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MAY/JUN 2018


From Landfill to Windfall Ultra Capital investment reimagines recycling



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Positioned for Impact


PAT MORRIS President & CEO, ACG Global

CG’s mission is to drive middle-market growth by supporting the companies that account for one-third of U.S. private sector GDP and employment. By fueling corporate growth, middle-market private equity firms are making an impact on the economy. Some have gone a step further and made impact investing—with the explicit goal of driving positive social or environmental change—a core tenet of their investment thesis. This issue’s cover story looks at one such firm, San Francisco-based Ultra Capital, which invested in a project that introduces cuttingedge technology to revolutionize waste management and recycling. Not only will it generate returns for Ultra’s investors, the project will reduce the garbage that enters landfills. At a time when U.S. infrastructure spending is in doubt, there’s an opportunity for sustainable infrastructure-focused investors like Ultra to help fill the void. Since joining ACG as president and CEO, I’ve been traveling to ACG chapters to see the varied programming in each local market. One chapter-level initiative is the Corporate Development Officers network. Corporate acquisitions account for two-thirds of middle-market M&A, but many of these acquirers make only a couple of purchases a year. Through the network’s peer group meetings, corporate development officers exchange best practices and connect with ACG’s unrivaled network of buyers, sellers and advisers. Like corporate M&A activity, cross-border deal flow continues to rise. Deal-makers looking to understand the European market and connect with a robust global network should consider attending ACG’s EuroGrowth conference in Amsterdam on June 19-20. Among the topics covered will be regulation, a fast-evolving area that deal-makers in Europe and the United States are watching closely. ACG’s Private Equity Regulatory Task Force has been active in 2018, helping members stay current on industry regulations and working with decision-makers at the SEC and on Capitol Hill. In this issue’s Policy Points, ACG’s manager of legislative and regulatory affairs highlights topics that will be addressed at upcoming PERT meetings, including ESG, and fees and expenses. I look forward to meeting many of you in San Diego at InterGrowth and in the coming months at ACG chapter events. Thank you for your positive impact on the middle market. //



MAY/JUN 2018



QUICK TAKES Watermill Bets on Wind Power 17

A QUALIFIED OPINION Raymond James’ Brendan Tierney on Water 18

POLICY POINTS Infrastructure Innovation 32

IN THIS ISSUE Executive Summary 1 Cover and above photo by Adam Ewing


From Landfill to Windfall San Francisco-based Ultra Capital targets above-market returns with investments in sustainable infrastructure. Its support for a high-tech recycling plant that uses artificial intelligence, vision recognition and biotechnology proves that impact investing strategies are anything but garbage.

Executive Suite 6 The Round 8 Midpoints by John Gabbert 13 Vertical View 15 Growth Economy 35 The Portfolio 37


Human Capital Changes the Equation PE firms are increasing their focus on the people behind the portfolio, using personality assessments, talent-incubator programs and more to find the right leaders for their companies. 28


ACG@Work 42 The Ladder 46 It’s the Small Things 48

CBIZ is Expanding

Mark Coleman, Managing Director

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The GIIN’s CEO on Impact Investing’s Growing Appeal Amit Bouri, co-founder and CEO of the Global


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M&A Activity Follows the Light F What types of deals are you

BRETT BOND Title: Managing Director Company: DHG Corporate Finance, LLC Location: Charlotte, NC Expertise: Bond has

seeing in the LED space? Over the past decade, LED lighting has steadily progressed from a niche to mainstream market for both consumers and businesses. This has precipitated a changing of the guard as traditional lighting companies lose significant market share to smaller technology-focused companies that can respond to shifting trends in real time. In 2017, DHG advised Atlas Lighting during its sale to LSI Industries, which wanted to expand its outdoor LED lighting business. In late 2017, ILP, a portfolio company of Harbour Group, acquired Green Creative to move into LED lamps; several more LED lighting companies are known to be in the market. A few middle-market LED lighting companies will emerge as the new leaders through both organic growth and acquisitions, and some legacy leaders will be replaced.

more than 20 years of investment banking experience. His team is active in the LED lighting and agriculture markets, specializing in sell-side and buy-side M&A advisory.


F Given the adoption of LEDs,

where does the industry seem to be headed? In two words: intelligent controls. Historically, electrical control companies have offered a wide range of capabilities, such as dimming, motion control or automatic shut-off, which in recent years have significantly increased in popularity to save energy. Led by the LED companies, the next generation of intelligent lighting is now entering the market. These networked lighting controls could offer incremental energy savings of 20 to 60 percent, depending on application

and usage, which would represent more than the initial transition to LED. Just last year, a small number of utilities announced the first rebates for intelligent controls, and we expect these controls to be a main focus in the LED industry over the next several years. Companies that can offer open-system, integrated solutions will have the competitive advantage. F How are LEDs lighting the

way for other industries and M&A activity? DHG Corporate Finance has been active in the LED space, and we’ve seen firsthand the potential impact of LED lighting on the agricultural space as the technology becomes more economically feasible. Because of LEDs, indoor vertical farming, for example, continues to gain traction. The vertical farming startup Plenty raised $200 million in 2017 from investors like SoftBank, Alphabet Chairman Eric Schmidt, and Amazon founder Jeff Bezos. Plenty uses LED-lit 20-foot towers, which are devoid of soil, pesticides and natural sunlight. Meanwhile, grocery stores such as Whole Foods are experimenting with rooftop greenhouses and vertical farming, thanks to LEDs. LEDs are not only lighting homes and businesses, but soon they will enable countless other possibilities, such as POE (Power over Ethernet) and Li-Fi (Light Fidelity, or essentially Wi-Fi over the light spectrum), to improve our energy systems and everyday lives. We expect M&A activity to “follow the light.” //

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ESG’s Place on the Social Impact Spectrum Defining What ESG Management Is—and What It Isn’t

T Andrew Malk Managing Partner, Malk Partners

Erin Michelotti Vice President, Malk Partners

ransparency has become the new normal in a society that demands greater accountability. Look no further than companies like Equifax, Wells Fargo, Chipotle, Uber and Wynn Resorts, and it becomes easy to understand why many investors have felt the heat of unaddressed risks and increased stakeholder expectations. While this issue of Middle Market Growth focuses on impact investing, environmental, social and governance management occupies a neighboring and broader stage of the same continuum. Impact investments are made into companies, organizations and funds with the intention of generating positive social and environmental impact alongside a financial return; meanwhile, ESG management is the inclusion of environmental, social and governance considerations in traditional investments to reduce risk and increase returns. ESG management has been used as a broad concept by the investment community to describe a range of investment factors related to environmental stewardship, social equality and ethical governance. There tends to be significant misconception, so it is worth breaking down what ESG management is and what it isn’t.



ESG management is not: ɋɋ A driver of broken deals nor lower investment returns ɋɋ A “box-checking” exercise nor reporting headache ɋɋ The same set of risks and issues for every transaction Rather, ESG management is a set of practices: ɋɋ Aimed at creating long-term value, mitigating risk and protecting reputation ɋɋ Integrated into existing investment processes and led by investment professionals ɋɋ Expected to be a permanent part of the private equity landscape A common misunderstanding among investors has been that ESG management is focused primarily on environmental performance and only relevant to heavy industry operations, such as paper mills and refineries. However, social and governance risks and incidents cut across all industries and are just as likely to push companies into headlines, protracted lawsuits or a regulator’s crosshairs. Amplified by unprecedented transparency through social media, companies face greater risk exposure with a larger impact than ever before. Across industries, material ESG risks are most commonly found in the following areas of operations: ɋɋ Data privacy and security ɋɋ Labor and environmental practices in the supply chain ɋɋ Ethics and compliance ɋɋ Social and labor conditions ɋɋ Diversity and equal employment opportunity ɋɋ Worker health and safety ɋɋ Anti-bribery and -corruption ɋɋ Environmental performance ɋɋ Other areas

CASE STUDY Client’s Challenge Malk Sustainability Partners conducted an ESG review of a company that was generating a large portion of its revenue from government customers. Previously, an employee had filed a complaint alleging that the company was acting unethically by exaggerating a partnership with a minority business enterprise arranged to be eligible for government contracts that mandated a percentage of spending with minority business enterprises. The company fired the employee, who subsequently led a legal claim against the business; the matter was settled out of court. Impact and Value The legal diligence team saw the settled claim and deemed the issue no longer a risk, whereas Malk saw it as evidence of a larger problem. Using a minority business enterprise to be eligible for a government contract, without that business performing actual work on the contract, is a serious violation. Furthermore, Malk found that the company did not investigate the former employee’s complaint, signifying either a careless attitude toward ethics matters or intentional disregard for unethical behavior. The issue of exaggerating the true nature of the partnership, if unresolved, could result in sanctions,

fines, loss of contracts and debarment from government contract programs. ESG Comes into Focus Risk management, reputation preservation and value creation drive ESG management for fund managers. Investment professionals are recognizing that ESG due diligence reviews enhance visibility on operational risk and management capability and, furthermore, that such scrutiny should continue throughout the ownership period. In addition to wanting to better size up risk, GPs are looking to satisfy growing investor expectations. Most firms heading to market today can expect to receive ESG questions from pension funds, LP consultants and some endowments. Firms may even be asked to sign an ESG side letter with firm-level commitments. It’s hard to imagine a future where LP pressure is not greater than today. No longer classified as exotic concerns to be addressed outside the investment process, ESG issues have found their place in middle-market investing, and private equity firms in the lower middle market are starting to take note. The most successful, and fruitful, ESG efforts are marked by steady adoption across the firm and consistent practices in the core of the investment process.

Andrew Malk is a recognized ESG management expert and the





managing partner of Malk Partners. Erin Michelotti is a vice president at Malk Partners, where she

© 2018 Association for Corporate Growth. All Rights Reserved.

focuses on ESG management market strategy.




Certifiably Impactful B Lab Helps Companies Do Business Differently


hile working for private capital investment firms, Andrew Kassoy saw an opportunity to change how businesses operate in a way that would positively benefit workers, communities and the environment. “There wasn’t much market infrastructure to support doing business in a different way, and that’s what led us to start this nonprofit called B Lab,” said Kassoy, who co-founded the organization in 2006 alongside two college friends-turned-entrepreneurs. The goal was to put in place a framework that “would allow all business to be used as a force for good,” he said. B Lab offers a certification for companies—known as B Corporations—that meet its standards for social and environmental performance, public transparency and legal accountability. There are more than 2,100 certified B Corps today. They operate in more than 130 industries and range from well-known brands like Patagonia and Ben and Jerry’s, to banks and financial services businesses, among others. Their reasons for adopting the certification vary, from improving their credibility or, in the case of business-to-business companies, increasing transparency for their partners. For customer-facing businesses, the certification can serve as a brand differentiator. “Most consumers don’t believe the claims that companies make about themselves, but they’re looking to buy from trusted companies. More and more they’re interested in the


company as a whole, not just whether its product is sustainable,” said Kassoy, who worked at MSD Real Estate Capital, an affiliate of Michael Dell’s family office, prior to founding B Lab. Other companies view the certification as a recruitment tool, particularly for younger workers who value mission-driven employment. Increasingly, investors are recognizing the value of the legal accountability associated with B Corp certification and are prompting their portfolio companies to explore it. B Lab’s business development team actively meets with CEOs and entrepreneurs to promote the certification, but the most effective marketing is word of mouth, Kassoy said. “Most companies that become B Corps, it’s really happening because they heard about it somewhere— another B Corp CEO or entrepreneur has championed the idea, or an investor has asked them to consider it, or they’re hearing from their consumers,” he said. “Often they’re hearing from their own workers about it. Millennial workers will say, ‘Hey, how come we haven’t done this?’” B Corporations are headquartered in 67 countries, and the majority are privately held middle-market businesses. The certification requires a company to meet a set of social and environmental performance standards, and to make itself legally accountable to its stakeholders. To become certified, a business is assessed on its governance and environmental practices, and its relationships with employees,

E B Lab co-founder Andrew Kassoy

consumers, supply chain partners and the communities in which it operates. A section of the assessment addressing labor might ask what percentage of a company’s workers are paid a living wage, for example, or the types of benefits that nonexecutive-level employees receive. To be sure, adopting sustainable or socially conscious policies can come at a financial cost—think raising salaries or investing in employee training. But in Kassoy’s opinion, the benefits outweigh any immediate dings to a company’s bottom line. “I think most of the evidence shows that the companies with good environmental, social and governance practices actually perform better over the long term, even if sometimes they’re making some short-term trade-offs,” he said. —Kathryn Mulligan

Catalytic Capital Sparks Change in Struggling Cities Photo: National Community Investment Fund


nvestors have a role to play in community development in areas that have struggled to provide economic opportunities for residents, a phenomenon that Saurabh Narain, president and CEO of the National Community Investment Fund, calls a “tale of two cities.” “There has been good progress, but uneven progress,” he said, speaking at an event his organization co-hosted with the Global Impact Investing Network titled “Accelerating U.S. Community Impact Investing.” Low-income populations in American cities are affected by pressure from gentrification, along with changes to how the federal government administers social services, according to Amit Bouri, co-founder and CEO of the GIIN. Such trends have created an opportunity for investors to drive positive change in local communities by investing in segments like affordable housing, he said. “Capital can, and must, do more than just generate more capital.” Using private capital to target poverty-related challenges is personal for Bouri, who spoke about growing up in the United States as a child of immigrants, raised by a single mother and supported by welfare benefits. A panel session addressing placebased investment strategies featured representatives from organizations designing financing solutions in Baltimore, Chicago, Detroit and St. Louis. Benefit Chicago, for example, facilitates funding for local businesses like Sweet Beginnings,

E Amit Bouri, co-founder and CEO of the Global Impact Investing Network

a maker of honey-based skin products that employs former inmates. Meanwhile, U.S. Bancorp Community Development Corporation created Infuse, a set of capital products and services designed to facilitate community development investing in cities across the United States. “Impact and improvement of distressed communities is a responsibility that all of us have,” said William Carson, vice president and director of Infuse at U.S. Bancorp. Taking the Long View There’s a growing interest among private sector investors in opportunities to generate an impact alongside returns, Narain said. He stressed the importance of looking beyond quarterly earnings results. “Changing the lives of people

takes decades—perhaps generations,” he said. Bain Capital is blazing a trail as a private equity firm in the impact investing space. Last year, the firm closed its $390 million Double Impact Fund, which targets investments in sectors such as health and wellness, sustainability and community building. Greg Shell, a managing director with the firm, spoke during a panel session at the event, which was hosted in partnership with the John D. and Catherine T. MacArthur Foundation on Jan. 31 at the Federal Reserve Bank of Chicago. “We firmly believe capital can be catalytic in society,” Shell said. “We want to push the envelope on what private capital can do.” // —Kathryn Mulligan



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MIDPOINTS by John Gabbert

Is It Sustainable for PE Firms to Consider Sustainability?


hen you think of private equity buyouts, sustainability doesn’t necessarily come to mind. After all, fund managers are looking to achieve positive returns for their investors first and foremost. But that doesn’t mean sustainability and conservation—or any explicit target of positive social and environmental impact—are excluded from private equity investors’ scope. Not every fund manager can raise a vehicle dedicated exclusively to impact investing, but all investors can keep some of those goals in mind, especially if their mandate includes particular target areas. Take real estate-focused funds, where cutting costs often can be environmentally friendly. An investor might purchase an office property and replace aging light fixtures with longer-lasting bulbs, for example, or install smart energy consumption monitoring systems. It may take time to defray the upfront costs, but private equity investment is all about the long run anyway. Real estate and infrastructure opportunities are obvious areas where well-established PE investment strategies and sustainable, environmentally friendly initiatives align. But they are hardly the only ones. One major area of opportunity for private equity funds with goals of promoting sustainability is recycling. The pros and cons are well-known; recycling is associated with recurring revenue streams as well as environmental liability. News stories have

highlighted how Chinese recyclers are reducing their intake of recyclables from the United States, citing the lack of quality and the additional cleanup required for proper processing. By implementing technologies that can process even single-stream recyclables, a patient investor could address the growing need for domestic disposal companies. Investments in recycling businesses also provide opportunities to integrate with existing portfolio companies. A PE investor might purJOHN GABBERT chase a recycling facility to operate it Founder and CEO, as a supplier to a packaging company PitchBook that’s already part of the firm’s portfolio, potentially “NOT EVERY FUND MANAGER leading to savings on disposal and other costs. CAN RAISE A VEHICLE Another area of opporDEDICATED EXCLUSIVELY tunity relates to the environmental regulation of TO IMPACT INVESTING, BUT modernized truck fleets and ALL INVESTORS CAN KEEP other sources of emissions. SOME OF THOSE GOALS Staying in compliance with IN MIND, ESPECIALLY IF tighter laws will affect a broad subset of private THEIR MANDATE INCLUDES equity portfolio comPARTICULAR TARGET AREAS.” panies, but moving swiftly to address those issues can represent a marketing opportunity. PE funds can achieve a happy medium when it comes to focusing on financial gain while taking sustainContent Sponsored by ability concerns into account. Nailing the right approach won’t necessarily come easily, but private equity firms can add goals of positive environmental and social impact without impacting ultimate returns. //




Valuation for Acquisitions and Exits Transaction Tax Strategy Quality of Earnings Review for Acquisitions and Exits Risk Assessment for Acquisition Targets Working Capital and Intangible Valuation Services Closing Integration, Attest, Compliance and Consulting

AN EXPERIENCED CLOSER makes all the difference.

At Brown Smith Wallace, we add value to every transaction for our clients. Our seasoned transaction team brings top industry and Big 4 expertise from both sides of the table – further enhancing the value and turnaround time for our private equity clients. Looking for high quality services at lower costs? Put us on your closing team.

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A T O P 10 0 F I R M


B R O W N S M I T H WA L L A C E . C O M


All Around the World Among the largest impact-focused funds closed in the last decade is London-based Actis’ $2.9 billion Emerging

The United States and United Kingdom are home

Markets III Fund, which closed in December 2008. Actis

to the greatest share of impact-oriented private

raised the fund to target investments in Africa, China, India,

equity funds in PitchBook’s database. Thirty-five

Latin America and southeast Asia, according to Reuters.

such funds are headquartered in the United States, while 13 are based in the United Kingdom.

35 U.S.

Bain Capital in 2017 closed its $390 million Double

Impact Fund, which is led by former Massachusetts Gov. Deval Patrick. Its first two investments reflect the fund’s focus

13 U.K.

on socially and environmentally oriented investments— Living Earth, a recycler of organic landscaping materials; and Impact Fitness, a health club that promotes fitness in underserved communities.

Impact investing funds in PitchBook’s database are nearly evenly split between buyout (58 funds) and growth/expansion strategies (61 funds).

Dubai-based TVM Capital Healthcare Partners is the region’s first private equity firm dedicated exclusively to the health care sector. Its MENA II Fund closed in 2015 with $23.4 million

58 Buyout 61 Growth/Expansion

to meet the demand for health care services in the Middle East and North Africa, Turkey, India and southeast Asia.



P R I VAT E C A P I TA L , P U B L I C G O O D ®

S E P T E M B E R 1 2 - 1 3 , 2 0 1 8 | W I L L A R D I N T E R C O N T I N E N TA L H O T E L | W A S H I N G T O N , D . C .



W W W . A C G . O R G


© 2018 Association for Corporate Growth. All Rights Reserved.



Watermill Deal Has the Wind at Its Back


t face value, manufacturing high-quality industrial fasteners doesn’t sound like a particularly exciting business. But when the fasteners are used to help propel massive wind turbines in the fast-growing green energy market, the story gets more interesting. The promise of an expanding wind market was the impetus behind Massachusetts-based Watermill Group’s buyout of the parent of Sheffield, England-based Cooper & Turner last August, says Julia Karol, Watermill’s president and COO. “The renewables sector is growing particularly fast,” Karol says. “We’re super excited about wind.” The Global Wind Energy Council, a trade group, forecasts that cumulative installed wind capacity will reach 800 gigawatts globally by the end of 2021, up from 486.8 gigawatts through 2016, the most recent year for which complete data is available. The industry has been growing by more than 10 percent annually, led by large markets such as Asia and Europe. Wind turbine makers represent an important segment for Cooper & Turner’s high-grade bolts, studs and anchors, which the company says can safely withstand extreme environments. In the U.K., for instance, expansion of wind turbines in the North Sea is boosting demand, Karol says. Meanwhile, in China, where many cities are plagued by high levels of air pollution, attention is steadily shifting to renewable sources of power. In addition to wind turbines, Cooper & Turner’s fasteners are used

E Cooper & Turner supplies fasteners used for wind turbines

for critical infrastructure projects, such as tunnels, rails and general construction, as well as applications in the oil and gas industry. “Watermill really looks for industries that are going through transformation in one fashion or another,” Karol says, adding that recent technology improvements are allowing for more offshore installations of windmills. The company’s recent numbers reflect its growth potential. Karol says year-over-year revenue is accelerating by an expected 25 percent, up from 14 to 15 percent prior to the acquisition. // —Deborah L. Cohen


Photo: Cooper & Turner

Cooper & Turner provides a range of fasteners for the wind turbine market, including for: ɋɋ Nacelles ɋɋ Blade to Hub ɋɋ Foundation Fixings ɋɋ Tower Construction ɋɋ Transition Bolts & Studs




Brendan Tierney Managing Director, Raymond James Brendan Tierney is a managing director in the industrials investment banking group at Raymond James, focusing on the $700 billion water industry. Tierney previously led the industrials practice at Janney Montgomery Scott, where he developed sector expertise in water and wastewater, flow control, test and instrumentation, specialty chemicals and niche manufacturing. He gained significant M&A experience working for Citigroup and Rabobank.



How are issues of water quality impacting the way communities manage water? With recent tragedies in Flint, Michigan, and Newark, New Jersey, the industry has become increasingly focused on improving the quality of water—not only what we drink, but also the quality of the wastewater that is eventually discharged back into the environment. The EPA regulates both of these water types, requiring companies to sufficiently invest in and manage their water systems to avoid not only tragedies and enforcement actions, but also public backlash when water quality is not maintained. Against this backdrop and faced with increasingly complex water management issues, more municipalities and corporations are looking to outsource the management of their water systems to third-party specialist operators.  

Q MORE ONLINE Read more from this interview at


With over 70 percent of the Earth’s surface covered by water, why do we experience scarcity problems? Surprisingly, less than 1 percent of the planet’s water is usable by humans—the rest is in the oceans, soil, ice caps and atmosphere. In addition, human populations and industrial operations are not always


located near abundant usable water sources. As recent media attention on Cape Town, South Africa, highlights (Cape Town has been cited as potentially being the first major city to run out of water), water supplies at a given location are finite. This issue is exacerbated by the fact that water use has grown at more than twice the rate of population growth in the last century; as average income increases, water use per capita increases. The United Nations estimates this trend will result in twothirds of the world’s population living under water-stressed conditions by 2025. The solutions to this problem involve conservation, as well as reuse and increasing the local supply of usable water.


What opportunities are actionable for private equity firms? Not surprisingly, the opportunities match well with the trends we’ve seen in the industry. We’ve seen a lot of interest in service businesses that help governments and corporations tackle water quality issues, including solutions that provide new or more efficient methods of monitoring and treatment. Similarly, we’ve noticed increased interest in reuse solutions, as well as a trend

“GENERALLY, WE HAVE SEEN STRONG INVESTOR APPETITE FOR ALL KINDS OF WATER-RELATED BUSINESSES.” toward decentralized and/or modular systems. And finally, we’ve seen demand for all kinds of infrastructure plays—for long-term asset operators, as well as for technology and service providers. This is just to highlight a few areas. Generally, we have seen strong investor appetite for all kinds of water-related businesses.


How is aging U.S. infrastructure affecting the cost of usable water? According to the American Society of Civil Engineers, all U.S. infrastructure, with the exception of the rail networks, is in need of immediate investment to achieve adequacy. Alarmingly, some of the lowest grades—D and D+, respectively— were attributed to our nation’s water and wastewater systems. The study suggests that if investment in these conveyance systems isn’t increased significantly, the ripple effect might put at risk over $400 billion in U.S. GDP by 2020; 700,000 jobs would be endangered and over $500 billion in personal income would be at risk. When water systems are not properly maintained, the cost of failure can be five to 15 times more expensive than the cost of maintenance. This forces America’s municipalities into a vicious cycle: They are inefficiently spending scarce capital that is needed for investment and upkeep on maintenance and repairs. To break this cycle, progressive communities are turning to proactive asset management plans, leveraging smart solutions, including software, sensors and data analytics,

to find breaks before they happen and to most efficiently repair and replace the portions of their system that truly need it most.


With growing global concerns regarding water scarcity, what is being done to preserve the world’s most vital natural resource and address future needs? The solutions to water scarcity are similar to those for managing other natural resources: Look for ways to use less, to more efficiently use the quantities needed, and attempt to increase the supply, if possible. Over a third of pumped water globally ends up being lost or unaccounted for, so municipalities are looking for ways to reduce this non-revenue water. Increasingly, this includes leveraging technology to more efficiently detect leaks and prevent water main breaks. As staggering as it sounds, home and office use only accounts for 10 percent of all water consumption; agriculture and industrial use account for 70 percent and 20 percent, respectively. Therefore, investment in improving the efficiency of irrigation, food production and energy production (80 percent of industrial water is related to energy production and cooling) would have large effects on the demand side. On the supply side, it really comes down to investing in solutions that make more wastewater reusable (such as for irrigation and cooling) and making more previously unusable water usable (such as through desalination or decentralized filtration). //


VOICES OF THE MIDDLE MARKET In-depth interviews about the trends impacting midsize companies and M&A. Guests include CEOs, economists, private equity investors and other influencers who discuss what they’re seeing in the market.


© 2018 Association for Corporate Growth. All Rights Reserved.



Ultra Capital investment reimagines recycling

From Landfill to Windfall Photos by Adam Ewing


T Ultra Capital’s Emily Landsburg with Craig Stuart-Paul (left) and Steve Davey of Fiberight

rash nerd. That’s how Emily Landsburg identifies herself. Her colleagues agree the label fits, and so do her kids. “I have created a detour more than once on a family vacation to visit some sort of waste facility,” she says. “I get genuinely, passionately excited learning about new waste-to-value technology and pro­jects.” In her role as director at Ultra Capital, she’s found ample opportunity to nerd out. Landsburg vets investments that match her firm’s criteria for sustainable infrastructure. Unlike most private equity firms, Ultra focuses exclusively on projects. “Most people think of infrastructure as a bridge or an airport, but we look at specific types of projects that actively function like a standalone business,” she says. That includes a public-private project that Landsburg helped identify: a 144,000-square-foot facility in Hampden, Maine, that aims to make waste disposal a lot less wasteful when it begins operating this year. “We take a recycling plant and put it on steroids,” says Craig Stuart-Paul, CEO of Fiberight LLC, the company that operates the facility. Consider the current state of U.S. garbage. About 33 percent of waste gets recycled, and the rest heads to landfills (55 percent) or incinerators (about 13 percent). Fiberight intends to flip those numbers. With the help of artificial intelligence, vision recognition and biotechnology, Stuart-​ Paul says the facility could achieve a recycle rate somewhere between 70 and 80 percent.




The project aligns with the sustainability catchphrase of “people, planet, profit.” In that triple bottom line, the last item is critical. When garbage isn’t buried or burned, facility operators avoid disposal costs and can transform the refuse into promising revenue streams. “I think impact investing is moving away from the early days when people thought of it as a fluffy, feel-good thing,” Landsburg says. “Oftentimes you’re getting above-market returns and lower risk. Now people are realizing ULTRA CAPITAL this is a very shrewd investHeadquarters: San Francisco ment strategy. Impact investing, first and foreFocus: Infrastructure-based projmost, is investing.” ects related to the “commodities

of life”: energy, agriculture, water and waste Investment Range: Equity investments between $5 million and $50 million Recent Project: Fiberight LLC, a high-tech recycling facility operator that will serve 87 municipalities in northern Maine


WASTE NOT Fiberight’s waste processing requires plenty of sorting, but not by consumers. All of their trash—halfeaten tacos, water bottles, diapers, anything—can go in one bag. At the facility, that junk travels through two main phases. The front end of the plant has

cutting-edge technology that includes video imaging and artificial intelligence, which allows mechanical systems to sort trash precisely. “We don’t want people touching waste if we can avoid it,” says Stuart-Paul, who notes that most of the facility’s 42 full-time employees will fill technical positions like mechanics or forklift drivers. The plant’s high-tech system allows for more exact sorting of recyclables by group—separating colored plastic from clear, for instance—because higher-purity materials command steeper prices in the market. At the plant’s back end, valuable materials are recovered from garbage that would otherwise get buried or burned. That, says Steve Davey, Fiberight’s COO, “is where the secret sauce of Fiberight resides.” As sauces go, it’s not particularly appetizing. Once the plastic, metal and cardboard have been plucked from the trash, two things largely remain: food waste, and paper products deemed unfit for recycling, such as pizza boxes, tissues and diapers. The food waste runs through an anaerobic digester (where microorganisms break down the waste in an oxygen-free tank), creating methane that can be used to power the facility. The paper-based items are processed into pulp, which can be used for products made

from lower-quality paper—like egg cartons, or paper trays that hold hot dogs at concession stands. The municipal solid waste (aka trash) project has received $70 million in financing, which includes $45 million from a tax-exempt bond issuance, $23.5 million from Ultra and $1.5 million from Fiberight. In addition, Maine’s Municipal Review Committee contributed $5 million in the form of site improvements. Advances in technology mean that big problems don’t always require big plans—local, smaller-scale infrastructure projects such as Fiberight’s can play a vital role in addressing those issues. Conventional project finance, however, has evolved to focus on billion-dollar projects, Landsburg says. That leaves Ultra’s target investment range an underserved market. The firm looks for investments with total project costs in the $5 million to $100 million range; its equity investment in those projects is between $5 million and $50 million. (Private equity giant Blackstone Group underscored the appeal of large-scale projects in 2017 when it announced plans to raise $40 billion for an infrastructure fund.)

the best practices of European waste processing and applying it to the U.S.,” Stuart-Paul says. Fiberight already has a 46,000-square-foot facility in Virginia with similar technology that’s been tested for more than 10,000 hours, making the Maine project low risk, an essential criterion for Ultra. Long-term predictable cash flow is an additional requirement for the firm’s investments, and Ultra checked that box for the Fiberight project. “Trash will continue to be produced, and it has to go somewhere,” Landsburg says. More specifically, the project has long-term contracts with credit-worthy counterparties, including a

SCALING DOWN WITH TECHNOLOGY “I see a large opportunity for private equity because what the waste industry needs is new technology,” says Stephen Simmons, senior vice president at Gershman, Brickner & Bratton Inc., a McLean, Virginia-based waste management consulting firm. Ultra hired Simmons to evaluate the potential revenue streams of the Fiberight facility. “In almost every instance, new technology comes from entrepreneurs,” he says, adding that private equity funding helps get their innovations to market. “There’s a whole pent-up demand across the country and a whole mantra of zero waste. That means there needs to be new technologies and new markets developed.” Fiberight’s process, although popular in Europe, is considered new in the United States, where anaerobic digestion isn’t typically used for municipal waste. “We’re essentially taking




project finance, at Jefferies and lead banker on the transaction. “We received orders from 17 high-yield municipal investors and had strong oversubscription on the offering.”

15-year contract with 87 municipalities in northern Maine. The project is guaranteed to receive Fiberight’s COO approximately 102,000 tons of trash as part of a put-or-pay contract. “If we don’t receive it, they have to pay us for it anyway,” Stuart-Paul says. The facility also will receive about 50,000 tons of commercial waste, such as restaurant garbage. “We do expect a few lobster shells,” he says. Additional revenue will come from selling recyclable materials and low-grade paper pulp. All told, Stuart-Paul expects the project to generate about $8 million to $10 million in EBITDA in 2019. Ian Copeland, CIO and managing director with Ultra, says the firm seeks a 15 percent net return, plus or minus 2 percent. “With impact investing, a lot of people have this misconception that you’re sacrificing return. We firmly believe that, in fact, you’re generally increasing returns and increasing resiliency of the investment,” he says. “And there’s speed of deployment, which makes these smaller projects more cost-ef“I SEE A LARGE fective and therefore more OPPORTUNITY FOR attractive as an investment.” Other investors seem to PRIVATE EQUITY agree, based on the response BECAUSE WHAT THE to the tax-exempt bond WASTE INDUSTRY issued by the state’s finance NEEDS IS NEW authority. Investment bank Jefferies served as sole underTECHNOLOGY.” writer on the transaction. “Despite large supply in the STEPHEN SIMMONS week we priced, we saw sigSenior Vice President, nificant demand,” says Kevin Gershman, Brickner & Bratton Inc. Coleman, vice president, E

Steve Davey,


‘HIGH-TOUCH’ PROJECTS But funding and technology won’t guarantee success for infrastructure projects. “Project development is high touch,” Landsburg says. “We all know stories of projects that never see the light of day, or falter after they’re built, because they didn’t properly obtain community support.” Fiberight worked hard to avoid that potential pitfall. The project was replacing an incinerator (Maine’s landfills are full), and the owner of that facility would lose millions in revenue when it shut down, Stuart-Paul says, adding that the owner used paid advertising in an attempt to turn public opinion against the project. “There was a lot of mudslinging. They were taking out full-page ads, TV ads, radio ads; it was a total dogfight.” Fiberight decided on a grass-roots response. The company’s leadership attended more than 100 town hall meetings to explain Fiberight’s facility. Stuart-Paul says he went to at least 40. “I stood before the residents and said, ‘I’m the guy who’s gonna take your trash, and I’m the guy who’s gonna make sure it’ll work for you,’” he recalls. “In Maine, that goes a long way.” But what really surprised him was how much the residents cared. “The unique moment for me was the level of debate in a town meeting in rural Maine at 6 o’clock at night with nine people there,” he says. “You think it’s just trash, but they all got involved in it and they all realized how important it was. They said, ‘No, this is a new way to do stuff. We’re hearing from you guys over there that it’s risky, but if you don’t take some risks on some things, how does this country ever move forward?’ I heard that statement.” One of those town hall meetings took place in Brewer, Maine. “We had some initial concerns about adopting a technology for processing waste that was not in use at this scale in the United States, but the thorough work done by the Municipal Review Committee’s technical consultants allowed us to be confident about

Paper products-turned-pulp go on to become egg cartons and paper trays



the firm to understand

goal of funding anywhere

investment opportunities

from 20 to 50 projects annu-

better and faster than typical

ally, Ultra Capital requires

financial analytics. With the

a systematic investment

software, the firm can take a

process. That’s why, in

project developer’s financial

2016, the firm purchased a

model and analyze it in an

financial-modeling software

hour or two. Without that

company called EverVest.

technology, it could take any-

“Anybody who’s seen it,

where from 15 to 40 hours,

literally their jaw drops when

Copeland says.

they find out what we can

In addition to speed, the

do inside of it,” says Ian

software avoids risks posed

Copeland, CIO and manag-

by financial analysts. “If four

ing director at Ultra.

people sit in a room and

The software uses Monte

they build a financial model,

Carlo simulations—algo-

all four of those models are

rithms that apply random

going to be different,” he

variables to determine

says. “It’s error-prone.”

the probability of certain

Human fallibility can also

outcomes. Leveraging

overestimate an investment’s

cloud-based computing,

future payoff. “The worst

the software can generate

analysts are ones that say to

more than 10,000 unique

you, ‘The project has a 14.73

simulations of a project’s

percent return.’ That’s not

future performance. “That

true,” Copeland says. “The

allows us to actually under-

project has a return some-

stand what’s happening in

where between X and Y with

the project and where the

the highest probability of it

biggest returns come from,”

being about a 14.73 percent

Copeland says.

return.” That speaks to one

The software’s creators,

of the firm’s financial maxims:

MIT alums Teasha Feld-

We’d rather be approximately

man-Fitzthum and Mike

correct than precisely wrong.

Reynolds, are now directors

“We can take a develop-

at Ultra. The technology

er’s model and put it into

is based on one of Feld-

our system with rock-solid

man-Fitzthum’s research

confidence that one of our

projects from MIT’s Com-

analysts or the developer

puter Science and Artificial

has not made a mistake

Intelligence Laboratory.

about how the tax perspective runs, how the cash flows


Better and Faster

run, how the debt service

Copeland emphasizes

runs,” Copeland says.

that the software does not

“That increases confidence

make investment decisions


for Ultra, but it does allow

—S.A. Swanson

its ability to succeed here in this region,” says Karen Fussell, finance director for the City of Brewer. “We are excited to be part of a project that we hope will become a model for other communities in the Northeast and across the country.” Fussell says she was pleasantly surprised by how much interest the initiative received from private equity. “To me, it represented another vote of confidence in the project,” she says.

A DIFFERENT MODEL At press time, Ultra planned to close its first fund by the end of May, aiming for $150 million. It plans to market its second fund by the end of 2018, with a goal of raising around $250 million to $300 million. “We’ve got tremendous appetite for the second vehicle already,” Copeland says. Like his trash-nerd colleague Landsburg, Copeland does more than examine a project’s numbers. He studies infrastructure up close, as his wardrobe suggests (he owns at least two pairs of composite-toe work boots). “My children get really, really frustrated with me when I’m driving … and I pull over and look at a construction site or a power plant or a waste treatment facility,” he says. That’s probably not a typical side trip for most private equity executives. Then again, Ultra is not a typical firm. Usually, private equity firms will buy a company and continue to invest or reinvest in that business, Copeland says. “We’re buying a project that, after it hits the commercial operations date, has significant amounts of free cash flow,” he says. “So we see stabilized cash flow after about the second year of the vehicle, and typically, given the returns that we’ve got, our investors’ capital is fully returned within about year five. We’re not reliant on a market exit or a trade sale or something like that. We’re actually producing our return from predictable cash flows and at project levels producing a real commodity or a real service.” He points to another example of how Ultra deviates from the investment norm. “A typical private equity firm … is essentially screening out things that are good but maybe aren’t home

runs,” he says. “We’re not trying to build a firm that’s only swinging for home runs. We firmly believe that a strong, diversified portfolio of well-contracted, well-structured projects has a better chance of providing a predictable return.” A typical investor might look at 100-plus deals a year and maybe do five, he says. “Our goal is to look at 100 and if 50 of them meet our criteria, to do 50.” Whether energy, agriculture, water or waste— the “commodities of life” that Ultra targets for investment—the firm wants projects with solutions to widespread problems. Investment won’t happen without the potential for a longterm relationship with a developer that can build additional similar infrastructure projects. “We’re not interested in doing one-off projects,” Landsburg says. Fiberight certainly meets that requirement. The company has already had discussions with officials in California, New England and worldwide. “I get two calls a day from India,” Stuart-Paul says. “But we want to walk before we run. This is a flagship project for us, and we want to be sure it works well. We’re very proud of it, and from that we will grow further.” Fiberight would eventually like to add even more value to the organic material at its Maine plant by breaking down the pulp further, creating biochemicals

or biofuels such as ethanol through a process called hydrolysis. The plant’s operators hope to add that capability within the next two years, provided they receive additional capital. For investors focused on sustainable projects, returning capital to stakeholders is important, but it’s only part of their motivation, Landsburg says. “There’s an underlying drive for them—or ambition for them—that adds to their dedication and commitment and focus. There’s a mission component.” //

E Recycling technology on display at Fiberight’s Virginia facility

S.A. Swanson is a business writer based in the Chicago area. She frequently covers technology.




Human Capital Changes the Equation Private equity is increasing its focus on the people behind the portfolio BY CHAUNIE BRUSIE


any factors contribute to the success of portfolio companies, from access to capital to their business models and customer base, but private equity firms are increasingly recognizing the element that may matter most: talent in the executive suite. The traditional approach to accelerating portfolio company growth emphasized financial strategies, but today’s investors are more intent on choosing and nurturing the right people to lead. As a result, talent and the channels for attracting it are playing a greater role in private equity firms’ strategies. “We believe it’s the primary differentiator,” says Amy Fields, vice president and chief human resources officer for investment firm HBM Holdings. While she acknowledges that demand for a company’s product, a strong business model and effective use of technology are important, “we feel like talent is really what makes the difference.” Elise Chowdhry, managing principal of Optimum Advisors, a consulting firm specializing in PE firms and their portfolios, agrees. PE firms “are much more focused on getting this piece of the equation right,” she says. “Research has shown that people are really the linchpin of organizational success.”


Illustration by Stuart Kinlough



‘PERSONALITY IN THE RIGHT PLACE’ Talent has become a buzzword in business circles, but defining the term and deciding how to harness it are essential for taking growth companies to the next level. “We think of talent as personality in the right place,” says Dave Winsborough, vice president of innovation for personality assessment firm Hogan, which emphasizes the importance of cultural “RESEARCH HAS fit. He says placing a person SHOWN THAT with appropriate characteristics into the right PEOPLE ARE REALLY environment, while proTHE LINCHPIN OF viding necessary support, ORGANIZATIONAL will increase a business’s SUCCESS.” chances of success. According to Optimum’s ELISE CHOWDHRY Chowdhry, qualities such Managing Principal, as reliability and leadership Optimum Advisors are instrumental to the success of all CEOs. From there, strengths in specific areas, such as managing growth or guiding a business through a challenging time, can be identified and sought out according to a company’s particular needs. For its software businesses, San Franciscobased private equity firm Alpine Investors looks for leaders with soft skills, such as perseverance,


the ability to overcome obstacles, self-awareness and humility. HBM Holdings, which invests in manufacturers, employs a four-pronged assessment tool to evaluate qualities of prospective general managers and CEOs: the capacity to be action-oriented, make complex decisions, manage ambiguity and build effective teams. In addition, it looks for candidates who display a strategic mindset, interpersonal savvy and emotional intelligence. Despite the temptation to conflate demonstrated career advancement with strong leadership, the two do not always correlate, says Hogan’s Winsborough. Besides ambition, effective executives exhibit specific behaviors that aren’t necessarily found in everyone who has risen through the ranks. “In our view, good CEOs—those who build and sustain winning enterprises—tend to be self-aware and humble, and more interested in their people than the firm being well-known,” he says.

THE TALENT DIFFERENCE Securing senior executives who fit the organization begins with building solutions for attracting and developing the C-suite. Increasingly, PE firms are using a combination of data analysis and in-person assessment tools to help identify

and foster leaders for their portfolio companies. Matt Moore, chief talent officer and chief of staff for Alpine Investors, explains that firms must be proactive in securing the right leaders. “We believe that we are in the talent business first and foremost,” he says. “This is a dramatic shift from the past.” By using tools such as personality assessments, a private equity firm can take a sophisticated approach to hiring. A thorough analysis can help it identify the specific competencies that would define success for individual roles, and data about candidates can highlight behaviors and characteristics an individual might display under pressure. Exhaustive efforts at talent selection are worthwhile. A strong leader can drive success; an ineffective one can negatively impact a company’s entire infrastructure. “Most people have experienced and know the pain of a bad hire,” Chowdhry says. “Investors often start with the wrong CEO, and that can carry through the rest of the C-suite. It undermines morale, it undermines productivity. It can set investment back—sometimes by years—and ultimately result in a big hit to investment returns.” 

EXPANDING THE PIPELINE Cultivating strong leaders isn’t just for growthstage companies or startups. Ongoing organizational assessments are helpful for improving productivity and success for mature companies as well, Chowdhry says. HBM, which is family-owned and so able to hold its investments for the long term, has created a talent-incubator program that develops CEOs and other top-level leaders. It also has a team that provides day-to-day operational support, offering everything from oversight and advice on best practices, to leadership training and vendor support.

Through the program, the firm hires associates into a hybrid position focused on corporate development and internal projects. During two years acting as internal consultants, participants develop leadership skills and functional expertise before transitioning into a portfolio company in a fast-tracked general management role. The program uses a variety of methods to prepare its future leaders, including leadership training tailored to their individual development plans, team building, and broad-based, hands-on experience in all aspects of active acquisitions. Alpine Investors is pursuing a similar talent acquisition strategy with a CEO-in-residence program, in which the firm recruits a CEO before it identifies a platform to buy. The program provides a new leader with the opportunity to participate in the due diligence process prior to the acquisition. “We believe that having a great CEO to take over a company the moment we acquire it is instrumental in the overall success of an investment,” Moore says. Both HBM and Alpine Investors partner with MBA programs to expand their talent pipelines. HBM also has used platforms such as Linked­In and Twitter to build a presence at business schools and for connecting with proprietary deal-makers, according to Fields. “Talent drives the ultimate return,” Moore says. “The returns are far greater for us when we really focus on hiring the right person.” // Chaunie Brusie is a freelance writer and author based in southeast Michigan.




Look Beyond Washington for Infrastructure Innovation


he release of President Trump’s infrastructure plan in February reinvigorated the conversation in D.C. policy circles about the feasibility of an infrastructure overhaul and how it can be practically achieved. But a federal spending package appears unlikely and insufficient, creating room for a middle-market solution for infrastructure improvement. According to many economists and policy wonks, large federally funded BEN MARSICO infrastructure investment should Manager, Legislative and be reserved for times of economic Regulatory Affairs, downturn. That’s because the governACG Global ment can spend money hiring workers that companies can’t, such as through the public works programs implemented during the Great Depression. “THE MIDDLE-MARKET During an economic ECONOMY IS CHALLENGED slump, both political parties BY AILING U.S. INFRAare likely to back fiscal stimSTRUCTURE, BUT IT IS ALSO ulus—even if they disagree on how to spend the money. WELL-POSITIONED TO HELP Republicans often lean IMPROVE IT.” toward tax cuts; Democrats are more likely to push for expansion of so-called social safety net programs. But historically, both sides have agreed on the need for some sort of economic stimulus, and that can lead to bipartisan solutions such as infrastructure investment. MORE ONLINE The American economy today is Find updates and insight relatively strong. Wages are rising, on policy issues at companies are generally optimistic, unemployment is low, and 2017 ended with a massive tax reform effort


that slashed tax rates and was very favorable for businesses generally. The Federal Reserve will likely continue raising interest rates this year in an effort to stave off inflation and economic “overheating.” These signs suggest a political climate that may make federally funded infrastructure projects unlikely. Opposition Mounts The tax overhaul and congressional budget will likely impede federal spending on infrastructure, even though the Trump plan would leverage $200 billion of federal spending to incentivize $1.5 trillion additional investment. Fiscal conservatives in Congress balk at the current rate of deficit spending—the estimated combined price tag of the two-year federal budget and the GOP tax bill is nearly $1.8 trillion—and they’re unlikely to support more of it. Congressional Democrats are equally unlikely to support any package that would decrease federal control of infrastructure in favor of public-private partnerships. Nor are they likely to back modifications that shorten reviews of the environmental implications associated with private investment—a feature of the administration’s proposal. But infrastructure improvements are clearly needed. The American Society of Civil Engineers’ most recent Infrastructure Report Card, which assesses the state of U.S. infrastructure, indicated that the average American household “will lose $3,400

each year in disposable income due to infrastructure deficiencies” through 2025. It also warned that by the same year, the economy will lose almost $4 trillion in GDP and shed nearly 2.5 million jobs if the current infrastructure investment gap is not addressed. According to the National Center for the Middle Market’s 2015 Middle Market Indicator, 9 out of 10 middle-market executives want to see the nation’s infrastructure improved, and nearly half of that group say they are willing to pay higher taxes for it. Meanwhile, 83 percent of middle-market executives say that the state of U.S. infrastructure has at least a moderate impact on their business.

Part of the Solution The middle-market economy is challenged by ailing U.S. infrastructure, but it is also well-positioned to help improve it. Middle-market private equity firms, responsible for more than 80 percent of PE transactions, hold record amounts of capital available to invest in infrastructure-related projects. And innovative midsize companies have the capacity to solve infrastructure problems. Proterra is one such example. Profiled last summer in MMG, the electric-bus producer reduces operating costs for municipalities by eliminating the need for gasoline and expensive brake repairs. The result is more

cost-effective and environmentally sustainable public transportation—a form of infrastructure that, like roads, bridges and airports, needs an upgrade. Federal investment is part of the solution for addressing the nation’s infrastructure challenges, but the creativity and innovation of midsize companies shouldn’t be underestimated. Ben Marsico is ACG Global’s manager of legislative and regulatory affairs.


Whether you are raising capital and pursuing investments, managing a portfolio, or planning an exit, CLA is here for you, every step of the way.

WEALTH ADVISORY | OUTSOURCING AUDIT, TAX, AND CONSULTING Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor. ©2018 CliftonLarsonAllen LLP | 24-0136





What’s in Store for ACG’s Private Equity Regulatory Task Force? CRACKING THE COMPLIANCE CODE Become a Member of ACG’s Private Equity Regulatory Task Force

ACG PERT gathers together CFOs, CCOs and in-house legal counsel of middle-market private equity firms nationwide. As a member of PERT, your firm will join a national network focused on shaping compliance best practices alongside federal regulators. FOR MORE INFORMATION, CONTACT CHRISTINE MELENDES, AT CMELENDES@ACG.ORG. © 2018 Association for Corporate Growth. All Rights Reserved.



CG’s Private Equity Regulatory Task Force has been active in the first half of 2018, including implementing changes to communications tools and meetings for improved idea-sharing among the group’s members—chief financial officers, chief compliance officers and in-house legal counsel. This year’s PERT activities build on the success of 2017. Last year, the group released the landmark Private Equity Regulatory and Compliance Principles, designed to help middle-market private equity firms navigate industry rules and regulations. It hosted three in-person meetings and four quarterly calls, and members met with the new chairman of the Securities and Exchange Commission, Jay Clayton. The group also engaged with congressional lawmakers as they worked to pass December’s tax reform bill. This year, PERT changed its meetings from quarterly calls to an in-person format for members to discuss PERT business and hear presentations on topics relevant to the task force. (For those unable to attend, there is a webinar option, which is recorded for members to watch after the event.) In February, PERT launched a new committee workspace on the ACG website, allowing participants to interact in a private forum, view upcoming meeting dates, access recordings from past meetings, and direct follow-up questions to ACG’s policy and regulatory teams.

The group’s January meeting addressed how to choose the right vendor for a firm’s cybersecurity program. Upcoming quarterly in-person meetings for PERT members will highlight a range of topics. They include: ɋɋ May 7, 2018 – SEC Compliance, New York City ɋɋ Sept. 13, 2018 – Fees & Expenses, Washington, D.C. ɋɋ November (Date TBD) – Environmental, Social and Governance (ESG) for Middle-Market Funds, Location TBD CFOs, CCOs and in-house legal counsel of private equity firms focused on middle-market businesses are eligible to join PERT. Membership in the task force includes opportunities to meet with key regulators and lawmakers to discuss issues related to middle-market private equity. PERT members also receive a monthly newsletter and gain regular access to ACG’s policy and regulatory teams. // —Ben Marsico

CONTACT To learn more about PERT membership and activities, please contact Ben Marsico at


MAINE // 1998–2015 Private investors backed 113 companies in Maine between 1998 and 2015. Consumer companies received the bulk of investment capital, at 46 percent, while business-to-business companies received 21 percent. Private equity-backed businesses in the state grew sales by 46 percent over the period, compared with just 11.1 percent across all businesses.







0% 27.6% 55.9% 16.5% 0%

SALES GROWTH % BY SEGMENT 15.1% 26% 58.9% 0% 0%

Small: Less than $10M in sales MM Seg 1: $10-50M in sales


MM Seg 2: $50-100M in sales MM Seg 3: $100M-1B in sales


Large: More than $1B in sales




30.6% 17.5%



MORE ONLINE See the impact of middlemarket private equity on your state at

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








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 / S P O N S O R S H I P © 2018 Association for Corporate Growth. All Rights Reserved.


Strong M&A View for Oil Field Services MIDMARKET TRENDS // Resilient OFS Companies Stand to Benefit

T Ken Hirsch Managing Director, BKD Corporate Finance

he first “green shoots” of healthy company M&A activity in the oil field services (OFS) sector began in the middle of 2017. We believe the expectation of continued stability in oil and gas prices, improving financial performance by OFS companies, and renewed interest in the sector from institutional investors—along with factors that in general will drive overall M&A activity, such as abundant capital, business optimism and solid economic growth—set up the sector for accelerated M&A activity in 2018. The dramatic and prolonged decline in energy prices created a Darwinian restructuring of the OFS sector as inefficient, leveraged or geographically poorly positioned players were driven from the market. This past year saw the convergence of a strong recovery in oil prices (approximately 30 percent since June 2017) and greater extraction efficiencies that have significantly lowered wellhead break-even prices. The average price per barrel necessary to generate a profit is about half of what it was in 2010, falling from an average of $74.90 per barrel to approximately $35.70 per barrel across U.S. key shale plays. Improvements in extraction efficiency continued to lower this break-even price in 2017. With higher prices and better production efficiency, rig count—a proxy for OFS activity— increased to 937 in December 2017 from 407 in May 2016. In 2017, there were 82 transactions involving OFS companies, consisting of oil and gas drilling, and oil and gas equipment and services sectors in the United States. Total transaction value was $9.1 billion, a decline from $10.3 billion over the same period in 2016. To a large extent, this reflects a slow first quarter as the market sought oil price stabilization, and the general slowdown in M&A activity due to the political uncertainty related to the last presidential election. For those transactions with disclosed

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seller financials, valuation multiples also have decreased slightly to 10.7 times EBITDA in 2017 from 11.9 times EBITDA in 2016. This decrease in valuation multiples can be attributed to fewer blockbuster deals in 2017, earlier concerns of a potential second downturn in oil prices and, interestingly, a shift of target companies being valued on cash flow, not hard asset value. Importantly, capital is returning to the OFS market. Anecdotally, BKD Corporate Finance has seen renewed interest in the space from both large and midsize private equity firms. Further demonstrating institutional interest in the sector, three OFS companies (Quintana Energy Services, Liberty Oilfield Services and Nine Energy Service) have completed initial public offerings with more offerings in the future. We believe the OFS market is well-positioned for very strong, sustainable financial performance in 2018 and beyond. With a consensus forecast of rising oil prices, better operating characteristics leading to improving financial performance and the return of institutional capital, 2018 is expected to be a very good year for OFS M&A activity. Companies that demonstrated resiliency through the last downturn, have diversified customers and geographies, and have focused on strong financial performance will be rewarded with premium valuation multiples. // Ken Hirsch advises clients and executes corporate finance engagements, including mergers and acquisitions, debt and equity financing, and strategic financial advisory services for companies in the Gulf Coast region.




Health Care Attracts Corporates and PE MIDMARKET TRENDS // Robust Deal Flow Shows No Sign of Slowing

M John W. Jones Jr. Partner and Chair of Health Care Transactions and Regulatory Practices, Pepper Hamilton LLP


&A in midmarket health care services has benefited from steady growth. Enterprise values and EBITDA multiples remain strong, as sponsors and corporate buyers seem willing to spend on quality assets with sizeable growth expectations. Although corporate strategic buyers continue to dominate the health care services industry, financial sponsors have materially increased their activity over the last few years, benefiting from rich stores of dry powder and fragmentation within certain health care subsectors. Key drivers for this robust deal activity include consolidations, low cost of capital and accessible debt markets, large balance sheets, availability of dry powder, cost pressures, and desires to offset low organic growth. Even generalist private equity firms are becoming more interested in health care, with a buy-and-build strategy (as add-ons and strategic tuck-ins make up a significant portion of PE buyout activity). Processes remain competitive, even among sponsor-to-sponsor transactions, where there is a strong track record and opportunity for significant scale. Particularly active subsectors include longterm care, specifically assisted living and home health; physician practice management, including women’s health, dermatology, behavioral health and dental; and hospital combinations, affiliations and strategic transactions. Other subsectors, like ophthalmology, remain ripe for roll-up and consolidation, given their growth, high fragmentation and new technologies. There also has been significant activity in health care mega-mergers. CVS announced a proposed acquisition of Aetna for $69 billion, and UnitedHealth’s Optum announced a proposed acquisition of DaVita Medical Group for $4.9 billion, both vertical mergers. Amazon, Berkshire Hathaway and JPMorgan announced a

new health care initiative to improve employee satisfaction and reduce costs. Amazon already is challenging CVS and Walgreens with its proposed pharmacy offering. These moves show how the industry is distancing itself from traditional health care delivery and insurance models. There could be a real opportunity to drive down costs and improve patient care with vertical mergers. It remains to be seen if the moves are meant to embrace this opportunity, or are more defensive and seek to control the entire continuum of patient care. Regardless of motive, these moves could influence the activity in the midmarket space— causing more health care providers and organizations and their financial sponsors to look beyond their core capabilities for acquisitions and avenues to improve their bottom lines. Tail winds remain strong as the health care services sector is mostly a highly fragmented, founder-owned industry. Meanwhile, people are healthier and living longer. Value-based medicine is having a positive impact on M&A for companies that lack the infrastructure and human and capital resources to compete and need to merge. Regulatory risk and labor shortages remain the strongest head winds. Although it is unclear how the tax cuts will impact government reimbursement, there is more certainty and clarity on the potential for reform as “repeal and replace” of the Affordable Care Act has so far failed. Accordingly, we should expect continued activity in midmarket health care M&A and investment by financial sponsors in fragmented subsectors with significant growth opportunities that face minimal negative impact from policy changes. // John W. Jones Jr. is a partner and chair of health care transactions and regulatory practices for Pepper Hamilton LLP, and a member of the leadership team of the firm’s health sciences department.

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The New Normal for Recognizing Revenue BY THE NUMBERS // How the New Standard Impacts the Energy-Efficiency Space

T Steven Frank Partner, Dixon Hughes Goodman LLP

he new revenue recognition standard, ASC 606, provides a structure for assessing all revenue transactions. The assessment of revenue recognition under ASC 606 consists of five steps: 1. Identify the contract(s) with a customer 2. Identify performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when (or as) the entity satisfies performance obligations Two issues often impact revenue and the quality of earnings in the energy-efficiency industry: ɋɋ Performance-based contracts ɋɋ Gross vs. net revenue recognition These issues may be impacted further by the new revenue recognition model. It is important to understand this, as the target’s cash flow may not necessarily change despite differences in reported revenue. Performance-Based Contracts Energy-efficiency consulting firms help design, develop and implement programs for residential or commercial customers to reduce energy usage. In addition to revenue earned from contracts via fixed fee or time and material arrangements, firms often earn performance-based bonuses tied to savings generated by the end user. Revenue related to performance bonuses is often incorrectly recognized too early rather than at the end of the contract once customer acceptance clauses are satisfied or savings have been realized. Under ASC 606, revenue associated with performance-based bonuses may be able to be recognized earlier in the contract term as services are provided and performance obligations

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are fulfilled—provided that a significant reversal of revenue is not probable. Unfortunately, there are often several factors beyond a company’s control that could likely cause a significant reversal of revenue. However, it should be noted that the cash flow of the target would likely not align with reported revenue should a target be able to recognize revenue earlier under the new standard. Gross vs. Net Revenue Recognition Many utility companies incentivize customers to implement energy-efficiency programs, and energy-efficiency firms may assist in the development and administration of these programs. These consulting firms often collect the incentive rebates from customers (i.e., utilities, governmental agencies, etc.) and remit them to the end user. Revenue is often incorrectly recognized from these rebates on a gross basis; rather, it should be reported net since the target is truly acting as the agent. Under ASC 606, the principles regarding revenue recognition on a gross or net basis have not significantly changed. However, ASC 606 is centered on who controls the subcontracted services, meaning companies could now potentially make a different determination as compared with current guidance. While the cash flow of the target would not change, if reported revenue is a factor in the valuation model for a contemplated transaction, valuation of the target may be impacted by the change in revenue recognition if a buyer is not aware of the implications of the new revenue recognition standard. // Steven Frank is a partner with DHG LLP based in Washington, D.C. With more than 15 years of experience, he specializes in complicated transactions for corporate and private equity clients in the middle market.




Drilling into the Energy Sector GLOBAL VIEWS // Trends to Watch in 2018

A Steve Sprenger Principal, RSM US LLP

bsent major geopolitical shocks, oil and gas prices are expected to remain range-bound in 2018. Technological innovations and operational efficiencies in the United States have helped to stabilize margins at lower prices. The shift toward lower carbon generation will continue to lead to myriad investment opportunities. Amid stagnant electricity demand and rising costs, power and utility companies will seek opportunities to bundle services and increase margins. Here are some trends to watch: Technology Oil and gas: The gains attributable to innovations in technology may be hitting a plateau. The days of double-digit increases in recovery are likely ending, and the widespread use of advanced drilling and completion technologies levels the playing field. Power and utility: Technological innovations for renewable sources such as solar and wind have reduced their levelized cost of electricity, or LCOE, making renewable energy much more competitive than it once was. Unfortunately, much of the existing infrastructure in the United States is quite dated, and it will need to be upgraded or replaced to accommodate newer technologies. Pricing and Margins Oil and gas: The United States is now considered by many to be the swing producer, and its ability to ramp up production creates a check on advancing prices. In late November, OPEC agreed to extend production cuts through 2018; it is expected they will provide continued price stability well over $50 per barrel. Price stability, in turn, is expected to push U.S. crude production to a record-breaking 10 million-barrels-perday mark in 2018.


Power and utility: Efficiencies gained through technological improvements and energy conservation ultimately contribute to declines in energy demand. Despite population increases, energy usage is decreasing, and rising costs will drive utilities toward higher-margin opportunities. Consequently, these companies will seek to bundle energy management, security and other homeand utility-related services for the consumer. Regulatory Environment State renewable portfolio standards, a global movement away from carbon, and declining LCOEs for renewables will continue to drive investment in the alternative energy sector. Natural gas and renewable energy costs make it difficult for coal to compete. Furthermore, there are 29 states with portfolio standards that require an increasingly higher percentage of total electricity produced within the state to be generated through renewable resources. Financing Private equity investment in oil and gas companies has increased substantially in recent years. But this could mean short-term profits that come at some expense of longer-term innovation and resource discovery. After a tremendous amount of investment in the Permian Basin in recent years, the area’s attractiveness appears to be waning. There is still considerable interest in the opportunities found in the Woodford SCOOP, or South Central Oklahoma Oil Province, liquids-rich play. Similarly, the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play is providing lower break-even opportunities. Look for investment in these plays and related midstream infrastructure to increase. // Steve Sprenger is a principal with RSM US LLP.

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ACG has the top global network for middle-market businesses, hands down. AD



© 2018 Association for Corporate Growth. All Rights Reserved.


E ACG DETROIT At ACG Detroit’s November event, “Michigan Economy: Bull or Bear,” attendees gathered at the Detroit


Golf Club to hear from speaker David

A December breakfast hosted by McMillan

Littmann, senior economist at the Mack-

LLP in Toronto encouraged young pro-

inac Center for Public Policy. Pictured

fessionals to share their experiences and

(left to right) are ACG Detroit Chapter

discuss developing careers in the midmar-

President Christopher Letts, Jeremiah

ket industry. ACG Toronto’s Young Profes-

Jones and Joe Lynch.

sionals group presented the event as part of its quarterly series. Pictured (left to right) are Cale Bentley, YP co-chair; Rebecca Kennedy, past YP co-chair; Brittany McKenzie, past YP co-chair, Matthew Roberts, YP co-chair; and Maria Sagan, a member of the YP committee.

H ACG TORONTO The 15th Annual Toronto ACG Capital Connection in November brought together more than 500 senior executives from across North America for a leading conference focused on the midmarket investment sector in Canada.


ACG CHARLOTTE F ACG Charlotte kicked off 2018 with its M&A Ladies Night Out. More than 40 women attended this social networking event featuring acupuncture, palm readings, chair massages and Champagne.

H DEALMAKING AT THE MOUNTAIN Five ACG chapters in late January collaborated to host their annual three-day ACG Northeast Dealmaking at the Mountain event. ACG’s Boston, Connecticut, New York, New Jersey and Philadelphia chapters coordinated the weekend of close-knit networking, highend accommodations, gourmet food, and skiing and snowboarding.




H ACG DENVER ACG Denver hosted its annual Rocky Mountain Corporate Growth Conference in March with more than 800 attendees from around the country. The conference acts as a catalyst for corporate growth in the region’s middle market by offering content addressing successful growth strategies, direct access to deal flow and capital sources, and robust opportunities for deepening relationships across the business community.

G ACG NATIONAL CAPITAL ACG National Capital celebrated its 30th anniversary in February at The Barns at Wolf Trap, an event venue in Washington, D.C. More than 200 people attended the celebration, including 15 past ACG National Capital presidents (pictured). Two classic rock cover bands composed of ACG members provided entertainment.

E ACG MINNESOTA ACG Minnesota’s Young Professionals group hosted its WhirlyBall event in February, creating an opportunity for Twin Cities deal-makers to learn more about the chapter and network over happy hour drinks and games.


H ACG NEW YORK A panel session at the 5th Annual Women of Leadership Summit addressed how technology has changed deal sourcing, financing, marketing and CRM systems. Panelists at the January event at the InterContinental New York Barclay Hotel included (pictured left to right) Linda Hollinshead, Olu Fajemirokun-Beck, Amy Brodsky, Joseph Healey and Beatrice Mitchell.

ACG HOUSTON F ACG Houston hosted its first Deal of the Year event to celebrate the region’s middle-market community. The chapter recognized notable deals and deal-makers whose work leads to job growth, capital formation and the advancement of meaningful business relationships.

—Compiled by Hollie Merrick

CONTACT Want to share photos from your recent chapter event? Email us at




TRACY STRECKENBACH has joined Lexington, Massachusetts-based The Watermill Group as partner. She will work closely with the firm’s portfolio companies. Streckenbach brings more than 25 years of experience as a CEO, board member and consultant, and was previously a founding member of CR3 Partners, a national performance-improvement and turnaround consultancy.

DIANE SWONK has joined Grant Thornton LLP as chief economist. Swonk will enhance the firm’s client services, drawing on her extensive experience in economic forecasting and advising U.S. policymakers, central banks and C-suite teams. Swonk was formerly chief economist at Mesirow Financial.

JUSTIN KARR has joined East Wind Advisors as a director. Karr brings 12 years of corporate finance experience to the New York-based investment bank, which focuses on education services; technology, media and entertainment; and consumer and retail. Karr will focus on strengthening the firm’s consumer and retail coverage efforts.

Mutual of Omaha Bank has promoted DWAYNE SIECK to president and chief operating officer. In his new role, Sieck will oversee the bank’s strategic business plan. He joined the bank in 2008 and has since held several leadership roles, most recently chief lending officer and president of the firm’s commercial banking operation.


TRISH GILBERT has joined Chicago-based private equity firm Wind Point Partners as chief talent officer. Drawing on extensive talent acquisition and human capital experience, Gilbert will work with Wind Point’s senior partners to identify and cultivate relationships with candidates for CEO, board director and executive-level positions. Gilbert was previously vice president of human capital at The Edgewater Funds.

ARIC HASSEL has joined Commerce Bank’s Cincinnati office as senior vice president. Hassel brings over 20 years of experience to the bank, where he will develop and support commercial banking relationships with middle-market companies. Hassel joins Commerce Bank from BB&T. He also serves on ACG Global’s board of directors.

CohnReznick has expanded its transactional advisory practice, promoting NATALIE TRONKINA (top) to managing director in Los Angeles and HELANA ROBBINS HUDDLESTON to managing director in Chicago. Meanwhile, JEFFREY MICHELSON has joined CohnReznick as managing director in New York. The expansion of the transactional advisory services team comes in response to growing M&A activity among financial sponsors and strategic buyers.

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WOW! ESG Is B.I.G. In the U.S., the number of investment products


TBH, Millennials Really ♥ Impact Investments

—including mutual funds, ETFs and variable

Of the high net worth investors who own or are

annuities—that screen for environmental, social

interested in impact investments, millennials make

and governance criteria has grown at a compound

up the lion’s share at 52%, compared with Gen

annual rate of 29% a year since 2010, according to

Xers at 37% and boomers at 29%. A gender break-

The US SIF Foundation.

down reveals that 34% of women are interested in


the space, edging out men at 31%. —U.S. Trust


Is Recycling an E-waste of Time? According to, between 20 million and 50 million metric tons of e-waste (electronic


Where in the World Is ESG? (Not San Diego)

products such as cell phones, TVs, computers,

European markets continue to set the global stan-

etc.) are disposed of every year globally, while only

dard for sustainability. The Nordics and eurozone

12.5% are recycled.

garner the highest scores. The U.S. ranks below all

—Natural Papa

developed markets except Singapore. —Morningstar


Follow the Impact Investing Money Where do impact investing dollars go? According to the Global Impact Investing Network, housing pro-


PE Revs up the Geothermal Engines in Africa

grams are the most popular use of funds, with about

U.S. private equity and hedge funds are backing

$25 billion invested, followed by energy projects

an effort by Ethiopia to turn itself into an exporter

with $19 billion, and microfinance with $14 billion.

of electricity to the region, channeling at least $4


billion into sustainable geothermal projects across the nation.


SRI Assets Are Sustaining More than Responsible Growth A 2016 report from the Forum for Sustainable and Responsible Investment Foundation found that



Renewable Energy (Made in China) China is betting big on renewable energy, more

sustainable, responsible and impact, or SRI, assets

than any other country in the world. It pledged in

have expanded to $8.72 trillion in the U.S., a 33%

January to invest 2.5 trillion yuan ($367 billion) in

increase from 2014.

renewable power generation—solar, wind, hydro


and nuclear—by 2020. —CNN Money

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

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Middle Market Growth - May/June 2018  
Middle Market Growth - May/June 2018