Middle Market Growth - May/June 2016

Growth MIDDLE MARKET

// MAY/JUNE 2016

M&A DEAL INSURANCE GAINS POPULARITY A QUALIFIED OPINION: DAVID MELCHER, PRESIDENT & CEO, AEROSPACE INDUSTRIES ASSOCIATION

AERYON LABS’ DRONES PUT

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L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S © 2016 Association for Corporate Growth. All Rights Reserved.

EXECUTIVE SUMMARY RICHARD P. JAFFE // Chairman, ACG Global and Partner, Duane Morris LLP GARY A. LABRANCHE // President & CEO, ACG Global

A Drone’s-Eye View of ACG

T

he theme of this issue is aerospace and defense. With a cover story profiling private equity-backed Aeryon

Labs, a maker of commercial drones, it’s only fitting to provide an aerial snapshot of ACG’s activities since last year’s InterGrowth® conference.

ACG has made considerable headway on public policy issues in the past year, including establishing an office in Washington, D.C., to ensure that the voice of the middle market is ever-present to shape policy and respond to regulatory issues. Thanks in part to the effort of ACG members, the SBIC Advisers Relief Act has become law. The SEC Small Business Advocate Act has been introduced to ensure that small and midsize businesses are represented within the SEC. And ACG is part of a large coalition to overcome the impact of a recent National Labor Relations Board ruling on the joint employer standard. Members of our Private Equity Regulatory Task Force, or PERT, have also provided input on a range of issues, including a proposed fee reporting template developed by the Institutional Limited Partners Association.

CFOs, CCOs and in-house general counsel from more than 45 private equity firms have joined together in PERT. This committed group is developing best practice guidelines on issues such as fees and expenses, marketing and cybersecurity. Look for PERT Principles to be published later in 2016. Also, watch for the publication of the “Guide to Private Equity Regulatory Compliance,” a practical, user-friendly guide available from Thompson Information Services. ACG is proud to help bring this resource to members.

ACG’s newly formed strategic partnership with Insperity, a professional employer organization, offers ACG members discounts on payroll, benefits management and a range of human resources services.

Meanwhile, members have access to more places to do business with each other, thanks to the recent launch of ACG Madrid and ACG Hong Kong. With 59 chapters and a successful EuroGrowth conference, ACG offers local community and global reach to more than 90,000 middle-market professionals.

January marked the release of the 25th edition of MMG. This award-winning publication is thriving due in large part to strong commitment from ACG’s partners. Recently, MMG incorporated additional content in areas that resonate with readers. For example, a new Web series on cybersecurity began in January.

We welcome your thoughts about the publication, the middle market and the issues important to your business. //

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EXECUTIVE SUITE BRIAN PITERA // Principal, Grant Thornton LLP

Q

WHY DID IT MAKE SENSE FOR YOU TO JOIN GRANT THORNTON? BRIAN PITERA: Grant Thornton’s acquisition of Blossom Growth

Partners is in line with the firm’s strategy to provide clients a holistic approach through the entire transaction life cycle, including performance improvement. The Grant Thornton platform will allow us to scale our capabilities with the use of the firm’s 6,000 resources across the United States. And it makes perfect sense for Grant Thornton to expand its offering of performance-improvement solutions to existing and potential clients. We don’t tell clients what can happen with a business. We take them through what should happen and help them implement change. My team and I—who remain focused on value acceleration—are excited to have joined Grant Thornton.

Q

HOW DOES YOUR TEAM HELP OWNERS CREATE VALUE?

BP: A transaction shouldn’t focus on where a company is today, but on

how it can grow and what it can be in the future. At Grant Thornton we work with the owner and management team to help the business reach its full potential. It’s also important to note that everyone on our team has had a career on the company side, working within management and the executive team. We have all walked in management’s shoes.

We look for opportunities to drive quick wins and longer-term plays.

Even the best management teams sometimes have a hard time stepping back from the day to day to assess the bigger picture, and they often begin to accept inefficiencies within the company. At Grant Thornton we

BIO // BRIAN PITERA is a principal in Grant Thornton’s transaction services group. He focuses on operating services performance improvement and buy- and sell-side operations diligence.

Content Provided by ACG Partners and Featured Firms

have the ability to look at the company with a fresh perspective, correct inefficiencies, help the company run better and create new opportunities to add value. //

MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook Data

Blue Skies Ahead for A&D Industry

T

he first airplane flight took place on Dec. 17, 1903, at Kitty Hawk, North Carolina. More than a century later, the United States boasts the largest number of airports of any country—

some 13,513, according to the most recent figures from the The World Factbook published by the CIA. By comparison, to round out the top three, Brazil comes in at just over 4,000 airports total, while Mexico has 1,714.

Those are just a few statistics that illustrate the scope of the U.S. aerospace industry. Here are a few more, courtesy of the General

BIO //

Aviation Manufacturers Association’s 2015 General Aviation Statistical

As founder and CEO of PitchBook Data, John Gabbert brings more than 15 years of experience building comprehensive databases that cater to the private equity and venture capital industries. Gabbert is recognized as an industry leader.

He built the PitchBook Platform from the ground up and grew the company into the foremost data and technology provider for the global PE and VC markets.

Databook & 2016 Industry Outlook. In 2014, the United States exported 696 airplanes, accounting for 42.7 percent of total plane shipments that year and $5.4 billion in exported billings.

Given the extent of the domestic industry, it’s not surprising private equity investors completed 125 aerospace and defense deals in 2014 and 2015 combined, taking advantage of continued consolidation and technological changes. Aerospace and defense is a classic lodestar of private equity interest, aligning with the manufacturing and middlemarket aspects of classic private equity strategies. Warburg Pincus’ $900 million buyout of Wencor Group in June 2014 is a good example, so let’s take a closer look at that deal.

Content sponsored by

Wencor designs, repairs and distributes highly engineered aftermarket replacement components for commercial airlines and maintenance providers. Its acquisition was financed in part by a second-lien facility provided by American Capital, according to PitchBook. The industry niche Wencor operates in has been facing headwinds, as consolidation among parts makers has rippled through the aerospace supply chain.

The advent of improved manufacturing technologies has also contributed to the need for new investment, as demand for new large commercial aircraft grows globally. As manufacturers and suppliers look to merge to Continued on next page

MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook Data AEROSPACE AND DEFENSE IS A CLASSIC LODESTAR OF PRIVATE EQUITY INTEREST, ALIGNING WITH THE MANUFACTURING AND MIDDLE-MARKET ASPECTS OF CLASSIC PRIVATE EQUITY STRATEGIES.

achieve economies of scale, private equity investors have an opportunity to provide capital or operational expertise to aid companies’ transition to new business models—the latter shown in the Wencor deal. In addition, low oil prices will enable large aircraft producers to allocate more spending to fleet and equipment upgrades.

When it comes to the defense subsector, U.S. military expenditures are set to grow in 2016 after a downturn of several years, particularly given increased apprehension around certain security threats.

Consequently, defense contractors could see orders increase, which might incentivize them to grow via acquisitions, presenting an opportunity for private equity firms to sell off the holdings they acquired in the past few years of growth contraction. Or private equity investors could opportunistically provide investment capital to companies with growth prospects directly related to the expansion in military spending. For example, nearly a year ago Seacoast Capital invested $32 million of development capital in The VMC Group, which makes vibration isolation and seismic energy management technology.

There are plenty of opportunities for private equity to expand its role in the aerospace and defense industry through a variety of avenues. To highlight one new niche set to grow in popularity, the Federal Aviation Administration recently announced that the number of drone registrations has eclipsed that of piloted aircraft. Regulations concerning drones are still under development, but these machines clearly have huge potential to transform subsectors ranging from local delivery services to weather forecasting and military surveillance. How rapidly the space will scale remains to be seen, but private equity investors and their portfolio companies can already plan for the potential impact that increased drone usage will likely have on niche sectors.

In the meantime, private equity firms continue to grow or tend to their portfolios: Currently, 329 U.S. aerospace and defense companies are private equity-backed, accounting for about 5.5 percent of today’s U.S. private equity middle-market company inventory. That’s more than fair for one niche of the business-to-business space—the same figure for commercial transportation is only 8.6 percent, by comparison—and only reinforces how aerospace and defense remains a key area of interest for private equity. //

Growth MIDDLE MARKET

// MAY/JUNE 2016

Photo by Jonathan Bielaski

FEATURES

Aeryon Labs’ Eyes in the Sky For jobs too dull, dirty or dangerous for employees, companies are turning to drones manufactured by Waterloo, Ontario-based Aeryon Labs. Backed by Summit Partners, Aeryon is revolutionizing operations of the companies it sells to, which use drones for everything from earthquake rescue missions to construction surveillance.

Read more.

“WHEN WE STARTED, WE HAD TO EXPLAIN TO CUSTOMERS HOW THEY MIGHT USE A DRONE IN THEIR BUSINESS.” // DAVE KROETSCH, CEO, AERYON LABS

M&A Deal Insurance Gains Popularity Representations and warranties coverage is an ever-growing part of the merger process, helping both buyers and sellers mitigate risk during a deal.

Read more.

TABLE OF CONTENTS

IN THIS ISSUE

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

Executive Summary

VICE PRESIDENT, COMMUNICATIONS & MARKETING

Executive Suite MidPoints

by John Gabbert

Kristin Gomez kgomez@acg.org

Growth Economy Face-to-Face Quick Takes

EDITOR-IN-CHIEF

DEPARTMENTS

B-Side

POLICY POINTS

The Ladder

• Best Practices for Disclosing Fees & Expenses.

It’s the Small Things

Read more.

THE ROUND • It’s the Year of Crowdfunding—How Will It Work?

2015 Folio Ozzie Digital Winner, Standalone Digital Magazine 2014 Association TRENDS All-Media Silver Award, Monthly Trade Publication 2014 Folio Eddie Digital Winner, Standalone Digital Magazine 2014 Apex Award, New Magazine, Journal & Tabloid

ASSOCIATE EDITOR Kathryn Mulligan kmulligan@acg.org

• New Guide Unpacks Private Equity Regulations.

The Leadership

READ ONLINE // Read additional content on the MMG website.

Deborah L. Cohen dcohen@acg.org

Read more.

A QUALIFIED OPINION David Melcher, President & CEO, Aerospace Industries Association, Discusses the Challenges Midsize Aerospace and Defense Companies Face.

Read more.

ACG@WORK • ACG Cleveland Celebrates Two Decades of Awards.

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

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

DIRECTOR, STRATEGIC DEVELOPMENT Maggie Endres mendres@acg.org Custom media services provided by Network Media Partners, Inc.

• Legacy of Liftoff: Aerospace & Defense Panel.

Read more.

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

Read more.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2016 Middle Market Growth®, InterGrowth® and the Association for Corporate Growth, Inc. All rights reserved.

INSIDE THE MIND OF THE

DUANE MORRIS DEAL LAWYER

BROAD PRIVATE EQUITY SECTOR CONVERSANCY

CLIENT PRIORITIES

DEEP BUSINESS EXPERIENCE

REGULATORY INSIGHTS

STRATEGIC GROWTH ADVICE

KNOW THE INDUSTRY PLAYERS

MARKET TERMS

FINANCE EXPERTISE

360° VISION

PRIVATE EQUITY INDUSTRY TRENDS

GLOBAL ACCESS

REFERRAL SOURCES

TECHNOLOGY SMARTS RELATIONSHIPS

When Duane Morris attorneys partner with private equity businesses, you get the value of whole brain solutions that couple great lawyering with keen commercial sense in deal-making as well as intellectual property, employment, finance, real estate and tax law.

For more information, please contact: BRIAN P. KERWIN, Chair, Global Corporate Practice Group 312.499.6737 | bpkerwin@duanemorris.com RICHARD P. JAFFE, Head, Private Equity 215.979.1935 | rpjaffe@duanemorris.com www.duanemorris.com Duane Morris LLP – A Delaware limited liability partnership

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

PUBLIC POLICY UPDATE POLICY POINT NEWS

1

Best Practices for Disclosing Fees & Expenses

Best Practices for Disclosing Fees & Expenses

By Amber Landis

2

New Guide Unpacks Private Equity Regulations

Over the past few years investors and regulators have been looking closely at fees and expenses charged by private equity firms to their limited partners.

To help funds comply with this increased push for transparency, ACG and its Private Equity Regulatory Task Force, known as PERT, are developing a set of industry-wide best practices that address fees and expenses, among other issues.

The U.S. Securities and Exchange Commission has signaled its expectations through recent enforcement actions against private equity firms with respect to expense disclosure, conflicts of interest and allocation of co-investments. Meanwhile, the SEC Office of Compliance Inspections and Examinations, or OCIE, has named fee and expense disclosure for private funds among its 2015 and 2016 examination priorities.

Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET PERT is working to develop principles for how private equity firms can, and should, disclose fees and expenses borne or reimbursed by the private equity funds they advise and their portfolio companies. This includes manager compensation (direct and indirect), shared services (annual meetings, IT, etc.), operating partners (whose compensation structure generally should be spelled out in the limited partner agreement) and affiliated expenses assumed by portfolio companies.

ACG and its members, including more than 1,200 middle-market private equity firms, recognize both the challenge and the need for increased disclosure, transparency and providing limited partners with the information they seek—which often differs from investor to investor.

Fees and expenses are one of six focus areas for PERT, whose members include chief compliance officers, chief financial officers and in-house counsel to middle-market private equity firms. ACG formed PERT in 2014 to help middle-market funds navigate the changing regulatory landscape, and to create PERT Principles, a set of industry and compliance best practices that ACG plans to release next year.

Common-Sense Solutions The limited partner community, too, is requesting greater transparency. In an effort to streamline and standardize the reporting process, the Institutional Limited Partners Association on Jan. 29 released its fee reporting template.

ACG in late 2015 submitted comments to ILPA on this draft template, acknowledging ILPA’s stated purpose of providing “common-sense solutions” that lead to “meaningful and useful information regarding fees and expenses” to LPs. However, ACG expressed concern that the broad range of information requested in the template may not be relevant for investors. ACG requested clarification on several definitions, including those related to the complex concepts of “related party” and “non-related party,” and fund and portfolio expenses. The template was unclear regarding the specific questions the data are meant to address, ACG noted in its comments, along with how the information will be used by private equity limited partners, which should drive the reporting request.

ACG cautioned that if adopted, many small and middle-market private equity funds would be required to implement new systems and tools to provide the requested information—most of which, if not all, is already provided to limited partners in other ways. It is yet to be determined who should bear the additional costs associated with implementation of the template.

Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET Completing the template in its current form would require a significant amount of time for private equity firms while not providing much new relevant information to investors, ACG said.

The time-consuming document would pull general partners away from their primary tasks: finding and managing investments on behalf of limited partners and increasing the profitability of portfolio companies.

Amber Landis

ILPA has publicly stated that the template should be used for future funds, not retroactively.

However, members of ACG are being asked by their limited partners to implement the template in current funds.

Last May, Marc Wyatt, now director of the SEC Office of Compliance Inspections and Examinations, acknowledged positive changes in allocation practices among GPs, but the topic still remains a priority for SEC examiners. As ACG, ILPA and other groups work to find practical solutions—whether through the disclosure process, principles or templates, there undoubtedly has been a positive shift in the industry with respect to disclosure practices. ACG looks forward to sharing its contributions through PERT in the coming months. // If you have questions related to ACG’s public policy efforts or the Private Equity Regulatory Task Force, please contact Amber Landis, ACG Global vice president of public policy, at alandis@acg.org.

READ ONLINE // Find updates and insight on policy issues on the MMG website.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

New Guide Unpacks Private Equity Regulations

By Kathryn Mulligan Private equity firms faced with daunting new regulations now have a resource to navigate the rules and avoid unknowing violations on the part of their funds.

The “Guide to Private Equity Regulatory Compliance,� published by Thompson Information Services in partnership with ACG, will help middle-market private equity compliance officers, financial officers, in-house legal counsel and legal and accounting advisers address their many compliance and regulatory challenges.

The guide covers a broad range of compliance and regulatory issues under federal and state law, including allocation of fees and expenses, co-investment and cybersecurity. The guide is designed for use by attorneys and nonlegal users alike.

The publication is the latest in a series of steps ACG has taken to address regulatory issues relevant to middle-market private equity firms. In 2014, ACG formed the Private Equity For more information or to order the guide, please visit thompson.com/ equity.

Regulatory Task Force, which actively engages with the Securities and Exchange Commission and is in the process of developing industry-wide best practices. //

Strength, solutions and strategic growth for private equity Audit | Tax | Advisory | grantthornton.com

“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the independent network of GTIL member firms provide services to their clients, as the context requires. GTIL and each of its member firms are not a worldwide partnership and are not liable for one another’s acts or omissions. In the United States, visit grantthornton.com for details. © 2016 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd

GROWTH ECONOMY THE IMPACT OF MIDDLE-MARKET PRIVATE EQUITY

LOUISIANA // 1995-2013 Louisiana has seen tremendous jobs and sales growth driven by private equity-backed middlemarket businesses, including a jobs growth rate nearly three times that of all businesses in the state between 1995 and 2013.

+100+T

97.5% JOBS GROWTH IN PE-BACKED BUSINESSES

301.1%

LA

33.7%

SALES GROWTH IN PE-BACKED BUSINESSES

JOBS GROWTH IN ALL BUSINESSES ACG LOUISIANA

34.3%

5,387

SALES GROWTH IN ALL BUSINESSES

JOBS CREATED

BY PE-BACKED BUSINESSES

See the impact of middle-market private equity on your state at GrowthEconomy.org.

JOBS GROWTH % BY SEGMENT 2.8%

SALES GROWTH % BY SEGMENT

MM Seg 1: $10-50M in sales

26.4%

0%

MM Seg 2: $50-100M in sales

9.4% 38.5%

0%

Small: Less than $10M in sales

1.8% 58.7%

62.4% 0%

KEY

MM Seg 3: $100M-1B in sales Large: More than $1B in sales

All stats are from PitchBook and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL FEATURED SPEAKER // SEC Commissioner Michael Piwowar (center) at the 2015 fly-in with Gary LaBranche (left), Pam Hendrickson and Richard Jaffe.

June Fly-In Will Bring Together PERT Members A packed two days await members of ACG’s Private Equity Regulatory Task Force, who will convene in Washington, D.C., on June 7-8 for a rapid-fire series of working sessions, presentations and visits to Capitol Hill.

During the fly-in, PERT members will work toward developing industry best practices— known as PERT Principles—to help guide middle-market private equity firms. Marc Wyatt, director of the SEC Office of Compliance Inspections and Examinations, will address the group on June 7.

A full day of meetings with legislators and staffers is scheduled for June 8, providing an opportunity for the group to interact with lawmakers and to represent the interests of the private equity industry. Participation in the event is limited to PERT members.

ACG formed PERT in October 2014 to bring together middle-market private equity chief compliance, financial and legal officers to help address regulatory challenges faced by middle-market private equity funds.

Last year’s inaugural PERT fly-in featured roundtable sessions with lawmakers from the House Financial Services Committee and regulators with the Securities and Exchange Commission, including SEC Commissioner Michael Piwowar. // To learn more about PERT or to get involved, contact Amber Landis, ACG Global vice president of public policy, at alandis@acg.org.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This summer, ACG chapters across the globe will host hundreds of local events. Check out what’s happening at your local chapter, register and join in on valuable educational and networking opportunities.

ACG Maryland Young Professionals Group Kickoff at Bond Street Social in Baltimore’s Fells Point Left: From left, Amy Wong, RSM US; Lindsay Monti, Venable; Donni Engelhart, Tucker & Meltzer; and Stephanie Johnson, RSM US. Right: From left, John Lang, Key Global Advisory; Mario Richards, Venable; Heather Pruger, Womble Carlyle Sandridge & Rice; and Tom Arseneau, RSM US.

ACG Atlanta Chapter

ACG Kansas City Chapter

ACG Boston Chapter

ACG Los Angeles Chapter

ACG Charlotte Chapter

ACG Maryland Chapter

ACG Chicago Chapter

ACG Minnesota Chapter

ACG Cincinnati Chapter

ACG National Capital Chapter

ACG Columbus Chapter

ACG New York Chapter

ACG Detroit Chapter

ACG Tennessee Chapter

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Had a newsworthy chapter event?

Send a 150to 200-word summary and high-resolution photos to Associate Editor Kathryn Mulligan.

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ Yo u on

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L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S Š 2016 Association for Corporate Growth. All Rights Reserved.

THE ROUND NEWS THAT MATTERS

It’s the Year of Crowdfunding— How Will It Work?

By Douglas Fink This year Main Street investors will finally have the opportunity to get in early on what they hope will be the next Facebook or Amazon. That’s because crowdfunding may hit the big time, helping businesses large and small raise capital from accredited and nonaccredited investors alike through online platforms. Everyday investors will soon be able to buy equity or debt in private companies, giving them an opportunity to earn returns normally reserved for the wealthy.

Globally, crowdfunding is already a $34.4 billion industry and growing fast. Thanks to Regulation CF, a new SEC rule finalized at the end of October, nonaccredited investors later this year can invest, via portals such as Kickstarter or broker-dealers, up to $1 million in startups and middle-market companies. Meanwhile, access to a broader investment base will appeal to businesses, from startups not yet profitable to seasoned firms with annual sales in the millions.

Continued on next page

THE ROUND NEWS THAT MATTERS Crowdfunding enables private companies and investors to connect online. Companies can solicit investments and investors can learn about, research and ultimately invest in firms of their choosing—whether a dry-cleaning chain funding its switch to organic methods, a property developer financing a construction project, or an app developer building a startup.

New Investors Come Online This new avenue will allow businesses to move a step beyond fundraising from friends and family. They’ll be able to raise debt or equity from nonaccredited investors, a group that comprises most of the population. Investors in this category do not meet the accredited investor definition: a net worth of at least $1 million, excluding home value, or an income of at least $200,000 (or, if married, $300,000) for each of the last two years.

Businesses will connect with investors via online portals run by firms specializing in crowdfunding and early-stage investments. Crowdfunding is projected to overtake venture capital in 2016 in terms of total amount of money raised by businesses.

You probably won’t see many high-tech, or “unicorn,” startups, using this option, however. Under Regulation CF, a company that reaches a size greater than $25 million in assets or takes on more than 500 individual investors triggers SEC filing requirements—something many companies with billion-dollar valuation ambitions would find onerous.

That means that generally speaking, crowd financing will find a sweet spot with less glamorous, and hopefully more stable, middle-market businesses, using other new regulations with fewer restrictions. A broker-dealer specializing in crowd finance can help a company navigate the complex choices and combinations available to it.

Crowdfunding will particularly appeal to management teams that want to retain control of their firm. In the United Kingdom, Australia and Israel, such funding has been used to sell an average of between 10 and 20 percent of a firm’s equity. By contrast, venture capital firms typically take much, if not most, of a company’s equity. (Private equity funds typically demand less, but they usually still take a majority stake in return for their investment.) Plus, VC and PE investors typically don’t finance less than $10 million to $15 million.

Continued on next page

THE ROUND NEWS THAT MATTERS

What Is the Risk?

For companies, equity crowd financing poses the lowest risk for a business. The company may not have to repay capital if the enterprise fails, depending on the terms of the financing agreement. For many companies, crowdfunding may be the first opportunity for serious financing, following a basic line of credit or loan from the local bank. For cash-starved startups, crowd financing does not require a firm to have audited financial statements or even revenue, making it an unusually inexpensive way to raise capital.

Informed, savvy investors should consider allocating up to 10 percent of their investment dollars to private companies. Such vehicles may offer high returns that are not realistic in public companies. But remember: The potential for higher returns also comes with increased risk.

Like any investment, investors must conduct rigorous research and due diligence before parting with their hard-earned cash. Investors can gain additional confidence in the business through its association with the portal where it’s raising capital. Investors should evaluate whether the firm is using a respected and licensed broker-dealer that is required to conduct comprehensive research on the company’s business plan, balance sheet and financial reporting.

Broadly speaking, investors can buy debt or equity through crowdsourcing mechanisms.

Debt might work best for an investor seeking steadier, regular returns. It’s designed to deliver a regular interest payment and a schedule to repay the bond at some point in the future, or convert to equity.

Meanwhile, equity offers investors the chance to buy shares in a company and the potential to reap larger returns. However, they must be comfortable taking a long-term view on their investment, expecting to hold shares for several years to see returns, either once the business grows and raises more capital, reaches sufficient profitability to make distributions, or goes public. Equity will be illiquid at first, but over time, as crowdfunding grows, a secondary market will likely develop where shares in private companies can trade more freely.

The driver of the American dream has always been a can-do entrepreneurial spirit. The new rules that enable everyday investors to help fund young companies could make 2016 a great year for business creation. // —Douglas Fink is CEO of Group Capital LLC, a licensed broker-dealer that brings together private investors, business owners and entrepreneurs with a full range of financial and investment services to facilitate a selection of crowd financing possibilities.

Douglas Fink

THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // UP IN THE AIR

Among the largest corporate divestitures in the A&D sector last year was Dubai Aerospace Enterprise Ltd.’s $2.13 billion sale of StandardAero, a provider of aircraft maintenance, repair and overhaul services, to private equity firm Veritas Capital.

$4.75 BILLION

Harris Corporation, a communications company, defense contractor and IT services provider, in June 2015 closed its purchase of Exelis, an aerospace, defense and IT company, for $4.75 billion, marking one of the largest corporate A&D deals of the year.

33 22 The number of private equity deals in aerospace and defense rose between 2014 and 2015—to 33 from 22—while total capital invested dropped to $3.4 billion from $5.49 billion.

$522.3 MILLION

Aena, Spain’s state-owned airports operator, paid $522.3 million in 2013 to acquire London Luton, an airport in the United Kingdom, alongside the infrastructure fund of Axa Private Equity in the second London airport sale that year.

All stats are from PitchBook.

ACE Management, headquartered in Paris, is the most active PE firm in aerospace and defense, with an explicit focus on that industry, along with maritime and security.

12 DEALS

Among the most active A&D corporate strategic acquirers is Portland, Oregon-based Precision Castparts, which Warren Buffett’s Berkshire Hathaway bought in 2015.

Precision has closed 12 deals since 2013.

“The United States, the U.K. and Japan are all expected to up their defense spending— I think you’ll see a lot of growth in the A&D sector, but not necessarily from an uptick in the private markets.”

—Chelsea Harris, data analyst, PitchBook

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Assurance | Tax | Advisory | 855.357.5225 | peinfo@dhgllp.com | dhgllp.com/private_equity

DRONE MASTERS // Aeryon CEO Dave Kroetsch (left) with Dave Litwiller, VP of strategy.

Drones Aeryon Labs’

Put Eyes in the Sky

BY S.A. SWANSON

Photos by Jonathan Bielaski

Photo Courtesy of Aeryon Labs Inc.

AERYON LABS INC. // Headquarters: Waterloo, Ontario Business: Weather-resistant commercial drones for search and rescue, environmental cleanup, equipment surveillance and more Backing: $60 million from Summit Partners Employees: 200 projected by year-end, with one-third dedicated to technology Strategy: Remain relevant in a crowded drone market by targeting high-end customers

I

n 2007, when Dave Kroetsch co-founded Aeryon Labs Inc., most people lumped drones into two categories.

“There were RC helicopters in the hobby stores, and drones that dropped bombs on the other side of the world,” says Kroetsch, Aeryon’s CEO. He and his co-founders, Mike Peasgood and Steffen Linder, saw potential in another category: A flying tool that takes pictures to make tasks safer, more efficient and cost-effective.

That was a tough sell for potential customers who associated drones with toys or weapons, or hadn’t even heard of them. But thanks to a user-friendly, resilient design, Aeryon’s drones have flown in 35 countries for an array of jobs in the “three D’s” category—dull, dirty and dangerous. That includes assisting the Manchester Fire Department in the United Kingdom, rescue workers for Nepal’s magnitude-7.8 earthquake, and cleanup efforts for the BP oil spill in the Gulf of Mexico.

QUADCOPTER // Four propellers enable Aeryon’s drones to take off in confined spaces.

What began in Kroetsch’s living room has expanded to two offices in Waterloo, Ontario, totaling 70,000 square feet. Revenue has increased 100 percent for the past four years, and Aeryon expects 2016 to at least match that pace. “When we started, we had to explain to customers how they might use a drone in their business,” Kroetsch says. “Now people are calling us saying, ‘I know how I want to use a drone. I just need one.’”

Increasingly, that need is coming from the commercial market. With a $60 million investment from Summit Partners, announced in October 2015, Aeryon has additional resources to develop technologies that will maintain its competitive edge.

THE POWER OF POINT-AND-CLICK Before the co-founders designed Aeryon’s first drone, a conversation with local police officers revealed a crucial technology hurdle: the Fat Finger Problem. Officers tried a radio-controlled helicopter for crime-scene aerial shots, but the only one who could operate the joysticks was a detective’s son. “We have fat fingers,” the officers told the co-founders, “and we break things.”

That discussion shaped two important goals for Aeryon: Make drones easy to use, and make them reliable. The team also learned that potential customers preferred a quadcopter (with four propellers) instead of a fixed-wing drone, so it could take off in confined spaces and hover.

In 2009, Aeryon introduced Scout. Instead of joysticks, a touch-screen tablet controls the quadcopter’s flight and camera. “Our interface is basically like a Google map,” says Peasgood, Aeryon’s principal systems designer. “You point and click on the map where you want the vehicle to go.” To map a large area, the user draws the perimeter on the screen and the drone automatically flies back and forth, taking pictures that can be stitched together for a complete aerial view. “It takes a whole lot of expertise and training off the users, so they can focus on what they are actually interested in, which is the pictures,” Peasgood says. Aeryon’s camera technology now includes options such as infrared imaging and zoom capability that can recognize a face or read a license plate from more than 1,000 feet away.

Weighing less than three pounds, Scout fits in a backpack and can be ready for takeoff in about two minutes.

Aeryon’s co-founders didn’t know if their initial customers would be police, military or industrial—but they would all require working in harsh weather. So Aeryon designed Scout to withstand rain and snow, extreme cold and heat, and 50 kilometer per hour winds.

When a U.S. Coast Guard icebreaker needed to create a path for a fuel tanker to reach Nome, Alaska, Scout flew in high winds and temperatures dropping to minus 20 degrees Fahrenheit, capturing images to assess ice conditions for the best route. “They consider themselves in a niche, and I think they are,” says Mike Blades, senior industry analyst for aerospace and defense at consulting firm Frost & Sullivan.

“WHEN WE STARTED, WE HAD TO EXPLAIN TO CUSTOMERS HOW THEY MIGHT USE A DRONE IN THEIR BUSINESS.” Dave Kroetsch CEO, Aeryon Labs

Blades says he can’t keep track of all the new drone introductions and wouldn’t be surprised if 85 percent of the manufacturers went out of business in the next five years. But he’s confident Aeryon won’t. “If you look at the companies that are trying to get funding—you see all of this focus on lower-end drones because it means moving more product,” he says. “Aeryon is more focused on the high end, for projects where you can’t let weather get in the way.”

In 2013, Aeryon introduced an even more resilient drone, SkyRanger. While Scout’s battery allows it to fly for 20 minutes, SkyRanger can fly for 50 minutes and is built to handle stronger winds, including gusts of up to 90 kilometers per hour. Aeryon’s drones range in price from about $60,000 to $160,000, not including add-ons. (The night vision camera costs about $20,000.)

“AERYON IS MORE FOCUSED ON THE HIGH END, FOR PROJECTS WHERE YOU CAN’T LET WEATHER GET IN THE WAY.” Mike Blades Senior Industry Analyst, Aerospace and Defense, Frost & Sullivan

FOCUS ON COMMERCIAL CLIENTS About 40 to 50 percent of revenue has come from military customers, but the commercial market looks most promising now, says Dave Litwiller, Aeryon’s vice president of strategy. “Our belief is that over the next few years, that market will likely significantly outpace the rate of growth for more traditional military and law enforcement applications.”

Drones can do inspections in a fraction of the time it takes a person, without putting anyone in harm’s way, Kroetsch says. To inspect a power line, Aeryon’s drones allow users to count the threads on a bolt (with the camera hovering 75 feet away). Oil refinery flare stack inspections typically require shutting down the plant for about a week, Kroetsch says—but Aeryon’s drones can perform the task in less than 20 minutes while the plant keeps running.

“THEY’VE ALWAYS TREATED THEIR PRODUCT AS THOUGH THEY’RE BUILDING AN AIRCRAFT, ALBEIT ONE THAT’S NOT PILOTED BY A HUMAN ON BOARD.” Len Ferrington Managing Director, Summit Partners

UNMANNED POWER // Drones do the work that’s too dangerous for humans.

In some regions, including the United States, government regulations have hindered commercial drone use. That’s changing now, and Aeryon expects to benefit. Consider the volume of requests the Federal Aviation Administration has received from businesses wanting to operate drones in U.S. airspace. The FAA began accepting those applications in May 2014; by September 2015 it had received more than 2,650 (with 1,407 of those approved).

During the last few years, commercial use was often limited to pilot projects, Litwiller says. “Now there are proof points in different industries that UAVs (unmanned aerial vehicles) can deliver the efficiency and business value that people had hoped for,” he says. “This is going to lead to much wider-scale deployment.”

Ken Meade has witnessed how drones assist commercial projects. He’s working on the construction of approximately 350 kilometers of transmission line as director of environment and aboriginal affairs at Halifax, Nova Scotia-based Emera Newfoundland and Labrador, a subsidiary of energy company Emera. To help monitor progress, his team flies a Sky-

Ranger above the construction sites each week. The drone facilitates a level of monitoring that wasn’t possible before, Meade says, because it would cost too much for helicopters or planes to take weekly photos.

Winds can be severe in the coastal areas where construction occurs, making SkyRanger’s stability useful, Meade says, although he notes that sometimes the harsh weather exceeds SkyRanger’s wind tolerance. “We do have a drone from another manufacturer, but it can’t fly in the conditions that SkyRanger can,” he says. “We’re looking to explore opportunities in terms of how this technology could be further developed for our industry.

We want to continue working with Aeryon to see what they can develop for this project.”

INVESTMENT IN THE FUTURE

“WE ARE AIMING TO IDENTIFY TECTONIC SHIFTS IN LARGE MARKETS WHERE WE THINK THERE ARE GOING TO BE OPPORTUNITIES FOR BUSINESSES TO DRIVE INNOVATION.” Len Ferrington Managing Director, Summit Partners

Len Ferrington, managing director at Summit Partners, says his firm has invested in more than 250 technology companies, but Aeryon is its first foray into drones. “We are aiming to identify tectonic shifts in large markets where we think there are going to be opportunities for businesses to drive innovation,” he says. Summit sees significant potential within the commercial drone market for jobs like surveying or inspection. “We think Aeryon is very well-positioned for this,” Ferrington says. “They’ve always treated their product as though they’re building an aircraft, albeit one that’s not piloted by a human on board.”

Summit’s funding will help Aeryon continue improving its technology, Kroetsch says. This year, research and development represents 22 percent of Aeryon’s budget, up from 16 percent in 2015. More widespread industrial use will lead to demand for additional safety capabilities, Litwiller says. “The ability to sense and avoid approaching objects is something that will become increasingly valuable, but it’s a significant technology to develop,” he adds. “It is still very early days for that technology in unmanned aircraft.”

Additional staff will help Aeryon focus on its technology roadmap. At the end of January, the company had 140 employees—that number will likely rise to 200 by the end of 2016, with R&D staff accounting for 30 percent, Litwiller says. The company might have expanded at the same rate without Summit’s investment, he says. “But we would have been more apprehensive. This financial support allows us to be very decisive about delivering the best product and service that we can, rather than having to tightly manage the dynamics of a purely self-funded, cash-flow-driven growth model.”

Since Aeryon was founded, the competitive landscape has changed dramatically. “Now it seems like there’s always a new Kickstarter campaign for someone building a drone for this or that,” Kroetsch says. By February 2016, the number of registered U.S. drone owners exceeded 325,000. That’s more than the number of piloted aircraft registered with the FAA (320,000).

TEST CHAMBER // Drone components are tested through simulated flight scenarios.

“It’s hard to go a day without hearing about a drone,” Ferrington says. “But I give credit to Dave for always being inspired about the potential, well before anyone was taking it as a foregone conclusion that we’re going to see these things all over the place. He and his co-founders had a sense of vision and inspiration, far in advance of any market validation.” // S.A. Swanson is a business writer based in the Chicago area who frequently writes about technology.

“THE ABILITY TO SENSE AND AVOID APPROACHING OBJECTS IS SOMETHING THAT WILL BECOME INCREASINGLY VALUABLE.” Dave Litwiller Vice President of Strategy, Aeryon Labs

M&A DEAL INSURANCE

GainsPopularity

BY MYRA THOMAS

N

ot long ago, insurance against misrepresentations in a purchase or merger agreement wasn’t on the radar of most private equity firms, institutional investors or corporate buyers. Representations and warranties coverage, as it’s known, was a rather obscure offering unknown to most M&A attorneys. But today, R&W coverage is much more common and an ever-growing part of the merger process, helping buyers avoid many of the unidentified risks in a deal while allowing sellers to reduce or avoid escrow.

Simply put, insurers in recent years have done a much better job getting the word out. There are also more insurers and more large insurance firms ready, willing and able to offer R&W products. In turn, pricing is becoming more competitive and predictable, and coverage terms are more favorable. This environment is making it easier for insurance companies to peddle these wares.

According to John Quinn, director of transactional risk insurance at insurance provider The Hartford, the increased use of R&W insurance is in large part a result of market education about the value of the coverage as an important component of an M&A transaction. “Over the past few years, brokers have done an excellent job educating buyers, sellers and their advisers about the use of this insurance as a tool to facilitate transactions by transferring risk to an insurer,” he says.

PRIVATE EQUITY GETS COVERED Private equity firms are increasingly recognizing the value of representations and warranties insurance, particularly as a competitive tool in the negotiation process. With R&W coverage, escrow can be reduced or eliminated. The insurance can supplement the indemnification clause and make structuring the deal easier and the terms more attractive.

In addition, it can help reduce indemnity requirements for the buyer and make exits less worrisome for the seller. The coverage also lengthens the typical survival period of representations and warranties offered by the sellers.

A partner in a New York City-based middle-market private equity firm describes the insurance as a way for an investor to stand out in the largest, most competitive deals.

“There’s traction because the insurance is a good tool for the seller and for the buyer, and it’s good for the insurance company too,” says the partner, who declined to be named.

Other industry experts, while not willing to comment on the record, note that insurers haven’t seen any major losses from R&W insurance, at least for now, which could be driving insurers to amp up their marketing efforts.

Certainly, strong M&A activity has also contributed to the bump in R&W coverage—creating more deals to insure.

According to research firm PitchBook, aggregate M&A value reached $1.95 trillion in 2015, an increase of 21 percent over the $1.61 trillion racked up the year prior. Insurance brokers had a whole new crop of buyers and sellers to woo. The Hartford’s Quinn notes, “Increased appreciation for the strategic value of this coverage, combined with a robust M&A market, has really driven growth.”

“INCREASED APPRECIATION FOR THE STRATEGIC VALUE OF THIS COVERAGE, COMBINED WITH A ROBUST M&A MARKET, HAS REALLY DRIVEN GROWTH.” John Quinn Director of Transactional Risk Insurance, The Hartford

“THE DEAL TEAM, INCLUDING THE INVESTMENT BANKERS AND LAWYERS, NOW UNDERSTANDS THE VALUE IN PASSING OFF SUCCESSOR LIABILITY.” Craig Goesel Senior Managing Director, Mesirow Insurance Services

DETAILS, DETAILS So what does the coverage include? In a nutshell, R&W protects against losses stemming from inaccuracies in or breaches of representations and warranties in the merger or acquisition agreement. Craig Goesel, senior managing director of Mesirow Insurance Services, says breaches are typically related to issues with financial statements, inventory accounting, revenue recognition, normal business operations, title to assets, accounts receivable, compliance with laws and regulations, and patent infringement.

R&W policies are available to protect parties on either side of the deal, but the vast majority are written for the buy side, Goesel says. Buy-side policies let the buyer recover losses, including defense costs, from the insurer instead of the buyer having to find and pursue the seller if there’s a problem. The buy-side policy, as opposed to escrow or a claim against the seller, serves as the buyer’s primary recourse if there’s a breach.

According to Quinn, the sell-side policy picks up the seller’s defense costs and any losses resulting from claims made by the buyer for inaccuracies in or breaches of the representations and warranties in the acquisition agreement. The coverage serves as a backstop to the seller’s indemnity or escrow obligations. He adds, “Sell-side policies are available to provide a seller with comfort that some or all of the escrow will be available for distribution when the survival period for the representations and warranties under the acquisition agreement has expired.” A fraud or dishonesty clause is a typical part of the sell-side policy.

Like most other insurance, R&W coverage is subject to a set policy limit and a deductible. Each policy typically contains a clause excluding risks known to the insured before the policy inception date, including issues outlined in the diligence report and the disclosure schedules to the acquisition agreement. “It’s important for a buyer to consider how, if at all, a known material risk should be addressed in the acquisition agreement—for example, through a purchase price reduction, specific indemnity or otherwise,” Quinn says, adding that product liability and environmental exclusions usually apply as well.

THE FINE PRINT Limits are typically based on a percentage of the deal price.

According to Craig Schioppo, transactional risk practice leader at insurer Marsh, policy limits are generally in the same range as what a seller would escrow on the M&A transaction, about 10 to 20 percent of the purchase price. The premium is calculated based on the policy limit, generally set at about 3 to 4 cents per the limit’s dollar amount. In addition to the premium, there’s an underwriting fee, generally about $20,000 to $30,000, depending on the insurer and the type, size and complexity of the M&A deal, Schioppo says.

While insurers take into account the due diligence done on the deal, they also perform their own investigations.

That’s the reason for the upfront underwriting fees associated with the policy, says Neil Posner, a principal in the law firm Much Shelist and chair of the firm’s policyholders’ insurance coverage group. “Understandably, this work is highly specialized and the applicants for coverage pay for this work, even if the insurers decline to quote on coverage or the applicants decline to buy it,” Posner says.

Craig Schioppo Transactional Risk Practice Leader, Marsh

“UNDERSTANDABLY, THIS WORK IS HIGHLY SPECIALIZED AND THE APPLICANTS FOR COVERAGE PAY FOR THIS WORK, EVEN IF THE INSURERS DECLINE TO QUOTE ON COVERAGE OR THE APPLICANTS DECLINE TO BUY IT.” Neil Posner Principal, Much Shelist

He notes the complexity of the M&A deal means R&W policy terms are fairly exacting, depending on the nature of the deal and the type of companies involved. “This category of insurance is specialized and sophisticated,” he says. “The terms of such policies should be expected to be carefully drafted. They need to be as explicit as possible as to which risks are covered and which are not.”

Fortunately, given the growing number of insurers offering coverage, there is usually flexibility when it comes to the premium and some of the policy terms. It’s best to shop around for quotes and to take the time to know the insurer, Posner says, adding, “The insured, through its broker and legal counsel, will have the opportunity to review the proposed policy and its terms, and to negotiate for changes.”

AN EVOLVING INSTRUMENT As the market for representations and warranties insurance continues to mature, insurers are becoming more comfortable underwriting and pricing the product. Goesel says the coverage and the underwriting process have changed substantially since the insurance was first introduced more than 15 years ago. Today’s R&W policy typically provides more coverage, while underwriting has become more streamlined and focused.

The minimum premium levels have dropped too, leading more buyers and sellers to consider coverage. “Historically the insurance product was too capital-intensive for smaller deals—for example, enterprise deal values under $50 million,” Goesel says. “However, with a more streamlined underwriting process and reduced minimum premiums, smaller deals are looking into the product.”

And while the vast majority of M&A transactions are still completed without coverage, Goesel says the tide is turning. He credits growing visibility of the product and the competitive M&A marketplace with helping to drive the lion’s share of growth over the past two years. “The last time there was a hot market for M&A, the insurance wasn’t really available because of the pricing and the underwriting process,” he says. That has since changed. “The deal team, including the investment bankers and lawyers, now understands the value in passing off successor liability,” he says. “Once you get the deal team to appreciate it, it’s simply one more item to smooth the transaction along.” // Myra Thomas is a freelance writer based in northern New Jersey.

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QUICK TAKES DEVIN TALBOTT // Co-Founder and Managing Partner, Enlightenment Capital

Enlightenment Capital’s Influential Network

N

etworking is the lifeblood of private equity—if you’ve got connections, you work ’em.

That’s true for Washington, D.C.-based Enlightenment

Capital, whose links to the State Department run deep.

To date, the firm—now raising its second fund—has invested in 11 contractors that serve the defense industry.

Co-founder Devin Talbott, the son of former Secretary of State Strobe Talbott, grew up surrounded by government insiders. He started his career at Lazard and later became a vice president at D.E.

BIO //

Shaw, investing in midsize government contractors. Before raising his

Devin Talbott is a co-founder and managing partner of Enlightenment Capital. Prior to that, he was a vice president with D.E. Shaw’s direct capital strategy, where he helped establish the group’s Washington, D.C., area office and built its defense and government vertical. He was named a “40 Under 40” by The M&A Advisor.

own fund, Talbott worked for The Cohen Group, a merchant bank run by former Defense Secretary William Cohen.

Enlightenment’s board is stacked with former Defense Department heavyweights, including retired U.S. Marine Corps Gen. James Cartwright and Kenneth Krieg, a former under secretary of defense for acquisition, technology and logistics. The firm relies on this influential bench to evaluate would-be investments.

“We have folks who help us understand where budgets are going, and policy changes and trends affecting the kind of businesses we’re looking at,” says Talbott, a member of ACG National Capital.

“Oftentimes they know the companies by reputation and they can help us understand the people, the businesses. They can help us do the assessment around the risk and merits.”

Talbott says Enlightenment typically takes a $5 million to $20 million minority stake in technology or services companies through a mix of debt and equity. A planned exit would likely be a sale to a more traditional private equity firm, he says.

Continued on next page

QUICK TAKES DEVIN TALBOTT // Co-Founder and Managing Partner, Enlightenment Capital Talbott’s co-founder, Pierre Chao, is a former top-rated Wall Street aerospace and defense analyst for Smith Barney, Morgan Stanley and Credit Suisse. Prior to teaming with Talbott, he ran an aerospace strategy firm.

“WE’RE OFTEN THE FIRST THIRD-PARTY INVESTOR THAT’S HELPING THEM GET OVER THE HUMP, HELPING THEM PROFESSIONALIZE, HELPING THEM AUGMENT THEIR BUSINESS.” Devin Talbott Co-Founder and Managing Partner, Enlightenment Capital

Talbott says Chao helped investors “get inside companies, understand the business, understand the contracts, understand how products or services aligned with (government) budgets.”

Founded in 2012, Enlightenment raised $80 million for its first fund, which closed in 2014. Talbott declines to discuss specifics of the second fund, but PE Hub, citing a source and an SEC filing, reported the fundraising target was $125 million.

Enlightenment’s portfolio includes REI, a provider of logistics services for time-sensitive products, and Vistronix, a data security firm. The firm’s most recent investment is in Aurora Flight Sciences, one of the largest private manufacturers of commercial drones.

“The majority of our investments are (with) owner-entrepreneurs.

These are founders who have built a business over 20-some years,” Talbott says. “They’ve bootstrapped and we’re often the first thirdparty investor that’s helping them get over the hump, helping them professionalize, helping them augment their business.” // —Deborah L. Cohen

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A QUALIFIED OPINION DAVID MELCHER // President & CEO, Aerospace Industries Association

BIO //

R

etired Lt. Gen. David F. Melcher is president and CEO of the Aerospace Industries Association, the most authoritative and influential trade association for the aerospace and defense industry. Representing more than 300 manufacturers and suppliers, AIA’s strong advocacy is essential to protecting the interests of the industry while helping to establish new growth opportunities. Following a 32-year career in the U.S. Army, Melcher joined ITT Corporation before becoming the inaugural chief executive at Exelis after its spinoff from ITT in October 2011.

Melcher also led Exelis through a successful merger with Harris Corp. in May 2015.

“STABILITY IN EXPECTATIONS IS WHAT HELPS OUR COMPANIES BEST SUPPORT OUR GOVERNMENT CUSTOMERS AND MANAGE CONTRACTS ON TIME AND WITHIN BUDGET.”

AIA HAS MORE THAN 300 MEMBERS. CAN YOU TALK A BIT ABOUT WHAT YOUR ORGANIZATION DOES FOR THEM?

S

mall and midsize companies are the backbone of our industry. More than 70 cents of every dollar coming to our industry through federal contracts flows into the supply chain through subcontracts. Companies come to us to help them make connections with the giants of our industry, which we provide through our Supplier Management Council. They come for advice on how to make sense of government customer buying habits and to offer improvements to the acquisitions process. For example, AIA is experiencing success in getting new equipment certification streamlining provisions for aircraft in House Transportation and Infrastructure Committee Chairman Bill Shuster’s multiyear FAA reauthorization bill. Additionally, we have been actively promoting a “regular order” appropriations process that results in timely enactment of the $1.07 trillion in federal discretionary spending for fiscal year 2017 called for in the Bipartisan Budget Act of 2015. Stability in expectations is what helps our companies best support our government customers and manage contracts on time and within budget.

A QUALIFIED OPINION DAVID MELCHER // President & CEO, Aerospace Industries Association WHY IS IT IMPORTANT TO GET NEW CERTIFICATION PROVISIONS INTO THE FAA REAUTHORIZATION BILL?

O

ne of the big issues facing civil aircraft manufacturers is the time it takes to bring their products to market. Inefficient certification processes sometimes result in delays that have a negative impact on midtier companies in the supply chain. AIA is working with the FAA and advocating before Congress to improve the certification process by maximizing the potential benefits of delegation, including more effective use of Organization Designation Authorization, or ODA, which implements a risk-based systems approach to certifying new products. This would vastly improve the timeliness of certification without compromising safety. The proposed FAA reauthorization bill would require FAA to develop an issue resolution process and certification effectiveness metrics. The bill will also establish a central office for ODA approvals and audits, and a governmentindustry advisory council to improve stakeholder collaboration. These are all important AIA initiatives that work toward the mutual goal of bringing innovative products to market while further enhancing aviation safety.

“IF WE CAN HELP OUR CUSTOMERS BECOME MORE AGILE AND CONSISTENT BUYERS, COMPANIES OF ALL SIZES WILL BE ENCOURAGED TO ENTER THE DEFENSE MARKETPLACE AND TO OFFER INNOVATIVE SOLUTIONS.”

A QUALIFIED OPINION DAVID MELCHER // President & CEO, Aerospace Industries Association WHAT IS AIA DOING TO ENCOURAGE THE DEPARTMENT OF DEFENSE TO IMPROVE ITS BUYING HABITS SO THE PROCESS IS LESS CHALLENGING FOR SMALL AND MIDSIZE BUSINESSES?

“ONE REAL DETERRENT TO SELLING TO D.O.D. CAN BE THE RISK FOR COMPANIES THAT THEY’LL LOSE CONTROL OF THEIR INDEPENDENT RESEARCH AND DEVELOPMENT ACTIVITIES...”

W

e think the Pentagon has made some progress recently in streamlining its acquisition practices and processes, but the system is still too slow, inconsistent and risk-averse. However, DOD realizes this and is cooperatively engaged with AIA to find solutions. America’s aerospace and defense companies are still the best innovators in the world—if we can help our customers become more agile and consistent buyers, companies of all sizes will be encouraged to enter the defense marketplace and to offer innovative solutions.

One real deterrent to selling to DOD can be the risk for companies that they’ll lose control of their independent research and development activities, and the intellectual property that comes with them. Last year, DOD proposed a set of rules that would have significantly increased government control over R&D and IP. AIA pushed back strongly, resulting in revised guidance from DOD. We hope that this more welcoming approach to independent research and development will encourage more companies—large, medium and small—to contribute their talent and good ideas to national defense.

A QUALIFIED OPINION DAVID MELCHER // President & CEO, Aerospace Industries Association AS THE A&D INDUSTRY CONTINUES TO GENERATE THE COUNTRY’S LARGEST MANUFACTURING EXPORT SURPLUS, WHAT ARE THE OPPORTUNITIES AND CHALLENGES THAT MIDSIZE COMPANIES NEED TO BE AWARE OF TO TAKE ADVANTAGE OF THIS GROWTH?

“I THINK MIDSIZE COMPANIES NEED TO TAKE BETTER ADVANTAGE OF THE NETWORKING AND MARKETING OPPORTUNITIES AVAILABLE AT INTERNATIONAL TRADE SHOWS.”

T

here are significant opportunities in the civil aviation and defense marketplace for maintenance, repair and overhaul—known as MRO—of exported systems. I would draw particular attention to training for and sustainment of defense systems, as well as identifying opportunities for innovative non-program-of-record solutions that can be a better fit and price point for the defense requirements of our allies and partners. A second area of focus would be improving compliance with relevant regulations and processes (e.g., export controls, customs, anti-corruption) that are increasingly generated by both U.S. and foreign governments.

Finally, I think midsize companies need to take better advantage of the networking and marketing opportunities available at international trade shows. AIA’s top priorities include initiatives to address these areas. //

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ F r o m c o n s u l t a n t s t o C PA s a n d a h o s t o f o t h e r a d v i s e r s a n d specialists, ACG Global Partners guide the success of more than 90,000 professionals in the middle market worldwide.

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S Š 2016 Association for Corporate Growth. All Rights Reserved.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

CLEVELAND SAN DIEGO

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ACG CLEVELAND

Chapter Celebrates Two Decades of Awards ACG Cleveland in January hosted its 20th annual Deal Maker Awards, a major milestone for the chapter. Honorees, including the J.M. Smucker Company, Ferro Corporation, Area Wide Protective and Resilience Capital Partners, were recognized for exceptional deals completed over the past 24 months.

The chapter highlighted the award recipients during a private, pre-event reception that included the awards presentations and a video featuring their accomplishments.

“It’s hard to believe that the first ACG Cleveland Deal Maker Awards took place nearly two decades ago,” said David Dunstan, president of ACG Cleveland and managing director of Western Reserve Partners. The inaugural event drew more than 250 attendees.

“From that point on, (the event founders) knew they were on to something and the event has grown significantly ever since,” Dunstan added.

This year, more than 800 guests from 14 states attended the awards event, held Jan. 21 at the Cleveland Convention Center. //

READ ONLINE // Learn about other ACG events on the MMG website.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG SAN DIEGO

Legacy of Liftoff: Aerospace & Defense Panel Charles Lindbergh piloted the first nonstop flight from New York to Paris in 1927 on the single-seat Spirit of St. Louis, a plane that, despite its name, was built by Ryan Airlines in San Diego.

Since then, the aerospace and defense industry has been central to the city, home to one of the largest concentrations of uniformed military personnel in the world.

ACG San Diego on Jan. 19 hosted a breakfast panel discussion that looked at the industry today, including current trends, M&A activity and financing concerns facing the region’s aerospace and defense companies.

Panelists agreed that cybersecurity has become a focus area for the industry and discussed the value that intelligence software companies offer to government clients.

The event, held at the Lomas Santa Fe Country Club, drew 110 attendees to hear from a panel of industry leaders, including Eric Basu, CEO of Sentek Global; Ellen Chang, managing partner of LightSpeed Innovations; John Lyons, CEO of Solute Inc.; Alan Stewart, managing director of RA Capital Advisors; and Bill VanDeWeghe, co-founder and CEO of RippleNami. Doug Burke, president of Cognitive Medical Systems, served as moderator. //

THE PORTFOLIO INSIGHT FROM THE EXPERTS

BY THE NUMBERS

SOUND DECISIONS

MID-MARKET TRENDS

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IN THIS ISSUE

BY THE NUMBERS Concepts like builder baskets and incurrence tests were previously seen only in large deals, but in today’s frothy market, they’re being introduced in small and middle-market transactions too.

SOUND DECISIONS Striking the right balance between speed and thoroughness in a deal is crucial and especially challenging in transactions involving a family-owned business, new industry or carve-out.

Ignoring government statutes and workforce regulations can be costly for employers. By keeping six key areas in mind, companies can protect themselves as they grow, evolve or change hands.

MID-MARKET TRENDS Private equity co-investment is on the rise due to the benefits it brings, but transparency is paramount to ensure such relationships don’t run afoul of regulators.

COMING SOON Check out the Portfolio section of the July/August issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Global featured firms. To learn more about contributing to this section, please contact Maggie Endres, (312) 957-4257.

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

THE PORTFOLIO

BY THE NUMBERS // Brian P. Kerwin, Partner, and David B. Shafer, Associate, Duane Morris LLP

BY THE NUMBERS

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Hot Topics in Middle-Market Acquisition Financing

O

A look at concepts PE firms should address in the term sheet stage to aid more rapid deal execution.

ut of the financial recession of the late 2000s, private equity deal flow has rebounded. Even as demand for buyouts grows, attractive targets have failed to keep pace. Abundant capital and available debt have pushed multiples to near pre-recession levels. As a result, sellers have regained lost bargaining power. Sponsors have applied pressure on lenders to be increasingly accommodating in financing documentation.

As competitive pressures have caused

cash flow from the prior year, the other

terms to become more sponsor-friendly, the

50 percent of excess cash flow is “added”

concepts below, which were once almost

to the available amount. Most loan agree-

exclusively in the realm of large deals, are

ments with this concept also permit cash

being introduced in lower- and middle-

equity contributions from sponsors to

market transactions. Given the frothy

increase the available amount. Uses of the

environment, these concepts should be ad-

available amount typically include invest-

dressed in the term sheet stage whenever

ments, restricted payments and prepay-

possible to aid more rapid deal execution.

ments of subordinated debt—often without giving effect to other limitations in the

Available Amount/Builder Baskets Builder baskets are used as a conduit

acquisition financing documents.

Sponsors relish the available amount. If

through which built-up cash or equity

the portfolio company is enjoying positive

contributions can be used to make pay-

cash flow, sponsors argue that it provides

ments or investments that would other-

well-deserved flexibility to de-lever the com-

wise be restricted by the terms of the

pany, increase its assets or reward investors.

credit agreement.

Having its roots in term loans, this

Incurrence Tests

concept typically includes a portion of

Originating in high-yield bond indentures,

unswept excess cash flow. If the applicable

incurrence tests govern lien or debt re-

credit agreement requires an excess cash

strictions and permit borrowers to incur

flow payment equal to 50 percent of excess

debt or subordinated liens so long as they

THE PORTFOLIO

BY THE NUMBERS // Brian P. Kerwin, Partner, and David B. Shafer, Associate, Duane Morris LLP

BY THE NUMBERS

SOUND DECISIONS

MID-MARKET TRENDS

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remain in compliance with applicable

loans, application of prepayments car-

financial covenants on a pro forma basis

ries heightened importance, particularly

after incurring debt or granting a lien.

for regulated banks. Most lenders will, at

As with the available amount, incurBrian P. Kerwin

David B. Shafer

least initially, require application of all

rence tests provide sponsors with the abil-

prepayments in either inverse scheduled

ity to manage a portfolio company without

order (i.e., applying to the last payment

directly involving the lender. If the com-

first, working backwards) or pro rata

pany can “handle” the additional debt and

among the remaining scheduled install-

remain within financial covenant compli-

ments reducing each installment by some

ance, sponsors argue that they should be

amount. With greater frequency, sponsors

permitted to flexibly manage their ac-

are requesting that prepayments reduce

quired company.

scheduled amortization payments in direct order of maturity. Lenders must consider

Net Debt Leverage Calculation

the impact on fixed charge calculations to

Leverage ratios are typically calculated as

ensure that the calculation of fixed charge

the ratio of debt to EBITDA. Net debt is an

coverage ratios retain their teeth if pay-

accommodation made by lenders to permit

ments are applied in direct order. //

borrowers to reduce the debt portion of the ratio by the amount of cash on the com-

Brian P. Kerwin is chairman of Duane

pany’s balance sheet as of the date of such

Morris’ corporate practice group and a mem-

calculation. Variations and limitations are

ber of the firm’s national governing partners

typically not fully vetted until credit agree-

board. He has extensive experience repre-

ment negotiations are well underway.

senting business entities, lenders, private

Net debt leverage calculations are

equity funds and entrepreneurs in various

rather common in upper middle-market

business and financing transactions.

transactions and have worked their way into lower- and middle-market deals. If ac-

David B. Shafer practices in the area of

ceptable to a lender, careful consideration

corporate law, with a focus on debt financing

should be given to limiting the amount of

transactions. He has experience with acquisi-

cash or other assets that offset debt.

tion finance, senior secured credit transactions, broadly syndicated transactions, club

Application of Prepayments

deals, and subordinated and mezzanine

For transactions with amortizing term

secured and unsecured credit transactions.

THE PORTFOLIO SOUND DECISIONS // Dennis Cail, Director, Technology and Management Consulting, and Christina Churchill, Principal, Technology and Management Consulting, RSM US LLP

BY THE NUMBERS

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In a Seller’s Market, Accelerating the Deal Close Is Critical—And Risky

T

Striking a balance between speed and thoroughness may require additional resources.

hese days, it’s not uncommon for private equity firms to close a deal within 30 days of the letter of intent. Competition is intense and sellers know it.

But closing a deal too quickly—before truly understanding the business, and its people and systems—can hold back growth potential, lead to unexpected costs and destroy value in the long term.

Below are three situations when striking the right balance between speed and thoroughness is especially challenging and may require investing in additional resources to close the deal on time and according to plan.

Family-Owned Businesses

Focus on facilitating the pre-close data

Transparency is a critical contributor to

collection process and keeping the lines of

an accelerated close. When everyone is

communication open. If investing in exter-

aligned on priorities, closing the deal and

nal resources, make sure the business can

jump-starting value creation is a straight-

provide strategic thinking about post-close

forward process.

opportunities to cut costs and streamline

When that transparency is lacking, pri-

the reporting process.

vate equity firms sometimes assume that the sellers are just being difficult or unfo-

New Industry

cused and that the situation will improve.

An industry-agnostic firm faces greater

Unfortunately, that’s rarely the case.

risks in closing a deal quickly—and in

Family-owned companies might not

setting up an acquired company for

know how to be transparent. They’re not

financial transformation—than one that’s

used to sharing data and might not have

sector-specific.

it or be able to pull it together. Unless the

Take a financial sponsor that’s inter-

buyer is willing to place additional re-

ested in a $100 million carve-out of an

sources on-site during the transition and

aerospace company. It’s a great opportu-

invest in standardized reporting systems,

nity, and on paper everything makes sense,

these issues will continue.

though the sponsor has never invested

THE PORTFOLIO SOUND DECISIONS // Dennis Cail, Director, Technology and Management Consulting, and Christina Churchill, Principal, Technology and Management Consulting, RSM US LLP

BY THE NUMBERS

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Dennis Cail

in this industry. It closes the deal and

help negotiate the TSA agreement if the

subsequently learns of all the regulatory

timeline is overly aggressive and facilitate

requirements it signed on for when the

an efficient exit off the TSA.

check clears. In this case, the company re-

Having the right information at the

mained stagnant in the sponsor’s portfolio

right time ensures a successful close and

for more than seven years as the sponsor

faster financial transformation. But when

struggled to capture value and realize the

investing in a family-owned business, a new

synergies originally envisioned.

industry or a carve-out, knowing what the

Having in-house industry experts or

Christina Churchill

right information is, getting access to it,

investing in external ones can prevent this

and verifying its accuracy can be daunting.

scenario. Consider enlisting them before

Additional resources are often necessary

the LOI, as they can provide critical in-

to expedite the process, highlight any blind

sights to extract value and set a strategic

spots and set up the company for success. //

vision for how a company will fit within the firm’s portfolio.

Dennis Cail specializes in complex mergers, acquisitions, and divestitures—with emphasis

Carve-Outs

on M&A integration, carve-outs, transitional

With carve-outs, the priority is to get off

service agreements, M&A playbooks and

the transition services agreement, or TSA,

complex transformational projects. He has

as quickly as possible. But far too often,

more than 20 years of combined industry and

companies that picked the fast, cheap op-

Big Four management consulting experience

tion are forced to invest millions in a sys-

across IT, operations, HR management and

tem upgrade or overhaul within the first

finance in various industries.

year because the chosen solution wasn’t aligned with their business needs.

Christina Churchill focuses on the planning,

When closing the deal, it’s important to

execution and delivery of operational improve-

assess the level of customization in the cur-

ment projects. She works with project owners

rent IT systems and the level of documenta-

to optimize process efficiency, performance

tion. A lot of customization and little docu-

and profitability utilizing technology. She has

mentation almost always lead to trouble.

a proven track record of developing and

Again, bringing in advisers early to as-

implementing financial transformation, plan-

sess the situation can result in significant

ning and analysis solutions, and operational

savings down the line. An adviser can also

process improvements.

THE PORTFOLIO SOUND DECISIONS // Michelle Mikesell, Managing Director, Insperity

BY THE NUMBERS

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Workforce Compliance Demystified

T

he number of government statutes and workforce regulations has quadrupled since 1980. Keeping up is challenging, but ignoring compliance issues and employer liability can lead to costly litigation and penalties.

Here are six areas to keep in mind as your companies grow, evolve and even change hands.

Avoid compliance issues and liability by keeping up with government statutes and workforce regulations.

Classifying Employees

Discrimination and Harassment

Determine how many full-time and full-

The Equal Employment Opportunity Com-

time-equivalent employees there are in the

mission, or EEOC, enforces federal laws

company and whether they’re exempt from

that protect against discrimination and ha-

overtime. This will help your company

rassment based on race, color, religion, sex,

comply with the Fair Labor Standards Act

national origin, age, disability or genetic

and the Affordable Care Act.

information. It’s essential that your employ-

Employees will likely fall into three

ees receive anti-harassment training.

categories: independent contractor, nonexempt employee or exempt employee. If you

Employee Records

misclassify employees who work unpaid

From health and medical records to basic

overtime, they may be entitled to back pay

information, your records must be kept up

and other damages.

to date and secure.

For ACA purposes, you must know how

If you have employee health informa-

many full-time employees you have. But

tion, the Health Insurance Portability and

“full time” doesn’t mean only those work-

Accountability Act dictates that the infor-

ing 30 or more hours per week. Full-time-

mation must be protected. Violations can

equivalent and seasonal employees help de-

range from releasing information improp-

termine the number of full-time employees.

erly to allowing unauthorized employees

These numbers, as well as the health cover-

access to files.

age offered to each full-time employee, are

Other employee records, such as I-9

reported to the Internal Revenue Service.

forms, must be maintained and available for an unexpected audit by Immigration and Customs Enforcement.

THE PORTFOLIO SOUND DECISIONS // Michelle Mikesell, Managing Director, Insperity

BY THE NUMBERS

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Family Medical Leave Act

action must be reported to the employee.

This act provides unpaid, job-protected

The Fair Credit Reporting Act requires

time off from work and benefits continu-

that applicants be given a chance to chal-

ation for eligible employees when events

lenge the finding.

such as military service, personal illness Michelle Mikesell

or family medical needs arise. Eligible em-

Workers’ Compensation and Safety

ployees are allowed up to 12 weeks under

Workers’ compensation laws exist in ev-

federal law for personal illness or care of a

ery state. Benefits are paid for lost wages,

family member. In certain circumstances,

hospital and medical expenses, and death.

additional time is allowed.

Keep a safe environment using the follow-

To stay compliant and reduce liabil-

ing directives:

ity while employees are on leave, obtain

••Safety-first culture. Show employees

proper documentation such as a doctor’s

the company cares about preventing

note or military orders. The company

accidents. Involve them in designing

should continue paying the employer

safety-training programs.

health benefit contributions during the

••Communication. Post Occupational

leave, and the employee should make his

Safety and Health Administration

or her standard contribution.

publications and posters, and provide safety training.

Employee Screening

••Task force. To identify safety issues,

The EEOC has increased its scrutiny of

include representatives from nonman-

background checks. It said employers

agement employees to senior execu-

should limit the use of arrest and convic-

tives. Focus on safety inspections, re-

tion records in employment decisions

porting systems, and reviewing losses

because it could be deemed discriminatory.

and injuries.

Many states, counties and cities no longer allow businesses to immediately disqualify

•• Documentation. Keep records of all occupational injuries and illnesses. //

candidates with criminal records.

In addition, negative information

Michelle Mikesell is managing director, mid-

found through third-party screening that

market consulting and development for

causes an employer to consider adverse

Insperity, an HR services provider.

THE PORTFOLIO MID-MARKET TRENDS // Bruce K. Fenton, Partner, Pepper Hamilton LLP

BY THE NUMBERS

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The Rise of Co-Investment in Private Equity

T Co-investment is becoming a competitive advantage for private equity firms.

he hottest trend among private equity groups is co-investment. Private equity firms are increasingly seeking to involve other investors in their deals, and contributions from co-investors are becoming more significant portions of the funding for acquisitions. A recent study sponsored

by Pepper Hamilton LLP in association with Mergermarket, “Joining Forces: The Co-Investment Climate in Private Equity,” investigated these trends and found that 100 percent of surveyed funds offer co-investment opportunities. A majority of general partner respondents also said they were actively exploring investment opportunities that would enable their funds to offer occasions to co-invest.

At first glance, the key driver of this

•• To establish relationships with other

trend appears to be risk-sharing, a com-

private equity firms (8 percent).

mon rationale when pooling capital. In-

•• To fund sponsors’ drive to remain

deed, 26 percent of private equity firms

competitive through differentiation

cited this as the primary reason for the

(8 percent).

increase in co-investments. A closer analy-

These key drivers provide insight into

sis, however, provides a more telling look

current developments in the private equity

at why co-investments are on the rise.

space, as well as the primary benefits of

Other driving forces—and the percentage

co-investment.

of respondents who named them—include: •• To facilitate the fundraising process/

As investors decrease the number of funds they invest in, fundraising concerns

obtain capital commitments from

have become more important to private eq-

investors (22 percent).

uity firms. Even when not actively raising

•• Investors’ strategic alignment with

capital, they must focus continuously on

private equity portfolio companies

fundraising. One way they do this is by of-

(16 percent).

fering co-investment opportunities, which

•• To build relationships/goodwill with (potential) investors (12 percent).

•• To gain operating partners (8 percent).

can directly facilitate the fundraising process and indirectly help by establishing relationships with new potential investors.

THE PORTFOLIO MID-MARKET TRENDS // Bruce K. Fenton, Partner, Pepper Hamilton LLP

BY THE NUMBERS

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Co-investment allows private equity

Bruce K. Fenton

To overcome these challenges, private

firms and investors to establish a history

equity firms must focus on providing en-

of investing together, which the private

hanced disclosures during the fundraising

equity firms can capitalize on later by of-

process and developing policies and proce-

fering a co-investor the chance to invest in

dures that reflect industry best practices.

the firm’s next fund. Private equity firms

By insulating themselves from liability in

can also use co-investments to facilitate

this environment of enhanced regulatory

differentiation and specialization, and to

scrutiny, they will be able to maximize

capture high-quality partners, particularly

their competitiveness by continuing to of-

in the private equity firm’s key industries.

fer co-investment opportunities. //

Despite these benefits, co-investment relationships are complex, and private

Bruce K. Fenton is a partner in the com-

equity firms and investors face regula-

mercial department of Pepper Hamilton LLP.

tory hurdles. In the Pepper/Mergermarket

He is chair of the firm’s private equity practice

survey, 76 percent of respondents cited

group and investment funds industry group.

regulatory scrutiny as one of the biggest

He serves as secretary of the Pepper partner-

challenges to co-investment.

ship and is a former member of the firm’s

There are some potentially costly regulation-related concerns for co-investments.

Co-investment vehicles are required to maintain separate books and records and undergo an annual audit, and they may be subject to U.S. Securities and Exchange Commission examination. They are also subject to scrutiny around fiduciary dutyand disclosure-related concerns. For example, offering to waive the management fee or carried interest for the co-investment opportunity may raise concerns, and certain transaction fee and expense terms must be properly examined for conflicts of interest so as not to invoke regulatory scrutiny.

executive committee.

Announc i ng. . .

Thomps on’ sBRANDNEW

Gui det oPr i v at eEqui t yRegul at or yCompl i anc e

i npar t ner s hi pwi t ht heAs s oc i at i onf orCor por at eGr owt h

Putt hi sGui det owor kt ot ac kl edi f f i c ul ti s s uess uc has : moneyl aunder i ng c y ber s ec ur i t y f undr ai s i ng ERI SA FCPA ACGMember sr ec ei v ea30% di s c ount wi t hc odeACGGROWTHatc hec kout ! www. t homps on. c om/ equi t y

B-SIDE TODD DAUPHINAIS // Managing Partner, Clavis Capital Partners

SOUTH OF THE BORDER… “(My wife and I) love to travel, but we have young kids so it’s tough to travel too much internationally. Luckily in Texas we can get down to Mexico and Costa Rica and some other really interesting places pretty quickly.”

TODD DAUPHINAIS // Drawing on extensive corporate M&A and operating experience, Dauphinais in 2014 launched Clavis Capital Partners, a Dallas-based investment firm that targets industrial-oriented companies.

Last year Clavis invested in Solair Group, a provider of aftermarket maintenance and ground support equipment products to the aircraft and aerospace industry.

“WHETHER OR NOT OIL GOES UP OR DOWN, WHETHER OR NOT CAPITAL MARKETS GO UP OR DOWN, AIRPLANES STILL NEED TO BE MAINTAINED.” MARKET NICHE...

“I decided there was a place for a very operations-focused firm that was founded by and staffed by people who had spent a fair amount of time on the ops side of the world, not just investment banking and financial analysis.”

STEADY DEMAND… “Even through the recession, airline miles flown and takeoffs certainly did not decline at the same rate as the general economy, and they proved to be incredibly resilient.”

FUTURE INVESTMENT… “I happened to be in Tampa for a meeting and I had a day to kill. The company Solair is based in Miami, and I had never driven down the Florida coastline and through the Everglades. It was almost on a whim that I decided to go check (Solair) out.”

GREAT PLANES… “One of the unique things about this space: In Airbus and Boeing you’ve got two huge companies that are either customers or competitors, or some combination of both, so that’s a bit of a different dynamic than in other industries.”

“I REALLY CUT MY DEAL TEETH ON DOING CORPORATE M&A WORK, AND A LOT OF IT.”

MAINTAINING CUSTOMERS… “We particularly like the maintenance side of the industry because it’s not something that’s going away. Airlines are going to continue to need to be maintained no matter what happens in the economy.”

Visit middlemarketgrowth.org to read the full Q&A.

S A V E

T H E

D A T E

W W W . E U R O G R O W T H . O R G

# E U R O G R O W T H

THE LADDER ACG MEMBERS ON THE MOVE DHG, a public accounting firm

Greg Baty has joined Trivest

headquartered in Charlotte,

Partners, a Miami-based private

in February was named the

equity firm, as partner to lead its

winner of the University of

noncontrol and growth efforts.

Tennessee, Knoxville Center

He was most recently a principal

for Career Development Dr.

Greg Baty

with Hamilton Lane, a global

Jane S. Redmond and PepsiCo

private equity management firm

Commitment to Diversity

with approximately $240 billion

Award. The honor was given to

of assets under management.

recognize DHG’s commitment

Baty oversaw several investment

to diversity through outreach

allocations from the State of

and inclusion of students from

Florida, after the Florida State

diverse populations at the

Board of Administration selected

University of Tennessee, where

Hamilton Lane as the general

the firm has partnered with the

partner of the Florida Growth

Haslam College of Business.

Fund, which focuses on private

DHG is one of ACG Global’s

equity opportunities in the state.

Growth Leader partners.

Michael Hunter, a member Upacala Mapatuna has joined

of ACG Dallas/Forth Worth,

asset management firm Victory

has joined Commerce

Park Capital as chief investment

Street Capital, a Dallas-

officer from Goldman Sachs,

based investment bank, as a

where she was a managing Upacala Mapatuna

Michael Hunter

managing director in the firm’s

director and a member of the

real estate investment banking

alternative investments and

group as part of Commerce’s

manager selection group. In

efforts to expand its real estate

her new role, Mapatuna will

capabilities. Hunter also serves

sit on VPC’s investment and

on ACG Dallas/Fort Worth’s

management committees, and

board of directors.

will be involved in overseeing the firm’s current and future funds.

To submit your promotions, job changes and other accomplishments, please send details and a high-resolution color photo to Associate Editor Kathryn Mulligan at kmulligan@acg.org.

C RAC K IN G T H E C O MP L IANCE CO DE Become a Member of ACG’s Private Equity Regulatory Task Force

ACG’s Private Equity Regulatory Task Force (PERT) gathers together CFOs, CCOs and in-house legal counsel of middlemarket private equity firms nationwide. Together, they interpret and navigate the often complex compliance and regulatory issues affecting the industry. As a member of PERT, your firm will join a national network focused on shaping compliance best practices alongside federal regulators.

CONTACT US For more information on joining PERT today, contact Amber Landis, VP of Public Policy, at alandis@acg.org.

© 2016 Association for Corporate Growth. All Rights Reserved.

IT’S THE SMALL THINGS AEROSPACE & DEFENSE TRENDS // Flights of Fancy

1

PE SEES $$$ IN DEFEN$E

2

5

CH-CH-CH-CHAIIIIN OF FUELS

#SORRYNOTSORRY FOR DRONING ON

6

IT’S A BIRD! IT’S A PLANE! IT’S A BOWLING ALLEY?

3

GETTING DEFENSIVE

7

4

THE JET SET

Private equity firms play a major role in the defense industry today. From 2004 to 2013, PE invested more than $30 billion in 358 U.S. aerospace and defense companies.

Solar-powered airplanes, screens on your tray table and in-flight bowling alleys are among the airline innovations that will change the way we fly.

The total market for commercial drones was valued at $15.22 million in 2014 and is expected to reach $1.27 billion by 2020, with an estimated CAGR of 109.31%.

The global aerospace and defense industry is expected to resume growth in 2016, with revenue estimated to increase by 3%. This positive signal follows revenue declines of an estimated 0.5% last year, 1.9% in 2014 and 3.2% in 2013.

The Federal Aviation Administration is working to enable the United States’ annual use of 1 billion gallons of sustainable “dropin” alternative jet fuels by 2018.

The global airline industry continues to grow rapidly, with revenue doubling over the past decade to a projected $746 billion in 2014 from $369 billion in 2004, according to the International Air Transport Association.

—Larry Guthrie, director, communications & marketing, ACG Global

SPACE ODDITY

From Virgin Galactic’s winged SpaceShipTwo, to Jeff Bezos’ reusable rockets and even helium balloons that could carry us to orbit, the space tourism race is heating up. More than 700 people have already bought tickets for Virgin Galactic, which sell for $250,000 each.

I T ’ S

Y O U R

D E A L .

W W W . I N T E R G R O W T H . O R G

# I N T E R G R O W T H

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2016

Brent Baxter Clayton Capital Partners ACG St. Louis Term expires 8/31/2017

Jason Byrd Charter Capital Partners ACG Western Michigan Term expires 8/31/2017

Robert Brighton Shutts & Bowen LLP ACG South Florida Term expires 8/31/2017

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

Steve Castino Vestal & Wiler CPAs ACG Orlando Term expires 8/31/2018

Mark Hollis Centerfield Capital Partners ACG Indiana Term expires 8/31/2016

Karen Grexa KeyBank Business Capital ACG New Jersey Term expires 8/31/2017

Jay Jester Audax Group ACG Boston Term expires 8/31/2018

Jay Hansen O2 Investment Partners ACG Detroit Term expires 8/31/2017

Scott Linch Dixon Hughes Goodman ACG Charlotte Term expires 8/31/2018

Karin Kovacic Alcentra Capital ACG Connecticut Term expires 8/31/2018

Don Lipari McGladrey ACG New York Term expires 8/31/2017

Mark Lehman Parsons Behle & Latimer ACG Utah Term expires 8/31/2018

Cassandra Mott Thompson & Knight LLP ACG Houston Term expires 8/31/2016

Mike McVey Hylant Group ACG Columbus Term expires 8/31/2018

Martin Okner SHM Corporate Navigators ACG New York Term expires 8/31/2018

Walter O’Haire Valuation Research ACG San Francisco Term expires 8/31/2017

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

Titus Schurink HPE Growth Capital ACG Holland Term expires 8/31/2018

Karen Tuleta Morgenthaler ACG Cleveland Term expires 8/31/2017

Mitch Woolery Kutak Rock LLP ACG Kansas City Term expires 8/31/2018

Thomas Turmell TMT Capital Partners LLC ACG Chicago Term expires 8/31/2018

Vice Chairman Jason Brown* Victory Park Capital ACG Los Angeles Term expires 8/31/2016 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Angie MacPhee* RGL Forensics ACG Denver Term expires 8/31/2016 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2016 Immediate Past Chairman Doug Tatum* Newport Board Group ACG Atlanta Term expires 8/31/2016

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband *denotes member of Executive Committee

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