Sandra Swanson | July 13th, 2015
The article below appears in the forthcoming July/August issue of Middle Market Growth. Access the full issue online starting July 15, or visit the archive.
Sometimes sharing can be good business.
As private equity firms maximize the value of investments, they look for ways to help portfolio companies operate more effectively and efficiently. To that end, some firms encourage portfolio companies to help each other overcome business challenges, a process that entails creating ample opportunities to discuss company problems and solutions. When firms make best-practice sharing a high priority, they can spur portfolio company improvement in areas such as human resources, technology, employee productivity and workplace culture.
“We’re constantly looking at ways that we can pollinate between our portfolio companies,” says Peggy Roberts, COO of the Riverside Capital Appreciation Fund for The Riverside Company, a private equity fund focused on the middle market. “If our operating team is working with one company where they see something good happening, they are little bees that take it from one flower to another and help make sure it gets deployed into the next company.”
“We’re constantly looking at ways that we can pollinate between our portfolio companies.” – Peggy Roberts, COO, Riverside Capital Appreciation Fund
One of the most effective ways Riverside spreads best practices is by encouraging direct communication between portfolio companies. “The richness of the learning comes from the peers,” says Roberts, who notes the firm spends a lot of time and money organizing portfolio company events.
An example is its annual human resources forum, where representatives from the companies exchange lessons learned on issues such as employee retention and compensation. That sharing is particularly useful, considering human resources departments are often under-resourced in middle-market companies. At an HR forum a few years ago, one Riverside portfolio company discussed the hiring portal it had built to streamline employee applications and screening. That gave the other companies some ideas for building their own effective hiring portal, Roberts says.
Another educational opportunity is Riverside’s “mini-MBA”—an annual executive management event held at the University of Michigan for portfolio company CEOs, CFOs and/or sales leaders. Moderated by university professors, the event highlights two portfolio companies as case studies. “The case-study portfolio company executives have the benefit of a group of 60 people talking about their company and the challenges, and giving them advice,” says Roberts, whose fund is based in Cleveland. “But it’s also letting the other CEOs think, ‘Wow, I have some of the same challenges—maybe I can take this advice back home too.’”
During the past five years, Sun Capital Partners in Boca Raton, Florida, has persuaded all of its portfolio companies to focus on improving workplace culture. The idea originated when one of Sun Capital’s companies used a culture survey (designed by Denison Consulting) and then made changes to address weaknesses. The firm’s CEO saw a connection between better workplace culture and a boost in profitability—and shared that with Sun Capital’s leadership. “It really resonated with us,” says Scott Edwards, managing director. “We always felt that a great company culture would lead to great results.” He adds: “Our view is, if you can measure it, you can improve it.”
The survey covers areas such as the company’s adaptability and employees’ understanding of the corporate mission. When companies identify their cultural weak spots, Sun Capital can help steer them toward relevant best practices at other portfolio companies. “If a company is struggling with adaptability, for example, and another company is doing well—we can put them in direct contact,” Edwards says.
All portfolio companies take the survey about once a year to gauge their progress and identify problems. For most of the companies, the survey wasn’t a tough sell, Edwards says—when they saw the data showing how their peers had benefited, they adopted it. “But then you have other companies that are more skeptical,” he says. Those skeptics changed their minds after Sun Capital took the culture survey itself and openly shared the results with its portfolio companies. “If we are prepared to do it, and other portfolio companies are prepared to do it, it’s hard to resist that,” Edwards says. One concern he heard was that the survey might take a lot of time. “And we could say, ‘Well, we’re busy and we did it.’”
When it comes to technology-related best practices, middle-market companies often struggle to keep up. “Every company we see—and certainly those we invest in—knows it would like to be doing more with software and tech,” says Ryan Craig, a partner at Bertram Capital in San Mateo, California. But it’s tough for companies to retain tech workers when they are in high demand—and equally challenging to predict whether the return on investment would make hiring tech consultants worthwhile. That leads to postponed investments in potentially game-changing technology assets.
“Every company we see—and certainly those we invest in—knows it would like to be doing more with software and tech.” – Ryan Craig, Partner, Bertram Capital
In 2010, Bertram created a solution: Bertram Labs, a team that now includes 25 software engineers, designers and digital marketing pros who work solely for Bertram’s portfolio companies. The group has a vested stake in the performance of the fund, which means it’s aligned with Bertram’s interests. Says Craig: “Usually when you have a vendor, their interest is to create a project that goes on forever.”
When spreading best practices, it’s a mistake to dictate, he says, noting that Bertram’s investment team is dominated by entrepreneurs who understand what it’s like on the other side of the table. “It doesn’t work if explicit contentiousness is at play,” he says. “We have to be humble, and we have to be willing to put ego aside.”
One best practice came from Supra, a footwear brand operated by one of Bertram’s companies, One Distribution. Supra didn’t have an e-commerce site when Bertram invested in the business, but it did blog about new limited-edition shoe designs every week. Tens of thousands of customers checked those weekly posts, even though the shoes couldn’t be purchased online—or in some cases, at all. Craig and his Bertram colleagues soon observed that content—in this case, blog posts and photos—could be an incredibly valuable asset. “It lets customers find you, instead of you having to go find customers,” he says, adding that most companies spend 10 percent to 20 percent of revenue on marketing. “If we can use content as a substitute for the marketing budget, we can be a whole lot more profitable.”