Rich Tinervin is an advisor on several transactions in the private-equity marketplace today. In the first of a two-part interview, he discusses the evolving role of the private-equity community and the process for selecting the right partner.
We last interviewed Rich Tinervin in the fall of 2003, soon after he had founded Tinervin Advisors. He spoke to us about his vision for financial services outsourcing and how HRO and other outsourced processes are fueling the growth in the retirement and financial services markets. Today, as managing director of Tinervin Advisors, Rich is a close advisor to several leading private-equity firms and regularly identifies and assesses investment opportunities in the asset management and outsourcing industries. He has become a key player in the private-equity community, helping transform our capital markets and directly impacting the outsourcing industry.
For decades, Rich has been in the forefront of outsourcing in financial services. He’s helped to create a new financial services industry that manages employee assets and their service delivery through innovative investment- based products and services widely enabled by outsourcing. Rich has shaped scores of alliances, partnerships, and acquisitions across the globe with his deep operational experience, from running start-ups to large businesses located domestically and globally.
JV: With such an interesting career and so many options once you left the corporate world in 2003, what led you to devote so much of your time to helping companies and participating in the growth of the private-equity phenomenon across the globe?
RT: I saw a tremendous growth in new capital formation, and I thought that there was a need for the kind of operating skills that I had acquired from running businesses over the years, especially in what I considered the four critical factors for building and sustaining a successful business: target market, client experience, risk mitigation, and the P&L. I also knew first hand the competitive and regulatory trends transforming the financial services industry and the growing role of outsourcing as a strategy to support market leadership. I saw this restructuring of the industry as an opportunity to create new partnerships and build new companies that could transform how financial services and non-core processes are delivered on a global basis.
JV: Let’s set a baseline. Can you define private equity versus venture capital? There appears to be some confusion on how these terms are discussed in the media.
RT: Venture capital firms typically fund companies in the early stages of development. These are new businesses just coming out of the gate with a value proposition frequently centered on new technology. These investments are naturally more speculative, but many of the leading technology firms were initially funded by the venture capital community. In contrast, private-equity firms seek to invest in more established businesses with an operating track record and sufficient size and credibility to support a unique value proposition with profitable growth. In many cases, a company will secure funding from a venture capital firm in its early stages. As the company grows, it will attract additional investments to support its growth from private-equity firms.
JV: It is obvious that the private-equity market has generated a lot of buzz. Are there any differences in how private-equity firms make investments?
RT: A good number of people that start private-equity firms come from either the investment banking or consulting industries. This can shape their investment philosophy and the types of firms they invest in. But overall, the differences in private-equity firms mirror what you see in the investment manager’s community. There is a proliferation of managers that focus on different market or industry segments and generally have a preferred company size and risk profile in which they like to invest.
JV: Where is the capital coming from to fund the growth of the private-equity market?
RT: Historically, businesses either turned to the banking community or Wall Street to fund their short-term and long-term capital needs. But during the past 20 years or so, institutions, and in particular pensions funds, began accumulating massive amounts of capital. At the same time, there was exceptional growth in the number of ultra-high, net-worth families. Both the institutions and the ultra-high, net-worth families sought out alternative investments to fuel capital formation and were willing to take a higher risk in order to generate a superior return. With a strong track record of performance, private-equity firms, as well as hedge funds, have successfully tapped both sources of capital and in the process created a third source of funding for the business community.
JV: What kinds of companies tend to seek private-equity capital?
RT: There are three kinds of organizations that typically look for private equity. One would be a closely held private company that has grown its business nicely and has a good reputation and a recurring revenue base, but it needs additional capital to grow the business. It may also need sophisticated help on the financial side and some operating help to grow the business side.
The second group would be conglomerate-owned companies that are no longer a strategic fit for the parent. Yet it could be a very successful business that needs additional resources. In these cases, we generally see a management buy-out funded by a private-equity firm. In many cases, the parent company endorses the buy-out because it is in the best interests of the company and its clients. It also represents a good opportunity for the people running the business and gives the parent company additional capital to invest in areas that support its strategic goals.
The third group is a public company with a market cap generally less that $300 million. However, for a variety of reasons, the company has not generated a good following in terms of shareholders or “the street.” In these situations, they may be better off having a private-equity owner recapitalize the business. This would give management time to regroup and retool the company and select the best strategy going forward, which might involve selling the company to a strategic buyer or going public again with a stronger financial base and value proposition.
JV: If you were an owner of a successful company, what criteria would you use to select a private-equity partner?
RT: It all depends on what you are trying to accomplish. When the private-equity market first emerged as a funding source, most owners welcomed the capital but resisted any involvement in the running of their business. Private-equity firms had a narrow role that just focused on financial requirements and not operating performance. But today, that narrow role for the private-equity firm is passé, and many firms now provide strategic, financial, and operational support. So the first decision criteria should be: Do I want to partner with a firm that will just provide capital or a firm that can help me build my business?
Then you should look at private-equity firms in terms of industry expertise, asking, “Do they really know my industry, and can they provide insights and contacts to propel my business?” Importantly, look at the cultural fit between your firm and the private-equity firm and envision the kind of working relationship that would ensure the maximum value of the relationship. Finally, be comfortable with the governance structure that the private-equity firm recommends.
JV: How does an owner of a $50 million company get over the emotional hurdle of bringing in a private-equity partner?
RT: First and foremost, it’s a cultural thing. He has to trust and be comfortable with the private-equity partners he will work with. Second, the person running the business is probably running non-stop and is exhausted. It’s pretty lonely when every night you are worrying about your company’s future, and it’s hard to do that on a solo basis. We see companies all the time coming into the market young and bold, but when they grow, the risks are greater and the competition increases. It is a real challenge to be a market leader and consistently preempt the market with new products or services. It can be overwhelming as you balance the needs of your firms, your employees, and your clients.
With every new decision adding another layer of complexity, some businesses start to lose momentum, and competitors begin to out flank you. It’s at that point that you should reach out to private-equity partners who can financially and operationally support your goal of regaining market momentum and taking your firm to the next level.
JV: With the changes in the perceived value of what a private-equity firm can deliver, how are private-equity firms restructuring themselves to meet those needs?
RT: One of the challenges that private-equity firms have today is that institutional and high-net-worth investors are very intrigued by alternative investments such as hedge funds, real estate, commodities/raw materials, and private-equity funds. There is an enormous pool of money available to the private-equity community, but finding the right investment is becoming increasingly difficult. To date, the performance of private-equity firms has been good, yet some question whether they can continue to generate such high returns. Some firms are looking internally and evaluating how they can better run their own operations as a business.
Some have grown so large that they are now assessing whether they should outsource their own non-core services or move some of their research and analytical resources offshore. Other firms are managing risk by partnering with other private-equity firms in what the industry calls “club” deals. Overall, they are becoming more thoughtful about how they run their business. But the core challenge that all private-equity firms have is to find the right kind of portfolio companies to invest in. This has driven firms to expand their research groups and add advisors with deep industry experience to their investment teams.
In Part Two, Rich Tinervin will discuss the increasing role of the private-equity community in restructuring and transforming the outsourcing industry. For more information,(843) 342-3985 and RRPTinervin@aol.com.