

Cross and Blue Shield of Nebraska (BCBSNE), and a member of the

Capital Connection brought more

company’s executive management team.

than 1,200 attendees to the Dallas

When asked about a recent deal he put together with First Capital

Convention Center. Hosted by the

Partners, based in Omaha, Neb., and how his relationship with ACG

ACG Dallas/Ft. Worth, Houston

contributed to making that agreement happen he said, “I had known

and Central Texas chapters, it

Dave McLeese and Wesly Hampp, both of First Capital Partners, but

also included more than 50 spon-

our relationship expanded with ACG. Networking through ACG’s

sors, 90 private equity and mez-

platforms increased my confidence in these individuals and BCB-

zanine firms and 31 investment

SNE ultimately invested twice the amount we initially projected.”

banking firms exhibiting.

It is common for the power and strength of ACG’s network to

The event’s breakfast keynote

foster new partnerships and generate transactions. “ACG provides

speaker was Eric Affeldt, presi-

quality speakers and events. I always learn something new through

dent and CEO of ClubCorp Inc.

ACG,” Trowbridge says. “There is nothing in Omaha like ACG for

and former principal of KSL

mergers and acquisitions professionals. At your fingertips, you

Capital Partners. Luncheon key-

have the ability to engage your peers— whether attorneys, inves-

note speaker was Marcus Luttrell,

tors, or companies—looking for investments all in the same place.”

a decorated, retired U.S. Navy

His advice for other ACG members, both new and long-time, is to

SEAL and New York Times best-

“make sure you make an effort to meet new people at the events. Sit

selling author of Lone Survivor.

and talk with people you don’t know. The key is to follow up after the initial connection.”

Local ACG chapters offer a wide array of content and events to help ACG members reach every level of the deal-making ecosystem.

For more information about how to connect with your local chapter, please visit www.acg.org.

The event also included a panel discussion, “The Resurgence of the Middle Market M&A Transaction,” with Jay Jester, managing director, Audax Group; Glenn Askew, managing director at Brazos Private Equity Partners LLC; and Greg Elliott, partner at The Sterling Group LP. For information visit www.acgtexas.org.

We create conditions that are Exactly Right.

For more information: Harry C. Steinmetz Partner-in-Charge Financial Advisory Services 212.375.6741 Harry.Steinmetz@WeiserMazars.com

WeiserMazars provides reflective insight and forward thinking. Our global, industry-focused perspective offers clarity when assessing investment opportunities, creating conditions that are exactly right for growth.

www.WeiserMazars.com

the portfolio insight from the experts

Focus on Funding

sound decisions

by the numbers

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Fed contract realities, SuperReturn trends and PE opportunities in health reform IN THIS ISSUE Focus on Funding If you were fundraising earlier this year, there was only one place to be—at the annual SuperReturn International Conference in Berlin. The attendee roster was a veritable who’s who of private equity, from David Rubenstein, Leon Black and Henry Kravis, to Steve Kinsky, Jeremy Coller and Mario Giannini. Mega funds dominated the panels; however much of the discussion focused on the middle market.

sound decisions With the U.S. government’s spending budgets continuing to decline, it is expected the government contracting industry may go through another round of consolidations as companies once again look for ways to increase revenue in the declining market. However, in addition to the “normal” risks associated with this industry, today’s marketplace has several new risk areas. Buyers and sellers alike need to be aware of these areas and take appropriate consideration when planning a transaction.

by the numbers With the re-election of President Obama, it is clear the U.S. government will continue to support the healthcare initiatives he introduced during his first term. This means more than 20 million people will be eligible for access to government-subsidized healthcare. With such major growth projected, it’s no surprise private equity firms are increasing investment in the sector.

COMING SOON Check out the Portfolio section of the June 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 or Ellen Moore, (312) 957-4274.

These articles are brought to you by ACG’s Global Partners.

the portfolio Focus on Funding // Piero Carbone and Linda J. Zeman, Duane Morris LLP

Focus on Funding

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LPs look to the middle market for ALPHA

I Duane Morris reports from SuperReturn International 2013

f you were fundraising in February, there was only one place to be — at the annual SuperReturn International Conference in Berlin. The attendee roster was a veritable who’s who of private equity, from David Rubenstein, Leon Black and Henry Kravis, to Steve Kinsky, Jeremy Coller and Mario Giannini. Mega funds dominated the panels, however much of the discussion focused on the middle market.

Equity capital for small and medium-sized

Several panelists commented that many

enterprises has long stood in the shadow

companies targeted by middle-market

of the large leveraged buy-out world,

buyout funds operate in highly fragmented

where limited partners (LPs) fought hard

industries; they are entrepreneur-founded

for access to the largest private equity

and/or family-owned businesses undergo-

funds. However, in recent years, many

ing generational change. General partners

private equity investors have turned their

and LPs recognize this is an opportunity

attention to small and medium-sized busi-

for buyers, to add value and scale; lower,

nesses, aka the middle market, seeking to

more attractive acquisition multiples; lim-

achieve alpha.

ited competition for smaller non-auctioned

This comes as no surprise to sophisti-

businesses; and strong exit opportunities.

cated investors and middle-market private

With this in mind, LPs at SuperReturn

equity funds, given that returns for the

reported that they want to increase their

middle market have outperformed the rest

allocations to middle-market buyout funds.

of the private equity market over the past

Additionally, changing market condi-

20 years, and in light of increased atten-

tions place new premiums on GP strategy.

tion from investors seeking to diversify

While middle-market funds have always

portfolios away from those of the larger

planned and executed well, several panel-

buyout funds.

ists and commentators emphasized the importance of having a precise plan for the target company at the outset, implementing that plan, and understanding the increasingly complex and ever-changing regulatory landscape.

the portfolio Focus on Funding // Piero Carbone and Linda J. Zeman, Duane Morris LLP

Focus on Funding

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tap buttons to navigate columns Another lesson learned at SuperReturn

Piero Carbone

was that many LPs believe managers with

LLP, working out of its London office. He

an international network capable of cap-

focuses his practice on cross-border corporate

turing the growth in the emerging mar-

transactions that include venture investments;

kets, turnaround expertise and operational

buy-and-build transactions; mid-market and

knowledge, are best-positioned to benefit

large leveraged buyouts; and public-to-pri-

from the current environment. As such,

vates. His clients include U.S. and European

the most sought-after funds are those that

private equity firms.

have demonstrated their ability to leverage international opportunities, navigate extremely challenging markets and add value Linda J. Zeman

Piero Carbone is a partner at Duane Morris

to their companies.

Finally, although it was stated that large LPs are reducing the number of managers in which they are investing and writing larger checks to, there was a definite change in the air. The last two or three years have shown that despite one of the worst financial and economic crises in post-war history, the middle market has largely proven resilient and institutional investors are more receptive to entertaining commitments to middle-market managers on a selective basis. //

Linda J. Zeman is an associate at Duane Morris LLP, working out of its London office.

She practices corporate law with a focus on M&A, capital markets and private equity and has experience with general corporate taxation.

the portfolio Sound Decisions // Mark Burroughs, CPA and Partner, Government Contracting Consulting Group, Dixon Hughes Goodman LLP

Focus on Funding

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The Future of Government Contracting

W Buyers and Sellers Must Be Aware of Risks in Today’s Market

ith U.S. government spending budgets continuing to decline in the foreseeable future, it is expected the government contracting industry may go through another round of consolidations as companies once again look for ways to increase revenue in the declining market. However, in addition to the “normal” risks associated with this industry, today’s marketplace has several new risk areas. Buyers and sellers alike need to be aware of these areas and take appropriate consideration when planning a transaction:

Outside Buyers Beware

ALL Buyers Beware

In times of market growth, it is common for

Government contractors operating in a

companies or investors who are not tradi-

cost-based/government environment bear

tional government contractors to become

the unique risk of having government au-

active in the government marketplace. As

ditors review their records to ensure costs

with any marketplace, buying in a period of

are reasonable, appropriately allocated to

growth vastly improves the odds of buying

contracts and allowable per the Federal

into a stable, if not growing, organization.

Acquisition Regulations. Part of the dili-

However, in a period of downturn investors

gence process for government contractors

must be very cautious as to how the com-

is to try to assess this risk and evaluate ap-

pany, service, technology, etc., may fare.

propriate methods to account for that risk

This risk is amplified if the target is a

through price adjustment and/or escrow

subcontractor. A prime contractor has some

reserves. The current environment adds to

level of control of its own destiny when it

these complexities in a number of ways:

comes to existing, funded contracts; un-

Open Years: Government contractors with

fortunately this control often comes at the

cost-reimbursable contracts often have

expense of subcontractors. As primes look

six or more years where final direct costs

to increase revenue, efforts that normally

and indirect expense rates have not been

may have been subcontracted are brought

agreed to. These years are either in nego-

in house. Therefore, it is important that

tiation or awaiting audit. Not only does

subcontractors establish themselves as

the risk of contract adjustments compound

critical to the project either through

arithmetically with each open year, they

relationships or having the all-important

also increase incrementally as time

niche expertise.

goes by.

the portfolio Sound Decisions // Mark Burroughs, CPA and Partner, Government Contracting Consulting Group, Dixon Hughes Goodman LLP

Focus on Funding

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Mark Burroughs

Defense Contract Audit Agency (DCAA)

Is History Representative: In order to evalu-

auditors are more aggressively questioning

ate risk, buyers often analyze a company’s

costs, which complicates the challenge of

audit and negotiation history to establish a

trying to explain or defend a transaction

baseline of findings, yet today’s environ-

that occurred six or more years ago, if you

ment raises the question as to how valid

are able to locate supporting documents in

that is. This is not only because of the

the first place. Imagine how difficult this

challenge of tracking down supporting

task would be if you lose the knowledge of

documentation but also because we have

the history of the acquired company.

entered into a “brave new world” with

In addition to the complexities of deter-

regard to both the audit process and ne-

mining risk, the number of open years rais-

gotiations. Since 2008 there have been a

es questions as to how to account for that

number of reports by both the GAO and

risk as part of the transaction, particularly

various inspector generals raising con-

when escrows are being considered. If the

cerns as to the quality of the audits being

establishment of final costs and rates are

performed and the negotiation positions

fairly current, one could establish a three-

taken by the government. As a result,

year escrow and have certain comfort that

transactions and issues that may have been

some, if not all, of the open years would

acceptable or negotiable in years past may

be addressed during that period. The same

now be questioned. It is difficult, if not

cannot be said for the current audit backlog

impossible, to identify the nature or costs

and the time it takes to complete each open

associated with these areas. //

year. Fortunately, the DCAA has increased the number of small/low-risk contractors.

On Dec. 18, 2012, the Government Accountability Office (GAO) issued an audit report

Mark Burroughs is a partner of the Dixon Hughes Goodman Government Contracting Consulting Group in the Washington, D.C., metro region.

on DCAA’s backlog and identified that the DCAA has increased its threshold that triggers an automatic audit of a contractor’s Listen to Dixon Hughes Goodman LLP’s latest webinar, In the Eye of the Storm—Current Risks of Sequestration.

incurred cost submission from $15 million to $250 million and significantly increased the number of low risk audits that may be randomly sampled. Unfortunately, while the risk is reduced for some companies—it is not eliminated.

Read the complete article online.

the portfolio

By The Numbers // Ira N. Gottlieb, Principal at WeiserMazars

Focus on Funding

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A Healthy Living

W

ith the re-election of President Obama, it is clear the U.S. government will continue to support the healthcare initiatives he introduced during his first term. This means more than 20 million people will be eligible for access to government-subsidized healthcare.

Already representing nearly 18 percent

Healthcare Technology Investments Heat Up

“There will be continued activity. We

of the GNP and growing, a study from the

need more healthcare providers to meet

Georgetown University Center on Educa-

growing demand and deliver efficient care

tion and Workforce shows that demand

to patients,” says Steven Kops, financial

for healthcare workers is growing at twice

advisory services partner at WeiserMazars.

the rate of the national economy, with

“At the same time, medical technology is

the industry on track to create 5.6 million

evolving to enhance the delivery of patient

new jobs by 2020. This will both create a

care in a more cost effective manner. These

shortage of physicians and necessitate an

points are not lost on investors.”

expansion of care delivery from physician extenders and nurse practitioners.

With such major growth projected,

For example, a sensory technology that allows physicians and patients to be in communication regarding glucose levels

it’s no surprise private equity firms are

and heartbeats using smartphones not only

increasing investment in the sector. Ac-

improves patient care, it reduces costs by

cording to PitchBook Data, 57 healthcare

allowing patients to record their own glu-

technology companies received $3.1 billion

cose levels. Similarly, cloud computing al-

from private equity firms in 2012, while

lows electronic health records to be stored

healthcare companies as a whole received

and made available to a patient’s physician

$2 billion just during the first two months

or the nearest hospital, eliminating the

of 2013. Strategic acquirers also are look-

need for repetitive testing.

ing for strong add-on acquisitions to expand their offerings—Berkery Noyes found the healthcare sector as a whole saw an uptick in M&A activity by 21 percent in 2012, with the action particularly intense around healthcare technology.

the portfolio

By The Numbers // Ira N. Gottlieb, Principal at WeiserMazars

Focus on Funding

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by the numbers

tap buttons to navigate columns An excellent example of the trend to-

Ira N. Gottlieb

says. “More people will need to be served

ward technology infrastructure investment

under the Affordable Care Act, we have

happened in 2011, when insurance provider

an aging population, and there’s a discon-

Aetna bought Medicity, a health informa-

nect in the marketplace right now. Private

tion exchange (HIE) company, for $500 mil-

equity firms are in a good position to take

lion. HIEs allow hospitals and physicians

advantage of these trends.” //

to securely access healthcare information, ultimately improving the quality and effi-

Ira N. Gottlieb is a principal at WeiserMazars,

ciency of patient care while reducing costs.

a leading accounting firm. He has spent more

Middle-market private equity players such as Riverside Partners and Arsenal

segment on both the provider and payer sides,

Capital have made similar acquisitions in

and he has substantial experience working with

healthcare technology. In January, Arsenal

client organizations entrenched in the govern-

Capital Partners and GE Healthcare Finan-

ment programs space. He develops strategy

cial Services made an undisclosed invest-

and systematic approaches to assist payers in

ment into TractManager, a provider of

developing turnkey provider networks for man-

tech-enabled compliance and business pro-

aged Medicaid, managed Medicare and man-

cess improvement services for healthcare

aged long-term care plans.

organizations. Also in January, Riverside Partners made an undisclosed investment in Stinger Medical, which manufactures mobile medical workstations.

“The bottom line is that private equity firms are finding ways to take advantage of any opportunities that appear in the sector. I suspect we will see a lot more private equity investment moving forward,” Kops

To learn more about health care technology.

Take a look at WeiserMazars report.

than 30 years in the managed care market

the ladder ACG MEMBERS ON THE MOVE

Kayla Picciano

Kayla Picciano of ACG Minne-

Jerry Fox of ACG Richmond

sota recently transitioned from

and a managing partner for

the Minneapolis/St. Paul Busi-

Cherry Bekaert LLP, will serve

ness Journal to Edina-based

as chairman of the Greater Rich-

Web-development firm Irish

mond Chamber beginning July 1,

Titan. At Irish Titan, she is re-

Jerry Fox

sponsible for continuing to

the mission of growth and con-

create and support company

tinual improvement for the Great

growth as a senior business

Richmond business community.

developer.

Bruce Pavesich of ACG Mary-

Anthony Gizinski of ACG

land was hired as regional first

Minnesota was recently promot-

vice president, business devel-

ed to president of SPECTRUM

opment officer, and will work as

Commercial Services’ manage-

a part of Crestmark’s growing

ment team. He has experience Anthony Gizinski

Bruce Pavesich

East Division. He joins Crestmark

working in capital lending and

from Keltic Financial, having

management that will enhance

spent the last four years as vice

his relationships with current and

president and regional manager.

prospective SPECTRUM clients.

Helen Bulwick of ACG San

Scott Estill of ACG New York

Francisco was appointed to

and a member of its board of

partner at the Newport Board

directors, recently joined

Group. The Newport Board

Heidrick & Struggles Inc., as

Group is a national professional

partner within its financial serScott Estill

2013. In his role, Fox will support

Helen Bulwick

services firm composed of expe-

vices practice based in New

rienced CEOs dedicated to help-

York. Most recently, Estill was

ing middle-market companies

a founding member and direc-

drive sustained growth, navigate

tor at investment banking firm

complex transitions and improve

Coady Diemar Partners.

business performance.

To submit your promotions, new hires, job changes and other accomplishments to the Ladder section of Middle Market Growth, please send information and a high-resolution color headshot (300 dpi or above) to editor Kristin Gomez.

the ladder ACG MEMBERS ON THE MOVE Stacey Rector of ACG Maryland was recently promoted to vice president at Patriot Capital, a $180

AWARDS ®

award in the category Editorial/

million, Baltimore-based mezza-

Op-Ed Article/Advertorials from

nine fund, and Bengur Bryan, its Stacey Rector

the Public Relations Society of

investment banking affiliate. Rec-

America for its section in Crain’s

tor joined the firm in 2010 after

Cleveland Business in late 2012.

working with Bank of America Securities in Charlotte, N.C.

Jim Wood of ACG Seattle was honored as CFO of the Year

Adam Kelly of ACG Maryland was

in the Nonprofit Organizations

recently hired as a senior associate

category at the Puget Sound

at Patriot Capital, a $180 million, Baltimore-based mezzanine fund, and Bengur Bryan, its investment Adam Kelly

Business Journal’s awards dinJim Wood

of ACG Seattle.

M&T Bank in a structured finance group that provided senior capital

Peter Huff of ACG Central

to private equity firms.

Texas was awarded along with his company, Blue Sage Capital,

David Braun of ACG National

the M&A Mid-Market Award for

Capital and CEO of Capstone StraSuccessful Acquisitions, now available on Amazon. The book provides a “roadmap” for acquisitions of middle-market companies using longtime front line experience in

ner. Wood is CFO of Northwest Center. He also is the treasurer

banking affiliate. Kelly was with

tegic Inc., recently wrote the book

ACG Cleveland won a silver

the Seller of the Year. The firm Peter Huff

made 63 times its money on its original investment achieving an IRR of 150. Peter also serves on the ACG Central Texas board of directors.

transactions.

To submit your promotions, new hires, job changes and other accomplishments to the Ladder section of Middle Market Growth, please send information and a high-resolution color headshot (300 dpi or above) to editor Kristin Gomez.

it’s the small things The Tube // Evolution of a Cultural Icon

Shows on-the-go //

6

5

With the popularity of online streaming from companies like Hulu and Netflix, people are not tied to their TV sets. Television is mobile and available almost anywhere there is an Internet connection.

1

fewer sets //

Television ownership has dropped for the first time since 1991, from 98.7 percent of American households to 96.7 percent.

According to The Nielson Company, there are two reasons for this: People cannot afford new digital sets and the increase of secondary screens such as tablets, laptops, smartphones, etc.

competition for cable //

Free or low-cost TV alternatives are giving cable a run for its money, with the average highend cable package costing more than $1,200 per year. For example, Hulu offers free programming from a wide range of networks, while Netflix offers an array of television, premium cable shows and movies for an affordable $7.99 per month.

4

2

Ratings strike out //

An average of just 12 million people tuned in to watch the 2012 World Series, a collapse of nearly 80 percent from 54 million during the World Series in 1980.

moving targets //

Binge viewing (watching the entire season of a show) is growing in popularity, making it a constant challenge for advertisers to place their ads and reach the right demographic.

3

package deal //

Major League Baseball, realizing that cable viewership is waning, now offers yearly subscriptions to its exclusive ondemand content at around $129 a year for a premium package that streams into almost any mobile device.

The Leadership acg directors ACG Board of Directors //

Chapter Representative Directors //

Directors At Large //

Chairman Charles J. Morton, Jr.* Partner, Venable LLP ACG Maryland Term expires 8/2013

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

Ken Berryman CapitalSouth Partners ACG Kentucky Term expires 8/2014

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

Mike Ehlert Capital One Leverage Finance Corp.

ACG Dallas/Fort Worth Term expires 8/2015

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

Brian Gilbreath Merrill Corporation ACG Nebraska Term expires 8/2015

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

Patti Gillenwater Elinvar ACG Raleigh Durham Term expires 8/2013

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

Richard Jaffe Duane Morris LLP ACG Philadelphia Term expires 8/2015

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

Frank Mack Merck Capital Corporation ACG Chicago Term expires 8/2014

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

Cory Mims ICV Capital Partners, LLC ACG New York Term expires 8/2013

Robert Napoli* First West Capital ACG Vancouver Term expires 8/2015

Stephen Prostor Citi Private Bank ACG New York Term expires 8/2013

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

Durant (Randy) Schwimmer The Carlyle Group ACG New York Term expires 8/2014

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

Tom Washbush Benesch, Friedlander Coplan & Aronoff ACG Columbus Term expires 8/2015

Hans-Josef Vogel Beiten Burkhardt ACG Rhein-Ruhr Term expires 8/2015

ACG Honorary Directors //

Vice Chairman Pamela Hendrickson* COO, The Riverside Company ACG New York Term expires 8/2013 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Les Alexander* Faubourg Capital Partners ACG Louisiana Term expires 8/2013 Secretary Penny Larsen* Links Financial ACG Tampa Bay Term expires 8/2013 Chairman of InterGrowth 2013 James Marra Blue Point Capital Partners ACG Cleveland Term expires 8/2013 Immediate Past Chairman Andrew Rice* Senior Vice President, The Jordan Company ACG Chicago Term expires 8/2013

Robert G. Coffey Alan B. Gelband

*denotes member of Executive Committee

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