In part two of our interview with Rich Tinervin, he discusses the issues shaping the private equity community and the importance of hands-on operational expertise.
Rich Tinervin is an advisor on several transactions in the private equity marketplace. He knows how to create, build, and operate major businesses and how to make deals happen. He has developed a structured approach and methodology for managing transactions to generate win-wins for both parties. He is also a great friend and advisor. Tinervin and I worked together at E.F. Hutton in the 1980s, introducing needs-based/consultative selling to the brokerage industry. We built an incredibly strong sales force to serve the investment needs of thousands of middle-income families across America.
With more than 30 years of experience serving the financial services and private equity community, Tinervin is recognized as a visionary and innovator in both the asset management and business process outsourcing industries.
JV: How does a private equity firm succeed in today’s environment, where there appears to be lots of money chasing potentially harder and more complex deals?
RT: It is a challenge. Every week, you hear about private equity firms raising hundreds of millions or even several billion dollars of capital for new investment funds. Many private equity firms are under a lot of pressure to quickly invest these funds into new portfolio opportunities. Some of the larger firms have responded by raising the stakes and writing billion-dollar checks. In contrast, just a few years ago, the investment sweet spot for these firms was typically in the $300- to $500-million range.
As the size of the initial investment has dramatically increased, some would argue that the risk profile has also increased. As a result, many firms are pursuing what the industry calls “club deals.” In these situations, three or more private equity firms collaborate and pool their resources and expertise to acquire or achieve a majority position in an extremely large company or organization. An example was the SunGard transaction where seven private equity firms joined forces in a $10-billion deal to take SunGard private.
JV: What is driving large public companies to entertain offers from private equity firms?
RT: Just a few years ago, no one would have thought that a market leader like SunGard and its shareholders would be receptive to a private equity investment. But today, market dynamics have changed. Public companies are experiencing intense pressure from the financial community to consistently report aggressive growth results, enhanced profitability on a quarterly basis, let alone deal with the increased financial regulatory reporting. So firms that do not meet or even exceed consensus financial projections can be punished severely in their stock price.
There is no margin for error. All of this is occurring in a competitive environment where consistent, top-line growth can be very difficult to achieve. Many senior executives and academics openly question whether this focus on short-term results is in the best interests of shareholders. Many executives see the transition to private ownership as a welcome opportunity to implement more long-term strategic initiatives that can foster innovation and build substantial value for their stakeholders.
JV: Has the risk profile also increased for private equity transactions in the middle market and the small business/venture capital marketplace?
RT: Valuations for both small and mid-size companies have also significantly increased as private equity firms have expanded their investment profile to target these firms. An example is the outsourcing industry where a typical $25- to $100-million, privately held firm receives several calls a month from investment bankers, private equity firms, and strategic buyers looking for tuck-in acquisitions or access to new technology. No surprise that valuations for many of these firms are very “rich.”
Some investors back away from these transactions because so much of the value depends on meeting stretch goals for operational improvements and profitable revenue growth. Determining the right risk/reward ratio is so difficult. As such, many private equity firms have expanded their leadership teams to include industry executives who have deep operational and market experience. There is a select group of senior executives in the private equity community who have the hands-on insights and breadth of experience to transform a financial transaction into a business transaction that generates extraordinary long-term value for its stakeholders.
JV: Have private equity firms been able to attract the right kind of operating executives to lead their portfolio companies?
RT: One of the greatest demands in outsourcing is finding people with great operating experience who can deliver a robust value proposition and build a partner-like relationship with their clients. It is the same thing in portfolio companies that private equity firms invest in. Despite the financial rewards and the results-oriented culture of the private equity community, the industry has difficulty finding senior executives with the right kind of operational experience to lead their portfolio companies.
For example, many of today’s operational executives have deep experience running important functional areas but do not have experience in directing a wide-range of business functions or units in a company. Private equity firms are looking for operational executives with a diversity of hands-on experience in almost all aspects of a company’s operations. It’s that kind of experience that enables an executive to bring holistic solutions that can be quickly implemented and adopted to the culture of the organization.
JV: Have Sarbanes-Oxley and the complex regulatory environment led companies to re-evaluate how they should structure and grow their businesses?
RT: Absolutely. The regulatory environment has more than challenged large, mid-size, and small companies. The media typically focuses on the financial impact of regulations on small and mid-size firms, but large companies are also struggling with the ongoing stream of new regulations and mandates. The day of the conglomerate with a string of disconnected business units has faded. It is too difficult to manage the wave of regulatory issues that limit their ability to generate synergies among their business units. Many companies, especially in financial services, have abandoned the ITT/supermarket type model and sold off non-core business units. But other large companies have turned to the private equity community as not only a viable source of capital formation but also capital restructuring without going through the break-up pains experienced by firms selling off business units/divisions.
JV: With the growth of the private equity and alternative investment communities, are we in the middle of a major transformation impacting the ownership structure of companies around the globe?
RT: I think the free-market system has to be allowed to live and breathe, succeed and fail on its own. I personally think private equity has played such an important role in capital formation that it is here to stay. But there are some people who are worried that the world of private equity and alternative investments is moving too fast. Some fear that the bubble will burst and that what we see as capital formation is simply financial re-engineering. Others point out that several private equity transactions have lacked strategic foundation and will begin to unravel as operations cross country borders and have to compete in the global marketplace. Other comments focus on the key questions: who’s really benefiting from the growth of the private equity community? Are the benefits skewed to the financial community, or is the economy in general benefiting from the explosion in capital formation? They are all important questions that need to be addressed and evaluated. But today, when it comes to private equity, I believe that the train has already left the station. Private equity is a global phenomenon driving capital formation and economic growth in a very efficient manner and will play a key role in the continuing growth of the global economy.
JV: You mention the role of private equity in driving economic growth across borders. Has globalization played a key role in shaping
RT: The large, multi-nationals have played on the global stage for decades. But there are a lot of mid-market companies and fast-growing start-ups that also recognize how the world has gotten smaller and the markets for their goods and services have no borders. But to a lot of smaller companies, expanding globally is still a difficult event. International expansion typically requires substantial additional capital for facilities and people. Cultural issues can become real barriers impeding growth. Finding the right partner to accelerate the global transition can also be difficult. In some cases, the clients of the mid-market company have already expanded globally, and some demand that their service providers match their geographic expansion on a country-by-country basis. This trend can be seen in the outsourcing marketplace where RFPs routinely ask service providers to comment on their capabilities to serve in multiple countries. This is a no win scenario for a service provider with limited geographic reach. In many cases, private equity firms can be the enablers to strategically support the international growth plans of successful mid-market firms—providing the capital, management expertise, and the local contacts to help ensure a smooth and orderly global expansion.
Rich R. Tinervin, managing director of Tinervin Advisors and an advisor to several private equity firms, can be reached at Tinervin Advisors, 4 Yacht Club Drive, Hilton Head, SC 29926; by phone at (843) 342-3985; and e-mail at RRPTinervin@aol.com.
This article was co-authored by Kerry Ann Vales. For more information she can be reached via email at KAVales@aol.com.