Middle Market Growth - May 2014

Growth MIDDLE MARKET

Groceries on Demand

In-Home Delivery of Local Favorites Helps Small Stores Serve the Masses

A publication of

// MAY 2014

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ACG GLOBAL PARTNERS THANK YOU O F F I C I A L S P O N S O R S O F G R O W T H SM

G R O W T H L E A D E R SM

G R O W T H C H A M P I O N SM

G R O W T H S U P P O R T E R SM

For information on becoming an ACG Partner, 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.

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

Telling Our Story

A

s an alternative to the standard chairman letter, I wanted to offer a video testimonial for this issue of Middle Market Growth. These pages are chock full of important trends happening in the tech industry, including a feature article from our friends at Privcap that was written by CEO

and Founder David Snow. The article details how valuable the medium of video is to telling the middlemarket story, and I thought I would give it a try and create a short video of my own on what’s great about this issue. I’ve worked with David in the past, recording videos for Privcap discussing a variety of issues affecting the middle market and deal flow. I firmly believe that putting faces to names and sharing our firsthand knowledge of the industry is key to helping the general public understand our impact on the economy and driving growth. Enjoy!

EVENT SPONSORS AND ALLIANCE PARTNERS THANK YOU INTERGROWTH EVENT SPONSORS

Cortland

®

A L L I A N C E PA R T N E R S 6 th A n n u al W ome n ’s Alter nat ive I n v e stme n t Su mmit 8 t h An n u al W ome n ’s P r ivate Equ ity Su mmit T h e F in an c ial Ex e c u ti ves Ne twork in g Grou p

Nati o n a l Ce n te r fo r t h e Mi d d le M a rke t P ri v Ca p Whart on P ri vate Eq u i ty & Ve n tu re Ca pi ta l A s s o c i ati o n

For information on becoming an ACG Partner, 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.

EXECUTIVE SUITE ED BIFULK // President, Merrill DataSite

Q

WHY DOES A VIRTUAL DATA ROOM SOLUTION MATTER DURING THE COURSE OF A DEAL?

EB: The primary and most important reason a virtual data room (VDR) matters during the course of a deal is because it allows everyone involved to view the information in real time, letting them make informed decisions.

Utilizing a virtual data room such as Merrill DataSite helps reduce transaction times and deal expense while at the same time allowing multiple users to view all the information at the touch of a button. People involved in a sale need to know exactly who is viewing their information—and the superior security of a Merrill DataSite provides this peace of mind. Surety, the mitigation of risk, and accessibility mean that dealmakers are increasingly depending on VDRs to facilitate their deals. A VDR can also be used on the buy side or as a high-level collaborative tool in information sharing.

It also provides the ideal solution for securely sharing information between designated parties over a significant period of time. For example, when the transaction is completed, DataSite can be used to help monitor every aspect of the performance of a company on an ongoing basis.

Q

TECHNOLOGY IS CONSTANTLY CHANGING AND INCREASINGLY A CHALLENGE IN TERMS OF SECURITY. HOW CAN AN ORGANIZATION ACCOUNT FOR THESE CHANGES AND POTENTIAL RISKS?

EB: As we know with the cyberhacking that has taken place recently, data security means protecting a database from destructive forces and the unwanted actions of unauthorized users. Best practices contain more technical security precautions that most should know, and if they haven’t

BIO //

already, all IT professionals should implement. Hardware-based security

ED BIFULK joined Merrill Corporation in 2004 to head Merrill’s Virtual Data Room Solution, DataSite.

Since then, he has been instrumental in DataSite’s significant growth.

solutions can prevent read-and-write access to data and hence offer very strong protection against tampering and unauthorized access.

The best way for a company to protect its confidential documents and information during a deal is to use a VDR. This has become a normal practice throughout the industry as the days of the old deal room at a hotel or conference center are obsolete. The security and focus of that data room includes employing several layers of security, such as: Continued on next page

EXECUTIVE SUITE ED BIFULK // President, Merrill DataSite

• Be ISO 27001 accredited that complies fully with an Information Security Management System (ISMS).

• Client data should be 256-bit SSL encrypted with EV from VeriSign®.

• Allow only one login per person at any time and follow strict protocols on passwords.

• View documents as encrypted images through a secure viewer— no files on a hard drive.

• Don’t subcontract hosting management; be the Application Service Provider.

• Place full disclaimer language upon first logging into a project and even each time a user logs into a project to ensure that users accept conditions of use.

• Printing rights should be controlled for each user, down to the document level.

• Secure documents further with a tamper-proof personalized watermark that appears on any document viewed or printed.

Q

WHAT SUCCESS STORIES CAN YOU TELL US ABOUT SOME OF YOUR CLIENTS? WHY DID WORKING WITH MERRILL MAKE A DIFFERENCE?

EB: Customer loyalty is Merrill’s key metric of success. We measure this through our customer satisfaction scores and our repeat client base.

We are committed to providing each of our clients with excellent project management support, accurate and complete deliverables and extraordinary customer service. Our average customer feedback score is 9.29 out of a possible 10, and over three-quarters of our projects are administered by one or more repeat clients.

Continued on next page

EXECUTIVE SUITE ED BIFULK // President, Merrill DataSite

Q

LAST YEAR, MERRILL DATASITE, IN COLLABORATION WITH ACG GLOBAL, HOSTED ITS FIRST LIVE EVENT AND LIVE WEBCAST “MIDDLE MARKET INSIGHTS: BANKING, LENDING AND THE IMPACT ON M&A.” WHAT DO YOU BELIEVE WAS THE BIGGEST TAKEAWAY FROM THIS PRESENTATION?

EB: Merrill Corporation, in collaboration with ACG Global and ACG New York, hosted this informative live Banking Executive’s Roundtable in October 2013, where we had over 200 guests and more than 600 participants sign in online from around the globe.

The session moderator, Michael Cerminaro, president & CEO of Cerminaro Group LLC, helped showcase the panelists: Dennis Robleski, managing director, head of sponsor finance for BMO Harris Bank; Leonard Tannenbaum, CFA, chief executive officer for Fifth Street Management LLC; Lawrence Golub, chief executive officer for Golub Capital; and Pam Hendrickson, chief operating officer for The Riverside Company and chairman of ACG Global, in a lively discussion. They imparted their knowledge on key trends and challenges in banking, lending and the impact on M&A overall.

The five leaders explored the ideas, concepts and challenges related to the banking and regulatory environment today, including: • the state of the (banking) industry.

• the role of the Central Banks in “normalizing” interest rates.

• regulatory issues and insight impacting banks and our industry.

• who is lending and at what cost.

• the impact of M&A on credit and lending.

• crystal ball and predictions for the year ahead.

To view the discussion in its entirety, please visit www.datasite.com and sign in from our home page to see the playback from that day’s event. //

Growth MIDDLE MARKET

// MAY 2014

Photo by Shem Roose

GROWTH STORY

All for One

Brick-and-mortar grocery stores face increased competition every day from Peapod, AmazonFresh and other 24/7 digital grocers. The need to compete in that market is a primary reason MyWebGrocer became such an appealing target for HGGC ™, a middlemarket private equity firm that invested $154 million to gain a controlling interest in the e-commerce company.

Read more.

“WE WERE PROFITABLE AND GREW THE COMPANY ORGANICALLY. WE BUILD A GOOD PRODUCT AND BRING IT TO THE RETAILER COST-EFFECTIVELY.” // RICH TARRANT, FOUNDER AND CEO OF MYWEBGROCER

TABLE OF CONTENTS

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

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

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

FEATURE

IN EVERY ISSUE

The Power of Video Dealmakers are now using video to communicate because they finally can. Videos done right are both engaging and efficient and might provide an advantage that traditional marketing documents will not.

Read more.

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

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

MANAGER, COMMUNICATIONS & MARKETING Larry Guthrie lguthrie@acg.org

MANAGER, CREATIVE AND BRANDING Brian Lubluban blubluban@acg.org FOR ADVERTISING OPPORTUNITIES

DEPARTMENTS THE ROUND • Importance of Carried Interest for PE. • New ACG Mobile App. • Future of Interest Deductibility.

• Key Terms Shaping Transactions.

Read more.

A QUALIFIED OPINION Matt Sondag, senior director of West Monroe Partners, discusses trends in technology and opportunities in the space for middle-market PE firms.

Read more.

ACG@WORK • BOLD Awards in Minnesota.

• Illinois congressional visit.

• New York Health Care Conference.

Read more.

THE PORTFOLIO

DIRECTOR, STRATEGIC DEVELOPMENT Meredith Rollins mrollins@acg.org

The latest middle-market trends and

Custom media services provided by Network Media Partners, Inc.

thought leadership written exclusively by a team of expert ACG Partners.

Read more.

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.

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FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

SAVE THE DATE

Join Dealmakers this Fall for ACG EuroGrowth 2014 Join middle-market dealmakers Oct. 15-16 in London for the ACG EuroGrowth® 2014 conference. In just 36 hours, this premier global M&A deal flow event captures unprecedented networking opportunities for all ACG members and partners interested in engaging with the European marketplace. Like ACG’s annual InterGrowth® conference, EuroGrowth features exclusive networking for private equity professionals, intermediaries, lenders, advisers, corporate executives and development officers. This year, the event will provide top industry leaders as panelists and targeted roundtables on cutting-edge topics and issues facing the middle market.

EuroGrowth 2014 will also include an ACG Capital Connection® to efficiently connect with dealmakers in the UK and across Europe.

“ACG EUROGROWTH IS THE ONLY FORUM FOR MIDDLE-MARKET EXECUTIVES WITH GLOBAL COMPANIES TO MEET, DEVELOP AND DEEPEN LONGSTANDING RELATIONSHIPS. THIS YEAR, TWO OF OUR CLIENTS REALIZED CROSS-BORDER JOINT VENTURES BECAUSE OF THE RELATIONSHIPS FORMED AT ACG EUROGROWTH.” // MARTIN L. OKNER, MANAGING DIRECTOR, SHM, CORPORATE NAVIGATORS

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

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS MAY 5, 2014 ACG Tampa Bay 2014 Annual Golf Outing More info MAY 6, 2014 ACG Atlanta ACG Academy Breakfast More info MAY 1, 2014 ACG Detroit 6th Annual Texas Hold ’Em Tournament More info

MAY 6, 2014 ACG Columbus Annual Awards Dinner More info

MAY 1, 2014 ACG Pittsburgh May Lunch Meeting More info

MAY 6, 2014 ACG Denver Luncheon, Steve Swinney, President & COO, Kodiak Building Partners More info

MAY 1, 2014 ACG Toronto Breakfast with Diane Brisebois, CAE, President and CEO of the Retail Council of Canada More info

MAY 6, 2014 ACG New Jersey Women of Leadership: The Business of Broadway More info

MAY 2, 2014 ACG Boston Deal Hunters Technology Roundtable More info

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

MAY 7, 2014 ACG 101 Corridor The Aerospace and Defense Industry More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Deborah L. Cohen. Be sure to include name of event, time, date, location, cost and information or link as to where to register for the event.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS MAY 8, 2014 ACG Connecticut 14th Anniversary Party More info MAY 8, 2014 ACG Kansas City Wine Tasting More info MAY 7, 2014 ACG Cleveland ACG Akron Network More info MAY 8, 2014 ACG Barcelona Mis experiencias en operaciones corporativas (My Experiences in Corporate Transactions), Luis Bach of Orangina Schweppes Group/ Suntory Holdings More info MAY 8, 2014 ACG Central Texas ACG in Austin: Pre-Awards Social More info MAY 8, 2014 ACG Charlotte Franchise M&A Panel More info

MAY 8, 2014 ACG Maryland Business Growth Series The Growth of Firaxis Games, featuring Steve Martin, President and Studio Head More info MAY 8, 2014 ACG Orlando 2014 SMART Awards Luncheon More info MAY 9, 2014 ACG Richmond Breakfast Series with William H. Goodwin Jr., Chairman, CCA Industries Inc. More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Deborah L. Cohen. Be sure to include name of event, time, date, location, cost and information or link as to where to register for the event.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS MAY 14, 2014 ACG Arizona 2014 Southwest M&A Conference More info

MAY 9, 2014 ACG South Florida Charity Golf Event Benefiting Returning Veterans More info MAY 12, 2014 ACG National Capital Roundtable: Innovative Employee Benefits More info MAY 13, 2014 ACG Atlanta Charles Krauthammer: “Politics in Washington” More info MAY 13, 2014 ACG New Jersey Breakfast Meeting More info

MAY 14, 2014 ACG Central Texas ACG in Austin: Panel on Austin’s Top Private Equity Firms, Moderated

by John Weaver, CLS Partners More info MAY 14, 2014 ACG Denver Corporate Social Cocktail Event More info MAY 15, 2014 ACG Cleveland Panel Discussion More info MAY 15, 2014 ACG Dallas/Fort Worth Breakfast Event More info MAY 15, 2014 ACG Holland Accuracy Networking Lunch More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Deborah L. Cohen. Be sure to include name of event, time, date, location, cost and information or link as to where to register for the event.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS MAY 15, 2014 ACG New York 10th Annual M&A DealSource® & Annual Beer Tasting More info MAY 15, 2014 ACG Philadelphia Breakfast Briefing: Annual Lenders’ Panel More info MAY 16, 2014 ACG New York Westchester Breakfast: Health Care Deals 2014 More info MAY 19, 2014 ACG New York Third Annual Golf & Tennis Outing on Long Island More info MAY 21, 2014 ACG Charlotte YACG Affinity Event: The Leaders Journey More info

MAY 20, 2014 ACG Minnesota Luncheon: Summit Brewery Tour More info MAY 20, 2014 ACG San Diego Serial Entrepreneurs Featuring Peter Seidler, San Diego Padres More info MAY 22, 2014 ACG Austria Luncheon More info MAY 22, 2014 ACG Columbus Executive Leadership Breakfast: “The Art of Negotiation” More info MAY 22, 2014 ACG Nebraska Breakfast Meeting: Tony Raimondo, Chairman, Behlen Manufacturing Co. More info MAY 27, 2014 ACG Central Texas ACG in San Antonio: Mir Imran, Chairman & CEO, InCube Labs More info

To have your chapter’s upcoming events featured in Middle Market Growth, please send the details to editor Deborah L. Cohen. Be sure to include name of event, time, date, location, cost and information or link as to where to register for the event.

Helping you take the next step with confidence

When you trust the advice you’re getting, you know your next move is the right move. That’s what you can expect from McGladrey—experienced professionals that operate as strategic partners throughout the private equity life cycle.

With our extensive knowledge in privately held companies, we address the unique concerns of private equity firms investing in the middle market. That’s the power of being understood.

Experience the power. Visit www.mcgladrey.com.

Member of the RSM International network of independent accounting, tax and consulting firms.

EOE/AA MCG-0414TB

THE ROUND NEWS THAT MATTERS

Importance of Carried Interest for Middle-Market Private Equity There has been a great deal of discussion recently regarding the tax treatment of carried interest. First, the outgoing Republican chairman of the House Ways & Means Committee, Dave Camp, caught many by surprise by including carried interest in his proposal for comprehensive tax reform. The following week, President Obama, who has long supported changing the tax treatment of carried interest, proposed a much broader plan to raise rates on carried interest as part of his FY 2015 budget.

As is well known, the federal government has an enormous amount of debt and is running annual deficits. Rising costs and demand for additional spending add more pressure.

It is therefore not surprising that elected officials are looking for ways to raise revenue.

However, as is the case with so many other things in Washington, D.C., when it comes to carried interest, objective analysis has given way to half-truths and misinformation. Here are a few common misperceptions regarding carried interest:

Capital gains treatment is a “loophole.”

One of the most common refrains is that capital gains tax treatment is a “loophole” in the tax code. This simply is not true. For over 100 years, the tax code has provided preferential treatment to entrepreneurial investments on the basis that this encourages investment and ultimately leads to economic growth. Carried interest is not some obscure provision that was recently snuck into the tax code.

Changing the tax treatment is actually aimed at hedge funds.

It’s common to read that changing the tax treatment on carried interest will impact hedge funds. Much of this may be attributable to the fact that most people genuinely don’t understand the difference between a hedge fund and a private equity fund (which is itself a story worth writing about). The truth, however, is that most hedge funds don’t get favorable longterm capital gains treatment because they make short-term investments in marketable securities and therefore pay short-term capital gains rates.

In addition, many private equity fund managers find Camp’s proposal particularly frustrating because real estate funds—which are structured similarly to traditional private equity funds—would continue to receive capital gains treatment on their carried interest.

Continued on next page

Download the ACG Public Policy Agenda.

THE ROUND NEWS THAT MATTERS Carried interest is riskless income for fund managers.

Proponents of changing the tax treatment frequently argue that carried interest is “riskless” income for fund managers. This ignores the fact that carried interest represents profits from the successful sale of a company earned after fund investors have received a preferred return on their investment. If the company is not sold for a sufficient profit, there is no carried interest. Moreover, managers are almost always investors in their own funds and therefore have “skin in the game.” Finally, carried interest can be clawed back from investors if future profits are not sufficient.

A thoughtful discussion on how to treat carried interest is warranted. Camp bases his decision to tax most carried interest as ordinary income on his belief that a “partnership (e.g., private equity fund) that is in the business of raising capital, investing in other businesses, developing such businesses, and ultimately selling them, is in the trade or business of selling businesses. The businesses bought and sold by the partnership are its inventory.” Many will take issue with this statement as overly simplistic and not an accurate reflection of the entrepreneurial nature of the private equity profession.

The reality is that tax reform will not happen this year (many believe it will not happen until 2017 after the next presidential election) and the president’s FY 2015 budget is largely a political document with little practical efficacy. However, the two proposals continue the drumbeat for changing the tax treatment of carried interest. Moreover, Camp’s proposal in particular provides some intellectual cover for those seeking to change the law.

Organizations like ACG and the Private Equity Growth Capital Council (PEGCC) have been working to correct some of the misinformation described above and educate lawmakers and their staffs about private equity and carried interest. This outreach is absolutely vital.

It is challenging enough to maintain the current treatment for carried interest given the current scramble to raise federal revenues. This mission becomes even more difficult without a proper understanding of what private equity funds do and what carried interest is. // —Scott E. Gluck is an attorney with Venable LLP. His practice focuses on federal government affairs and regulatory work.

THE ROUND NEWS THAT MATTERS

Download the new ACG mobile app today.

ACG Releases Membership App Attending an ACG event and want to learn more about a connection you made? Busy traveling, but want to register for an ACG chapter event across town or across the globe? The ACG membership mobile app is ideal to help make networking and deal flow easier on the go. With the app, ACG provides each member with an Access Anytime, Business AnywhereSM experience featuring fast, convenient access to the ACG member directory and ACG calendar of events.

Both members and non-members alike are also able to use the mobile app to register for ACG events. And with more than 1,200 chapter events around the world every year, you are never far from the people and knowledge you need to succeed. ACG members, however, enjoy the exclusive benefit of searching and accessing member profiles with general and advanced search functionality.

It’s an essential app for your smartphone or tablet and is available now for iPhone, iPad, Blackberry and Android platforms. // If you have any questions about the app or how to use it, please contact Larry Guthrie at ACG Global.

THE ROUND NEWS THAT MATTERS

The Future of Interest Deductibility Within Tax Reform Over the past year, the Businesses United for Interest and Loan Deductibility (BUILD) Coalition, of which ACG is a proud member, has worked to ensure that 100 percent interest deductibility is maintained in the context of tax reform. The good news is that full interest deductibility is preserved in tax reform drafts from both former Sen. Max Baucus, D-Mont., and Rep. Dave Camp, R-Mich. The bad news is that neither Baucus’ nor Camp’s position on interest deductibility is guaranteed to be in the final tax reform bill. Instead, new chairs in House Ways and Means and Senate Finance will be holding the pen. In the Senate, Sen. Ron Wyden, D-Ore., whose 2007 tax reform draft imposed strong limits on interest deductibility, is the new chairman of the Senate Finance Committee.

Maintaining interest deductibility is critical to the U.S. economy. A recent study by EY’s Quantitative Economic and Statistics Group found that limiting interest deductibility to finance lower tax rates reduced long-run economic growth by $33 billion in 2013. The study shows that all industries and all states will see reductions in economic growth as a result of this ill-conceived policy. Moreover, given that access to credit is essential for American businesses and interest payments are a cost of doing business, full interest deductibility has been a core part of the modern tax code since its inception in 1921.

Continued on next page

THE ROUND NEWS THAT MATTERS While the most recent drafts have continued this tradition, the political consensus is that neither plan will move forward this year. Baucus was just confirmed as the U.S. ambassador to China and has left his post in the Senate. Meanwhile, neither Republican leadership in the House nor Democratic leadership in the Senate has shown a desire to take tough votes and move on Camp’s draft this year. Therefore it is critical that business owners who understand the value of interest deductibility and its importance to our economy look toward the future.

There are three main reasons interest deductibility is at risk: • Many in Washington have very little understanding of interest deductibility. Few see credit as a normal part of all business operations. Rather, discussions in Washington incorrectly tend to view credit through the lens of the recent financial crisis and treat limiting interest deductibility as a tool to prevent excessive leverage in the economy.

• With limits on advertising expense in both drafts, it is clear Congress is looking beyond normal expenditures, often defined as government spending through the tax code, as it seeks to find revenue to finance rate reductions. Interest deductibility is not a tax expenditure and is used by businesses of all sizes and in all sectors, yet it will remain in discussions.

• As stated above, while Baucus and Camp maintained interest deductibility in their draft proposals, their successors have taken different stances on the issue in the past.

In addition to Sen. Wyden, Rep. Paul Ryan, R-Wis., the frontrunner to take over as chairman of the House Ways and Means Committee, also has indicated openness to limiting interest deductibility.

As tax reform continues to be discussed in Washington, it is critical that business owners help policymakers understand the importance of maintaining 100 percent interest deductibility. Businesses of all sizes and in all sectors rely on debt financing to make critical investments and manage payroll. It’s a cost of doing business and Congress should work to ensure that it is fully maintained when reforming our tax code. // —Matt McDonald is a partner at Hamilton Place Strategies in Washington, D.C.

THE ROUND NEWS THAT MATTERS Key Deal Terms Shaping Middle-Market Transactions With middle-market deal activity expected to be strong this year, it

WEBINARS SEC’s OCIE Exam Issues for Middle-Market Private Equity Funds Wednesday, May 7, 2014 2:00–3:00 p.m. EDT Cost: Complimentary Register Here.

ACG, in partnership with McGladrey LLP and Venable LLP, is offering a unique opportunity for middle-market private equity fund professionals, accountants and attorneys to interact with top members of the Securities and Exchange Commission’s Office of Compliance Investigation and Examinations (OCIE), the division responsible for conducting examinations of private equity funds.

You’ll learn key compliance and recordkeeping problem areas for middle-market PE funds in examinations, as well as a review of key accounting/audit issues that arise in the context of middle-market PE examinations. Highlights include:

continues to be important for dealmakers to have current knowledge of how parties are addressing key deal terms in transactions in order to efficiently resolve transaction issues and get deals done. “What’s market?” is a question often faced by the parties engaged in an M&A transaction. Seyfarth Shaw LLP’s Middle-Market M&A SurveyBook is a quick reference guide of current market practice with respect to certain deal terms for buyers, sellers and deal professionals negotiating private target transactions.

What Seyfarth Shaw LLP Brings to Transactions.

• An overview of OCIE. • An introduction to the examination process by OCIE staff.

• Current valuation/audit issues.

• Current IAA compliance issues (recordkeeping, email retention, trading records, etc.).

Plus, participants have the opportunity to ask questions both in advance of and during the webinar. Email your questions to Kaitlin McAuley, ACG Global manager, program services.

Speakers • Matt Reynolds, McGladrey LLP • Richard Jaffe, Duane Morris LLP • Scott Gluck, Venable LLP • TBD–SEC In partnership with Continued on next page

Content Library If you’ve missed any of ACG’s complimentary webinar series, all are available online to view at your convenience. Check out the full content library today.

Browse past webinars.

THE ROUND NEWS THAT MATTERS Going Beyond Traditional Due Diligence; Using Data Analytics to Gain Unique Deal Insights Sponsored by BKD Tuesday, May 20, 2014 3:00–4:00 EDT Register Here.

What happens when, according to a Wall Street Journal report, the number of private equity firms worldwide skyrockets from 67 in 1984 to 5,330 today?

The result is that too much money begins to chase too few deals— causing enormous competitive challenges for private equity dealmakers still hungry for return in a cosmos filled with sometimes astronomical price multiples. Gone are the days when investors could simply rely on a traditional, high-level, qualitative approach to due diligence to give them an edge in the market. Instead, sophisticated investors are quickly turn-

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 job posts range from entry-level positions and internships to C-suite executive jobs.

Find out more information.

ing to a predictive analytics/data analytics due diligence approach that provides a deeper understanding of economic value and true profitability.

Join BKD Transaction Services professionals Steve Martin and Pat-

CONTACT US

rick Gilbert as they share secrets of how this approach is changing M&A

For questions about webinars

strategy for the savviest investors.

or assistance registering for the event, please contact Kaitlin McAuley, ACG Global manager, program services, at 312-9574285 or kmcauley@acg.org.

THE ROUND NEWS THAT MATTERS

17.51 BILLION

$

VERTICAL VIEW // TECHNOLOGY

237.

86 MILLION

$

$17.51 billion in capital was exited from tech deals last year, down from $37.52 billion in 2012.

There were 246 tech buyouts in 2013, an increase from 140 in 2009. The average buyout size last year was $237.86 million.

73

EXITS There were 73 IT exits in 2013, down from 97 in 2012.

There were 51 middlemarket buyouts in 2013 in communication and networking companies.

FIRST!

California, Massachusetts, Georgia, Illinois, Texas and Virginia saw the most IT deals last year.

$39.88 billion was invested in IT middle-market deals last year.

Vista Equity Partners made 34 tech investments from 2009-2014, making it the top PE investor during that time.

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

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

All for One

HGGC applies an old-school PE approach to acquiring MyWebGrocer

BY JERRY SOVERINSKY

HGGC LEADERSHIP//

(from left): Farouk J. Hussein, vice president; J. Steven Young, managing partner and co-founder; Philip S. Sampognaro, associate; Hudson D. Smith Jr., principal; and Richard F. Lawson, managing partner, co-founder and CEO.

Photos by Craig Sherod

O

n any given day in Chicago, a network of large, green Peapod delivery trucks buzz about the city’s streets, delivering groceries to homes and businesses. The trucks have become ubiquitous of late, especially on the heels of a particularly brutal winter that prompted many residents to embrace the convenience of home-grocery delivery.

Peapod and its rivals have caused an upheaval in how consumers shop for food, influencing mega-retailers, including Amazon and Wal-Mart, to enter the market with the intent of capturing a growing segment of digital-centric shoppers. They have also created a conundrum for traditional grocery chains unable to offer these services.

“The percentage of spending grocery shoppers will do online over the next 10 years will increase dramatically,” says Bill Bishop, chairman of Brick Meets Click, a Barrington, Ill.-based firm that consults on the use of technology in shopping and retail business models. “The most conservative market-level estimates are 3 percent to 7 percent, and the most aggressive are upwards of 16 or 17 percent,” he says.

HQ//

MyWebGrocer purchased The Champlain Mill in Winooski, Vt., in 2011 to house its burgeoning business.

PARTNERS // HGGC’s Richard F. Lawson (left) and Steven J. Young.

Since online giant Amazon launched its AmazonFresh home grocery delivery service in Seattle in 2007, the company has expanded to Los Angeles and announced ambitions to take its grocery delivery model to as many as 40 U.S. markets. Meanwhile, brick-and-mortar grocery stores, in their own efforts to defend market share, have been looking for ways to offer similar 24/7 digital access for their customers, along with the pickup or delivery options that AmazonFresh, Peapod and others are promising.

That need is a primary reason MyWebGrocer became such an appealing target for Palo Alto, Calif.-based HGGC ™, a middle-market private equity firm that invested $154 million to gain a controlling interest in the Winooski, Vt.-based company. MyWebGrocer provides e-commerce and e-marketing solutions to grocers and consumer packaged goods companies looking for the chance to compete in a burgeoning e-commerce market.

“MWG is empowering traditional grocery retailers to more effectively compete with emerging online entrants such as Amazon that are searching for large new markets to enter as [Amazon] looks to maintain its growth rate,” says Richard F. Lawson, co-founder, CEO and managing partner of HGGC.

Though now a leading player in the Internet grocery space, MyWebGrocer, founded in 1999, doesn’t operate a fleet of delivery trucks or have warehouses filled with rows of perishables stacked floor to ceiling. Instead, the company provides web-based tools that let grocery stores offer a robust Internet presence, using integrated online and mobile platforms allowing shoppers to order food for delivery or pickup. These tools integrate seamlessly into a retailer’s existing operations, eliminating the need to create an additional distribution model.

Rich Tarrant, founder and CEO of MyWebGrocer, says the company’s original goal was to be the “anti-Webvan,” referring to an earlier online grocery service with capitalintensive costs, including a string of warehouses in the Northwest and a large fleet of trucks. Those costs proved overwhelming, eventually forcing the dot-com startup to file for bankruptcy in 2001.

“The problem with the Webvan model is that it requires an expensive infrastructure and complicated supply chain logistics, which are difficult to maintain in a low-margin business where products are ubiquitous,” Tarrant says.

Maintaining MyWebGrocer’s e-commerce platform is a complex initiative, requiring the management of a website on behalf of retailers with up to 80,000 individual products, whose prices and offer promotions change frequently. “We spent the first five years building out the e-commerce component,” he says.

CONNECTING WITH RETAILERS Focusing on technology was critical and allowed MyWebGrocer to realize early successes where others had failed.

“We were profitable and grew the company organically,” Tarrant says. “We build a good product and bring it to the retailer cost-effectively. It’s a valuable service that they need.”

“WE WERE PROFITABLE AND GREW THE COMPANY ORGANICALLY. WE BUILD A GOOD PRODUCT AND BRING IT TO THE RETAILER COSTEFFECTIVELY. IT’S A VALUABLE SERVICE THAT THEY NEED.” Rich Tarrant founder and CEO of MyWebGrocer

WORKING TOGETHER //

MyWebGrocer employs more than 300 people at its Vermont headquarters, including the two staff members shown at left.

MyWebGrocer’s ability to maintain a digital presence resonates strongly among retailers, Bishop says. “MyWebGrocer found a really good place to play because it allows them to give the retailer a chance to be an online grocery business and better able to defend themselves from the likes of Amazon and others,” he says.

Retailers have responded to the model; over the past decade, MyWebGrocer has grown sales steadily. “We’ve seen 25 percent to 40 percent growth year-over-year, which is robust growth by anyone’s measure,” Tarrant says.

PRIVATE EQUITY ROUND NO. 1 In 2009, Stripes Group, an investment firm focused on technology and consumer products companies, took a $13 million equity position in MyWebGrocer to help maximize growth opportunities. The investment went largely toward expanding operations, with U.S. head count mushrooming to 200 from 75 in four years.

By 2013, Stripes was nearing the end of its investment cycle. Tarrant decided to recapitalize MyWebGrocer, bringing on a partner to help take the company to the next level, aiming for either an initial public offering or international expansion.

“WE LIKED THE E-COMMERCE SOFTWARE MODEL MYWEBGROCER HAS FOR GROCERY. GROCERY IS A UNIQUE VERTICAL, ONE OF THE LARGEST … AND [MYWEBGROCER’S] ECONOMIC MODEL IS UNIQUE.” Hudson J. Smith Jr. (above) an HGGC principal

PRIVATE EQUITY ROUND NO. 2: HGGC At the same time, HGGC became a major player in the ecommerce space with its investment in Hybris Software, which provides e-commerce services to corporations.

While working in that space, HGGC became aware of MyWebGrocer’s success and identified the company as an appealing investment target.

HGGC bought its controlling share of MyWebGrocer in June 2013, leaving MyWebGrocer’s management team virtually intact; the team became committed partners.

“We liked the e-commerce software model MyWebGrocer has for grocery,” says Hudson J. Smith Jr., an HGGC principal. “Grocery is a unique vertical, one of the largest … and [MyWebGrocer’s] economic model is unique.

Lawson says HGGC takes an old-school approach toward investing (think 1990s), selecting companies whose executive team is strong and committed to reinvesting in its future. “We never acquire 100 percent of a company outright…We are a back-to-basics private equity firm,” he says, adding: “One of the important distinctions of our partnership with MyWebGrocer is that they reinvested a significant portion of their proceeds, becoming both a seller and buyer.”

Lawson says the strategy was popularized in the mid1990s. Superior returns were driven by PE firms that worked closely with company founders, focusing on no more than three or four companies per fund cycle. Today, by contrast, most PE deals have become “an assets under management strategy,” he says.

Such an approach is certainly unique, especially with e-commerce companies, Smith says. “Many firms have a playbook, especially in technology; they want to implement management teams they’ve worked with, and so they tend to make changes that are substantial,” he says. “What Rich liked about us is that we’ve been successful with founders, [we understand that] they’re the lifeblood of these businesses and the employees are very loyal to them.

“It’s more of a partnership. We’re in control as control investors, but we wouldn’t do things without their consent.

That’s a differentiator in the controlled buyout model.”

Such collaboration was welcomed by Tarrant and his team and helped to cement the deal. “HGGC made it clear from day one of the interview process that their goal is to support us in building a very large and successful company,” Tarrant says. “They simply wanted to know what we needed.”

HIDDEN OPPORTUNITIES While the e-commerce toolkit MyWebGrocer provides retailers was its most visible offering, it was the company’s less visible assets—big data—that offered perhaps the strongest appeal for HGGC. In addition to online ordering

“ONE OF THE IMPORTANT DISTINCTIONS OF OUR PARTNERSHIP WITH MYWEBGROCER IS THAT THEY REINVESTED A SIGNIFICANT PORTION OF THEIR PROCEEDS, BECOMING BOTH A SELLER AND BUYER.” Richard F. Lawson co-founder, CEO and managing partner of HGGC

capabilities, MyWebGrocer offers additional tools, including website creation, digital circulars and a shopping list portal. Those features provide opportunities for consumer packaged goods (CPG) companies—the makers of the products on grocery shelves—to connect with consumers.

For instance, retailers that partner with MyWebGrocer allow their customers to compose digital shopping lists or build recipes, providing additional insight into consumer behavior that can be monetized to CPG companies for ad placement or other communications.

“CPG companies are huge consumers of media, and we expect growth in that area ... the future is just starting in terms of online grocery,” Tarrant says.

Smith says CPG companies spend $90 billion annually on promotions in the grocery area, with two-thirds on shopper marketing. The future looks bright for attracting those advertising dollars, especially as GPSenabled smartphones become pervasive shopping tools.

“We understood the software piece on the grocery side, but the data and digital advertising growth that could be monetized … that’s a big attraction,” Smith says. “That’s a very valuable impression opportunity for CPG companies.”

MyWebGrocer has already tapped large CPG companies for these revenue opportunities, including Kellogg, Procter & Gamble, Nestle, Kraft, Campbell Soup and Unilever.

LOOKING FORWARD HGGC wasted little time in helping MyWebGrocer achieve its goal of an overseas presence, acquiring Irish online e-commerce software vendor Buy4Now Technology Group in February 2014. Buy4Now provides web and e-commerce solutions to clients wanting to broaden their business by adding an online platform. With software that supports multiple currencies and languages, Buy4Now lets MyWebGrocer begin competing effectively in the European market. “The combined suite of solutions across both MyWebGrocer and Buy4Now will provide retailers and CPGs with a compelling value proposition in Europe,” Smith says.

Lawson offers a bullish outlook for MyWebGrocer with a portfolio of products attractive to both retailers and CPG companies. “We provide the picks and shovels, the [grocers] then decide how to give their shoppers a better shopping experience. Access, not demand, has driven this into a half-trillion dollar industry,” he says.

STRATEGY //

HGGC’s Philip S. Sampognaro (left) and Hudson D. Smith Jr.

“The industry is poised for a lot of change, and our goal is to help Rich [Tarrant] build the largest global independent provider of solutions to this market. Not only in the United States, but in Asia, Europe and the Middle East,” Lawson says. “This [AmazonFresh] thing is just the beginning; that’s a harbinger of things to come.”

For MyWebGrocer, success will be a direct result of Tarrant and the rest of his management team having the autonomy to continue flexing their operational expertise to help the company maximize its growth opportunities.

“We’re backing the management team, not augmenting them,” Lawson says. “We saw in Rich an opportunity to back somebody who we knew would be tremendously successful. And we bet that his team would be successful, too.

“We’re focused on underwriting great people,” he says. “We simply provide the capital to help them grow.” //

April 13 – 15, 2015 H IL T O N B O N N E T C R E E K A N D W A L D O R F A S T O RI A O RL A N D O , F Lo r i da

Dealmaking is a people business, making video a natural communications tool to vet potential investment partners

The

Power of Video

Dealmaking is a people business, making video a natural communications tool to vet potential investment partners

BY DAVID SNOW

BY DAVID SNOW

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n the early 2000s, when I was a reporter covering the private equity market for a trade publication, I had the opportunity to interview Blackstone co-founder Stephen Schwarzman. He told me something that I’ve often repeated as I build out my video-centric media business, Privcap.

At the time, Blackstone had only just begun opening offices overseas. I was surprised when Schwarzman said the decision to finally add far-away offices had a lot to do with advances in video-conferencing technology. He said he would have felt uncomfortable having billion-dollar conversations with people over the phone. But with a video hook-up, he had the ability to visually observe employees and potential partners, and in particular to zoom in on their eyes.

Success in business depends largely on people, and in no industry is this more the case than private equity, where parties “get married” for years and years with the hope of jointly creating value. Limited partners agree to have their capital locked up in GP-controlled funds for 10 to 15 years.

Private equity GPs structure multi-year incentive plans with portfolio company management. No wonder people in this industry are maniacal networkers and conference-goers—their success is based on meeting and “marrying” the right people.

These professionals spend their days in an endless procession of meetings, speaking face to face with potential fund managers, advisers, intermediaries and portfolio company executives. Why all the meetings? Because no matter how much due diligence material you pile into a data room, no one will commit to a multi-year, big-dollar business relationship without personally meeting their potential partners. Humans learn valuable things about other humans by watching them.

YES, PRIVATE CONVERSATIONS, HANDSHAKES AND COCKTAILS HAPPEN, AND THOSE CANNOT BE DIGITIZED, BUT THE MAIN CONTENT AT THESE EVENTS CAN BE CAPTURED ON VIDEO AND MADE AVAILABLE TO FAR MORE PEOPLE THAN WERE IN THE BANQUET ROOM.

PUT ANOTHER WAY, THE ‘I HAVE A DREAM’ VIDEO IS MUCH MORE IMPRESSIVE THAN THE ‘I HAVE A DREAM’ FLIPBOOK.

Technological breakthroughs, as well as the appeal of visually connecting with business partners, are behind the increasing use of online video in this market. Just as it was once expensive to get words from point A to point B (see newspapers), it was once incredibly expensive to broadcast video (see TV). The Internet has now made it possible for everyone in the world with a smartphone to be a video publisher. What’s more, until just a few years ago, online video, while inexpensive to produce, was often hampered by insufficient bandwidth and platform incompatibility. That led to frustrating viewing experiences, as in “I don’t care if this video is going to change my life, I’m not waiting four minutes for the damn thing to buffer.”

TECHNOLOGY MEETS DEMAND Dealmakers are now using video to communicate because they finally can. A market outlook once confined to text and charts can be brought to life by a video interview with the author. A portfolio company performance update can be delivered from the CEO in a personable, conversational format usually accessible only in in-person meetings.

Online video is delivered either live and appointmentbased, or pre-produced and on-demand. The advantage of a live session is its spontaneity and interactivity—the viewers can ask questions and gauge reactions. The potential downside is that, just like a poorly planned conference-panel discussion, these live sessions can meander and get hijacked by an audience member with irrelevant questions. The advantage of a pre-produced video is that the content can be edited, fine-tuned and then shared again and again in pristine form. As the TV world is learning, very few programs need to be viewed live.

Steven Barnes, head of North American PE for Bain Capital, joined Privcap recently to explain what types of operating executives tend to succeed at his firm.

Source: Privcap.com

SAVING TIME AND MONEY Videos done right are both engaging and efficient. Before you fly around the country giving the same 15-minute presentation again and again, consider capturing the best version on video and distributing it digitally. It will never replace the in-person meeting, but it helps your contacts evaluate whether or not an in-person meeting makes sense.

Video might give you an advantage that traditional marketing documents will not. A brief video of you and your team describing your strategy and the opportunity you hope to pursue might be far more persuasive than the 15-page flipbook you spent four months putting together. More often than people care to admit, they make decisions within minutes of seeing a potential partner speak. They think, “This guy is really impressive,” based not on what the guy said, but the way he said it.

Put another way, the “I Have a Dream” video is much more impressive than the “I Have a Dream” flipbook.

KNOW YOUR AUDIENCE Videos accessed online, like other forms of digital content, are highly measurable. Knowing, for example, that your commentary about the Marcellus Shale was watched three times more than a similar commentary about the Eagle Ford Shale gives you a sense of what your intended audience is interested in.

Knowing that people tend to hit the stop button at 03:15 might suggest your COO gets boring right about then and a change-up in her spiel is in order.

Follow David Snow on Twitter.

IN TRUTH, THE WAY VIDEO IS BEING USED IN THIS MARKET IS NOT ALL THAT DIFFERENT FROM THE WAY PARTICIPANTS ALREADY COMMUNICATE.

In truth, the way video is being used in this market is not all that different from the way participants already communicate. What happens at conferences? People fly in from around the world to watch their peers speak to each other on stage. What happens at an annual general meeting? Investors fly in from around the world primarily to see GPs and portfolio company CEOs deliver remarks on stage. Yes, private conversations, handshakes and cocktails happen, and those cannot be digitized, but the main content at these events can be captured on video and made available to far more people than were in the banquet room.

MATCHMAKING AND NETWORKING Finally, the rise of online video in the dealmaking market is predictable because we already see a video explosion in the consumer market. Communication trends tend to happen first on the consumer side before making their way to the relatively staid business-to-business world. People were using email for personal communication well before businesses embraced it.

Remember when online dating was weird and embarrassing?

Now everybody does it. Well, online dating is coming to the deal market in a big way, and video will be a key media format within it, despite the current apprehension some feel about saying on video the kinds of things they say in hundreds of private meetings each year.

It’s worth mentioning that no one is actually getting married online. But by using rich media, daters now have a chance to learn a lot more about each other, and look into each other’s eyes, before agreeing to go on a first date. // David Snow is CEO and co-founder of Privcap Media, a New York-based digital media company that has built a global audience of private capital market participants around thoughtleadership video programs and digital reports. Privcap Media offers premium content for subscribers, as well as sponsorship opportunities and custom-content services.

Learn more about Privcap.

A QUALIFIED OPINION MATT SONDAG // Managing Director, West Monroe Partners

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att Sondag is a managing director in West Monroe Partners’ Chicago office. He is responsible for expanding and deepening the firm’s unique offerings to the private equity market, including its merger and acquisition services.

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WHAT TRENDS ARE YOU SEEING IN THE TECH SPACE?

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ore and more companies are moving to the cloud, releasing “control” of their systems and data. Cloud security is improving, and there is a recent increase in hosting providers (e.g., Amazon Web Services) willing to sign business associate agreements (BAAs) to host protected health information (PHI). This provides considerable opportunities for companies in the health care space that didn’t exist 12 to 18 months ago. We’re also seeing more companies leverage tablet and mobile solutions to enable their workforce and streamline business processes. We’ve all probably experienced this in a retail store where the checkout process is now mobile. Finally, the term “big data” has been hyped over the last two years, but it’s finally starting to deliver real value. It’s helping companies predict the “what” (not so much the “why”) and drive customer interaction (e.g., predictive purchasing, fraud).

Photo by Alyssa Schukar

A QUALIFIED OPINION MATT SONDAG // Managing Director, West Monroe Partners

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att Sondag is a managing director in West Monroe Partners’ Chicago office. He is responsible for expanding and deepening the firm’s unique offerings to the private equity market, including its merger and acquisition services.

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WHAT OPPORTUNITIES DO YOU SEE FOR THE MIDDLE-MARKET PE FIRMS THAT WANT TO INVEST IN TECH COMPANIES?

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t’s certainly an exciting time to invest in technology companies. The business intelligence or big-data space is very hot and will continue to deliver more practical solutions for customers. The gathering of data (structured and unstructured) will continue to increase, and different industries are finding ways to extract value. The messaging or communication space is red hot, but also competitive.

The recent acquisition of WhatsApp by Facebook might sound expensive, but it really wasn’t when you consider its per user valuation ($42) was a third of Twitter’s ($127). The security space also will provide big opportunities, especially in managed services (annuity-based revenue). Big security breaches like the one at Target Corporation last December shine a spotlight on the need for advanced security to both protect a company’s brand reputation as well as stay ahead of hackers who are becoming more sophisticated. Lastly, I think we’ll also see a movement of security plays that move beyond B2B and into B2C.

Photo by Alyssa Schukar

A QUALIFIED OPINION MATT SONDAG // Managing Director, West Monroe Partners

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att Sondag is a managing director in West Monroe Partners’ Chicago office. He is responsible for expanding and deepening the firm’s unique offerings to the private equity market, including its merger and acquisition services.

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WHAT ROLE DOES PRE-DEAL INFORMATION TECHNOLOGY DILIGENCE PLAY IN THE OVERALL PROCESS AND WHY IS IT IMPORTANT?

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he value of IT diligence is two-fold: to identify risks and uncover opportunities. It’s critical to understand the maturity of the IT landscape and what landmines may exist. Does the enterprise resource-planning system need to be replaced? If a disaster happens, can business systems recover? Is the infrastructure adequate to support an acquisition? Identifying risks, and the costs to mitigate those risks, is critical during diligence. IT diligence can also identify opportunities to improve the top line. For example, can IT be leveraged to automate certain manual processes, enhance customer stickiness, improve cross-sell or provide visibility into key business metrics (e.g., customer profitability, product margin)? Bottom line, it’s almost impossible to be certain that the investment thesis can be achieved without first understanding the IT risks and opportunities.

Photo by Alyssa Schukar

A QUALIFIED OPINION MATT SONDAG // Managing Director, West Monroe Partners

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att Sondag is a managing director in West Monroe Partners’ Chicago office. He is responsible for expanding and deepening the firm’s unique offerings to the private equity market, including its merger and acquisition services.

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HOW DOES PRE-DEAL OPERATIONAL DUE DILIGENCE BENEFIT THE PRE-DEAL PROCESS?

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he key role of operational diligence is to estimate how much value, if any, can be extracted from the business operations. How lean are the business processes?

Is the Order to Cash process broken? Are services/products being procured in the most cost-effective manner? Is the distribution network optimized? Operational diligence identifies opportunities to streamline processes and, in so doing, improve EBITDA. This can result in shorter cashto-cash cycle times, reduced inventory, increased inventory turns, reduced shipping errors and quicker customer response. Not all private equity firms perform operational diligence, and it’s a key contributor to why valuations among buyers can differ. Those firms that successfully perform operational diligence have more insight into the specific operational opportunities, thus warranting a higher or lower multiple than what the seller might be asking.

Photo by Alyssa Schukar

A QUALIFIED OPINION MATT SONDAG // Managing Director, West Monroe Partners

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att Sondag is a managing director in West Monroe Partners’ Chicago office. He is responsible for expanding and deepening the firm’s unique offerings to the private equity market, including its merger and acquisition services.

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HOW CAN YOU IMPROVE THE VALUE OF A COMPANY POST-DEAL WITH IT INITIATIVES?

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ll CIOs should categorize the value of IT projects in one of six buckets: (1) increasing revenue/profitability (2) enhancing customer experience (3) reducing cost (4) enabling growth (5) reducing risk or enabling compliance and (6) “KTLO”— Keeping the Lights On. Investing in business intelligence or reporting solutions is typically a high return on investment. Providing this visibility into customer or product profitability can have a direct impact on revenue and profitability. Building mobile solutions for customers is a great way to enhance customer experience. If you’re not focused on this, your competitors will steal your customers.

Companies also should look to technology to automate processes, which can reduce operational costs. Another way to drive value creation is to build a scalable IT foundation that allows the company to grow easily. This might entail migrating the infrastructure to an outsourced data center or investing in a new ERP system. Finally, businesses must comply with increasing regulation, and IT will typically play a big role in enabling this compliance.

Photo by Alyssa Schukar

7th Annual M&A Conference

Tuesday, June 3 | Detroit Athletic Club | 7:00am – 1:00pm Kicking Off a Season of Renewal: A Fresh Perspective on M&A in Michigan Keynote Address Dave Brandon, Donald R. Shepherd Director of Athletics, University of Michigan Annual Economic Update David Sowerby, Portfolio Manager, Loomis Sayles & Company Panel Discussion Out-of-State Investors’ Perspective on Doing Deals in Michigan Panel Discussion M&A Market Update Closing Fireside Chat A Perspective on the Status and Future of Early Stage Investing in Michigan Register here: www.acg.org/detroit/events/ Sponsors:

Attendance fee $80 | Members $120 | Guests Breakfast, lunch and parking are included in the registration fee.

Location Detroit Athletic Club 241 Madison Avenue Detroit, Michigan More Information Sharon Kimble, Executive Director 877.894.2754 acgdetroit@acg.org

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

MINNESOTA NEW YORK

TAP CITIES TO NAVIGATE TO ARTICLE

ACG Global and The Jordan Company Host Congressional Visit This spring, members of ACG hosted U.S. Rep. Brad Schneider, D-Ill., at Vantage Specialty Chemicals, Lambent Division, in Gurnee, Ill. Vantage is a specialty chemicals producer focused on naturally derived ingredients serving global end markets, including personal care, consumer products, industrial and food markets. Vantage converts renewable animal and vegetable-based raw materials into products that are widely used in a range of everyday items such as cosmetics, snack cakes, cooking sprays, specialty cleaning supplies and lubricants.

Vantage was acquired by middle-market private equity firm The Jordan Company (TJC) in 2012. Vantage has annual sales of $550 million with four U.S. manufacturing plants. The Gurnee plant (Lambent Division) has sales of $150 million, employs over 190 people and has seen average growth of 13 percent per year. The Lambent Division has invested more than $21 million in capital over the past five years in its 15-acre facilContinued on next page

For information about hosting an in-district meeting with your ACG chapter and a congressional member, please contact Amber Landis, manager of policy communications of ACG Global.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE ity. In addition, $4.5 million of that capital has been invested to improve employee safety and environmental compliance. These investments have supported business growth, resulting in 32 new jobs and a 20 percent increase in full-time employment at the Gurnee facility.

Providing the case study of the Vantage and TJC partnership allowed Schneider the opportunity to see the value of private capital and the importance of the middle market. The congressman also was able to share with ACG, TJC and the senior Vantage executives his business acumen as an industrial engineer and owner of Cadence Consulting Group, LLC and Lead-Out Capital Partners, LLC. Schneider’s career in business and consulting with small and mid-sized businesses allowed for detailed discussions about federal policies that are needed to grow and foster the middle market. //

Association for Corporate Growth Forms Bipartisan Congressional Caucus for Middle Market Growth The Association for Corporate Growth (ACG) is pleased to announce the formation of a bipartisan Congressional Caucus for Middle Market Growth by several members of Congress. Led

by Reps. Steve Stivers, R-Ohio; Jared Polis, D-Colo.; Tom Rice, R-S.C.; and Brad Schneider, D-Ill., the Caucus will educate policymakers and leaders on the economic impact of the middle market and how it functions as a powerful engine for job and economic growth. According to the National Center for the Middle Market at The Ohio State University Fisher College of Business, the middle market includes companies with annual revenue of $10 million to $1 billion.

The Caucus will address issues relevant to this broad market segment, which employs more than 44 million U.S. workers.

The Congressional Caucus for Middle Market Growth will provide an important forum for members dedicated to elevating awareness of the middle market through data-driven research and regular briefings for congressional staff and policy leaders. The first event will be held on Thursday, May 29, 4:00–5:00 PM, EDT in Washington, DC. Learn more about the middle market at middlemarketgrowth.org.

To learn more about ACG’s policy efforts, please visit middlemarket voice.org.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

Tap to view a slideshow of The BOLD Awards.

ACG MINNESOTA (from left) Omar Onsari, founder, Surly Brewing Co., and Scott Ebert, partner, Baker Tilly.

ACG MINNESOTA

ACG Minnesota Spotlights Local Companies with BOLD Awards ACG Minnesota recently held the third annual BOLD Awards. Created to showcase and honor Minnesota companies that are making bold moves, these awards recognize innovation, collaboration, team and talent management, as well as growth through M&A. C-level corporate officers and their key team members, i-bankers, accountants, attorneys, equity partners and advisers are all considered and included in this awards program, as well as the nominator.

Over 300 attendees gathered to celebrate with the 12 finalists in late February at the Metropolitan Ballroom in Minneapolis. Awards were given in small, medium and large corporate categories as well as nonprofit. Determined by a live audience vote, the BOLDEST of the BOLD award went to Surly Brewing Co. for the “Surly Bill,” a historic and monumental step forward for the Minnesota brewing industry.

“The BOLD Awards spotlight companies that may not have otherwise been on our radar,” said Nicki Vincent, executive director of ACG Minnesota.

For information about next year’s awards, visit acg.org/minnesota.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

Tap to view a slideshow of the ACG New York Health Care Conference.

ACG NEW YORK

ACG New York Health Care Conference a Success ACG’s New York chapter recently sponsored its annual Health Care Conference at New York City’s Metropolitan Club. The Feb. 12 conference featured a panel discussion on consumer-directed health care. Ed Kennedy Jr., founder and president of the Marwood Group, moderated a panel with Jerry Korten, former CEO of iSonea and Versamed; Ben Pajak, head of strategy and business development for Towers Watson’s Exchange Solutions business; and Pat Ryan, CEO of Press Ganey and former CEO of both Broadlane and Polymedica/Liberty Medical. The dynamic debate ranged from the definition of “consumer-directed health care” to forecasts of meaningful quality and price transparency for health care services and the likely impact of smartphone technology on health care.

The Nashville Health Care Council was the joint sponsor of the conference, along with several other health care-oriented organizations. The event was capped off by an ACG Capital Connection® featuring 25 health care private equity firms.

The inaugural conference in 2009 was the brainchild of several New York chapter members. Since then, it has evolved into one of the chapter’s largest events.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

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THE PORTFOLIO INSIGHT FROM THE EXPERTS

SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS

IN THIS ISSUE SOUND DECISIONS After the close of the deal, could you encounter challenges and repercussions related to compromised intellectual property? In a word, yes.

SOUND DECISIONS Outsourcing IT functions can be an effective alternative to using internal in-

formation technology and resources for many PE portfolio companies.

MID-MARKET TRENDS With many organizations now storing more sensitive data in the cloud and through networked computing, the potential impact of a security breach has grown exponentially. So what is a corporate director to do?

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.

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

THE PORTFOLIO SOUND DECISIONS // Daimon Geopfert, National Leader-Security and Privacy Consulting, McGladrey LLP

SOUND DECISIONS

MID-MARKET TRENDS

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PE Firms Could Inherit Data Attacks (and Resulting Fallout) from Acquisitions

M After the close of the deal, could you encounter challenges and repercussions related to the acquisition’s compromised intellectual property? In a word, yes.

any organizations, including private equity firms and their portfolio companies, can experience data security breaches. On the surface, these infringements may involve the loss of customers’ personal and credit information; their broader implications reach beyond the potential loss of financial information to regulatory penalties and even lawsuits. As a private equity firm acquiring a new business, consider whether you could be held accountable for inherited ineffective security practices that result in breaches within the acquired company. After the close of the deal, could you encounter challenges and repercussions related to the acquisition’s compromised intellectual property? In a word, yes. You might inherit many of the problems from presale attacks and breaches; if so, you could be paying for these nagging issues for years.

To safeguard against attacks, get started by applying protective security strategies now. A simple assessment of your

networks and systems are managed, including third-party access.

Once a private equity firm or portfo-

company’s current state of security will

lio company has an understanding of its

help you understand your security posture

current security posture and potential

and intellectual property rights, as well

threats, management can target informa-

as identify gaps in your security program.

tion-security spending on the largest risk

Private equity firms can apply this same

areas to quickly reduce likelihood of a

approach to potential acquisitions. An as-

security breach. Improving the weakest

sessment can reveal appropriate security

links in an organization’s information

standards and uncover all of the ways the

security posture can quickly make an

company may be breached. For instance,

organization a less attractive target for an

most data breaches do not happen through

attacker and a much more attractive tar-

front-facing websites, but rather through

get for a potential buyer. //

side channels such as a branch wireless Learn more.

system or retail site network. Organiza-

Daimon Geopfert is the national leader for

tions should ensure that all access to their

McGladrey’s Security and Privacy Consulting.

THE PORTFOLIO SOUND DECISIONS // Jeremy Swan and Jim Ambrosini, CohnReznick

SOUND DECISIONS

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Outsourcing IT: A Strategic Choice to Add Value to a Portfolio Company

O For every dollar spent on IT outsourcing, operational costs drop by $1.26.

utsourcing IT functions can prove to be an effective alternative to using internal information technology and resources for many private equity portfolio companies. In an environment where organizations are faced with heightened pressure to minimize the cost structure without jeopardizing execution capabilities or business value, outsourcing IT serves as a cost-effective solution that simultaneously reduces operational cost while increasing value and efficiency.

In a study published in 2013 by MIS

• Reduce Overhead Cost—The costs

Quarterly, data gathered from approxi-

associated with hiring employees to

mately 300 U.S. companies studied over a

build, manage and maintain an IT

four-year period showed that a $96.14 mil-

infrastructure—such as training,

lion increase in IT outsourcing was associ-

health insurance and employment

ated with a $121.14 million drop in non-IT

taxes—is eliminated with outsourcing.

operating costs. In other words, for every

• Expert Capabilities—Unless a company

dollar spent on IT outsourcing, operational

is in the business of IT, shifting to an

costs dropped by $1.26. In addition to af-

outsource model is a tremendous

fecting the bottom line and cutting costs,

advantage. Many middle-market portfolio

other key advantages to shifting from in-

companies are not equipped with the

house to external IT services include:

proper level of resources needed to

• Focus on Core Activities—Outsourcing

effectively manage their IT functions.

enables portfolio companies to do what

Turning to outsourcing allows a

they do best. Instead of consuming

company to benefit from the collective

internal resources at the expense of

experience of a team of professionals

marginalizing core activities, outsourcing

who specialize in areas most needed

enables managers and employees to keep

and are able to assist in aligning IT

focused on core business functions with-

strategy with a company’s corporate

out sacrificing efficiency in IT operations.

strategy.

THE PORTFOLIO SOUND DECISIONS // Jeremy Swan and Jim Ambrosini, CohnReznick

SOUND DECISIONS

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• Mitigate Risk—Choosing to manage and

Whether choosing to outsource all or

support IT operations in-house instead

part of a company’s IT infrastructure, en-

of externally can actually pose a risk

suring a positive and successful sourcing

rather than function as an enabler of the

decision should be based on the following

business. Employees often do not have

key considerations:

the necessary skill level, time or

• What are the existing in-house IT

resources to effectively manage an IT

operational costs versus the projected

system, and critical monitoring of the

cost of outsourcing?

network, including proper security

• Does the outsourcing partner have

infrastructure, may be minimal or

strong resources and a positive history

absent. Professional outsourced IT

and reputation?

providers are able to keep up with

• Does the outsource company have a

technology required to run the company,

nearby facility for on-site support?

as well as identify and resolve issues

Are they U.S.-based or offshore?

before they cause any disruption to the

In conclusion, outsourced IT services

business. The cost of outsourcing is

provide a host of benefits at the portfolio

largely offset by the savings realized

company level, essentially reducing cost

through eliminating downtime and

and increasing competitive advantage. //

thereby a potentially significant loss in revenue and profitability.

While loss of control is often considered

Practice. Jim Ambrosini is a Director in

not necessarily the case. The company still

CohnReznick’s IT Audit Practice. Please

needs to identify a point person to work

contact them for more information.

clearly communicate the IT strategy of the business. Doing so will ensure the compaK. Han and S. Mithas, “Information Technology Outsourcing and Non-IT Operating Costs: An Empirical Investigation,” MIS Quarterly 37, no.1 (March 2013): 315-331 1

Private Equity and Venture Capital Industry

a risk in the decision to outsource, this is

directly with the outsourcing partner and

FOOTNOTE

Jeremy Swan is a Principal in CohnReznick’s

ny remains in control of the process.

THE PORTFOLIO MID-MARKET TRENDS // Sharon R. Klein and Melissa L. Nuñéz, Pepper Hamilton, LLP

SOUND DECISIONS

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Cybersecurity: Could It Be Your Next Fiduciary Duty?

F Directors are not expected to become IT experts.

However, they must begin to treat cybersecurity risks much like they treat any other significant risk their company faces.

ollowing the security breaches at Target and other major retailers, cybersecurity has emerged as one of the hottest topics of 2014. Companies have enjoyed enormous increases in productivity and profits as a result of Internet-related technologies. However, with many organizations now storing more sensitive data in the cloud and through networked computing, the potential impact of a security breach on the public as well as company shareholders has grown exponentially.

So what is a corporate director to do?

generally will apply the business judgment

Since the Security and Exchange Commis-

rule to decisions made by directors in han-

sion’s cybersecurity guidance in October

dling cybersecurity issues. Only if a plain-

2011, the SEC has strongly encouraged

tiff shows that a director has “failed to act

more disclosure of cybersecurity risks to

in the face of a known duty to act, thereby

inform investors whether such risks will

demonstrating a conscious disregard for

materially affect current or future opera-

[his or her] responsibilities” might they

tional results. Specifically, the SEC has

have a claim for a breach of fiduciary duty.

recommended disclosures of material costs

However, once directors are aware of spe-

related to preventive and remedial mea-

cific threats to a company or, even worse,

sures. More recently, the National Institute

once a company has experienced a breach

of Standards and Technology (NIST) cy-

of some sort, directors must act quickly. A

bersecurity standards provided a common

failure to respond adequately to a known

language for companies to describe their

threat or risk may lead to liability.

state of readiness for cybersecurity and opportunities to improve risk management.

Thankfully, directors are not expected to

Pepper Point: In order for directors to understand their cybersecurity risk and be able to effectively evaluate their options

become IT experts. However, they must be-

for reducing risk and build in privacy/se-

gin to treat cybersecurity risks much like

curity by design, we recommend they ask

they treat any other significant risk their

management to designate a chief privacy/

company faces. As with other areas, courts

security officer and/or team to provide

THE PORTFOLIO MID-MARKET TRENDS // Sharon R. Klein and Melissa L. Nuñéz, Pepper Hamilton, LLP

SOUND DECISIONS

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Sharon R. Klein

oversight and completely and periodically

Armed with the information necessary

report to the board of directors on the fol-

to evaluate the risks to their company, direc-

lowing issues:

tors can exercise their business judgment

• What type of sensitive data does the

in determining how best to allocate the

company collect, transmit and store,

company’s resources, protect against cyber

and what type of breach would be most

attacks and maintain investor value. //

damaging to the company, the public or shareholders?

• What liability risks were reported in the

Melissa L. Nuñéz

Sharon R. Klein is a Partner in Pepper Hamilton, LLP’s Orange County, California

company’s risk assessment and audit of

office and leads its Privacy, Security and Data

its privacy/security vulnerabilities, and

Protection practice.

what can be done to minimize them?

Melissa L. Nuñéz. is a Corporate and

• Have privacy and security principles, policies and procedures been

Securities Associate in Pepper Hamilton, LLP’s Orange County, California office.

implemented throughout the business?

• Has the company or related third parties experienced any breaches in the past, and what has been done as a result?

• Does the company have adequate cyber security insurance?

READ MORE 1. Partly Cloudy with a Chance of Data Breach 2. NIST Proposes Privacy Control Roadmap for Organizations 3. Executive Order Begins Process of Strengthening Nation’s Cybersecurity and Critical Infrastructure 4. Class Actions Adding to the Cost of Data Breaches 5. FTC Releases Final Report on Consumer Privacy Best Practices

TH E ACG GLO B A L N E TWORK IS N O W RI G HT IN TH E PA LM O F YO UR HAND.

The brand new mobile app is the one stop for ACG members to discover events, members, connect via social media, access Middle Market Growth, and more. Login credentials needed to access membership directory.

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Š 2014 Association for Corporate Growth. All Rights Reserved.

THE LADDER ACG MEMBERS ON THE MOVE

Terry M. Keating

Terry M. Keating of ACG

Spire LLC, an industry leader

Chicago has been named

in quantitative shopper intel-

executive president at Accord

ligence, has been acquired by

Financial Inc. and will be

Datalogix, a data-driven compa-

responsible for leading growth

ny connecting digital advertising

and expansion initiatives for

to offline sales. Carter Capital

Accord’s U.S. subsidiary.

Corporation, a Carter Morse & Mathias affiliate, served as

HGGC has signed an agreement

Spire’s financial adviser for

to acquire Serena Software, the

the transaction.

largest independent provider of IT application development and

The Watermill Group, a

deployment solutions, in part-

Boston-area private investment

nership with company founder

firm with extensive holdings

Doug Troxel. Serena Software

in metals and plastics compa-

had revenue of more than $200

nies, has acquired The Plastics

million in fiscal 2013. HCCG,

Group. TPG custom makes

the mid-market private equity

hollow, molded plastic products,

firm whose partners include

ranging from the small red gas

former NFL quarterback Steve

containers sold at home im-

Young, is in the midst of raising

provement stores to the large

$1 billion for its second fund.

portable toilets stationed at out-

Read more about HGGC in this

door festivals and construction

month’s Growth Story.

sites. Read more about The Watermill Group.

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.

IT’S THE SMALL THINGS VIDEO INDUSTRY TRENDS // I’m Ready for My Close-Up

1

THE RISE AND FALL OF THE FLIPCAM The Flip video camera, introduced in 2007, was sold to Cisco for $590 million in 2009. Production was shut down just two years later—a casualty of the smartphone proliferation.

2

YOU BETTER WORK Technological advances in video quality occur faster than you can say, “Action!” Apple even shot a 15-minute video taken exclusively on the iPhone 5s at Burberry’s London, Spring/Summer 2014 fashion show.

3

VIDEO KILLED THE FILM STAR Given the huge cost savings, movies are quickly transitioning to an all-digital distribution format. In fact, Paramount Pictures has become the first big studio to stop releasing its major movies on film in the United States.

6

COSTLY CONVERSION TO DIGITAL 88 percent of today’s theaters have made the jump to digital, but not without a cost. Converting each individual auditorium in a multiplex from film to digital costs upward of $75,000.

5 4

THE YOUTUBE PHENOMENON YouTube, the world’s most popular online video site, boasts 4 billion hours of watching each month and 72 hours of video uploaded every minute.

Launched in 2005, it was purchased by Google for $1.65 billion a year later.

EVERYTHING LOOKS BETTER IN 3-D Panasonic introduced the first 3-D video camera and TV system, both in 2010, paving the way for the expansion of these two product categories in the years to come.

Want to tap into the middle market?

LEARN ABOUT ADVERTISING OPPORTUNITIES IN MIDDLE MARKET GROWTH AND REACH 30,000+ MIDDLE-MARKET PROFESSIONALS. CONTACT US OR DOWNLOAD THE MEDIA KIT TO GET STARTED TODAY.

DOWNLOAD MEDIA KIT Contact Meredith Rollins at mrollins@acg.org // 312-957-4260

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THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

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

Jason Brown GE Capital Corp.

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 ACG New York Term expires 8/31/2014

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

Joel Rosenthal Schneider Downs & Co., Inc. ACG Pittsburgh Term expires 8/31/2014 Hans-Josef Vogel Beiten Burkhardt ACG Germany Term expires 8/31/2015

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