You’re either working a live deal, or hunting for the next one, at TA Associates

TA Associates has invested about $20 billion in nearly 500 companies since the firm was founded 50 years ago in 1968. The private equity firm backs companies in five industries: technology, healthcare, financial services, business services and consumer. Headquartered in Boston, TA invests in companies across North America, Europe and Asia. Managing partner Ajit Nedungadi co-heads the Core Investment Committee and heads the firm’s European efforts out of London and is actively engaged in investments in India. He joined TA in 1999 and has more than 20 years of experience in the private equity industry. Nedungadi’s primary focus is in the technology industry, but he has also sponsored investments across the asset management, insurance brokerage, medical device and healthcare services and consumer and e-commerce sectors. We asked Nedungadi about TA’s investment strategy in Europe and the firm’s culture, including the focus on proprietary deal flow.

For each of the sectors TA focuses on in Europe, what is the firm looking for in portfolio companies?
For our entire history, TA Associates has been a growth-focused investor. This shapes our sector specializations, as we target areas that are characterized by fundamental, secular trends that reflect a changing marketplace. But we don’t invest in either early- or late-stage financing rounds. In fact, we rarely, if ever, invest in venture-backed businesses. Our sourcing efforts are focused exclusively on profitable, growing companies, and we favor founder-led or true entrepreneurial businesses that require capital to fund continued rapid growth.

This lens brings us into specific areas. For example, we have a very long history in technology, including software and a range of tech verticals. We lean toward businesses that are driven by intellectual property and situations in which the most important assets are the people who lead the business. We also prefer asset-light companies in which cash flows can be reinvested to fund further growth versus asset-heavy businesses that are less flexible in a dynamic market.

These themes also extend to our other sector specializations. In healthcare, for instance, we’re active in the medical device market and specialty healthcare services. We look to zero in on those subsectors in which innovation provides a catalyst for rapid growth. We have found that in the dental and optical segments, to name two areas. Amann Girrbach is an Austrian company that we backed in 2010 that develops computer-aided design and manufacturing systems for dental restorations. And in 2015, we invested in Belgium-based PhysIOL, which develops intraocular implants for cataract surgery. The common thread across these businesses is that they’re both intellectual property-driven companies.

Another sector is financial services. Here, we’ve traditionally found compelling opportunities to support management teams that spin out of a larger company. It’s about backing “people-oriented,” asset-light businesses that enjoy high margins and benefit from secular trends. We also actively pursue business services and consumer investments. The specific industry dynamics and underlying theses may change, but it’s about backing exceptional people and supporting their efforts to grow the business.

Outline TA Associates’ approach across markets and geographies.
Regardless of the market, we seek to back entrepreneurial or founder-led companies. We don’t want to run companies. When partnering with entrepreneurs, we recognize the business is their child. They’ve developed the company and have a vision that we don’t want to unsettle. We’re investing in profitable, high-growth companies, where the founders have proven out the value proposition of the business. We want to be “fit for purpose” partners. We don’t use a standardized playbook; we bring capabilities and resources to bear that can add value, while always recognizing the importance of a company’s culture. This is one of the reasons we’re agnostic about control. Unlike most traditional financial sponsors, we’re comfortable working with entrepreneurs from a genuine minority position. And I think there is a real skillset required to influence entrepreneurally-driven businesses without impacting the culture. This has had a synergistic effect. The executives we back introduce us to their networks and serve as references, which facilitates proprietary dealflow and we believe that gives us an edge.

How does TA Associates’ origination strategy play out in Europe?
One of the areas we’ve nurtured over TA’s 50-year history is our ability to originate our own transactions. Our philosophy is that you have to go out and make deals happen; they’re not going to occur on their own. We have a very structured program and a scaled platform in which our firm is organized by our target industries. We have 24 partners, each of whom has built up specializations in specific verticals. They’re supported by an incredibly strong team that works to identify and target sub-sectors that present unique opportunities for growth or disruption. We then have a very methodical outbound strategy to develop relationships with the entrepreneurs who are bringing a new vision to their respective industries.

To illustrate, we met with around 3,300 companies last year, while making fewer than 20 investments. While we have a very low hit rate, this deal-sourcing process provides us with a deep understanding around the types of companies we want to back and their end markets. And I can’t overstate the importance of this process in helping us to build constructive, enduring relationships. Frequent and continual dialogue generally puts us in position to engage with executives at the very onset of a deal, when a transaction is first being contemplated.

Our culture encourages everyone across the organization to focus on origination. At TA, you’re either working a live deal or hunting for the next one. We know our edge is not in participating in a full auction. A deal may come 10 years after our initial meeting or after multiple CEO successions – in fact, these were the circumstances that led to our acquisition of Russell Investments from London Stock Exchange Group two years ago. When you track a company for as long as we typically do, and commit to truly understanding a market, you recognize how a business has evolved over time. Such insight is far more valuable than any information you might glean from the pages of a massaged and cleansed pitch book.

If there has been one change in our approach in recent years, it has been an increased focus on finding platforms for additional M&A that can take advantage of our origination engine. We’ve already identified and systematically built relationships across the market, so we want to leverage our outbound strategy. Add-ons also drive multiple arbitrage, particularly when you’re transacting at attractive valuations. And the credit markets have been very accommodating to these synergistic deals. We completed more than 50 add-ons in 2017, which is a sizeable increase over prior years.

How does TA foster a culture of excellence?
There are a few very strong traits that run through our organization. One of the most important is that TA is a true meritocracy. It’s very genuine, but effected through a measured and impartial process. Individual performance at the firm is tracked over a very long period and quantifiable metrics eliminate the perception of politics. A related trait is that our meritocracy drives accountability. Everyone knows they’re responsible for their own success. The average tenure of our partners is about 15 years. You earn your partnership here, and that keeps us motivated. Another factor is that TA operates a single fund on a global basis. We’re all aligned around the same strategy, regardless of which geography we’re in or on which vertical we’re focused. That drives collaboration across the firm. But it all starts with an entrepreneurial culture in which each member of our staff has the latitude and leeway to achieve their own success within a well-defined investment strategy. This sustains a positive flywheel. We have a culture that motivates people to take advantage of the opportunity, and this approach resonates with the entrepreneurs we back.