Middle Market Growth - September 2014

Growth MIDDLE MARKET

// SEPTEMBER 2014

CREO CAPITAL

Finds Its

Mojo with

INVESTOR INTEREST IN U.S. POT MARKET STOKED, BUT UNCERTAIN

Food Focus From a challenging investment to new opportunity

A QUALIFIED OPINION: ANDREW MALK, MANAGING PARTNER, MALK SUSTAINABILITY PARTNERS A publication of

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The official publication of

EXECUTIVE SUMMARY DOUG TATUM // Chairman, ACG Global Board and Newport Board Group

New Goals for the Middle Market

W

elcome to the September edition of Middle Market Growth magazine.

As incoming ACG board chairman, I look forward to

a year-long agenda of exciting initiatives designed to boost ACG’s presence as the definitive leader on issues affecting middle-market companies and the capital providers they depend upon to expand.

Consider EuroGrowth® 2014, which takes place in mid-October. We expect record attendance at this London event. It is fast becoming the go-to conference for dealmakers seeking prescient market information and a platform to expand their network of sources for mid-sized deals in Europe and elsewhere around the globe.

Domestically, the newly formed Congressional Caucus for Middle Market Growth—in large part the result of ACG’s determined outreach to influential lawmakers—is putting a stamp on middlemarket concerns such as the hotly debated tax issue of interest deductibility in Washington. The caucus is also shining a spotlight on the often-overlooked contributions of mid-sized companies to local economies across the United States.

To highlight the local impact of the middle market, this month’s magazine is dedicated broadly to the theme of food and agriculture. Our lead story profiles Flagship Foods, a private equity-backed aggregator of overlooked gems in the consumer food space. Flagship’s story is typical of the growth spurt that often occurs when private equity enters the scene, as the company—in this case backed by CREO Capital Partners—gains access to resources and strategic vision, while boosting revenue and adding jobs.

We also take a look at the viability of a fast-growing but controversial new agricultural market— legalized marijuana—which is drawing the attention of a wide range of investors and market speculators.

In the coming year, we will examine many more trends that impact the investment decisions of those betting on middle-market companies.

I’m looking forward to the chance to speak with many of our members as we continue to work together to strengthen the voice of the middle market through thoughtful outreach to legislators, academics, media and the public. We have a lot of work to do and face some challenges, but the members of ACG are ready and up for the task. With that said, I’m ready to get to work. Thank you for the opportunity to serve as your chair and for your ongoing support of Middle Market Growth magazine. Enjoy the read! //

EXECUTIVE SUITE DEXTER MANNING // Audit Partner, Grant Thornton LLP

Q

WHY ARE WE SEEING SO MUCH M&A IN THE FOOD AND BEVERAGE INDUSTRY? DEXTER MANNING: M&A is a growth mechanism, which accomplishes a few things: First, it reduces overall costs by creating economies of scale, particularly back office processes and inputs such as the commodities food companies are buying and processing. Second, it opens up new market segments or geographies. Consider Smithfield Foods, the largest U.S. pork processor, which was recently purchased by a Chinese porkprocessing company looking to expand its global footprint, including access to the U.S. market. Finally, M&A can also be a means to remove a competitor and improve market pricing. Companies are motivated by these factors, and many have conserved cash coming out of the recession that they need to invest. This, along with an abundance of cash in private equity, has created a market with more buyers than sellers. Consequently, when an opportunity arises, there are often multiple companies ready with offers. Bidding wars are not uncommon, such as the rivalry we saw recently between Tyson Foods and Pilgrim’s Pride for the takeover of Hillshire Brands. Tyson ultimately won.

Q

IS PRODUCT INNOVATION IMPORTANT AS A GROWTH STRATEGY IN TODAY’S MARKET?

DM: It’s absolutely essential. Consumers have changed, and companies need to innovate to hold on to their existing customer base and attract new consumers to their products. In the past, brands ruled. Consumers today, however, are not particularly loyal to specific brands. Food processors and manufacturers need to understand the generational differences between baby boomers and millennials, two groups fueling

BIO //

many of the changing preferences. Aging baby boomers looking for the

DEXTER MANNING is an audit partner at Grant Thornton and national practice leader for food and beverage. He has more than 20 years of experience in financial accounting and advisory services specializing in the food industry, including eight years as CFO of a regional beverage distributor.

fountain of youth want healthier products, which we’re seeing reflected in many product offerings. Millennials are even more health-conscious than their boomer predecessors, plus they care about sustainability, ethical issues, the origins of their food and related concerns. Today’s companies don’t have the luxury of simply doing what they’ve always done—they need to innovate continually to win.

Continued on next page

EXECUTIVE SUITE DEXTER MANNING // Audit Partner, Grant Thornton LLP

Q

WHY DO COMPANIES NEED TO INVEST IN R&D? DM: You can’t talk about innovation without talking about

R&D, which is how companies innovate. There is a product-innovation revolution going on right now, with companies investing heavily in R&D. But the focus of R&D has changed somewhat; in the past the focus was how to lengthen the life cycle of a product—for example, adding preservatives to extend shelf life. But tastes and consumer values have changed and today preservation and presentation are less important.

Instead companies innovate in areas such as bio-friendly and sustainable packaging and the removal of additives to achieve simpler, healthier foods. Much of Coca-Cola’s packaging contains materials that are 60-to80-percent biodegradable. Even the iconic Heinz ketchup bottle is now biodegradable. Less has become more. And it’s also worth noting that not all companies are taking maximum advantage of the incentives and tax credits that promote sustainable R&D and manufacturing at the federal, state and local levels. The bottom line is that companies have to have a robust pipeline of ideas in R&D. Those not investing are going to be left behind. //

Challenging the status quo in Private Equity.

With more than 25 years experience in PE markets worldwide, Dentons’ Private Equity team advises fund sponsors and their portfolio companies on all aspects of their business, including fund formation, M&A and financing transactions, tax and regulatory matters.

Dentons. The new Global Elite law firm created by Salans, FMC and SNR Denton.* Contact: Paul Gajer Partner, New York T +1 212 398 5293 paul.gajer@dentons.com Steve Rist Partner, Kansas City T +1 816 460 2645 steve.rist@dentons.com

dentons.com Š 2014 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. Please see dentons.com for Legal Notices. *Acritas Global Elite Law Firm Brand Index 2013.

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left

This Column is Gluten-Free!

M

aybe we’re getting carried away with the health craze that’s sweeping the food industry. But that and other emerging trends are creating a feeding frenzy among corporate and

private equity buyers.

Last year, Brynwood Partners picked up Lightlife, which makes soybased meat substitutes. In June, specialty food manufacturer TreeHouse Foods announced it was buying the nut-and-dried-fruit company Flagstone Foods for a multiple of more than 13 times EV/EBITDA. And there was the belly-buster deal for Hillshire, the producer of Jimmy Dean sausages, finally landed by Tyson for a sizzling $7.7 billion.

BIO //

Randy Schwimmer shares his perspectives in MidPoints each issue. A former member of senior management and investment committees for two leading middle-market debt platforms, he is also founder and publisher of The Lead Left, a weekly newsletter about deals and trends in the capital markets.

Content sponsored by

Wait, sausages? Shocking disclosure: It’s not all about health.

Yes, everyone’s obsessed with calories and weight loss. Food companies have responded with a dizzying menu of “natural,” “organic,” “lowcarb,” “fat-free,” “sugar-free,” and “hormone-free” choices, scientifically based or not. Never mind that, as a recent WSJ article pointed out, taking the gluten out of food often removes nutrients as well. Now they tell us.

But along with the “good-for-you” trend, there’s the equally powerful and conflicting impulse for cheap, good-tasting stuff. And since 50 percent of Americans earn $45,000 or less, premium-priced snacks and goodies are beyond the economic reach of many consumers.

The shift to thrift is fueling M&A activity in the so-called value food segment. A good example earlier this year was the flip by Wind Point Partners of a private label contract manufacturer, Hearthside Food Solutions, to Vestar Capital and Goldman Sachs.

“Better-for-you” items, such as low-salt pretzels and baked potato chips, seem to be the perfect healthy/happy mix, but carbs have lost favor. Cereal makers, seeing soggy sales of their core products, are fighting back. Post Holdings (maker of Fruity Pebbles) recently agreed to pay $2.45 billion for Michael Foods, a big producer of egg products.

Continued on next page

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left “BIFURCATION OF BOTH CONSUMER DEMOGRAPHICS AND APPETITES SPELLS OPPORTUNITIES FOR RETAILERS AND MANUFACTURERS ALIKE.”

Innovations like Greek yogurt, coming out of nowhere to gain an almost 30 percent share in the category, are highly sought after. Brand extensions, often effective revenue boosters, are taking on a new sense of urgency.

Want Cheerios? Forget the boring originals. Try multi-grain Peanut Butter, Dark Chocolate Crunch or Regular Chocolate (“Made with Real Cocoa!”). Whole-grain flavors are Frosted, Banana Nut, Honey Nut, Apple Cinnamon and Yogurt Burst. Got lactose-free milk?

Bifurcation of both consumer demographics and appetites spells opportunities for retailers and manufacturers alike. Positioning at either the value or premium end of the spectrum is key; those stuck in the middle (e.g., Target) are under relentless pressure to choose sides.

How about picking both sides? In a perfect emblem of the times, Hormel Foods, whose lineup includes the iconic staple Spam, agreed last month to buy the maker of Muscle Milk. We can’t wait to see that brand extension.

So stay tuned to the food fight in supermarket aisles near you. In the meantime, pass the Oreos. //

We create conditions that are Exactly Right.

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

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

www.WeiserMazars.com

Growth MIDDLE MARKET

// SEPTEMBER 2014

Photo by Chad Case

FEATURES

CREO Capital Finds Its Mojo After reinvigorating a struggling meatball producer, private equity firm CREO Capital Partners abandoned its generalist strategy to focus on food. Since then CREO has expanded its portfolio of brands and introduced a new logistics venture to increase efficiency.

Read more.

“WE WENT FROM THE HUMBLE BEGINNINGS OF A NEAR FAILURE TO A BUSINESS THAT DOES NEARLY $300 MILLION IN SALES.” // ROB HOLLAND, PARTNER, CREO CAPITAL PARTNERS

U.S. Pot Market Stoked, but Uncertain Against a backdrop of conflicting regulation, private equity firms are among the investor groups staking their claim in the highstakes cannabis industry.

Read more.

TABLE OF CONTENTS

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

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

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

Take the MMG Annual Readership Survey!

IN EVERY ISSUE Executive Summary Executive Suite MidPoints

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

2014 Apex Award, New Magazine, Journal & Tabloid 2013 Folio Eddie Honorable Mention, best digital edition 2013 Association TRENDS All-Media, monthly publication

DEPARTMENTS THE ROUND • Q&A with Hadley Mullin, Managing Director at TSG Consumer Partners

ASSOCIATE EDITOR Kathryn Mulligan kmulligan@acg.org

DIRECTOR, CREATIVE AND BRANDING

• ACG Presents Inaugural Growth Awards

Brian Lubluban blubluban@acg.org

• ACG’s Policy Expert Amber Landis Weighs in on Interest Deductibility Read more.

VICE PRESIDENT, CONFERENCES & PARTNERSHIPS

A QUALIFIED OPINION

Christine Melendes, CAE cmelendes@acg.org

Andrew Malk, Managing Partner at Malk Sustainability Partners, Talks to MMG About How Firms Can Unlock Value Through Sustainability.

Read more.

FOR ADVERTISING OPPORTUNITIES

ACG@WORK

Custom media services provided by Network Media Partners, Inc.

• Local Fare and Corporate Execs Enhance Minnesota Event.

• ACG Houston Introduces New Programming for Women.

• Experts Share Health Care Insights at ACG Chicago Conference.

• ACG Atlanta Honors Thriving Georgia Businesses.

Read more.

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

Read more.

DIRECTOR, STRATEGIC DEVELOPMENT Meredith Rollins mrollins@acg.org

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

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

To register to attend EuroGrowth, please visit www. eurogrowth.org.

For Cross-Border Dealmakers, EuroGrowth Is Not To Be Missed ®

EuroGrowth, the ACG-backed dealmakers’ conference in Europe, is fast becoming the premiere international networking event for professionals focused on overseas mergers and acquisitions.

Marking its second year, the two-day London conference held at Grange St. Paul’s Hotel will bring together advisers, corporate officers, private equity partners, bankers and others focused on transactions with mid-sized companies in Europe and around the globe.

Panel sessions led by industry experts will address topics such as alternative financing options in Europe and the private equity environment in emerging markets.

Returning this year are executive roundtables, the topical conversations facilitated by senior practitioners in the industry. Delegates can join open discussions on more than 30 relevant topics, including IPOs, fundraising and sector-specific investment.

“The signature events at EuroGrowth enable people to listen to and speak with high-profile international dealmakers,” says Piero Carbone, a partner in the London office of the law firm Duane Morris and event chairman. “The main focus of the conference is to facilitate as much networking as possible and create business opportunities for the participants.”

Carbone, who has worked on deals in a range of industries, notes that the event is designed to blend education with one-on-one interaction. EuroGrowth’s signature networking event ACG Capital Connection®, for example, is designed to showcase capital providers and bring together buyers and sellers during a lively, Oktoberfest-style reception. //

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This fall, 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.

Had a newsworthy chapter event?

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

ACG New York’s 2nd Annual Independent Sponsor Luncheon, Union League Club Left: Attendees mingle during a pre-session networking reception. Right: Panelists included moderator David Acharya, AGI Partners LLC; Joseph Catalano, Sentinel Capital Partners; Hannah Craven, Stone-Goff Partners; Evan Greebel, Katten Muchin Rosenman; James Illikman, Peninsula Capital Partners; Douglas Song, Prodos Capital Management; and Tatum Pursell, Unlimited Horizons, Inc.

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A D VA N C E R E G I S T R AT I O N I S N O W O P E N !

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

G L O B A L M & A D E A L F L O W . T W O D A Y S . O N E E V E N T. The premier source for cross-border networking and middle-market M&A deal flow.

R E G I S T E R B E F O R E 1 O C T O B E R 2 0 1 4 A N D S AV E £ 2 0 0 W W W. E U R O G R O W T H . O R G

#EUROGROWTH

THE ROUND NEWS THAT MATTERS SUPPORTING GROWTH // Left to right: Gretchen Perkins, Huron Capital Partners; ACG Past Chairman Pam Hendrickson; Rep. David Schweikert, R-Ariz.; ACG Global President & CEO Gary LaBranche.

ACG Presents Growth Awards to Members of U.S. House This May, ACG presented the inaugural ACG Growth Award to four members of the U.S. House of Representatives. The recipients were recommended by ACG chapters and global board members for their service to the middle market. The honors were given to Reps. Jim Himes, D-Conn.; Robert Hurt, R-Va.; Sean Patrick Maloney, D-N.Y.; and David Schweikert, R-Ariz. Understanding the crucial role middle-market companies play in creating jobs and fostering economic vitality, these award recipients champion growth policies and help improve the health of middle-market companies, not only in their own districts but across the country.

ACG Growth Awards are bestowed on appointed or elected officials, scholars, authors and others who have made significant contributions to the middle market and are the association’s highest recognition to non-ACG members for service to the middle market. The 2014 recipients were honored by leaders of ACG in Washington, D.C., in their respective offices.

Continued on next page

THE ROUND NEWS THAT MATTERS CHAMPIONING THE MIDDLE MARKET // Left to right: Ramsey Goodrich, Carter Morse & Mathias; ACG Chairman Doug Tatum, Newport Board Group; Rep. Jim Himes, D-Conn.; Karin Kovacic, Alcentra Capital Corp.; Richard Jaffe, Duane Morris.

In attendance from ACG Global were: • Doug Tatum, Chairman, Newport Board Group; ACG Global Chairman and

ACG Atlanta member

• Pam Hendrickson, COO, The Riverside Company; ACG Global Past Chairman and

ACG New York member

• Richard Jaffe, Partner, Duane Morris; ACG Global Vice Chairman and

ACG Philadelphia member

• Stephen Prostor, Director/SCO, Citi Private Bank; ACG Global Finance Chairman

and Past ACG New York Chairman

• Ramsey Goodrich, Managing Director, Carter Morse & Mathias; ACG Global Director

at Large and ACG Connecticut member

• Gretchen Perkins, Partner, Huron Capital Partners; ACG Global Director at Large

and ACG Detroit member

• Karin Kovacic, Vice President, Alcentra Capital Corporation; President,

ACG Connecticut

• Robert Blumenfeld, Executive Director, ACG New York • Gary LaBranche, FASAE, CAE, President & CEO, ACG Global • Kristin Gomez, Vice President of Communications & Marketing, ACG Global //

THE ROUND NEWS THAT MATTERS

Interest Deductibility Still a Priority for ACG Members A U.S. tax code that maintains interest deductibility is crucial for economic growth; recognizing its importance to the middle market, ACG highlighted the issue in its 2014 Public Policy Agenda. A 2013 study by Ernst & Young’s Quantitative Economics and Statistics group finds that limiting interest deductibility to finance lower tax rates would reduce economic growth over the long run by over $33 billion in 2013 dollars, with the majority of that effect realized within a decade. Furthermore, all industries and states would see reductions in economic growth as a result of this policy consideration, according to the study. Given that access to credit is essential for middle-market businesses and interest payments are a cost of doing business, full interest deductibility has been a core feature of the modern tax code since its creation in 1921.

ACG supports the Businesses United for Interest and Loan Deductibility Coalition which has worked to ensure that 100 percent interest deductibility is maintained, unless changes are consistent with comprehensive, pro-growth tax reform. While comprehensive tax reform remains unlikely in the 113th Congress and recent drafts of tax law have not included limiting interest deductibility, ACG and the BUILD Coalition continue to monitor policy discussions related to limiting interest deductibility as both chambers discuss tax policy. It is important to note that the new chairman of the Senate Finance Committee, Ron Wyden, D-Ore., in 2007 developed a tax reform draft which imposed strong limits on interest deductibility.

Overall, policymakers in Washington have very little understanding of this issue. Few see credit as a normal part of operations for all businesses. Rather, discussions in Washington incorrectly tend to view credit through the lens of the recent financial crisis and treat limiting interest deductibility as a tool to prevent excessive debt levels in the economy. It is clear that Congress is looking to find revenue to finance tax rate reductions, but deductibility is not a tax expenditure.

As tax reform continues to be discussed in Washington, middle-market business owners must help policymakers understand the importance of maintaining 100 percent interest deductibility. Businesses of all sizes and industries rely on debt financing to make critical investments and manage payroll. Absent a complete overhaul of the tax code that would balance any changes, ACG believes that interest deductibility should remain as it has been for a century. // —Amber Landis, director of public policy, ACG Global For more information on ACG’s policy efforts, please contact Amber Landis at alandis@acg.org.

A state-by-state breakdown of economic growth reduction is available here.

THE ROUND Q&A WITH HADLEY MULLIN // Managing Director, TSG Consumer Partners

BUILDING BRANDS WITH EDIBLE APPEAL

Private Equity at the Table What do you look for when evaluating a consumer food brand as a potential investment?

Hadley Mullin: TSG focuses on brands that deliver a strong value proposition to the consumer. And by value, I don’t necessarily mean the lowest price—often far from it.

Consumers are more discriminating than ever when evaluating options and will often pay for brands that deliver attributes they’re looking for. Some of the most important trends we’ve observed are natural and better-for-you positioning; convenience and portability; and, increasingly, environmental sustainability. In addition, we look for brands that have a distinct reason for being. In order to compete with the larger consumer packaged goods companies, earlier-stage and middle-market food brands need to deliver something truly unique—be it a proprietary formulation that offers distinctive taste and functional benefits to consumers or patented technologies that other brands can’t replicate. Smaller, evolving brands can never outspend large companies’ advertising budgets, so they need to deliver best-in-class products with a defensible point of difference.

Continued on next page

THE ROUND Q&A WITH HADLEY MULLIN // Managing Director, TSG Consumer Partners What trends are you seeing around consumer tastes and preferences and how have they influenced your investment decisions?

HM: Consumers are savvier today about ingredients and nutrition and far more discerning about what constitutes healthy eating. Ten to 20 years ago, “healthy eating” largely meant a low-calorie and low-fat diet, while today it encompasses a much wider set of consumption choices. Food companies need to pay more attention than ever when formulating products.

It’s not just a matter of producing palate pleasers or products that hit a certain calorie or fat count—products must deliver great taste and a host of other nutritional (and emotional) benefits. One important trend we’ve observed is a throwback to simplicity. Consumers want ingredient panels with words they understand (and can pronounce!), and they want to see “whole” foods over processed foods. We now see packaging that lets consumers view the actual product on the shelf (e.g., transparent wrappers) and more emphasis on raw ingredients and food imagery in marketing materials.

How does TSG drive growth in the food brands it invests in?

HM: We often invest in companies with underdeveloped product portfolios and immature distribution. We work with these brands to extend their product lines into adjacent categories, building from key brand attributes established in the original product line. We also work to expand distribution. For instance, we may help a brand that has historically sold in the natural channel adapt its product line and sales and marketing strategy to move into mainstream mass-market retail channels. Finally, we seek to increase velocity per point of distribution by investing aggressively in awareness building, using both social media and traditional marketing channels to drive trial and retention.

What strategies have you used to deal with rising food costs and the increasing market share claimed by private label products?

HM: Building best-in-class brand equity is the best defense against rising food costs and competition from private labels. Brands that have strong consumer loyalty can take more risks than weaker brands when it comes to passing along cost increases to consumers. And brands that have high awareness and high consumer esteem can more effectively compete against lower-priced private label alternatives. // Hadley Mullin is a managing director with San Francisco-based TSG Consumer Partners and a member of ACG Los Angeles and ACG San Francisco. TSG is a private equity group that makes $50 million-$300 million equity investments in branded consumer products, retail and services companies. Founded in 1987, TSG was one of the first equity funds to invest solely in established consumer product companies.

THE ROUND NEWS THAT MATTERS

Click here to register for “The Art of the Food Deal” webinar on Wednesday, Sept.10 at 2:00 p.m. EDT.

‘The Art of the Food Deal,’ A Middle-Market Insights Webinar The food-and-beverage sector is attracting an influx of capital from private equity firms as well as corporate and strategic investors looking to benefit from high-growth market segments and attractive exit multiples. Shifting consumer tastes and changing dietary needs are just some of the trends boosting potential for scalability at many food companies, adding to their appeal.

The operations consulting firm TriVista—in partnership with ACG, Headwaters MB and The Riverside Company—has assembled a team of industry experts to share their perspectives on M&A activity in this growing sector.

Participate in this complimentary webinar on Sept. 10 for a discussion of valuation trends, due diligence requirements and other considerations when investing in the food-andbeverage space.

Webinar panelists include: • Brad Schreiber, managing director, Headwaters MB • Jeremy Holland, principal, The Riverside Company • Mike McSweeney, senior vice president, TriVista • Jennifer Frankenberg, director of food, beverage and consumables, TriVista // To view past webinar recordings, visit the Middle-Market Insights webinar archive.

THE ROUND NEWS THAT MATTERS The eight Farm Credit institutions participating in the partnership are: AgStar Financial Services Mankato, Minn.

AgriBank St. Paul, Minn.

Capital Farm Credit Bryan, Texas CoBank Denver

USDA Forms $150 Million Fund To Spur Small Biz USDA has formed a $150 million investment fund to help foster growth in small businesses throughout rural areas in the United States, the agency said in April.

The Rural Business Investment Company marks USDA’s first foray into private equity, allowing the government to facilitate private equity investment in agriculture-related businesses. USDA financial support was previously limited to loans and loan guarantees.

Advantage Capital Partners will manage the new fund; partners from eight lending institutions in the Farm Credit System—the nationwide network of banks chartered to serve the agricultural economy—have pledged investments totaling $150 million.

The fund, an outgrowth of the Obama Administration’s “Made in Rural America” export and investment initiative, is being formed under USDA’s Rural Business Investment Program. USDA relies on the RBIP to license funds to invest in enterprises that will create growth and job opportunities in rural areas.

“This new partnership will allow us to facilitate private investment in businesses working in bio-manufacturing, advanced energy production, local and regional food systems, improved farming technologies and other cutting-edge fields,” said Agriculture Secretary Tom Vilsack in a prepared statement. //

Farm Credit Bureau Bank Of Texas Austin Farm Credit Services of America Omaha Farm Credit Mid-America Louisville United Farm Credit Service Willmar, Minn.

THE ROUND NEWS THAT MATTERS

Shipping Green to Stay Relevant When it comes to product delivery, consumers are willing to pay more and wait longer for climate-friendly shipping processes, according to a recent survey from business and technology consulting firm West Monroe Partners.

Of the more than 600 U.S. and Canadian respondents to the firm’s recent “Need for Green or Need for Speed” survey, 54 percent said they would pay prices at least 5 percent higher for products delivered sustainably; three-quarters claimed they would be willing to wait at least one extra day to receive their orders. But consumers have their limits: Only seven participants said they would pay more than a 10 percent premium for green transport.

Despite general enthusiasm across demographic groups for the idea of sustainable delivery, a large majority (79 percent) of survey respondents were not aware of options.

Given that figure, West Monroe says it’s unsurprising that only 5 percent reported they have used a climate-friendly shipping alternative.

The North American figures stand in contrast to those from a similar survey conducted in Europe by BearingPoint, West Monroe’s global alliance partner. BearingPoint found that 20 percent of European respondents have used a green shipping method, likely due to a higher prevalence of options, greater customer awareness and more emissions regulations.

West Monroe advises North American online businesses and logistics providers to follow the lead of their European counterparts and offer sustainable shipping alternatives to their customers sooner rather than later. //

THE ROUND NEWS THAT MATTERS CONNECTING ACROSS BORDERS // ACG Past Chairman Pam Hendrickson and Tianjin Mayor Huang Xingguo.

ACG Co-Hosts CIPEF 2014 An ACG delegation attended the 8th Annual China International Private Equity Forum in June where more than 8,000 dealmakers, business owners and government officials convened to discuss investment in a market projected to soon become the world’s largest economy.

As one of four event hosts, ACG represented the global private equity community, facilitating networking, capital sourcing and three panel discussions organized by ACG China.

CIPEF connects Chinese companies seeking capital with international investors looking for new opportunities. During a showcase of domestic firms, more than 1,000 Chinese companies hosted tables to network with attendees. Participating firms posted details about their operations and the level of investment they hope to receive.

A series of panel discussions at the CIPEF conference in Tianjin, China, was coordinated by ACG China Chairman Youming Ye, a managing director with The Jordan Company China.

Topics included the importance of operational due diligence for private equity and strategic buyers; outbound investment from China; and successful strategies for private equity groups in the new economy. //

THE ROUND NEWS THAT MATTERS

Click here to register. Visit the Kayo Conference Series website to learn more. We hope to see you in October!

2nd Annual Kayo Conference Series Comes to Washington in October Leading women in private equity will gather for the annual Kayo Women’s Private Equity Conference in October. The boutique conference attracts top women in private equity, venture capital and institutional investing and takes place Oct. 1-2 at the St. Regis Hotel in Washington, D.C. The event kicks off with networking cocktails on Wednesday, Oct. 1, and is followed by a one-day conference on Oct. 2. The agenda emphasizes relationship building and analysis of leading issues and trends in private equity. Conference sessions will feature founders of private equity firms, general partners and institutional investors and experts from sectors including health care, real assets and distressed investing.

More than 35 speakers will share their insights, including Kim Lew, co-chief investment officer of the Carnegie Corporation of New York; Pamela Hendrickson, chief operating officer of the Riverside Company and immediate past chairman of ACG; and Sandra Lerner, a cofounder of Cisco Systems and founder of cosmetics maker Urban Decay. //

THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // FOOD/AGRICULTURE DEALS

Add-on investments have steadily increased since 2011 as a share of food and ag buyouts, rising to 37 percent in 2013 from 27.6 percent.

Corporate acquisitions are the most common exits in the space: 2013 marked 20 such exits compared to 14 secondary offerings and three IPOs.

The value of mid-market food and agriculture investment peaked in 2010 with $24.5 billion spent on 104 buyouts.

Investment in food products grew by nearly $6 billion from 2012 to 2013 while restaurant investment fell by almost $2.5 billion.

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Billion California continues to be the most active state in the sector with 29 middle-market food and ag buyouts last year.

The median buyout size for food and ag deals has increased over the past two years to $90 million through May of this year from $37.5 million at the end of 2012.

124 DEALS

Last year, there were 124 food and ag deals, compared to 185 deals in software and 67 in health care devices and supplies.

Catterton Partners is the most active private equity firm in the space with 11 investments in food and agriculture-focused businesses since 2010.

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

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The official publication of

Mojo CREO CAPITAL FINDS ITS

BY DEBORAH L. COHEN

with Food Focus Bet on underperformer leads to budding portfolio.

Left to right: Patrick Moulder, vice president, CREO Capital Partners; Rob Holland, partner, CREO Capital Partners; and Gary Lim, CEO, Flagship Food Group Photos by Chad Case

FLAGSHIP FOOD GROUP // Business: Branded foods holding company First Investment: Frozen-food maker Oh Boy!, 2005 Number of Employees: 500 Private Equity Funding: CREO Capital Partners Revenue: Nearly $300 million Website: flagshipfoodgroup.com Click here to watch a video about Flagship Food Group.

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or many risk-averse private equity investors, purchasing a fledgling food company like frozen meatball maker Oh Boy! would have spelled disaster.

The San Fernando, Calif., business was severely underperforming when Los Angeles-based CREO Capital Partners bought it in 2005. But CREO’s partners were convinced Oh Boy! was salvageable, so they rolled up their sleeves and dug in, reversing the company’s losses and along the way developing an investment strategy for their firm.

“We had to step in and save the business, which was losing more money than we thought,” says partner Rob Holland, an ACG Los Angeles member whose plan was to turn Oh Boy! around and make a fast profit on its sale. “It was more work than we anticipated, but the experience changed CREO’s strategy from being a generalist private equity firm to a food-focused one.”

BUILDING BRANDS // Flagship’s diverse brand offerings include Chris’ & Pitt’s barbeque sauces.

CREO was founded in 2005 by Holland and Gregory Bortz, both former Wall Street investment bankers with heads for numbers but admittedly little hands-on experience with troubled companies. They raised their first fund that year for an undisclosed amount with the backing of one unnamed highnet-worth individual investor and were intent on buying companies across a range of industries.

But the Oh Boy! purchase forced them to quickly ramp up their knowledge of the food industry, undertaking a difficult transformation.

Holland was installed as interim CEO, overseeing everything from payroll to meatball production on the factory floor. Bortz maintained oversight of the firm, heading its investment committee.

Eventually Oh Boy! shed money-losing business units with combined annual revenue of $10 million and sold off underutilized production plants, among other changes that helped the business to improve progressively.

The deal also delivered some incidental but important benefits for CREO: The firm forged relationships with big food suppliers, national supermarket customers and the U.S. Department of Agriculture.

In 2007, the partners brought a second fund to market, raising $160 million from limited partners that included both institutional and individual investors.

FORAGING FOR FOOD

“WE HAVE A PASSION FOR CREATING GOODFOR-YOU FOODS THAT PEOPLE WANT TO EAT.” Rob Holland Partner, CREO Capital Partners

Following its success with Oh Boy!, CREO began to focus exclusively on food deals, hunting for brands that Holland says have distinctive characteristics, including the ability to foster consumer loyalty and meet demand in popular categories including better-for-you, natural, convenience and increasingly, gluten-free.

“We like to buy brands with a focus,” he says.

Consider 505 Southwestern, which CREO bought in 2007. Based in Albuquerque, the company uses Hatch green chile peppers unique to New Mexico to make its line of all-natural salsas. The chiles, which are flameroasted and flash-frozen during harvest, are a favorite among chile pepper connoisseurs.

At the time of purchase, 505 was doing just a couple million in yearly sales and was regionally focused in New Mexico and Colorado. Today, the brand is approaching $10 million in sales and is available in almost every state.

Over the course of nine years, CREO added a host of diverse brands that met its growth criteria: Chris’ & Pitt’s barbecue sauces, whose name is linked to a chain of famous L.A. rib joints; Su Ming, a maker of frozen take-out-style Chinese meals; and TJ Farms, whose frozen foods include breakfast items, appetizers and entrees.

By 2010, CREO’s combined retail business was pulling in more than $50 million in sales and $5 million in EBITDA. All of the brands are posting higher sales due to improved packaging and promotion, wider distribution and product line extensions.

HIDDEN TREASURE By far, CREO found its most worthwhile deal in the 2008 purchase of Treasure Valley Foods, a Boise, Idaho, business that specialized in packaging foods from thirdparty producers under its own brands. The acquisition brought with it additional talent and facilities, including a test kitchen large enough for 20 chefs.

VERTICAL INTEGRATION // TJ Farms, along with other Flagship Food brands, is transported by Flagship Food Logistics to increase efficiency and lower costs.

“(CREO’s founders) had a passion for food and it was a good fit,” says Gary Lim, a former Treasure Valley co-owner and president whose operational expertise helped the business reach $37 million in sales over its 12-year history.

Terms of the transaction included keeping Lim on board as CEO. By focusing on marketing and leveraging synergies among the different brands, Treasure Valley has since grown sales to $80 million yearly.

CREO created Flagship Food Group in 2012 to house its growing brand portfolio under one roof, a move that included appointing Lim CEO of Flagship North America.

The new platform also allowed the rollout of another fruitful venture, Flagship Food Logistics, which arranges transport of Flagship’s products along with those of other food companies, including dairy giant Stonyfield Farms. The division offers economies of scale and brings in additional revenue.

“Vertical integration is key in the food business—from getting the food from the fields to the processing plants to the retail stores,” Lim says.

“Having a freight logistics business is key to our overall success because transportation makes up a significant percentage of a food company’s P&L.”

Flagship now operates eight proprietary brands with some 400 products, and has de-emphasized its less scalable brands, including Oh Boy! It sells to roughly 100 customers, among them Fortune 500 companies, upscale national retail chains and mass retailers.

“We went from the humble beginnings of a near failure to a business that does nearly $300 million in sales,” Holland says. “We believe that we are on a path to becoming one of the great, diversified food companies.”

BACKED BY BOISE According to Bill Bishop, chairman of food industry advisory firm Willard Bishop Consulting, CREO’s route to becoming a conglomerate akin to ConAgra Foods will be fraught with challenges.

The overall food sector is sluggish, with volume increases in recent years slogging along in the low single digits. Food commodity costs are rising and customers, meanwhile, are besieged with myriad choices on grocery shelves.

Bishop concedes, however, that products that meet specific health or dietary requirements remain a bright spot.

DEVELOPING BRANDS // Left to right: Rob Holland, partner, CREO Capital Partners, and Ray Gadd, CMO, Flagship North America.

LOCAL BENEFITS // As Flagship grows, it is creating new jobs, including those for wounded war veterans at its call center in Indianapolis, shown in a video here.

“There is more demand for brands in the good-for-you category—people tend to look past the (well-known) brand names to newer brands,” he says, as they seek out those “with the ingredients they are looking for.”

Flagship remains undaunted, with expansion plans that include the development of its own product line. The first is Lilly B’s, a chicken nugget named after Holland’s daughter that will likely hit store shelves in September.

Developed at the Boise R&D facility with hormone-free chicken and a coating made from rice flour, the frozen nuggets are slated to compete in the better-for-you space where they will also serve the needs of those on gluten-free diets.

“We have a passion for creating good-for-you foods that people want to eat,” Holland says.

Along with Flagship’s steady growth, Holland says his investment firm is now motivated by some of the positive byproducts in the local economies where the company operates.

Among the most notable is a new state-of-the-art call center that Flagship built in Indianapolis. The facility is partly staffed by wounded war veterans and features specially designed cubicles for employees who are confined to wheelchairs or hospital beds.

In total, Flagship now employs about 500 people in eight locations—six in the United States and two in the U.K. According to Holland, who eventually would like to take the company public, the sky’s the limit in terms of how big is big enough. His firm is currently raising its third fund, which it expects to be its largest.

CREO is also poised to close on two more acquisitions within the next year. While details have not yet been disclosed, Holland says both will bolster Flagship’s offerings in the organic food market.

“Flagship will run the spectrum with good-for-you, organic and gluten-free products as well as value products sold to stores like Dollar General,” he says, adding that CREO will “remain an active buyer in the food space.” // Deborah L. Cohen is Editor-in-Chief of Middle Market Growth.

“VERTICAL INTEGRATION IS KEY IN THE FOOD BUSINESS— FROM GETTING THE FOOD FROM THE FIELDS TO THE PROCESSING PLANTS TO THE RETAIL STORES.” Gary Lim CEO, Flagship North America

Investors are betting on cannabis, despite controversial new laws

Investor Interest in U.S. Pot Market Stoked, but Uncertain

BY SUSAN NADEAU

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he burgeoning U.S. cannabis industry is slowly winning the confidence of more investors, industry players say, despite an environment fraught with risk that is underscored by the ongoing conflict between state and federal law.

Among the largest investors is Privateer Holdings, a Seattle-based private equity firm that focuses on the legal cannabis market. It is preparing to wrap up its latest round of financing, expected to bring in $50 million by the end of September. That’s a far cry from the 18 months it took the firm to raise $7 million for its first acquisition in December 2011.

“That’s indicative of how the environment has changed,” says Privateer CEO Brendan Kennedy. His firm owns a medical marijuana producer in British Columbia, as well as offshoot businesses including a Washington State-based company that connects patients and consumers worldwide to physicians and providers.

Estimating the size of the U.S. pot market is more art than science.

Kennedy pegs it somewhere between $40 billion and $50 billion, a ballpark figure that takes into account medical and recreational purchases, including the predominant portion constituted by illegal sales on the black market.

A GROWING MARKET // Privateer and other firms are raising funds to invest in pot-related businesses.

Troy Dayton, CEO of San Francisco-based ArcView Group, a matchmaker of sorts between private investors in the cannabis industry and companies looking for funding, is bullish about growth in legalized U.S. marijuana transactions. Last year they accounted for $1.5 billion, he estimates, a share of the market he projects could be nearly seven times as large by 2018, representing more than $10 billion.

Dayton has supported the marijuana legalization movement for decades.

He founded ArcView because he sees business as the most powerful platform for political change and points out that “every dollar spent in the legal market is a dollar not going to criminals and cartels.” A legalized market would also bring a notable switch away from some pharmaceuticals and alcohol to cannabis for medical and recreational use, he says.

“Find me another industry growing at that clip,” adds Dayton, whose firm has facilitated more than $10 million of angel investments in marijuana over the last few months through ArcView Investor Network, a group comprised of more than 180 accredited investors. “This is an unprecedented opportunity for investment and for the little guys to take a run at it before full legalization.”

U.S. federal law says the use, possession, sale, cultivation and transportation of cannabis in the United States are all illegal. Cannabis is classified by the federal government as a Schedule 1 drug—the most dangerous class, determined to have a high potential for abuse and potentially severe psychological and/or physical dependence, according to the Drug Enforcement Administration. Heroin and LSD are in the same category.

“If you are investing directly in the plant, you are violating federal law,” Dayton says. “That’s tough to hang your hat on.”

MURKY U.S. MARKET Even so, nearly half of all states have passed their own laws legalizing pot for some form of use, and the federal government—so far—has taken a hands-off approach.

“Now is federalism at its best,” says Michael Correia, director of government relations for the National Cannabis Industry Association, a U.S. trade group. Its membership has quadrupled in the past year to 700, including growers, dispensers, testing companies, producers of marijuana edibles, consulting firms, insurance companies and “any related industry.”

Just two states, Colorado and Washington, allow legal recreational use of the drug. Colorado has been open for recreational business since Jan. 1, 2014, and Washington opened its first store in July.

Twenty-three states (as of publication) and the District of Columbia have laws that permit medical use, and more legislation is in the works. By late this year, the majority of states could have laws legalizing marijuana on some level.

But state laws differ vastly. The reason for a prescription, the amount a patient is allowed to possess and the means by which the drug is legally dispensed are just a few of the variations muddying the picture for would-be investors in the United States.

In Montana, for instance, a patient can possess 1 ounce of dried leaves, the usable portion, while in Delaware an individual is permitted to carry 6 ounces. Doctors in many states can prescribe marijuana only for specific conditions such as glaucoma or chemotherapy-related nausea; in California, however, patients can obtain a pot prescription for any chronic or persistent medical symptom.

“The industry is so nascent, and the models are so unproven,” Dayton says. “Unless your M.O. is to invest in really early-stage speculative companies, the burners have just been turned on.”

The political environment seems to be tipping progressively in favor of legalization. National legislators have avoided tackling the issue head-on, instead attempting to address it through ancillary laws. On May 30, the U.S. House of Representatives passed a measure to prevent funding for DEA operations aimed at stopping states from implementing marijuana legalization laws (a similar appropriations measure is awaiting action in the Senate).

The measure passed by a vote of 219 to 189—while in 2003 it failed in the House in a vote of 273 to 152.

And investor interest is clearly picking up. High Times, the magazine devoted to marijuana, is reportedly starting a cannabis-industry investment fund aimed at raising $300 million. Other investors are turning to the public markets for funding, including cannabis-focused firms Mentor Capital Inc. of Ramona, Calif. and Boulder, Colo.-based Surna Inc., whose shares trade over the counter.

“THE INDUSTRY IS SO NASCENT, AND THE MODELS ARE SO UNPROVEN. UNLESS YOUR MO IS TO INVEST IN REALLY EARLYSTAGE SPECULATIVE COMPANIES, THE BURNERS HAVE JUST BEEN TURNED ON.” Troy Dayton CEO, ArcView Group

SAFER BETS In the U.S., Privateer and Surna are among the investors taking a shot at the market without risking legal trouble by targeting supplementary businesses that serve the marijuana trade.

Privateer bought into Seattle-based Leafly, the “Yelp.com” of the pot world, in December 2011, for an undisclosed amount. Leafly provides a platform for user reviews of different strains of the plant, the specific effects and conditions they alleviate and the dispensaries that sell them.

Leafly Founder Cy Scott says when the company opened four years ago, it searched long and hard for funding. “It’s much less risky than it was,” he says. “There is widespread acceptance.”

In April, Surna, the investment firm headed by former Zynga gaming technologist Tom Bollich, announced the acquisition of Hydro Innovations LLC, a Boulder-based producer of pot-growing equipment, including climatecontrol systems for indoor gardens. Surna paid $500,000, according to a regulatory filing.

“Not since I helped co-found Zynga back in 2007 have I seen such an unprecedented opportunity to quickly capture market share of an industry still in its infancy yet offering the promise of explosive value creation,” said Bollich in a press release disclosing the deal.

While proven business models such as online platforms and equipment makers attract investment, U.S. producers and dispensaries are having a tougher time securing funding. Banks are hesitant to set up accounts, payroll and loans, fearing that federal officials will charge them with money laundering: Production and distribution, therefore, are largely all-cash industries.

“We don’t touch product in the U.S.,” says Kennedy, noting that Privateer is looking to Spain and the Netherlands for its next direct investment in the industry.

OH, CANADA Canada has been attractive to Kennedy and other investors because it’s free of legislative conflict. Tilray, the Privateer-owned medical marijuana producer licensed under Health Canada guidelines, announced in April it was opening a 60,000-square-foot growing facility in British Columbia.

Spara Capital Partners, a boutique M&A advisory and merchant banking firm in Ontario, is another group targeting the burgeoning Canadian market. The firm has formed an in-house portfolio company called Clara BioPharma Corp. focused on the medical marijuana industry, Spara said in its recent quarterly newsletter. The business has applied to become a licensed producer in Canada.

In the United States, industry participants say they are eventually expecting broad-sweeping change to federal law: The question is when. The FDA has said it is re-evaluating marijuana for possible recommendation of “rescheduling,” or reclassification as less dangerous, but there is no word on how long that might take.

“EVENTUALLY, ENOUGH STATES WILL HAVE SOME FORM OF LEGISLATION WHERE IT WILL BE A FOREGONE CONCLUSION AND CONGRESS WILL HAVE TO ACT.” Michael Correia National Cannabis Industry Association

“Eventually, enough states will have some form of legislation where it will be a foregone conclusion and Congress will have to act,” says NCIA’s Correia, adding that the timeline for such action remains a matter of speculation.

ArcView’s Dayton looks to 2018 or 2019 as the year for definitive federal action, while Kennedy is banking on 2020.

“It’s only 2014 right now, so there is a lot of room for investment in the next five or six years,” he says. “It’s a beautiful opportunity for private equity investors.” // Susan Nadeau is a Hartford, Wis.-based business writer.

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

K e y note S p eaker A nnounced !

Si r W i n f ri e d B i s c h o f f Incoming jp morgan securities chairman Former chairman of Lloyds Banking Group and current chairman of The Financial Reporting Council to share his expert insights on the European financial landscape and what it means for you and your firm.

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A QUALIFIED OPINION ANDREW MALK // Managing Partner, Malk Sustainability Partners

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alk Sustainability Partners is a consultancy that helps private equity investors use environmental, social and governance management to maximize returns and thrive in an era of increasing stakeholder interest in responsible investment. Andrew Malk leads a team that drives the ESG program development process, from policy and strategy to initiatives and reporting.

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OVER THE PAST FEW YEARS, AN INCREASING NUMBER OF LPs HAVE BEEN INQUIRING ABOUT THEIR GPs’ ESG MANAGEMENT PRACTICES. HOW ARE GPs RESPONDING?

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nder pressure to generate strong returns, GPs are adopting a broader set of management tools to protect and create portfolio company value. ESG management is now recognized as a powerful addition to this tool kit.

It helps GPs identify previously overlooked risks and opportunities in targeted and owned investments to achieve better EDITDA growth, while strengthening stakeholder relations and improving brand reputation. For their part, portfolio companies are closely monitoring their resource use and exploring initiatives to drive cost savings, including reducing energy and water consumption and eliminating and repurposing materials to reduce waste-haul costs.

Our annual ESG in Private EquitySM survey shows that more LPs are looking for managers who generate good historical returns while also mitigating ESG risks over a fund’s investment cycle to generate strong returns well into the future.

Photo by Thomas Michael Alleman

A QUALIFIED OPINION ANDREW MALK // Managing Partner, Malk Sustainability Partners

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alk Sustainability Partners is a consultancy that helps private equity investors use environmental, social and governance management to maximize returns and thrive in an era of increasing stakeholder interest in responsible investment. Andrew Malk leads a team that drives the ESG program development process, from policy and strategy to initiatives and reporting.

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WHAT ARE THE GREATEST CHALLENGES GPs FACE WHEN LOOKING TO ADOPT ESG PRACTICES?

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here is not a one-size-fits-all approach to integrating ESG into GPs’ investment practices; the challenges differ. Some common obstacles include difficulty identifying how best to launch a program and countering the perception that ESG doesn’t add value. Investors new to ESG often seek information from publicly available guidelines, which are typically general in nature in order to apply to the entire private equity industry; however, an ESG program needs to be customized to align with each firm’s distinct goals and investment practices.

To overcome the misconception that ESG is only a dogooder exercise, initiatives must be closely tied to plans for value creation and risk mitigation. One way to push a program forward is by emphasizing the cost savings that come from eliminating waste at resource-intensive companies. Most firms that are serious about creating value from ESG management bring on an adviser initially and may decide later to hire an in-house ESG professional.

Photo by Thomas Michael Alleman

A QUALIFIED OPINION ANDREW MALK // Managing Partner, Malk Sustainability Partners

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alk Sustainability Partners is a consultancy that helps private equity investors use environmental, social and governance management to maximize returns and thrive in an era of increasing stakeholder interest in responsible investment. Andrew Malk leads a team that drives the ESG program development process, from policy and strategy to initiatives and reporting.

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HOW ARE GPs CAPITALIZING ON THE SUCCESS OF SPECIALTY GROCERS AND RESTAURANTS FOCUSING ON HEALTHY, NATURAL AND ORGANIC FOODS?

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eople are paying closer attention to the food choices they make and increasingly prefer foods produced with lower environmental and social impacts. This trend helped foster the success of businesses such as Whole Foods, Sprouts and Chipotle, whose rapid growth is attributable in part to its “Food with Integrity” campaign to support local farmers, source organic produce and use dairy from cows not treated with synthetic hormones. GPs are taking notice, watching the success of these companies and investing in similar businesses. Consider Huntington Capital’s investment in Native Foods Café and Brentwood Associates’ successful IPO of Zoes Kitchen. Today there are even thematic funds investing in companies whose products promote healthy and sustainable living, including Sherbrooke Capital and VMG Partners.

Photo by Thomas Michael Alleman

A QUALIFIED OPINION ANDREW MALK // Managing Partner, Malk Sustainability Partners

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alk Sustainability Partners is a consultancy that helps private equity investors use environmental, social and governance management to maximize returns and thrive in an era of increasing stakeholder interest in responsible investment. Andrew Malk leads a team that drives the ESG program development process, from policy and strategy to initiatives and reporting.

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FROM A GP’S PERSPECTIVE, ARE THERE ANY PREDOMINANT ESG OPPORTUNITIES WHEN INVESTING IN GROCERY STORES OR RESTAURANTS?

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es, these businesses are well positioned to benefit from ESG, particularly resource-saving opportunities due to the tight margins and heavy energy use of food and restaurant companies. Many grocers, for instance, have large store footprints, are open 24/7 and operate large refrigeration units—all opportunities for significant savings when energy-efficiency initiatives are deployed.

Grocers and restaurants can now turn expenses relating to perishable inventory such as waste management into revenue streams by separating and monetizing waste (e.g., packaging recycling, cooking oil recovery and composting) and localizing hauling contracts to help minimize waste expense.

Photo by Thomas Michael Alleman

A QUALIFIED OPINION ANDREW MALK // Managing Partner, Malk Sustainability Partners

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alk Sustainability Partners is a consultancy that helps private equity investors use environmental, social and governance management to maximize returns and thrive in an era of increasing stakeholder interest in responsible investment. Andrew Malk leads a team that drives the ESG program development process, from policy and strategy to initiatives and reporting.

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WE’VE SEEN THE LARGEST BUYOUT GPs DEVELOP COMPREHENSIVE ESG PROGRAMS. HOW CAN MIDDLE-MARKET GPs IMPLEMENT SOME OF THESE ESG PRACTICES GIVEN THEIR MORE LIMITED RESOURCES?

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e often address this concern with our clients by suggesting a pilot program that includes two to three of their portfolio companies with the greatest potential for value creation and protection opportunities.

This limited effort allows our clients to identify quickly initiatives generating significant cost savings and efforts to mitigate previously overlooked risks that may impact the companies’ operations and reputation. Oak Hill Capital Partners is a great example of a middle-market firm that prioritizes ESG within its investment process. Oak Hill published an ESG report last year highlighting several of the firm’s ESG success stories.

Photo by Thomas Michael Alleman

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ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

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ACG MINNESOTA

Local Fare and Corporate Execs Enhance Minnesota Event ACG Minnesota’s annual Upper Midwest ACG Capital Connection® welcomed over 500 attendees in June. Preceded by a golf tournament and opening reception, the conference incorporated local businesses and corporate attendees.

To kick off the conference, 144 golfers convened at the Minneapolis Golf Club for an afternoon tournament. During the opening night reception that followed, attendees had the opportunity to network while tasting craft beers from Minnesota’s thriving micro-breweries.

The theme of local fare continued as attendees sampled sweet treats from area vendors at the Hyatt Regency Minneapolis on Day Two of the conference. Meanwhile, over 60 private equity groups, mezzanine debt providers and hedge funds hosted tables during ACG Capital Connection to introduce themselves to dealmakers. During ACG DealSource, investment banks met one-on-one with private equity groups; this year corporate executives were also invited to participate in the meetings. A well-received addition, ACG Minnesota hopes to increase corporate participation in ACG DealSource during next year’s conference. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG HOUSTON

ACG Houston Introduces New Programming for Women ACG Houston has launched a new initiative to boost success of women in the middlemarket dealmaking industry. To kick off the effort, in March the chapter hosted an inaugural networking reception and luncheon as part of the 2014 Texas ACG Capital ConnectionŽ. The luncheon, held at Brennan’s restaurant, featured keynote speaker Gina Luna, chairman, Houston Region and CEO, Middle Market Banking, JP Morgan Chase.

ACG Houston in June hosted a spring fashion show at a local boutique. More than 100 women from the investment community attended to network and watch fellow ACG members walk the runway.

Drybar, a portfolio company owned by Massachusetts-based private equity group Castanea Partners, provided hair styling for the ACG member-models. Attendees donated professional attire and raised over $1,600 for Dress for Success, a charity that promotes the economic independence of disadvantaged women. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG CHICAGO

Experts Share Health Care Insights at ACG Chicago Conference ACG Chicago’s 5th Annual Healthcare M&A Conference drew over 300 middle-market dealmakers and featured panel discussions on the structural changes in health care and the risks and opportunities facing investors.

Senior executives from the private equity, lending and investment banking industries made up the majority of the crowd at the one-day June event at the Hyatt Regency Chicago. The program opened with a keynote panel featuring health care policy experts David Cade, acting general counsel for the United States Department of Health and Human Services, and Charlene Frizzera, former acting administrator and COO for the Centers for Medicare and Medicaid Services.

During a second keynote panel, senior representatives from leading investment banks offered perspectives on dealmaking in the health care sector. The following four sessions explored specific issues facing health care investors: working with lobbyists; hospital consolidation; innovation; and the evolution of health insurance.

Mark your calendars—the annual conference will be held in June again next year. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG ATLANTA

ACG Atlanta Honors Thriving Georgia Businesses In June, ACG Atlanta celebrated the fastest-growing companies in the Peach State with its annual Georgia Fast 40 Awards Dinner and Gala.

Georgia’s expanding universe of middle-market companies is an eclectic group. This year’s Fast 40 award winners, which are selected by ACG Atlanta, included 23 technology and health IT companies; seven manufacturing and distribution firms; and several real estate and construction companies.

To be eligible for an award, firms must be headquartered in Georgia with annual revenue of $15 million to $500 million and show sustained growth in both revenue and employment over the past three years, whether achieved organically or through acquisitions. Finalists are divided into two categories based on annual revenue: lower middle market ($15 million-$60 million) and upper middle market ($60 million-$500 million).

During a dinner and gala, honorees were presented with their awards while video montages showed C-level executives sharing details about their firms’ culture and how they’ve achieved growth and success. Each honoree received an ACG-branded printed photo of their team accepting the award and the opportunity to record a free video press release. //

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THE PORTFOLIO INSIGHT FROM THE EXPERTS

SOUND DECISIONS

MID-MARKET TRENDS

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IN THIS ISSUE SOUND DECISIONS Anti-corruption due diligence prior to a cross-border acquisition is essential, and firms should be aware of risk factors.

MID-MARKET TRENDS To become more innovative, middle-market companies should consider the organizational structures of their peers and look to them for ways to improve innovation initiatives.

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

THE PORTFOLIO SOUND DECISIONS // Michelle J. Shapiro, Partner and Peter Feldman, Senior Managing Associate, Dentons

SOUND DECISIONS

MID-MARKET TRENDS

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For Buyers and Sellers, Anti-Corruption Due Diligence Matters

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Pre-acquisition due diligence helps avoid FCPA violations, allowing firms to identify red flags and establish follow-up procedures.

he increasing focus on enforcement of the U.S. Foreign Corrupt Practices Act and other global anti-corruption laws makes conducting preacquisition anti-corruption due diligence an essential element of any cross-border transaction. Although some may view payments to government officials (defined broadly) as merely a cost of doing business, such payments can wreak havoc on an accurate economic analysis of the true costs of doing business, in addition to running afoul of applicable laws.

The failure to conduct anti-corruption

risk-based approach to conducting pre-

due diligence can lead to severe legal and

acquisition anti-corruption due diligence.

financial consequences, plus reputational

This entails an initial evaluation of the

damage, for both buyers and sellers. For

target’s risk profile, followed by review

buyers, anti-corruption diligence can be

procedures tailored to and commensurate

especially critical because, under U.S. prin-

with the risks identified.

ciples of successor liability, a buyer may be

In its November 2012 FCPA Resource

held liable for pre-closing FCPA violations

Guide, the DOJ and SEC cautioned that

committed by the target. If illegal conduct

they may pursue charges based on succes-

by the acquired company continues post-

sor liability or direct liability. They also

closing, the buyer can be held directly

noted that pre-acquisition due diligence can

liable. For sellers, putting aside any individ-

be a crucial mitigating factor in the deci-

ual liability, concerns about potential pre-

sion to bring an FCPA enforcement action

closing violations can strongly influence

and, should the government pursue charg-

a deal’s value, if not threaten the entire

es, it will factor into the calculation of any

transaction. Moreover, sellers may be asked

penalty sought.

to provide representations and warranties showing anti-corruption compliance.

The two government agencies respon-

Tips for conducting risk-based anti-corruption due diligence

sible for enforcing the FCPA, the Depart-

Potential buyers—or potential sellers

ment of Justice and the Securities and

wishing to conduct compliance assesments

Exchange Commission, have endorsed a

in advance of marketing a company—

THE PORTFOLIO SOUND DECISIONS // Michelle J. Shapiro, Partner and Peter Feldman, Senior Managing Associate, Dentons

SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS should consider the following non-exhaustive list of risk factors when formulating a

target has adopted and implemented

work plan:

adequate anti-corruption policies and

• Geography: the perceived corruption Michelle J. Shapiro

• Compliance program: whether the

procedures; and

risk of each jurisdiction in which the

• History: the target’s compliance

target or its affiliates operate, directly

history, including allegations or

or through third parties;

suspicions of corruption.

• Industry: the perceived corruption risk of the industry or sector in which the

Often, anti-corruption diligence can be

target does business;

performed alongside standard commercial

• Government business: the extent Peter Feldman

due diligence, using many of the same

to which the target’s revenues rely

materials and methods for obtaining infor-

on government contracts or

mation, such as the data room, financial

government concessions;

analyses, interviews of personnel and pub-

• Government interactions: the target’s

licly available information about the tar-

level of interaction with government

get. Throughout the process, anti-corrup-

entities and officials, and the degree of

tion diligence should focus on identifying

government oversight/inspection;

red flags requiring heightened scrutiny

• Business development and sales

and follow-up procedures. Integrating local

strategy: the target’s business

counsel to work alongside U.S. counsel will

development program, including any

help ensure appropriate consideration of

travel, gifts or entertainment provided

local risks and nomenclature.

or received; • Third-party intermediaries: the target’s

Given regulators’ ongoing focus on compliance with global anti-corruption legisla-

reliance on third party agents,

tion, conducting targeted anti-corruption

particularly in dealing with

due diligence is increasingly critical in

government officials or for business

advance of cross-border transactions. //

development efforts;

—Michelle Shapiro & Peter Feldman

• M&A activity and joint venture arrangements: the appropriateness of

Dentons is a global law firm created from

the target’s diligence in connection

the 2013 merger of Salans LLP, Fraser Milner

with past mergers, acquisitions and

Casgrain LLP and SNR Denton. It has more

joint ventures;

than 75 locations around the world.

THE PORTFOLIO MID-MARKET TRENDS // Gretchen Goffe, National Center for the Middle Market

SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS

Lessons in Innovation from the Middle Market

A

Middle-market businesses fall within five typologies based on their approach to innovation.

recent survey of middle-market companies says nearly two out of three business executives (61 percent) rate the ability of their organization to innovate new products, services or processes as highly or somewhat challenging. Thankfully, according to soon-to-be-released research from the National Center for the Middle Market, these companies need only look to their peers and competitors to learn what they can do to become more innovative.

This research proves yet again that the

which operates in the consumer space

middle market is a distinct market segment,

and has expanded into food service

not simply a blend of its small and large

with corporate clients like Jamba Juice,

counterparts. Unlike startups, which have

Starbucks and McDonalds.

flat organizations where nearly all employ-

• Fat businesses are content with the sta-

ees play a role in developing a handful of

tus quo. They have successful products

projects, or large corporations, which fund

or services, usually with healthy profit

large innovation groups and multiple pro-

margins, and typically do not invest

grams simultaneously, middle-market com-

time or resources to improve them.

panies organize their teams in five distinct

This typology is often seen in family-

ways, called typologies, which are unique to

owned businesses, particularly with the

this sector. They are outlined below:

second or third generation of owners

• First companies establish new

when more family members rely on

markets with little or no competition

the company and view innovation as a

and have the ability both to create value

drain on the bottom line.

and capture it. In their relentless pur-

• Fast firms let their “first” counterparts

suit to be first in a new market, they are

assume the risk of proving a market

particularly adept at looking at their

opportunity and then respond quickly

core product or service and identifying

with a competing product or service.

new ways of entering adjacencies. A

They benefit from having smaller

great example is Vitamix, a manufac-

research and development teams and

turer of high-performance blenders,

often compete on price in head-to-head

THE PORTFOLIO MID-MARKET TRENDS // Gretchen Goffe, National Center for the Middle Market

SOUND DECISIONS

MID-MARKET TRENDS

TAP BUTTONS TO NAVIGATE COLUMNS comparison marketing. This typology

What can middle-market companies learn

thrives in areas where there are little to

from these typologies?

no intellectual property protections or barriers to entry. • Finder companies seek opportunities Gretchen Goffe

that have been overlooked or where others have failed. They are experts

First, assess where your company is today. Which typology do you most identify with? How do you compare with your competitors?

Next, determine which typology, or mix

at identifying unarticulated customer

of typologies, can give you an advantage.

needs and shaping them in new ways

Is your company in a short- or long-cycle

through design, functionality and

industry? Could you benefit from shorter

marketing. A great example is Rent the

or faster innovation cycles?

Runway, a service for renting designer

Third, identify how you organize your

gowns and accessories. The mid-sized

company around innovation. If you want

business successfully identified an

to shift direction, how would you allocate

unmet need in the apparel space and

resources differently? What impact would

created an offering for high-fashion,

that have on leadership and skills?

cost-conscious consumers. • Frequent businesses continually

And finally, keep an eye out for the official release of the research from the

innovate because their business model

National Center for the Middle Market

compels them to. These companies are

later this year, which will include a tool kit

often found in the fast food and retail

to help middle-market companies be more

industries, where new offerings are

innovative. //

required to stay ahead of competition; however, the rapid pace of innovation

Gretchen Goffe is executive director for the

may inhibit their ability to maintain

Innovation Initiative at The Ohio State Univer-

long-term strategic focus. Exemplifying

sity Fisher College of Business, and is a fellow

this typology is the fast-casual

of the National Center for the Middle Market.

restaurant Noodles & Company, a thriving middle-market business that

The National Center for the Middle Market

refreshes its seasonal dishes for a

is a collaboration between GE Capital and

growing customer base.

The Ohio State University Fisher College of Business. To learn more, visit www.middlemarketcenter.org.

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

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

D O W N L OA D TH E A PP:

Š 2014 Association for Corporate Growth. All Rights Reserved.

THE LADDER ACG MEMBERS ON THE MOVE

Heidi Deiner

St. Jude Medical, Inc., a global

Harris Williams & Co., a

medical device company, has

middle-market investment bank,

acquired CardioMEMS, Inc.,

advised C.J. Foods, a specialty

an Atlanta-based producer

manufacturer of premium pet

of wireless heart monitoring

food and a portfolio company

implants, following FDA

of Dallas-based Trinity Hunt

approval of CardioMEMS’ heart-

Partners, during its sale to

monitoring technology. ACG

another private equity group,

Atlanta President Daniel Bauer

J.H. Whitney Capital Partners,

serves as CardioMEMS’ CFO.

based in Connecticut.

ACG New York announced the

Evin Boyle was recently hired as

election of Heidi Deiner, director

a senior financial analyst by the

of business development for

Eating Recovery Center, which

Murray Devine, as chapter

provides treatment for eating

president. She succeeds Martin

disorders. Boyle will assist with

Okner, managing director, SHM

Evin Boyle

acquisition analysis and private

Corporate Navigators, now

equity reporting. He is a 2014

chairman of ACG New York.

ACG Cup Denver winner and was introduced to Eating Recov-

Diane Zanetti of ACG National

ery’s CEO while volunteering at

Capital has joined Capital One

an ACG Denver event.

Bank as senior vice president and market manager for

Amber Landis of ACG Global

government contractor lending.

was promoted to director,

In her new role she’ll help Capital

public policy; she oversees

One serve the financial needs of

the association’s public policy

Washington, D.C.-based middle-

efforts, engaging with leaders in

market contractors.

Amber Landis

Washington to help shape the narrative around private capital investment in the middle market.

To submit your promotions, job changes and other accomplishments, please send information and a color photo (hi-res 300 dpi or above) to Associate Editor Kathryn Mulligan.

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

GROWTH LEADER PARTNER

GROWTH CHAMPION PARTNER

GROWTH SUPPORTER PARTNER

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

IT’S THE SMALL THINGS AGRICULTURAL TRENDS // From Farm to Table to Medical Office (or Dispensary)

1

THE WORLD’S CUP RUNNETH OVER //

4

OLD MACDONALD HAD A FARM //

CANNABIS IS THE NEW BLACK //

5

A BUDDING TAX FOR WASHINGTON //

From 1995 to 2050, it is projected that the population will grow from 5.7 billion to 9.8 billion people—a 72% increase— greatly impacting food production and consumption.

2

3

From 2011 to 2013, five more states legalized marijuana for medical use.

Currently, 23 states and the District of Columbia have legal medical cannabis programs.

HEMP, HEMP, HIKE! //

The American hemp industry, revived in the 1990s in a wave of cannabis-fueled environmentalism, now sells products worth $450 million—from hemp-oil soap to hemp-coned speakers for guitar amplifiers.

Half of U.S. farmland, an estimated 400 million acres, will likely change hands over the coming two decades as older farmers retire and interest among private equity investors grows.

Over four years starting in mid-2015, the state of Washington is projected to raise $190 million in taxes and fees from the legal marijuana industry.

6

GROWING JOBS //

40% of today’s global population works in agriculture, employing more people than any other industry.

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

Want to tap into the middle market?

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

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

The official publication of

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

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

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

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Jason Byrd The Charter Group ACG Western Michigan Term expires 8/31/2017

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

Greg Cinnamon Kilpatrick Townsend & Stockton LLP ACG Atlanta Term expires 8/31/2015

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

Mike Ehlert Capital One Leverage Finance Corp.

ACG Dallas/Fort Worth Term expires 8/31/2015

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

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

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

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

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

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

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

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

Walter O’Haire Valuation Research Corp.

ACG San Francisco Term expires 8/31/2017

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

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

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

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

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

Vice Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2015 Chairman of Finance Stephen Prostor* Citi Private Bank ACG New York Term expires 8/31/2015 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2015 Immediate Past Chairman Pamela Hendrickson* The Riverside Company ACG New York Term expires 8/31/2015 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global

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

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