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Polaroid Investors Develop a Better Picture

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Focus on the Future


JASON BROWN Chairman, ACG Global, and Partner, Victory Park Capital

photograph is a snapshot in time, an opportunity to look back and reflect, a visual archive of our lives. The instant cameras once manufactured by Polaroid—the subject of this issue’s cover story—captured many of life’s impromptu moments: mom’s crazy ’70s hairdo, a surprise birthday party, dad’s shiny new car. The desire to document—and hold onto—important moments is in large part responsible for Polaroid’s revitalization in the digital age. With the help of private capital, Polaroid has instilled a retro sensibility into new products that meet today’s insatiable desire to capture and share micro-moments. It adds up to a profitable combination for a once-distressed but iconic U.S. brand. The Association for Corporate Growth has also taken stock of important moments in time. The ACG brand is stronger than ever with 58 chapters and nearly 15,000 members. In the past few years, the organization has documented many important milestones, including the establishment of a presence in Washington, D.C., to firm up its position as the “voice of the middle market,” the development of a Private Equity Regulatory Task Force to work closely with policymakers on important issues, and the corresponding development of Private Equity Regulatory & Compliance Principles that guide private equity firms navigating today’s murky regulatory environment. Meanwhile, a new ACG website is helping members and outside parties interested in middle-market dealmaking better connect and learn about the multitude of noteworthy events ACG chapters produce. The evolution of this publication—now produced in print and mailed to members four times per year—is another important development in ACG’s recent history. This year ACG will undergo additional growth and change. We will soon welcome a new CEO and continue to build our D.C. presence to navigate the choppy waters of the new administration. As the voice of the middle market, ACG will carry on advocacy for the issues affecting the bottom line of our members’ companies and further educate lawmakers on policies that stimulate growth in the middle market. I look forward to serving as your chairman during this time and hope to see many of you at this year’s InterGrowth convention in Las Vegas. There will be plenty of important moments to add to ACG’s long-standing history.




Putting Distressed Brands into Sharper Focus


DEBORAH L. COHEN Editor-in-Chief, Middle Market Growth


hat do Lego, Burberry and Rolls-Royce all have in common? In short, they are all historic brands that have reinvented themselves for the 21st century. Transforming a legendary brand into its 2.0 version is no easy task for a healthy business, let alone one that has been through the churn of bankruptcy. Yet that’s often the challenge investors in distressed companies face when betting on what they view as a diamond in the rough. Consider Polaroid, which is featured on the cover of this issue of the magazine and profiled by regular MMG contributor S.A. Swanson. Hilco Global and other private equity investors have given this historic American brand—so synonymous with instant photography that its name is substituted for generic versions of instant snapshots—the private capital and operational expertise to develop a fresh image (pardon the pun) for millennial consumers. As you’ll read, this is not simply a licensing play. Polaroid CEO Scott Hardy and his team are committed to the rigorous curation of products that align with Polaroid’s long-standing association with instant gratification—but now through a digital lens: the Polaroid Cube Lifestyle Action Camera, the Polaroid Zip Instant Photoprinter and the Polaroid Pop, whose 3-inch instant prints speak directly to the company’s flagship product and made it to the short list of musthaves at the Consumer Electronic Show in Vegas. All told, a multitude of items ranging from smartwatches to t-shirts and stationery now bear the Polaroid name and retro stripe. To develop the more sophisticated products, Polaroid partners closely with manufacturers, app developers and brand strategists who clearly understand the company’s view of innovation. As a result, Polaroid’s sales have risen to $600 million since coming out of a contentious bankruptcy in 2009. Says the CEO: “What we found is that the brand is so much stronger than any kind of financial issue.” According to market research, some 80 to 90 percent of businesses fail within five years. When an 80-year-old brand like Polaroid draws backers willing to reinvest, an entire economic ecosystem benefits. I hope you’ll find this and the other stories about distressed investing in this issue of MMG beneficial. It’s enlightening to think about how many iconic brands have been reinvented through the commitment of private capital backers. Now say cheese!




POLICY POINTS Highlights of ACG’s Public Policy Summit 32

A QUALIFIED OPINION Milly Chow, The Turnaround Management Association 16

QUICK TAKES Making the Case for Environmental Liability Transfers

15 Cover and above photos by Joe Treleven



Polaroid Investors Develop a Better Picture In a departure from its long history, storied camera maker Polaroid no longer manufactures any products that bear its name. Eight years ago, with fresh backing from private equity, the troubled business became purely a licensing company. In 2016, with a multitude of new products, revenue reached $600 million. TREND

Under Pressure: Investors Dig In for Distressed Deals The U.S. economy is showing signs of strength,

Executive Summary 1 Letter from the Editor 2 Executive Suite 8 Midpoints by John Gabbert 9 The Round 10 Growth Economy 34 The Portfolio 37 ACG@Work 46

including employment growth, low interest rates and ample capital. For investors like private

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Looking for Trouble


When considering an investment in a troubled company, what is different about a Quality of Earnings analysis? In this case, the typical Quality of Earnings analysis becomes a stress test, looking not only at a company’s revenue history, but digging deeper into its past performance. How did the company weather previous downturns? How quickly did it rebound from a decline in sales or customers? Were the effects short and sharp, or long and gradual? We can use the information gathered to develop a forward-looking financial model that includes a borrowing base calculation, collateral analysis and, perhaps, even a liquidation analysis. This model can be used to stress test how the company could perform post-close. We run different scenarios to better understand the impact of changes to costs, revenue, pricing, margins and other parameters. This helps to better gauge the risk of the investment.


DENNIS GRAHAM Consulting Partner As national leader of Plante Moran’s Transaction Advisory Services Team and Private Equity Practice, Dennis Graham helps entities create tangible business value by providing strategic, process, acquisition and technology consulting services. Using a comprehensive approach, he combines the firm’s resources and industry expertise to help clients mitigate risk and build value throughout the life cycle of a deal.



How important is the current customer base analysis in troubled acquisitions? It’s critical. Not all customers are good for business—especially in troubled situations. When we evaluate the company’s customer list, we consider factors like profit margins and time dedicated to high-maintenance customers. Has the company taken on customers that produce negative margins or are bad for the bottom line? On the tactical side, we make sure the company has more than one point of contact within the business. Who

in the customer’s organization interacts with its customer base? It’s often surprising how much a “bad customer” or a “bad customer relationship” can cost a business.


How can an investor leverage data analytics for a potential acquisition? Data is the new oil. While some buyers miss opportunities or encounter risks by leaving untapped data in the ground, smart buyers mine deeper into financial due diligence to reveal the hidden story. And beyond the company’s data, buyers can tap into a reservoir of other data sources, including databases listing a competitors’ customers and publicly available demographic data.


Do you have an example of how troubled company due diligence makes a significant impact? We worked with a PEG client who made an add-on acquisition of a company that was struggling because, although it had great customers, customer relationships were poor. We helped the buyer dig into the details of the company’s relationships from a financial, analytical and strategic perspective. Once the deal closed, the buyer implemented a new strategy that developed new relationships with key customers, broadened its interface beyond purchasing, proactively learned about the customer’s challenges and provided solutions. This strategy helped the customer see the company not as a commodity, but as a strategic business partner. //


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MIDPOINTS by John Gabbert

Turning Company Carrion into Caviar


ince its advent in the late 1980s and early 90s, distressed debt investing has become a significant part of the alternative investment landscape. Some $15.7 billion was plowed into distressed notes in the United States in 2016. Distressed investors, known as “vultures” for targeting dying companies, often get a bad rap. In reality, they’re not unlike other investors—identifying mispriced market opportunities and placing sound bets. Distressed investments often involve bankruptcy, making distressed investors easy fodder for the media. Yet, responsibility for the default lies with the officers of the borrowing companies and, to some extent, the original creditors. Generally, credit is extended in ways it shouldn’t be— either at too low a risk-adjusted rate, with too few covenants to protect creditors, or to financially unsound companies. When the market sees greater risk of default, the debt trades at a discount to par value—often at 50 cents on the dollar or below. Enter the distressed investor. A sophisticated investor can perform fundamental credit analysis to determine any over- or undervaluation, as well as the likelihood the underlying company will perform well in the long run. Though typical, the borrowing company need not be in bankruptcy for a distressed opportunity to occur. But to be sure, distressed investors often enter an investment during or just prior to a bankruptcy proceeding. The goal, of course, is to identify the fulcrum security, or the most senior note that will not be paid back in full,

then negotiate a debt-to-equity conversion that makes sense for both borrower and creditor. Make no mistake, investors want to generate returns, but ideally incentives are aligned in ways that benefit all parties. Through restructurings, companies that are fundamentally sound but have overly burdensome capital structures can shed some of their debt and focus on investing in their core business, while also servicing creditors. The most opportune times for distressed investors come at the end of a JOHN GABBERT credit cycle or the beginning of a new Founder and CEO, PitchBook Data one, when loans have been over-extended and companies are overleveraged. Recent fundraising numbers show that investors have been preparing for such a downturn; $16.8 billion was raised in distressed debt vehicles in 2016, up nearly 40% from 2015. When I first decided to create PitchBook in 2007, I had no idea we were about to fall into the worst recession since the Great Depression. I suspect the newest downturn in the credit cycle will “NO MATTER THE ECONOMIC arrive in a similar fashion— SITUATION, THERE ARE when we least expect it. In ALWAYS CERTAIN SECTORS, the meantime, distressed investment will continue COMPANIES OR REGIONS IN to make up a small but DISTRESS.” integral part of the private equity marketplace. There are always certain sectors, companies, or regions in distress. Creditors and borrowers get greedy, bankruptcies are filed, and distressed investors then pick out the most salvageable pieces, while hopefully helping a few companies return to solvency while they’re at it. //

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Reducing Risk in Distressed Assets Dive into the Real Estate & Facility Portfolio


good rule of thumb for investors in distressed assets is to expect the unexpected. Many surprises arise when examining a target’s real estate and facility portfolio. Most often, these surprises bring expensive price tags. However, hidden gems may also be found, if you know where to look. Tammy Carr Principal, M.A. Mortenson Company


FIRST, THE BAD NEWS How do small issues become big surprises? Outside of the real estate industry, a company’s portfolio of facilities, leases and real estate is not core to its business. Leaders are unfamiliar with how to calculate ROI for improving facilities and workspaces, and real ROI may seem unattainable. Often, executives are never even made aware of opportunities for eliminating waste because facility managers are just as adept at implementing quick fixes for symptoms as

they are at addressing underlying causes. Further, investments in frontline revenue generation such as R&D or sales staff always trump facilities and spaces. It’s easier to try to squeeze in another year beyond the expected life of the HVAC system rather than miss out on the newest technology for the front line. In a nutshell, facility investments are routinely deferred, simply because they can be. Our experience has shown that more than 30 percent of a firm’s capital assets will have hidden issues that don’t surface during due diligence. That’s a problem because it opens the door to expensive surprises that can erode returns on an otherwise successful transaction and expose your investment decision-making to extra scrutiny. For example, while working with an organization in a regulated industry, we found a full $40 million in critical deferred maintenance needs

AN ASSESSMENT WILL DETERMINE WHAT YOUR FACILITIES ARE REALLY COSTING, REVEAL OPPORTUNITIES FOR OPERATING COST SAVINGS AND ALLOW FOR CREATION OF A CAPITAL EXPENDITURE ROADMAP. across 18 different locations. Worse, the client had ticking time bombs of environmental and life safety issues that were not on anyone’s radar, especially in older buildings. From loose ceiling materials to hazardous waste disposal practices, the problems had been overlooked for years. The challenge most corporate decision-makers face is that these problems are often less visible than the sales leader in your face asking for expanded workforce. Even when the issue isn’t as dramatic, wasteful spending is common with these types of assets. For one Midwestern corporation, we found overspending of $100,000 per year for electricity in just one facility due to subpar systems. That can be a meaningful cost overrun for a midsize company. In this example, the investment required to remediate this waste had a five-year payback period, with longer-term upside in reduced operating costs on an ongoing basis. However, the company chose not to make the investment. This is unsurprising, given such issues are invisible on a daily basis. More accurately, they are invisible until their useful life cycle has been breached. Ignoring them, however, can force unscheduled capital investments and lost productivity if facilities are temporarily shuttered. So how do investors pinpoint these hidden costs? Companies can reduce their risk and get full visibility into

their portfolio for a relatively low investment through a conditions assessment. An assessment will determine what your facilities are really costing, reveal opportunities for operating cost savings and allow for creation of a capital expenditure cash flow roadmap. Done right, an assessment should also include recommendations on action items ranging from basic risk mitigation to truly maximizing longterm ROI. Of course, the company’s overall investment strategy will prioritize decisions. Utilizing the assessment results will ensure those decisions are well-informed. //

PROCEED WITH CONFIDENCE 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.

Tammy Carr is a principal in Mortenson’s Phoenix office. With 18 years of experience in the real estate and construction industry, she leads the firm’s business development efforts in the Arizona marketplace. WEALTH ADVISORY | OUTSOURCING AUDIT, TAX, AND CONSULTING

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ACG Chicago Wins Grant to Assist MBEs

T Venita Fields

Craig Miller

John Weber


he number of U.S. minorityowned businesses is increasing rapidly—but without access to capital, they’re unlikely to reach their full growth potential. The Minority Business Development Agency, part of the U.S. Department of Commerce, in November announced ACG Chicago as the winner of a grant to fund a Capital Center that will facilitate access to capital for minority-owned businesses. Although based in Chicago, the center is national in scope and currently the only one of its kind. The $2.5 million grant award will support the center over five years as it works hand in hand with roughly 40 MBDA Business Centers, which source contracts and growth opportunities for an existing base of minority-backed enterprises, or MBEs. Once they’ve won new business, MBEs often need financing to prepare— expanding their inventory or adding new machinery, for example. ACG Chicago entered the MBDA’s Capital Project competition last June with the goal of helping MBEs tap into its network and to introduce a new source of deal flow for ACG members. “We’re trying to expand the opportunities for everybody, both the minority businesses as well as our member base,” said Craig Miller, ACG Chicago’s CEO. The number of minority-owned firms in the United States increased by 38 percent from 2007 to 2012, according to the U.S. Census Bureau’s 2012 Survey of Business Owners. Many of these companies fall within

the middle market, where ACG members typically focus. John Weber, the Capital Center’s executive director and a former ACG Chicago board member, noted the center will not provide loans directly—rather, it will serve as a “matchmaker,” pairing businesses with capital providers. ACG Chicago will administer the center and tap into its network of bankers, advisers and investors, as well as forge alliances with other groups. The initiative aligns with ACG’s mission of fostering corporate growth, said Venita Fields, president of ACG Chicago’s board and a partner with investment firm Pelham S2K Managers LLC. “It seems like it would be a fitting thing for us to do to serve as a connection between the minority business community and capital providers,” she said. The grant award requires the center to meet goals tied to financing, job creation and retention, and the number of companies served. In its first year, the center plans to facilitate $200 million in capital funding; its goal for the five-year period is more than $1.5 billion. In addition to matching businesses with capital, the center will also play a role preparing companies that may be seeking financing for the first time, or recommend advisers to help. “We want to make sure we get the right partner in the right place at the right time for these businesses,” Weber said. // —Kathryn Mulligan


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Environmental Liabilities Can Sideline the Deal: The Case for ELT Transfers


oday’s energy landscape has created new opportunities for distressed asset transactions in the energy, chemicals and industrial sectors. More often than not, however, they are accompanied by the presence of environmental liabilities. Managing the complexities of environmental risk falls outside the competencies of most private equity groups, yet when environmental issues are involved in an asset transRANDALL JOSTES action, fears and uncertainties from CEO, Environmental Liability buyers can sideline an otherwise wellTransfer Inc. crafted deal. When an environmentally compromised asset is part of an M&A transaction, the buy side typically wants to remove any associated environmental liability. That’s because after a deal closes and ownership transfer is complete, regulatory authorities make no “THE IMPACT OF HOLDING distinction between past LIABILITIES ASSOCIATED and current owners of the liability, despite the fact WITH ENVIRONMENTALLY that new ownership likely CONTAMINATED REAL played no role in creating ESTATE GOES FAR BEYOND the problem. Unanticipated risk THE ESTIMATED COSTS OF factors such as unknown CLEANING THEM UP.” contaminants, regulatory reopeners and off-site liabilities that could impact public health and safety can delay or ultimately derail an otherwise good deal. Exposure to environmental risk can also negatively impact long-term corporate growth potential. The impact of holding liabilities associated with environmentally contaminated

real estate goes far beyond the estimated costs of cleaning them up. One common solution to this dilemma is to transfer the liability to a third party. Using a liability buyout transaction, also known as an environmental liability transfer, or ELT, all risk of liability is removed from both buyer and the seller, clearing the way for the primary transaction to move toward closure. Our clients have seen company valuations increase by a substantial margin as environmental risk is transferred off the corporate balance sheet and real estate portfolio. An ELT provider such as Environmental Liability Transfer Inc. underwrites and contractually assumes all environmental liabilities at a guaranteed fixed price, which is calculated by combining a variety of factors, including known and potential risks, operational costs, and the fair market value of any real estate assets that may be part of the transaction. Environmental Liability Transfer Inc., as well as some other providers, will assume a broad range of liabilities, including, but not limited to, at grade, above grade, below grade, on site, off site, past, present and future. ELTs are a guaranteed fixed-price solution: any and all cost overruns to the liability are the sole responsibility of the ELT provider. This allows for more accurate forecasting and peace of mind for project investors. // Environmental Liability Transfer Inc. is the largest acquirer of corporate environmental liabilities in North America.




Milly Chow Partner, Blake, Cassels & Graydon LLP Attorney Milly Chow, based in Toronto, specializes in complex and multijurisdictional financial restructurings, distressed mergers and acquisitions and debtor-in-possession financing for restructuring matters across North America and internationally. She is also the 2017 global president of the Turnaround Management Association.


MORE ONLINE Read more from this interview at



How will an increase in interest rates impact distressed investment opportunities? General consensus calls for interest rates to continue to rise gradually, by as much as 75 basis points by the end of 2017, considering the anticipated tax cuts, increased spending and deregulation expected under the new Trump administration. Sectors that depend upon discretionary consumer spending, such as retail and automotive, are likely to be most significantly affected, resulting in continued or new distressed investment opportunities. A meaningful rate hike will increase debt service obligations of businesses, which will give rise to or exacerbate liquidity constraints for already-distressed or over-leveraged businesses. That will make it more difficult and expensive for businesses with maturing debt obligations to refinance, and is likely to reduce investor confidence in the high-yield bond market, making it more difficult or expensive for highly leveraged businesses to refinance in the high yield bond market. The low interest rate environment has enabled troubled companies to obscure underlying issues in their businesses with low interest financing and low loan default rates have masked the real level of distress. When interest rates increase, the real level of distress

will be revealed. It is estimated that approximately $1.5 trillion of debt will be maturing over the next five years.


What sectors are most likely to see the greatest distressed investment opportunities in 2017? Last year was a banner year for mergers and acquisitions in the oil and gas sector. Although the price of oil is trending up, distressed opportunities are expected to continue for at least the next year, particularly in oil field services as decreased capital spending will continue to significantly impact service providers and squeeze margins. In addition, as exploration-and-production oil companies continue to look for ways to conserve cash in a sustained environment of low oil prices, it is expected that these companies will continue to seek to offload their non-core assets to provide much needed liquity. Slashed workforces and capital budgets will continue to give rise to commercial real estate opportunities where recordlevel vacancy rates in oil industry hubs, like Houston and Calgary, have resulted in millions of square feet of prime real estate office space in those areas sitting vacant and landlords being further squeezed by rate reduction requests in an environment of surplus supply and low demand. In Canada, the impact of the Trump

administration’s trade policies may put increased pressure on the Canadian oil and gas sector as it tries to regain footing. Retail is also expected to continue to experience significant pressure. As the industry continues to struggle to adapt to dramatic shifts in consumer spending patterns, the rise of online shopping and competitive forces, the retail industry will now also face an environment of rising interest rate hikes that threaten to dampen consumer discretionary spending. While consumer confidence soared after the U.S. election, 2016 holiday spending did not match pace. As the retail landscape continues to experience significant pressure and more traditional brick-and-mortar stores are being shuttered, lower inventory volumes, competition and tighter margins will likely give rise to increased distressed opportunities in the transportation and logistics sector.


What are important cross-border considerations for investors seeking distressed investment opportunities in Canada? Generally, the laws governing insolvency proceedings in Canada are similar to those in the United States. However, there are important legal differences and considerations for investors to consider that can impact distressed investment opportunities and how they are


implemented. On the positive side, sale of distressed businesses in Canadian insolvency proceedings are similar to Section 363 sales under Chapter 11 of the U.S. Bankruptcy Code, and are typically quicker and less expensive to implement. As well, the unique corporate plan of arrangement mechanism under the Canada Business Corporations Act (known as a CBCA plan of arrangement) provides a relatively quick and non-insolvency mechanism to effect an investment in, or acquisition of, a distressed business in Canada. The CBCA plan of arrangement mechanisum saw increased use in the oil and gas industry last year. Lastly, the Canadian exchange rate is a major incentive for U.S. and other foreign investors seeking distressed investment opportunities in Canada, offering an approximate 25 percent gain in buying power. On the other hand, investors looking for distressed investment opportunities in Canada should note that “cram down” (the mechanism available under the U.S. Bankruptcy Code that permits a reorganization plan to proceed over the objections of an impaired creditor class) is not available in Canada. In Canada, similar plans must be approved by each class of impaired creditors. In addition, where a unionized distressed company in Canada seeks to restructure, it will not be able to reject its collective bargaining agreement. //


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Polaroid Investors Develop a

Better Picture


Photos by Joe Treleven

H CEO Scott Hardy offers Polaroid a fresh take

t the Consumer Electronics Show in Las Vegas this year, Polaroid had plenty to celebrate— even beyond the brand’s 80th anniversary in 2017. For starters, media outlets praised the company’s latest camera, Polaroid Pop, placing it in their “favorite CES gadgets” lists. The camera takes HD video and prints 3-by-4-inch photos—a nod to the dimensions of old-school Polaroid film. Polaroid also generated buzz with a $499 3-D printer and a Wi-Fi home security camera. “We were one of the busiest booths on the floor,” says Scott Hardy, the company’s CEO and president. Flash back to a very different experience in 2009. Three weeks before the show, Polaroid had filed for bankruptcy for the second time in eight years. That year, the booth chatter wasn’t about slick new products. Instead, Hardy and his colleagues had to convince retail partners that Polaroid wasn’t doomed. Then, Hardy says, they were just trying to survive. “Now here we are, growing and thriving.” That’s because, in a departure from Polaroid’s long history, the company no longer manufactures any products that bear its name. Eight years ago, Polaroid became purely a licensing company. Within 12 months, it was profitable. In 2016, revenue reached $600 million for the Minnetonka, Minnesota-based business (with offices in New York, Hong Kong and London). But there were times when those sales seemed unlikely. “It sure seemed like a long way to go, just based on where we were in those early days,” Hardy says. In that regard, the company’s overhaul was like pressing the button on one of Polaroid’s 20thcentury instant cameras: Take your best shot and hope it develops well. 



A COLORFUL COMPANY PORTRAIT POLAROID In 1926, months after Company: Private equity-backed enrolling at Harvard, worldwide seller of consumer Edwin Land made a critical electronics and other branded move toward founding products. Polaroid: He dropped out. After devoting himself to Heritage: An 80-year-old Amerresearch on light-polarizing ican brand known for pioneering materials, the 24-year-old instant photography. received a patent for polarPopular Products: The Polaroid izing film in 1933 (his first Pop and Polaroid Snap instant of 533 patents). That year, digital cameras. he co-founded a laboratory with his Harvard physStrategy: Position well-known ics instructor; in 1937 it attributes of a retro brand in became Polaroid Corp. products for the digital age. Polaroid’s early success came from the polarizing filters that improved military gear for World War II troops, but the company’s most iconic product sprang from an adorable “aha” moment. During a 1943 family vacation, Land’s 3-year-old daughter asked why she couldn’t immediately see the photos her dad had taken. That day, Land reportedly envisioned the Polaroid instant camera. The first one hit stores in 1948, and its popularity rose steadily. Soon after its introduction in 1977, the Polaroid One Step Land became the best-selling camera in the United States. In 1991, the year Edwin Land died, Polaroid sales reached a record $3 billion. The rest of the decade would not be so prosperous. Consumers began to adopt a different type of instant-gratification photography—digital cameras—and Polaroid struggled to compete. The company filed for Chapter 11 bankruptcy in “IT’S CLEARLY THE MOST October of 2001, reportedly listing $1.81 billion in assets ICONIC COMPANY WE and $948.4 million in debt. EVER BOUGHT.” In 2002, the private equity unit of Bank One (later acquired by JPMorERIC KAUP gan Chase & Co.) purExecutive Vice President and General Counsel, Hilco Global chased a 65-percent stake


in Polaroid for $255 million. Three years later, ownership shifted again—this time to Petters Group Worldwide (in a transaction valued at $426 million), a holding company that already owned licenses for Polaroid DVD players and plasma televisions. For all the marketplace challenges Polaroid faced, its biggest problem soon became the parent company’s CEO. In October 2008, Tom Petters was arrested—and later sentenced to 50 years in prison—for running a $3.65-billion Ponzi scheme. One of the largest frauds in U.S. history, it was eclipsed by another arrest two months later: Bernie Madoff. Seeking protection from Petters’ creditors, Polaroid filed for Chapter 11 protection again in December 2008. Its revenue at that time was reportedly about $365 million. By April 2009, Polaroid had new ownership. Hilco Consumer Capital LP, a unit of Hilco Global that later became Hilco Brands, and Gordon Brothers Brands LLC provided the winning $87.6 million bid for Polaroid’s assets, after a contentious auction that lasted several weeks. “I’ve never had one like that. They’re usually over in about 24 hours,” says Eric Kaup, Hilco Global’s executive vice president and general counsel. The joint investors, which also included Knight’s Bridge Capital Partners, received a 75-percent ownership stake, with the remaining 25 percent held by the Polaroid bankruptcy estate. Hilco saw untapped value in the Polaroid brand—the intellectual property, the name, the color spectrum logo, the iconic white border. The firm also saw value in Scott Hardy, Polaroid’s executive vice president and general manager at the time, and the group soon promoted him to president and CEO. “He’s relentless,” says Kaup, who recalls a license negotiation meeting in Hong Kong as a typhoon was approaching. “We got out of there a couple hours before the typhoon hit landfall, but (Hardy) wasn’t going to stop until the license was done,” Kaup says. Hilco had transformed a half-dozen distressed brands into licensing businesses, but Polaroid was different. “It’s clearly the most iconic company we ever bought,” Kaup says. It was also

H Reprising instant prints for a digital world

a bit of an anomaly. While apparel brands are commonly licensed, that’s not the case for consumer electronics. “There were people who thought that it couldn’t be done,” Hardy says. “They said, ‘You’re going to lose control of [Polaroid’s] quality and brand image.’” Hilco’s expertise helped with structuring licensing deals and understanding who to hire for legal, marketing, finance, quality assurance and business development.

Polaroid now has fewer than 50 employees—a mere fraction of its peak workforce of 21,000 in 1978. Hilco also brought much-needed licensing credibility to the bargaining table. But initially, it was still a tough sell. Hardy recalls, “People would say, ‘Well, is it really worth the value to me to license and pay you a royalty for using your brand on my product?’” Those people also wondered how Polaroid’s most recent bankruptcy would sit with

Photo: Science & Society Picture Library





H After dropping out of

The first polarized sunglasses are sold to the public, thanks to lenses developed by LandWheelwright Laboratories.

During a family vacation, Land’s 3-year-old daughter asks why she can’t immediately see the photo her father took. Within an hour, according to Land’s account, the instant camera and the chemistry required for its film “became clear to me.”

Harvard seven years earlier, 24-year-old Edwin Land receives a patent for polarizing film (his first of 533). That year, he joins his former Harvard physics professor, George W. Wheelwright, to form a laboratory for further development of polarizing material.

1937 Land and Wheelwright’s lab becomes Polaroid Corp.



consumers. “What we found,” says Hardy, “is that the brand is so much stronger than any kind of financial issue.” The reformatted company began with no more than five licensees. (Polaroid had already started to explore licensing by 2002). It took a couple years to find companies with the right financing and distribution capabilities, Hardy says. Now Polaroid has 90 licensees, including manufacturers of smartphones, smartwatches, tablets, drones, televisions, stationery and portable Bluetooth turntables. Not all product candidates match Polaroid’s ethos—hoverboards, air purifiers and kitchen appliances are a few examples of licensee rejects. “You have manufacturers saying, ‘Hey, I want to brand this Polaroid.’ And we have to say, ‘No, that doesn’t fit with what we’re trying to do.’”


‘WHAT ABOUT THE KIDS?’ One overarching to-do: Attract the youngsters. “We knew from day one, we had to go after that Gen Y, Gen Z consumer—that’s been the focus of our marketing,” Hardy says. He wanted to avoid mistakes he’d seen in other licensed brands, namely, leaning too hard on a company’s heritage and historical consumer base. “We were

SCOTT HARDY Polaroid President and CEO





H The first instant camera

The Polaroid One Step Land is introduced and soon becomes the best-selling camera in the United States. G

Edwin Land dies. The same year, Polaroid sales reach their peak, at $3 billion.

is available for sale—the Polaroid Land Camera Model 95, which develops black and white prints in about a minute. Polaroid introduces color film 15 years later.


saying, ‘Let’s build Polaroid for the next 80 years and not just do it short term.’” Serendipity also gave Polaroid’s youth marketing a bump, in the form of Taylor Swift’s 1989 album, which sold five million copies in nine months. Released in 2014, it featured a Polaroid photo of Swift on the cover, along with 13 Polaroid photos inside. Even so, when Tommy Stadlen and Frederick Blackford began raising funds in 2015 for their new photo app—which had licensed the Polaroid name and white border—some would-be investors questioned whether the brand was a bit long in the tooth. During one meeting, a London banker spoke fondly of his childhood memories of Polaroid, but expressed caution. “Look, I’m 50,” Stadlen remembers him saying. “What about the kids? Is it still relevant today?” Moments later, the banker was calling his 12-year-old daughter on speakerphone, asking if she’d heard of Polaroid. Her response: “What’s that?” “I thought, ‘Oh no, this is not going well,’” Stadlen recalls. Fortunately, they quickly realized the squawky speakerphone made the brand sound like “Polloid.” Once they clarified the word, the daughter recognized it immediately, saying “Of course I know Polaroid. I love

Polaroid.” The banker became an angel investor and also brought in two of his colleagues, Stadlen says. Meanwhile, Polaroid itself has invested in the app company. Twitter founder Biz Stone is also an investor and serves as chairman. Called Polaroid Swing, the app targets Polaroid’s ideal demographics—80 percent of users are between 13 and 30 years old, Stadlen says. It works like this: When a photo is taken on a smartphone using the app, it captures one second of video. The user can watch the image move in film-like fashion by dragging a finger across the touchscreen (or tilting the device back and forth). The motion is surprisingly jitter-free. Although Polaroid Swing captures

E Polaroid Swing app founders Frederick Blackford (left) and Tommy Stadlen





Struggling to compete with the popularity of digital cameras, Polaroid files for Chapter 11 bankruptcy in October.

In October, the holding company’s CEO, Tom Petters is arrested (and later sentenced to 50 years in prison) for running a $3.65 billion Ponzi scheme. In December, Polaroid files for bankruptcy to protect itself from Petters’ creditors.

Hilco Consumer Capital LP and Gordon Brothers Brands LLC acquire 75 percent ownership of Polaroid’s IP and trademarks. The investors transform the company into a licensing model. Polaroid Corp.

Revenue for the year reaches $600 million. By January 2017, Polaroid has 90 licensees (after starting with no more than five in 2009).

2005 Three years after acquiring part ownership of Polaroid, Bank One sells its stake to Petters Group Worldwide, a holding company that already owned licenses for Polaroid DVD players and plasma televisions.

no longer exists—instead, PLR IP Holdings LLC is now the entity that owns the Polaroid intellectual property and trademarks.



E Retro meets digital in Polaroid’s new products

60 frames per second, a proprietary computer vision algorithm fills in the blanks and increases that frame rate exponentially. Polaroid Swing launched in July 2016 in the Apple app store; an Android version is planned for this year.

COLLABORATIVE INNOVATION Although Polaroid no longer has an R&D department, the company still invests in innovation. To attract shoppers and licensees, the storied brand must evoke the smell of shiny new gadgets, not mothballs. Polaroid has added a 21st-century sheen “THE COMPANY to its retro image, with HAS BEEN VERY help from Ammunition, the San Francisco design AGGRESSIVE firm founded by a former ENTERING head of Apple’s industrial DIFFERENT PRODUCT design group. (It’s a nice bit of innovation symmeCATEGORIES.” try, because Apple’s late CEO Steve Jobs cited PolaROSS RUBIN roid’s founder as a personal Founder and Principal Analyst at hero). Collaboration with Reticle Research Ammunition has yielded several products, including the Polaroid Pop, introduced at CES in January [see sidebar on next page] as well as the Cube (launched in September 2014), a water-resistant HD video camera, measuring just 1.4 inches per side. Polaroid licenses


its Ammunition-designed products to Edison, New Jersey-based C+A Global for manufacturing and distribution. While Polaroid is discerning about new products, not all its licenses reflect its photo heritage. “The company has been very aggressive entering different product categories,” says Ross Rubin, founder and principal analyst at Reticle Research, a New York-based market research company. “The ultimate goal of a licensor is to maximize the opportunity, and it’s somewhat uncharted territory, how elastic a brand can be. And that is the boundary that they’ve been pushing. But so far, it seems to be successful.” Polaroid products are now sold in more than 100,000 retail stores in upwards of 100 countries. In 2016, 65 percent of those sales came from outside the United States. The company would like to further boost international business by expanding into India and Asia. Hardy is already well-equipped to foster Asian deals; he studied Mandarin in college and has lived in Taiwan. Meanwhile, Polaroid saw yet another ownership shift in December 2014—a $70 million deal that gave Pohlad Family Capital Fund (and an unnamed family office investor) 65-percent; Hilco and Gordon Brothers still hold an undisclosed stake. And last year, Polaroid saw an encouraging consumer trend. Research from NPD Group showed U.S. sales of instant-print cameras rose 166 percent from September 2015 to September 2016. Sales of instant film doubled during that time. “For Gen Z and Y, instant photography is something that is totally new and unique, because they were born into digital technology,” Hardy says. “It appeals to that sense of nostalgia where people are looking for things that are hipster and cool from the past.” Polaroid’s heritage has proven to be a valuable currency, but the company refuses to be constrained by it. With licensing choices and product expansion, Polaroid knows how to think outside the iconic white border. // S.A. Swanson is a business writer based outside of Chicago who frequently writes about technology.

POLAROID POP: OLD MEETS NEW In 2015, with Polaroid just two years from turning 80, company executives sought a new way to meld the brand’s analog past and digital present. Polaroid already had digital cameras that printed 2″x3″ photos in seconds, but they lacked an element of nostalgia. To reclaim Polaroid’s cherished retro aesthetic, the company envisioned a digital camera that would print photos similar to the instant film format that Polaroid made for 60 years (and stopped producing in 2008). With a 3″x4″ image surrounded by Polaroid’s trademark white border, that meant an entire print would measure 3.5″x4.25″.  It wouldn’t be easy.  “We wanted the camera to still have that compact feel, so it needs to be as small as possible—but we don’t want any compromises on the dimensions

Ammunition’s creative director for indus-

designed for 2″x3″ prints. “They had

of the photographs,” says CEO Scott

trial design. “With the Polaroid Pop, size

to make some significant investments

Hardy. Polaroid turned to Ammunition,

was also a challenge.”

in building a new printhead,” says

the firm founded by Robert Brunner,

Hardy, as well as other investments in

Shortly after starting, the team

former director of industrial design for

switched from sketches to repre-

factory machinery to produce the new

Apple; Ammunition has provided design

sentative models using Ammunition’s

photo paper size, adding it was worth it

expertise for prominent brands includ-

in-house 3-D printer, a move Lagerstedt

to “bring something to market that was

ing Beats by Dr. Dre and Lyft.

said “helped us to get an immediate

connecting with what made Polaroid so

sense of size and feel in the hand.”

strong historically.”

When Ammunition was hired in 2015 to create the camera that would

The 3″x4″ image dimensions also

As a digital homage to the brand’s

become the Polaroid Pop, it had already

required important changes for C&A

legacy, the Polaroid Pop earned plenty

worked on three other Polaroid prod-

Global. The Edison, New Jersey-based

of accolades when it debuted at the

ucts: The Snap (a digital camera that

company manufactures Polaroid

Consumer Electronics Show in January.

prints 2″x3″ photos); the Zip (a pock-

products, including those designed by

The camera can also record 1080p HD

et-sized photo printer); and the Cube

Ammunition, and owns Zink Imaging

video and print photos from any device

(a tiny, rugged video camera measuring

Inc., which produces the printing system

via Bluetooth or Wi-Fi. It made the “Best

1.4 inches per side). Ammunition would

used in Polaroid gadgets. Zink began as

of CES” lists from GQ and Mashable. Pop

later design the Polaroid Hoop, a Wi-Fi

a project within Polaroid during the ’90s

is set to hit store shelves later in 2017,

home security camera introduced

and was spun off in 2005 before C&A

with a price expected around $200, half

in January. 

Global purchased it.

that of a refurbished Polaroid SX-70.

“With the Polaroid Cube and

Instead of using ink cartridges, the

“CES is a great forum for us to launch

Polaroid Snap, the compact size of

Zink system uses heat to activate dye

new products, even if those products

cameras was the driving factor in the

crystals embedded in photo paper.

aren’t going to be available for another

design process and very challenging

Before the Polaroid Pop camera, all of

nine months,” Hardy says.

to achieve,” says Jonas Lagerstedt,

the photo paper and printheads were

—S.A. Swanson



Under Pressure:

Investors May Have to Dig for Distressed Deals




hen President Donald Trump picked Wilbur Ross to run the Department of Commerce, he reinforced the new administration’s pro-business reputation. The choice of Ross, a turnaround investor who built his fortune betting on struggling companies, sent a positive signal to both Wall Street and Main Street, which stand to benefit from the financial deregulation and tax reform promised by Trump. But for Ross’ distressed investor counterparts in the middle market, a stronger economy means fewer opportunities. In the absence of broad conditions pushing companies to the brink, these investors are honing in on specific drivers of distress and industries undergoing rapid change. The U.S. economy is showing signs of strength, including employment growth, low interest rates and ample capital. For investors like private equity firm Blue Wolf Capital Partners, that climate doesn’t spur the financial and operational turmoil that can push new industries into financial distress. “You have an environment where companies are more likely to be growing and profitable than shrinking and unprofitable,” says Michael Ranson, a partner at Blue Wolf, which focuses on special situations in North America, including distressed and turnaround investments. That can be a challenge for investors in distressed assets, who target struggling companies or market inefficiencies using strategies that include purchasing the debt of a troubled business, investing in an embattled company in hopes of turning it around or targeting so-called special situations—a catch-all term that describes businesses under pressure for any number of reasons.




Mansour Bassem

J. Scott Victor

Over the past few years, the pace of distressed and turnaround investing has slowed. The number of middle-market distressed debt deals fell to 73 in 2016 from 127 two years earlier, according to data provider PitchBook. Those conditions aren’t likely to change anytime soon. Trump has promised to dismantle many of the regulations instituted over the past eight years, notably the Dodd-Frank Act, the sweeping financial reform legislation that placed new restrictions on capital providers. With less regulation, banks will be able to lend more freely, in some cases propping up companies that might otherwise fall into distress. Interest rate increases expected during Trump’s first term are touted as a headwind to growth, yet many professionals like J. Scott Victor, founding partner and managing director of investment bank SSG Capital Advisors, don’t expect rates in the next few years to reach a point where they will impact middle-market distressed activity in a meaningful way. “The higher the interest rate, the more distressed there’s going to be, yes. But no one knows how high those interest rates are going to go, and I don’t predict they’re going to go that high,” says Victor, who is also immediate past chairman of the Turnaround Management Association.

NOT ALL MARKET SEGMENTS ARE CREATED EQUAL, AND FUNDS INVESTING IN SMALLER COMPANIES MAY FACE MORE OPPORTUNITIES AND LESS COMPETITION THAN THOSE CHASING BIGGER DEALS. Interest rate hikes present a heightened threat to companies carrying heavy debt loads, but Blue Wolf’s Ranson doesn’t think middle-market companies are particularly vulnerable. “I don’t sense that companies are systematically way overleveraged. I think that there’s a lot of debt capital out there, but we’ve seen the


(middle-market) lending community behave in a way that seems to be pretty responsible,” he says.

ONE MAN’S TRASH… The economic outlook doesn’t suggest widespread business failure, but opportunities still exist for investors in distressed assets. Not all market segments are created equal, and funds investing in smaller companies may encounter more prospects and less competition than those chasing bigger deals. Lower middle-market companies tend to be more susceptible than their larger counterparts to strains like the loss of a big customer, a quality issue at a manufacturing facility or a management mistake. Such events can create an opening for an investor to provide financing or operational support. A struggling lower middle-market company also may have fewer suitors. Strategic acquirers, large private equity special situations funds, and credit and hedge funds compete aggressively to invest in businesses generating $500 million in revenue or more. Fewer funds target the lower middle market, where private equity firm Resilience Capital Partners has focused since its founding in 2001. The firm’s co-CEO, Bassem Mansour, says this segment is typically less attractive to strategic buyers or falls under the radar of large private equity firms. As investors in distressed companies look for their next deal, private equity portfolios are a good place to start. Sales of portfolio companies to other private equity firms have grown as an overall share of the market, according to PitchBook. In fact, secondary buyouts made up more than half of middle-market private-equity-backed exits in the third quarter of 2016. Once a fund reaches maturity, a firm is under pressure to sell its holdings, regardless of performance; even before then, it may offload a business early to rid itself of an underperforming asset, which might appeal to a private equity firm oriented toward distressed assets. Corporate entities present another source of deal flow in the form of carve-outs. As large

companies—both public and private—grow, they often find that some assets no longer align with their core strategy or drive revenue. These noncore business units can appeal to investors with a different perspective. “We can carve those assets out, create an independent company with its own identity, invest capital behind it, bring strategic and management resources if necessary, and give it an opportunity to improve, recover and grow from there,” says Mansour, who expects this trend to continue.

INDUSTRIES UNDER SIEGE Even in a growing economy, individual industries experience pressures that force companies into distress. In the view of Thomas Kim, managing director of consultancy R2 Advisors, an economy in flux drives distressed deal flow by creating winners and losers, even as the overall business climate improves. “The best-run companies are going to enjoy the lift,” Kim says. “But the worst performers are going to quickly be left behind. Those are the businesses that will get restructured or sold because they can’t keep up.”

Industries like oil and gas, metals and mining, retail and health care have presented distressed opportunities for the past several years, and that activity is expected to continue. Trump and the Republicans have introduced legislation to upend the Affordable Care Act, creating uncertainty for health care businesses. The ACA’s future is unclear, but the impact of any legislative changes will be felt alongside a host of other factors, like downward pressure on reimbursement rates, rising costs and consolidation in the health care industry, says Warren Feder, a partner with investment bank Carl Marks Advisors and member of ACG New York. Feder expects those combined forces to continue creating work for firms that work on distressed deals. Although the price of oil has risen since its sharp decline in 2014, deal flow is likely to increase now that the industry is less volatile. When prices were dropping, many investors were “wary about trying to catch a falling knife,” Feder says, whereas today, the industry has largely adapted to the lower price environment. “Oddly enough, I think the rise in oil prices to above $50 and a certain amount of stabilization



Warren Feder

Thomas Kim

creates an environment and a dynamic that’s actually more favorable for investors, and we may see more transactions,” he adds. In retail, high-profile Chapter 11 bankruptcy filings by brands like American Apparel, Pacific Sunwear and Aeropostale have highlighted the challenges facing the sector. A major retail shipper, EZ Worldwide Express, filed for bankruptcy in mid-January. Heavy debt loads, reduced spending on apparel and changing consumer tastes have weighed on traditional retailers, as has the impact of e-commerce. The trend toward online shopping shows no sign of slowing. Kim emphasizes the impact this will have across the entire industry, hurting not only retailers slow to adapt to online platforms, but suppliers and real estate owners. “It’s just going to be a pretty big shift in one segment in the economy that’s going to ripple through,” he says.


Michael Ranson

Limited partners have continued to commit capital to funds with distressed asset strategies, despite strong macroeconomic indicators. In 2016, distressed debt funds raised more than $16.8 billion, an increase from $12.1 billion in



2015, according to PitchBook. Resilience’s Mansour sees an appetite for distressed funds among LPs, whose managers recognize the impact investors can have in transforming a troubled company. “Generally speaking, people view our business as intuitive and positive, and I’d anticipate there will continue to be funds raised in the space,” he says. The enthusiasm for distressed investing could become tempered for some limited partners, however, as they try to time their investments with the next economic downturn. The growth environment expected under the Trump administration may extend the business cycle, leading some LPs to adjust where they put their dollars and to choose funds more selectively. “Some of them might be willing to back funds thinking that two or three years from now maybe the economy softens and the natural business cycle creates opportunities, but I’ve got to imagine that because the economy is pretty healthy, LPs aren’t just throwing money at these strategies right now,” Ranson says. // Kathryn Mulligan is a former editor with Middle Market Growth and a contributor to the magazine.
















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


H ACG members at Capitol Hill

2017 Public Policy Summit Draws Record Attendees


MORE ONLINE Find updates and insight on policy issues at


he outlook for financial regulation under the Trump administration and related issues affecting middle-market deal-​ making drew record attendance of nearly 200 ACG members to ACG’s fifth annual Middle-Market Public Policy Summit in Washington, D.C., in February. Policy panels featured Sen. Thom Tillis (R-North Carolina), Rep. Bill Huizenga (R-Michigan) and staffers from the offices of House Majority Leader Kevin McCarthy (R-California) and Vice President Michael Pence, among others. Amid overtures by the Trump administration to overhaul the Dodd-Frank Act and rewrite financial

regulation, attendees gained insight on topics such as the timing of comprehensive tax reform, the future of interest deductibility and others impacting middle-market private capital investment. “This signature event is essential to educating our members and mobilizing the voice of the middle market,” said Gretchen Perkins, a partner with Huron Capital Partners and ACG Public Policy chair. “This is part of a consistent four-year effort by hundreds of volunteers to bring the voice of the middle market to the Hill.” At another panel, growing concern over cybersecurity was addressed by speakers from Venable LLP, RSM US LLP and the Brookings Institution;

Broker/Dealer & RIA Compliance Consulting Specialists

Rep. Bill Huizenga

Vice Presidential Aid Marty Obst


Martin Okner, managing director and co-founder of SHM Corporate Navigators, moderated a broad discussion on economic outlook under the Trump administration with CNBC and MSNBC news analyst Ron Insana. Visits to Capitol Hill by some 35 ACG members to dozens of House and Senate offices capped the fullday event, where members discussed the most recent ACG Public Policy Agenda and the economic outlook for their specific congressional districts. Said Amber Landis, former ACG vice president of public policy: “The congressional offices are very receptive to hearing from ACG members because they help them create jobs in their communities.” //

SPECIAL NOTE The Summit marked the last major event for Amber Landis, who recently resigned her role with ACG. In nearly four years with the organization, Landis has made significant strides for middle-market dealmaking. She helped spearhead the creation of the Congressional Caucus for Middle Market Growth; the establishment of the Private Equity

We specialize in regulatory compliance issues for both start-ups and existing broker/dealers and RIAs. We are cognizant of keeping projects within budget and on time. Our very customized approach and the personal relationships we develop with our clients allows compliance outsourcing to be seamless.

Regulatory Task Force, comprised of representatives from middle-market private equity firms, the creation of an ACG Political Action Committee, or PAC, and the establishment of a stronger presence in Washington,

Phone 770-923-9632

D.C., culminated by the opening of a D.C. office last year.




NEVADA // 1998–2015 Despite the major volatility caused by the Great Recession fueling statewide bankruptcies and foreclosures, Nevada has seen both sales and job growth driven by private equity-backed middle-market businesses, including a jobs growth rate nearly three and a half times that of other businesses in the state.



0.1% 8% 12.5% 79.7%





0.6% 26% 5.4% 68% 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





44.6% 26,933


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.


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Breakout Sessions Details: MONDAY, APRIL 24th 3:30–4:20 P.M. The New Normal? Bags of Capital, Challenging M&A Volume and Shifting Business Models Presented by Golub Capital MIDDLE MARKET GROWTH // WINTER 2017



Beware the Tax Man SOUND DECISIONS // Buyers Should Pay Attention to Tax Profiles of Bankrupt Targets

I D. Joshua Elliott

ncome taxes usually are a minor concern for distressed companies. However, as a company approaches bankruptcy, its tax profile can have real value for potential buyers. Due to the complexity of the tax bankruptcy rules, however, it can be difficult for a buyer to understand exactly what it is acquiring. This article briefly presents some unique bankruptcy issues for a buyer to consider when performing tax diligence on a bankrupt (or emerged) target.

Tax Partner, Dixon Hughes Goodman LLP

Generally, there are three areas to consider: 1. Tax attributes: The tax rules allow a bankrupt debtor to exclude cancellation of indebtedness income from gross income. In return for this consideration, the debtor must reduce its historical tax attributes, including net operating losses, credit carryovers and maybe even asset tax basis. Applying the attribute-reduction rules is tedious because various ordering rules and elections must be addressed. Frequently, tax COD income is different from book COD income because liabilities may have different tax bases. For consolidated taxpayers, the complexity increases exponentially. A potential buyer needs to understand how the debtor calculated its COD income, what alternative treatments were elected, whether the ordering rules were followed and whether the remaining tax attributes still exist after emergence. 2. Bankruptcy costs: Bankruptcy is an expensive process with fees paid to the attorneys, accountants, trustees, brokers and other advisers. Not all of these costs are tax deductible. A potential buyer should analyze how the target treated its costs and how any adjustments will affect the available attributes. 3. IRC §382 limitations: Perhaps the most critical issue to consider in buying a company

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that has emerged from bankruptcy is how the company applied the NOL limitation rules upon its emergence and related change in control. There are two primary options: ɋɋ If qualified, a debtor can avoid the NOL limitations by establishing that the debtors who succeeded to the target’s equity upon emergence were actually in control of the company before bankruptcy. While very attractive, this option comes with some costs. The NOLs have to be reduced by prior interest expense deductions that were recast as dividends. The debtor is also precluded from having another ownership change within two years. ɋɋ Alternatively, a debtor’s remaining tax attributes may be subject to severe limitations that will impact the buyer’s ability to use those NOLs. However, said NOLs are not clawed back by prior interest deductions. Analysis of these two alternatives is extremely fact dependent, complicated and one of the most important tax decisions a company has to make upon emergence from bankruptcy. Acquiring companies that emerge from bankruptcy can be appealing because they presumably have shed their old baggage. Further, as prior loss companies, they may have very attractive NOL carryovers and other tax attributes. And while a quick internet search can produce numerous tax diligence checklists, very little can be found regarding the purchase of bankrupt targets. As always, caveat emptor. And get a trusted adviser who has significant bankruptcy experience! // D. Joshua Elliott is a tax partner with Dixon Hughes Goodman LLP. He is a CPA and a certified insolvency and restructuring adviser with over 20 years of experience in public practice. He can be reached at



© 2017 Wipfli LLP

To Get to Higher Ground, You Gotta Go Through the Mud. The middle market is rife with opportunity but it’s also clear as mud. That doesn’t mean you shouldn’t take the road less traveled. When you’re interested in the territory, you want a guide who thoroughly knows the terrain. Wipfli is your Private Equity Guide, taking you where you’re going, faster, with audit, tax, technology consulting, and advisory services. From fund and transaction advisory services, to portfolio performance and management, you get powerful direction to navigate the muddy middle market, achieving growth while balancing compliance, without getting bogged down or stuck. Your Private Equity Adventure is Calling. Let’s Get Out There.


Section 363 Bankruptcy SOUND DECISIONS // A Potentially Quicker and Cleaner Path Than Reorganization

T Lawrence Kotler Partner, Duane Morris LLP

he suitcase had been around for over a century. The wheel had been around since, well, forever. Yet, it wasn’t until 1970 that Bernard Sadow thought of combining these two familiar objects in a new way. The result—rolling luggage—changed everything. Just look around next time you’re in an airport. Acquiring distressed assets can work the same way. With a previously little-used section of the U.S. Bankruptcy Code, called Section 363, investors can find and buy valuable, underpriced assets from distressed companies. The results can be very profitable—if you know where, and how, to look. Under Section 363, assets can be sold relatively quickly, directly and outside the ordinary course of business if there is sound business justification and certain other conditions are met. Investors can identify and often purchase assets from distressed entities without engaging in the slow and complex Chapter 11 reorganization process. The benefits for both seller and buyer are numerous. First, Section 363 sales can be fast. In some cases, they take fewer than 60 days. They’re also clean. Assets pass from seller to buyer “free and clear” of certain liens, claims and encumbrances. Finally, they’re final—the transaction requires approval by a federal bankruptcy court order that typically contains provisions protecting both seller and buyer from future collateral attack by jilted creditors, equity holders or others. The strategic use of Section 363 grew out of the 2008 financial crisis. The resulting bankruptcy cases helped redefine a Chapter 11 process that was once dominated by “reorganization” cases to one increasingly characterized by “363 sale” cases. Opportunities emerged for investors to find, and acquire, valuable distressed assets in innovative ways.

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For example, apparel retailer Aeropostale declared bankruptcy in May 2016. With hundreds of stores around the country, lots of commercial landlords stood to lose significant lease revenue. The solution? Create a consortium and, under 363, purchase the company in order to maintain the leases. Such a group, including several major mall operators, ensured that Aeropostale would continue as a going concern, and that landlords would continue to receive their rents. The consortium used Section 363 as a vehicle for sectioning off and acquiring assets separately from the sometimes cumbersome proceedings of a typical reorganization. Granted, the Aeropostale outcome was a bespoke solution. And not all industries and investors will be comfortable with using Section 363. Pacific Rim investors, for instance, tend to steer clear of this kind of asset purchase. Nevertheless, Section 363 has emerged as a versatile, effective tool for a variety of strategic situations, such as entering a new market by purchasing distressed assets in that market. It’s almost always worth a long, hard look. And increasingly, investors are liking what they see. // Lawrence Kotler is a partner in the law firm of Duane Morris LLP, practicing in the areas of business reorganization, bankruptcy and creditors’ rights.



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The Cost of Human Capital SOUND DECISIONS // How an Employee Cost Analysis Can Make Buying Companies Easier

A Cheryl Klug Senior Employment Cost Analyst, Insperity

n employment cost analysis is designed to facilitate a broad evaluation of an organization’s human capital spend. It can help your business understand your employment costs, review organizational structures and maintain productivity through the M&A process. The nature and complexity of human resources costs are unique and can be significant. That’s why, to properly value any M&A transaction, all aspects of earnings before interest, taxes, depreciation and amortization—including HR costs—must be carefully considered. An employee cost analysis helps evaluate the total human capital expenditure of an organization. Without it, you could miss critical aspects of employer cost and HR challenges. Unforeseen risks and liabilities could surface. And the speed of the transaction could be compromised. Here’s how to use an employee cost analysis to make buying companies easier, faster and more cost-predictable. Understand your costs Begin by rounding up key data from both companies, including general ledger, HR department expenses, vendor reports and turnover that will help you get a feel for variances. For example, how much is spent on payroll and HR administration? Employee benefits? HR services? How are Equal Employment Opportunity Commission compliance and wage claims handled? Employee training? HR technology?

structures be better aligned? For example, you might see an increase in EBITDA by eliminating redundant positions in the merged organization. Understanding the organizational structure of the merged company and how that looks in the surviving entity will be vital to your success. Make your employees whole after an acquisition Pay attention to what the company has spent on individual employees. If there will be any changes that affect acquired employees, you’ll have to consider the impact. If there will be significant adjustments to employee discretionary income—for example, if an employee will go from paying $100 a month for benefits to $400 a month (with no adjustment in compensation)—you could see loss of productivity due to employee dissatisfaction. An employee cost analysis gives you a line-by-line view of the potential impact of the M&A on individual employees. Consider such adjustments to benefits, including to retirement and 401(k) plans, and try to make employees whole through this process to avoid loss of productivity. Evaluate your M&A Overall, an employee cost analysis should help you come to terms—quickly—with the employer costs of your M&A, which is especially important when the speed of transaction is critical for deals. // Cheryl Klug is a senior employment cost analyst

Review organizational structures With this data in hand, you can answer critical HR-related questions. How does the human capital structure of the target company compare to your company? Going into the first year of acquisition, what does the human capital cost structure look like? Could varying positions or benefit

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with Insperity. She works with C-suite executives to facilitate a broad evaluation of their existing and projected human capital spending.








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Due Diligence: Beyond the Numbers MIDMARKET TRENDS // How Open-Source Software Is Changing Due Diligence

W Richard A. Martin Jr. Senior Director, Merrill Corp.

hile recently preparing to moderate a panel on open-source software and its impact on M&A, I was struck by three surprising trends: 1. Open-source is ubiquitous in modern software development. 2. Open-source use, documentation and management have a major impact on financial transactions—both in terms of successful completion and valuation. 3. A surprising number of financial professionals have not been exposed to this topic in sufficient detail. What particularly caught my attention was that open-source software does not seem to be on many executives’ radar as they conduct due diligence. I found this odd because, first, opensource is nearly everywhere and, second, like any other material omission, not knowing your organization’s software could have a negative, possibly fatal, impact on a deal. Harness the power Open-source software represents, in a sense, a third method for technology development. This means property-based development where a firm internally creates a product, or an outsourced model, where a company contracts to have the software developed on its behalf. There are significant benefits to using opensource software. Because it is literally sourced “in the open” and has many different code contributors, open-source harnesses the power of distributed peer review and transparency of process. The promise is better quality, higher reliability, more flexibility, lower cost and an end to predatory vendor lock-in. By some estimates, 80 percent of modern code contains some element of open-source. However, it is important to recognize and manage the risks. Open-source security and

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management challenges are formidable and most organizations lack visibility into the open-source they’re using. Organizations are on their own for updates, patches, hardware compatibiliy, documentation and more. There are also operational risks, potential license violations, changes in enforcement trends and a growing presence of trolls among us, in this case preying on copyright issue. The risks can be significant—financial loss, customer defection, legal issues, brand erosion— and can impact an organization’s valuation and transaction success in the context of M&A. Seven steps to a successful outcome: Here are some recommendations to help ensure a successful M&A outcome: ɋɋ Ask questions. There are many M&A implications on both the buy-side and the sellside. Smart buyers and sellers ask questions. ɋɋ Actively manage your open-source. Develop an automated process for securing and managing open-source. ɋɋ Know what you have. Do your apps contain open-source software? Ensure you have an accurate, real-time inventory of the opensource components you use. ɋɋ Be proactive. Enact policies use and processes for selecting, approving and tracking. ɋɋ Be secure. Put in place processes to identify and remediate known open-source security vulnerabilities and to monitor for new vulnerabilities. ɋɋ Be in compliance. Ensure open-source license obligations are met, including those for code acquired from third parties. ɋɋ Train your team. Developers should be trained on managing open-source and on your company’s specific policies. // Richard A. Martin Jr. is responsible for Merrill DataSite’s global marketing group.




Investors Are Taking Their Time MIDMARKET TRENDS // Expanding Life Cycles for Private Equity Funds

P Bruce K. Fenton Partner, Pepper Hamilton LLP

Daniel W. McDonough Partner, Pepper Hamilton LLP


epper Hamilton annually commissions a survey to keep clients abreast of middle-market private equity trends. This year, with Mergermarket, we surveyed 50 middle-market PE firms regarding fund life cycles. Our findings were no surprise. Compared to five years ago, fundraising is taking more time, investments are being held longer and overall fund life cycles are lengthening. To succeed in this marketplace, sponsors must understand these trends and respond accordingly. On the fundraising side, 58 percent of funds reported longer fundraising time frames than for their most recent funds, with an additional 16 percent reporting significant increases. This is not due to a lack of available capital, as the amount of capital being raised has been stable. Instead, the trend appears to be driven by investors trying to concentrate capital with fewer managers. Data from Preqin supports this: The more than $550 billion raised last year was invested in only 1,061 funds—a drop of 24 percent from the prior year. Investors are more closely investigating funds before committing capital (and using third-party advisers hired specifically to do so), determining which have the best track record and are most likely to obtain high returns. Respondents indicate investors are more aggressively negotiating their rights with these top-performing funds than in prior investments, and funds are equally aggressive in negotiating due to their “top performer” status. Sponsors have had to rethink their approach because of longer fundraising cycles. Increasingly, sponsors aim to distinguish themselves from competitor funds. Partly this may be due to specialization for specialization’s sake, but sponsors must examine their track records to identify strategies that have worked. What particular industries or asset types have outperformed? If areas of specialization are not obvious, funds

examine general industry trends to identify higher-performing asset classes. We expect this specialization trend to continue. Sponsors noted that deal life cycles are extending due to increased competition for quality targets. Further, “A+” assets are commanding premiums, which could lead other sellers to have unrealistically high expectations for their assets. This increases price pressure on sponsors and contributes to more broken deals. Sponsors are ensuring that assets are worth these premium prices through measures such as enhanced diligence, additional (often protracted) negotiations, and earn-out and/or price renegotiations. These all take time to implement. Thus, the period between signing and closing has lengthened. Furthering this trend is the fact that expensive assets require that either add-ons be completed at discounts to “average in” to the target return or that sponsors organically increase an asset’s value to achieve that return. Both processes contribute to longer deal life cycles. Indeed, 56 percent of sponsors said the time between initial platform investment and final disposition has increased, with an additional 12 percent saying it has increased significantly. Read the survey, Going the Distance: The Expanding Lifecycles of Private Equity Funds, at // Bruce K. Fenton is a partner and chair of Pepper Hamilton LLP’s Private Equity Practice Group and Investment Funds Industry Group. Daniel W. McDonough is a partner and member of Pepper Hamilton LLP’s Private Equity Practice Group.

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EUROGROWTH 2016F A panel on cross-border deals at EuroGrowth in October featured Stewart Licudi, William Blair (standing); L-R: Pamela Hendrickson, The Riverside Company; David Clark, Raymond James; Susanna Fuchsbrunner, Luther Rechtsanwaltsgesellschaft mbH; and Victor Xercavins, Cuatrecasas.

EURO NETWORK F Top Left: ACG Barcelona board members and former ACG President and CEO Gary LaBranche. Top Right: EuroGrowth 2017 Event Chairman Jeremy Harrison, Bank of America. Bottom: L-R: Piero Carbone, McDermott Will and Emery; EuroGrowth 2016 Chairman Maarten De Jongh, Norgestion; and keynote speaker Jamie Murray, Bloomberg.


E ACG KANSAS CITY Economist Alan Beaulieu of ITR Economics gave the keynote address at the chapter’s Annual Economic Breakfast in January.

H ACG DETROIT ACG Detroit President Doug LaLone, Fishman Stewart, presents a 2015 Meritorious Service Award to Ron Hingst, president and CEO of PR Services Inc., last September.




H ACG WESTERN MICHIGAN Winners Blackford Capital at the chapter’s first Finance Feud fundraiser, held in January for the ACG Cup Competition.

ACG NEW YORK F Attendees at the chapter’s Annual Holiday Luncheon at the Central Park Boathouse in December were entertained by Broadway performer Angela Reda.

ACG BOSTON F More than 50 women turned out to wrap gifts for the chapter’s Women’s Connection Holiday Luncheon in December, held at Wilmington Trust.


ACG PITTSBURGH F The chapter’s Annual Holiday Party was held at Heinz Hall in December. L-R: Allison Fromm, PNC Financial Services Group; Colleen O’Brien, Bank of America Merrill Lynch; and Lori Rooney, Clark Hill.

ACG CHICAGO G L-R: Panelists Suzanne Yoon, Kinzie Capital Partners; Elizabeth Davis, Burke, Warren, MacKay and Serritella; and Sidney Dillard, Loop Capital Markets at the Midwest Capital Connection in October.

H ACG SAN FRANCISCO At the Outstanding Growth Company Awards in November were (L-R): Christa Pedersen, Cross Country Consulting (awards committee chairwoman); Toby Kraus, Proterra Inc., finalist; and Jim Stephens, Fleetcare International, awards committee. The event was held at the City Club.

—Compiled by Hollie Merrick, ACG Global

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




BRITTA VON OESEN of CohnReznick Capital Market Securities, a boutique investment bank, was named co-chair of the Solar Energy Industries Association’s Women’s Empowerment Sub-Committee. CohnReznick Cap Markets has played a leading role in renewable energy. The strategic goal of the committee is to engage and provide a platform nationwide for women’s empowerment and provide a mentorship program and career development for women in the solar industry.

The DAK Group, an M&A advisory firm, appointed SHEON KAROL a managing director. With more than three decades of experience, Karol brings executive, turnaround, legal and financial experience in the middle market. Karol has negotiated transactions in a wide range of industries: manufacturing, sports, food and grocery, medical research, biotech and pharma. Previously, Karol was a principal at Newlands Consulting, an M&A advisory firm, and a managing director at CRG Partners (Deloitte CRG).

RANDY WILHOIT was named regional president of PNC Dallas-Fort Worth Metroplex. PNC announced its expansion by introducing a local leadership model and hiring additional employees to serve large and middle-market companies. Wilhoit, who has worked at PNC for over 18 years, most recently served as a senior executive in its business credit group, working with new business development and transaction structuring initiatives for corporate and commercial banking in the region.


SSG Capital Advisors has announced the promotion of TERESA C. KOHL to managing director. With over 20 years of experience, Kohl will lead investment-banking transactions and manage SSG’s litigation advisory practice. Prior to investment banking, Kohl worked in financial and operational restructuring at Bridge Associates, LLC and NHB Advisors, Inc. Kohl is a co-founder of TMA Global Network of Women.

CHAD J. SHANDLER has been appointed CohnReznick Advisory’s national director of the restructuring and litigation advisory practice at the firm’s headquarters in Manhattan. Shandler had worked across many industries restructuring some of the most complex and largest engagements. Previously he was a partner at CohnReznick, where he built his reputation in the bankruptcy and restructuring community.

DAVID HERR has been appointed as chief executive officer of Morbark, a leader in manufacturing equipment. With over 30 years of experience, Herr brings knowledge of operations, supply chain management and executive management with large companies. In his most recent role, he served executive vice president at BAE Systems. —Compiled by Hollie Merrick, ACG Global

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DISTRESSED INVESTING TRENDS // There is a season, turn, turn, turn (around)…


FILING CHAPTER 691 BILLION Lehman Brothers holds the fine distinction of the



largest bankruptcy in U.S. history with a value of

After entering into distress, PE-backed companies

$691 billion at the time the company filed Chapter

recovered their EBITDA margins significantly

11 in September 2008.

faster than their public counterparts did for the

—Business Insider

turnaround’s duration—typically up to 18 months, according to a recent McKinsey & Company study.


DON’T STRESS THE DISTRESSED FUNDS Since the economic crisis of the late 2000s, dry powder reached a record $54.7 billion in 2015



THE MILLION DOLLAR QUESTION Why do companies fail? Changes in market

before declining slightly to $52.9 billion in January

demand and missed technological development

2016—more than 30% higher than in 2007 and 2008.

are the top two external crisis factors, according to


a 2014 study by Turnaround Management Society. —


IT’S GOOD TO BE KING The “King of Bankruptcy” Wilbur Ross earned his nickname from decades of successfully investing in



distressed companies in a wide range of industries

Blackstone Group bought Hilton in a $26 billion

and building new companies from these assets.

leveraged buyout at the height of the real estate


bubble. But thanks to a brilliant turnaround, it’s become the most lucrative private equity deal ever,



with a paper profit of $12 billion.

On CNBC’s “The Profit,” wildly successful busi-


nessman and investor Marcus Lemonis lends his expertise and capital to struggling businesses in various industries across the U.S. His top five biggest turnarounds include Amazing Grapes, Inkkas Worldwear and Sweet Pete’s. —

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

M AY 2 – 4 , 2 0 1 8 | S A N D I E G O M A R R I O T T M A R Q U I S & M A R I N A | S A N D I E G O , C A

S AV E T H E DAT E. W W W . I N T E R G R O W T H . O R G

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Middle Market Growth - Spring 2017  
Middle Market Growth - Spring 2017  

The official publication of the Association for Corporate Growth (ACG)