The Rise of the Operating Partner
Today, operating partners at private equity firms are garnering more attention than CEOs or managing directors. With high valuations and little room for financial finagling in portfolio companies, PE firms are relying on operations experts to add value by increasing the efficiency of day-to-day operations and decreasing the costs of doing business.
Graham Partners’ Dan Soroka provides a good example. With two decades of strong operational experience in the building products industry under his belt, the senior operating partner helps Graham’s portfolio companies shave millions of dollars off the costs of raw materials, leading to profitable exits.
That’s the kind of operational expertise that private equity firms are bringing to transactions today. Here’s a look at five operations experts who are making a difference to PE firms and their portfolio companies.
How does an 80 percent increase in sales over four years sound? Baird Capital Partners exited its investment in Digi-Star Holdings in April 2015 to strategic acquirer Livermore, California-based Topcon Positioning Group, but not before growing the company substantially. Baird Capital bought the company in 2011 and focused on growth. Baird wanted Digi-Star, a provider of advanced measuring solutions for optimizing agricultural performance, to expand its footprint and invest in lean manufacturing practices.
“When we bought the company, the management team thought its manufacturing space was maxed out. They were looking for more space,” says Roberto Ferranti, a principal in Baird Capital’s portfolio operations. “We convinced them not to do that, but rather to invest in best practices and drive efficiencies to allow them to manufacture in their existing space.”
The management at Fort Atkinson, Wisconsin-based Digi-Star listened. Rather than spending on new space, the company invested in lean manufacturing initiatives, which drove better on-time deliveries and increased productivity. The plan was a success. Digi-Star was able to hit all the high metrics. Output per full-time employee increased by about 25 percent, and overall revenue per labor-hour increased by nearly 30 percent. This was completed without increasing the company’s manufacturing footprint.
“We introduced them to lean manufacturing. We went to much smaller batch-size production and reduced lead times. We actually increased overall manufacturing volume over three years using the same space,” says Ferranti. As part of the transformation process, Digi-Star performed about 30 so-called Kaizen events, originally a Japanese business practice that involves looking to improve every aspect of a company continuously.
“With Kaizen, you analyze the inefficiencies in the process and eliminate and reduce them to rebuild the process more efficiently,” says Ferranti. “All of the steps and processes that aren’t value-add are eliminated or meaningfully reduced.”
After the Kaizen process, Digi-Star was left with better output, along with less input of time and materials. “We increased efficiency by 19 percent, and there was a ripple effect across the plant. Time and quality in production improved across the board,” Ferranti says. On-time delivery rates rose to 95 percent at the time of the Baird’s exit from the investment, up from 75 percent when the firm purchased the company.
In addition to creating efficiencies, Digi-Star completed an add-on acquisition during Baird’s ownership. In 2012, the company purchased RDS Technology, a U.K.-based leader in monitoring, measuring and control systems for the agricultural machinery industry. The company also provides on-board weighing equipment to industrial markets, such as the quarrying, aggregate and recycling sectors. This allowed the company to scale and enter a new geography where it had been under-represented. Baird Capital also invested in human capital, replacing both the CEO and chief financial officer, and upgrading the leadership in human resources and engineering departments.
At the time of sale in April, Baird had increased the company’s gross internal rate of return by about 45 percent, while increasing revenue by 31 percent and increasing output per square foot in the manufacturing plant by 27 percent.
the Riverside Co.
In 2010, the Riverside Co. bought Employment Law Training, a company that produces and sells online training services to multinational corporations for work-related issues, including whistleblowing and other issues in business ethics. At the time of the purchase, Riverside planned on both inorganic and organic growth.
The sector was rife with opportunities, thanks to “heightened sensitivity to good corporate citizenship both nationally and internationally,” says Jeff Goodman, a senior operating partner with the Riverside Co. “Some companies hired attorneys to come in and do the training; others tried to create the training themselves using internal resources. Employment Law Training had room for growth.”
Riverside looked for ways to accelerate ELT’s expansion. Goodman and the Riverside team started by adding much more in sales and marketing resources for the company. It also added a chief marketing officer, chief financial officer and a head of product to accelerate the pace of adding new products and services. With the substantial investment in both the back and front offices, the business experienced double-digit growth in just a short time.
In addition to revamping the company, Riverside completed three add-on acquisitions during its ownership. The first was Global Compliance Services, a company that provided outsourced whistleblower hotline services, case management software, online training and ethics consulting. The second was EthicsPoint, another provider of outsourced whistleblower services and case management software. The two companies competed against each other in the marketplace.
“We were in conversations with EthicsPoint while we were still doing due diligence with GCS,” Goodman says. “We continued to negotiate, but it was tricky. We had to exclude GCS from hearing sensitive information about EthicsPoint and vice versa.”
Riverside rounded out the add-ons with PolicyTech, a provider of policy and procedure management software. PolicyTech provided an opportunity for ELT to expand into Europe. The team also concentrated on building ELT’s international capabilities. “The company did have international clients, and we challenged ELT to come up with what made sense to service them,” says Goodman. “They came to us with a good plan that drove growth.” At the time of Riverside’s exit late in 2014, the company had 23 employees in London.
Around the same time, the leaders of the company established a new brand for the company: Navex Global. “We wanted to get rid of the ‘us’ versus ‘them’ feeling. We banned the use of legacy language. We wanted the employees to feel like one team, so a new name was in order, and we adopted Navex,” says Goodman.
Riverside brought in an outside firm to help with the massive integration process that was needed. “We now had three CEOs, CFOs, chief technology officers and heads of sales. We needed to figure out how to best leverage the talent and make the best selections between the human capital and the technology platforms,” says Goodman.
One CEO was chosen, and the remaining CEOs were retained within the business, one as chief strategy officer, one in product management, and one as a corporate director. The new senior management team methodically communicated the plans through the integration process.
“As much as possible we didn’t want to leave anyone uncertain,” says Goodman. During the integration, the team created a new uniform employee compensation plan and formed new sales territories. As soon as the firm realized where there would be overlap and headcount reductions, they communicated it to employees. “We wanted employees to have clarity and we tried to err on the side of being generous with outplacement services and stay bonuses,” says Goodman.
Within 90 days of the acquisitions Riverside had communicated nearly every change that would be made going forward. “You want to get through these difficult decisions as fast as possible and make the story about growth and put the focus on the customer,” says Goodman. During Riverside’s ownership period, Ebitda grew more than 800 percent.
Excellere Partners demonstrates it doesn’t take long to make a lasting impression. In 2012, Denver-based Excellere formed PhyMed to acquire Anesthesia Medical Group in Nashville, the largest provider of anesthesia services to health care systems, ambulatory surgery centers and independent offices in Tennessee. Subsequently, PhyMed expanded into Pennsylvania and Kentucky.
Within 30 months, Excellere, in partnership with the PhyMed management team, increased topline revenue by about 50 percent, more than doubled the company’s Ebitda and sold its partnership interest in PhyMed to Ontario Teachers’ Pension Plan. The company represented more than 350 clinicians in both anesthesia and pain management at the time of Excellere’s exit.
John Lanier, partner in charge of strategy and operations at Excellere, says he felt supplemental leadership skills would help PhyMed really soar. “In PhyMed’s case, we added eight leadership positions at the company, which included orderly CEO succession planning, a chief financial officer, controller, chief people officer, director of human resources, chief business development officer, chief technology officer and director of operations,” says Lanier.
The Excellere team also focused on finding the right technology products, which meant using certified electronic health record technology to improve quality, safety, and efficiency, and to reduce health disparities. “There were vendors out there with solutions we needed in order to become more efficient in our operations and better track clinical outcomes and patient data. We found a mobile solution to help the physicians track and chart patients’ care better,” says Lanier. “It made our clinicians’ work much easier.”
PhyMed also closed two add-on acquisitions, which expanded the company’s footprint. It partnered with four affiliated companies: Anesthesia Services of Middle Tennessee PLLC, Pain Management of Middle Tennessee PLLC, Anesthesia Billing Management PLLC, and Anesthesia Business Management PLLC, which solidified the company’s leadership position in Tennessee. Additionally, PhyMed partnered with two affiliated and Pennsylvania-based companies: Lebannon Anesthesia Associates Ltd. and Lebannon Pain Management Associates Inc.
Excellere enabled PhyMed’s transformation through its value creation roadmap, a byproduct of collaborative strategic planning with PhyMed’s leadership. One of the takeaways of that exercise was to prioritize technology deliverables.
“I took the lead on the process mapping that helped the PhyMed team with vendor choices,” says Lanier. “The IT solutions helped improve operations and scale the company. It was a big part of the value creation.”
We were introduced to Dave more than five years ago, and we agreed to jointly search for a company that Wynnchurch would acquire and Dave would run,” says Michael Teplitsky, a managing director of Chicago PE firm Wynnnchurch Capital, referring to David McConnaughey. The industrial executive’s background includes working at Federal Signal Corp. (NYSE: FSS), Maytag Borg Warner Automotive (NYSE: BWA) and Nippon Denso, now called Denso Corp., a spin-off of Toyota Motors (NYSE: TM).
Wynnchurch and McConnaughey looked at more than 100 companies before finding Northstar Aerospace, which was an underperforming aerospace and defense supplier. Headquartered in the Chicago suburb of Bedford Park, Illinois, Northstar manufactures parts for military and commercial aircrafts. It makes gears for Apache and Chinook helicopters manufactured by Boeing. In 2012, Wynnchurch acquired Northstar in a bankruptcy hearing.
Northstar had its issues. It was small, public, operationally unfocused, capital-constrained, riddled with environmental liabilities. It lacked appropriate management, and its board was unprepared to deal with the key problems. The first change Wynnchurch made was installing McConnaughey as the CEO.
“We find that in distressed and turnaround investments, more than 50 percent of the time you need to bring in an outside CEO. We knew Dave was capable,” says Teplitsky. “In general, execution-oriented executives with Fortune 500 experience make great operating partners.”
In addition to adding McConnaughey, Wynnchurch replaced 60 percent of executive leadership within the first six months of ownership and negotiated new employee collective bargaining agreements. McConnaughey and team negotiated with the union to put a new agreement in place that created more flexibility. This was an important step in allowing Northstar’s management to make investments in human capital— bringing in new executive resources to the company and cross-training employees in various skills. For example, Northstar recruited a new vice president of continuous improvement to build Kaizen and lean manufacturing capabilities at each Northstar facility. Then, some of the manufacturing floors were realigned, which led to set-up time reduction. As a result of these initiatives, output increased by almost 50 percent across the company.
McConnaughey and Wynnchurch also focused on quality, delivery and customer needs. Northstar had four facilities and the manufacturing system was disjointed. The company had big orders, wasn’t shipping on time and its unit costs were too high. McConnaughey and his team deployed a new company-wide metric reporting tool as part of its Toyota Production System implementation. This allowed them to launch lean manufacturing initiatives to improve available capacity and reduce high scrap expenses.
Northstar also helped one of its critical suppliers that was having operational issues deploy the Toyota Production System. As a result, Northstar was able to reduce scrap by 30 percent to 50 percent on key helicopter platforms.
With all the changes, both delivery rates and unit volume per week increased by 100 percent in the first year of ownership. The company has about $200 million in revenue today and 1,000 employees. Wynnchurch is still an owner of the company.
Graham Partners senior operating partner Dan Soroka has more than 20 years of experience in manufacturing management, having worked at Ingersoll Rand Company (NYSE: IR), General Electric (NYSE: GE) and Delta Airlines (NYSE: DAL). At the end of 2011, when Graham Partners acquired Mitten Inc., a Canadian-based manufacturer and distributor of vinyl siding and accessories, Soroka was the firm’s go-to person. Upon reviewing the company’s financials, Soroka felt strongly that the target was overpaying by millions of dollars for raw materials, including the resin needed to produce siding. “It was such a large number from a savings opportunity that the team didn’t really believe it. Once Graham bought the company I was challenged to make it a reality,” says Soroka.
Soroka, along with Mitten’s CEO, quickly set up a meeting with Mitten’s key resin supplier. “Before we even sat down, they offered a reduction so we knew there was more savings to be had,” says Soroka. After that initial meeting, Soroka and the CEO mapped out what they thought the savings should be based on prices in the various geographic areas where Mitten was active. They came up with a number, and the supplier said it would think about a further reduction.
“A week later, the supplier accepted the reduction without countering so we knew there were more savings to be had,” says Soroka. Over the next six months, Soroka and the CEO were able to improve the company’s savings even further, and Mitten was able reduce costs for its own customers as well.
While under Graham’s ownership, Mitten embraced lean manufacturing projects, one of which resulted in reducing the time to change siding molds from four hours to one. Other developments included recruiting a seasoned CEO, hiring a new CFO and creating several new operational roles. Mitten also expanded sales in the U.S. and Canada, which had been flat.
Within 20 months of buying the company, Graham sold Mitten to Ply Gem Industries, Inc., a Cary, North Carolina-based building products manufacturer and distributor. Mitten increased Ebitda by more than 65 percent during Graham’s hold period. Upon selling Mitten, Graham garnered a 90 percent IRR and a 3-times return, providing a vivid example of the value of operational expertise.