Devin Green, chief operating officer of The Capital Corporation, based in Greenville, South Carolina, contributes 30 years of business experience, including investment banking, private equity, change-of-control lender, and C-level operations.
These complementary backgrounds allow him to appreciate each perspective involved in a given transaction, including sellers, strategic buyers, financial buyers, lenders, and business owners.
Green began his career at Bank of America Securities, where he closed over 30 change-of-control and financing transactions. After several years in the investment bank, he advanced to Bank of America's $2 billion private equity group, Bank of America Capital Investors. There he served as a private equity buyer, participating in a series of mezzanine and equity investments across a variety of industries.
Interested in learning firsthand how to start and operate a company, Green then left corporate America and launched his own wireless technology company.
As CEO and chairman of that company, he successfully raised eight figures of growth capital, secured recurring revenue contracts valued in eight figures, and established international operations, ultimately ranking in the "Top 40 under 40" in the U.S. by U.S. Venture Magazine.
He has worked with both product and service companies in a wide variety of industries, including e-commerce, aerospace and defense, energy, value-add distribution, staffing, software, telecom, datacom, manufacturing, retail, professional services, health care services, and others.
Green graduated magna cum laude from Vanderbilt University with a double major in economics as well as human and organizational development.
In an interview with Integrated Media Publishing Editor David Dykes, he discussed capital raising and investment strategies for growth, and risk-management solutions to enhance financial stability.
Here are excerpts from the conversation.
Q. What are the trends you're seeing in PE activity here?
Green: Private equity is active in South Carolina. This state is a business-friendly state, for a variety of reasons, and it is attracting attention from (the) universe of the private equity buyers.
I'm not seeing a disruption or a dip in private equity investing. In some ways, we're seeing even more aggressiveness from PEGs (Private Equity Groups). If there has been anything noteworthy on the setback front, it would be the recent tariffs. The tariffs created a lot of uncertainty and slowed down some of the PEGs’ capital deployment cycle as well as their exits.
At a macro level, uncertainty is not a good thing for M&A. And when you have some macro-level event like a series of tariffs ripple through various supply chains and industries, it can cause private equity buyers to temporarily pause on investing, and it can also slow private equity funds from selling their portfolio companies, since they would not be able to command the values and deal structures what they want during uncertain times. So, tariffs temporarily pushed things to the right on the typical PEG timeline, due to the need for the tariff ripples to work their way through the value chains of different industries. However, those tariff ripples have worked their way through the value chains and the PEG activity has been back in full swing.
Q. How important do you think PE activity is to South Carolina's investment pipeline? The reports I'm reading think that the pipelines are pointing towards stronger growth. Is that your reading?
Green: We do. It's a major catalyst and contributor to South Carolina. Last year there were over 60 private equity transactions with South Carolina companies, and the prior couple years, South Carolina has been averaging 50+ each year. South Carolina compares well to a lot of other states, including industries like manufacturing and others. So I think private equity is aware and becoming more and more aware of South Carolina and its differentials in certain sectors, manufacturing being one.
Q. What about the investment shifts? Is funding now concentrating in later-stage middle-market companies?
Green: Private equity funds form their own investment theses on what size companies, what stage companies, and that follow through on those theses. If you're asking, are private equity companies or private equity funds moving up and down the spectrum of size deals and (types of) companies they work with, that's always evolving some. Let’s say they raise a $500 million fund, and they form an investment thesis. They're not changing that thesis for the next handful years, unless they discover something that breaks that investment thesis. They accepted their limited partners’ money, they're going to invest it. They're going to stick with that. So private equity does not change their theses year to year. It's a five- to seven-year cycle for these guys to materially change where they're targeting after they accept their investors’ money.
Q. What about, is there an average check size you can point to in the Southeast?
Green: It just depends on the fund. … The sandbox our firm is playing in, just anecdotally in case that's helpful, is we're working on companies with $25 million to $150 million enterprise values. Enterprise values are the purchase prices the private equity funds close on. And those private equity guys are often investing somewhere around 40 percent, give or take, of that value in the form of their own equity.
Q. Help me from a layman's perspective draw in the comparison of the connection between private equity and venture capital activity.
Green: Good question. So venture capital and private equity are related, but they are cousins, not siblings. First, bifurcate the ecosystem of companies into two groups. One group consists of early stage startup or early stage pre-revenue, or just barely post-revenue type companies, and that's “venture capital.” So venture capital invests in earlier stage companies. It's higher risk for that venture capital fund because the company's not as established as much as it could be, but it's higher reward. Risk is usually commensurate with return, so venture capital offers more upside potential for venture capital investors. Alternatively, private equity is not the early-stage venture capital stuff. It's more established companies that are usually cash-flow positive. They're profitable, and they're later in their development cycle of the business cycle and, therefore, are lower risk for private equity investors, but also offer less upside for those private equity investors.
Q. What am I not asking you about that you think is important for South Carolinians to understand about private equity?
Green: A couple things. Some of your readers are going to read this and they’re going to — there's a stigma associated with private equity sometimes — say they've heard stories about a private equity company buying a business and breaking that business up into pieces and selling it. That's something I hear from business owners more often than I would anticipate. There's a related stigma that private equity will buy a company and often run it into the ground, and not purposely, but fumble the ball. And those two things I often hear from business owners, and those two things can happen, but it's rare and not the norm. I don't know how to put a quant on it, but it may be 10 percent or so of the time. That is not the core competency of private equity and private equity should not be labeled with a negative connotation to it.
Q. My basic understanding is smart money is hunting for cash-flow positive industrial innovators in the middle market rather than unicorn valuations.
Green: Well, yeah, that's right.
I'm going to use an example. A PEG raises $500 million. They get that money from what's called limited partners, or “LPs.” Those LPs are the private equity fund’s investors. You also have “GPs,” or general partners, which are the private equity professionals who are actually diligencing the companies and making the investment decisions. They're the guys essentially doing the work with their LPs' capital. But of the $500 million raised, the LPs are often universities, pension funds, wealthy families, basically people or entities with substantial capital that want to target a higher return than what they can get in the stock market.
Many of these investors, who are very smart people, have concluded that targeting a number of lower middle market companies that offer differential value propositions to their respective industries is a more calculated choice than hunting for the elusive unicorn.
Q. Is there a minimum investment in most of these deals?
Green: There's always a minimum, and it just depends on the specific private equity fund. But they raise $500 million with a group of LPs, and those LPs have an expectation that this is going to be an illiquid investment for a certain amount of time. It's not like the stock market where you put money in and then can pull it out at-will. With private equity, you park this money and plan on waiting seven or so years before you recognize your returns by getting your money back plus any return those private equity investments generated.
Now, the private equity fund, depending upon the fund, will use an incredible amount of analysis, network, and experience to target certain industries that have various trends and can meet certain qualitative and quantitative standards, and that will all be part of the plan that these investors sign up for. And the private equity company will disclose to the investors what kind of return they're targeting. They might say we're going to target 2.5 times your money in five to seven years. So if you put in a dollar, our goal is to get you $2.50 in five to seven years from now. So, more than doubling your money in that timeframe, if it happens, offers a higher average annual return than the more traditional investment options, such as public stocks and bonds.
That is an example of private equity. To go backwards, venture capital might say, "give us a dollar and we're going to try to get you four to five times your money in that same time frame." It's higher return, but it's a higher risk. You have a greater chance of losing all of it.
That's the private equity model. They buy companies, existing companies. They try to grow them. They'll sit on the boards of them once they buy them. They'll bring in relationships to try to help accelerate the growth and mitigate execution risk, or they'll contribute experience and best practices on how to make it run smoother and more profitably. They'll help sometimes bring in team members to augment the team with expertise and networks. They will target, negotiate, and fund what is called “bolt-on” acquisitions, which often allows that company to augment their product or service mix and/or geography and bench strength beyond what they already had. So they take steps to try to enhance what the company has already been proven successful to do, but they'll try to make it grow faster and smarter. It's not to tear it down … and it's not to run it into the ground. Now, that happens, but the vast majority of the time, these private equity guys are very successful and the entrepreneurs who partner with these private equity funds share in that success. So that's what they'll do. Now, the sellers of the company to the private equity guys, sometimes — let's talk about that — sometimes the sellers will sell their entire company and head off to the Bahamas. So that's scenario A. But more often than not, the private equity guys are not operators. They don't know how to run a business like these owners do.
So the private equity funds will say, we'll buy 80 percent of your business, we'll pay you cash for 80 percent, but the other 20 percent we want you to keep in stock and roll forward with us.
So the seller maintains skin in the game. Their primary goal on doing that, is to align their economic interests with the owner and operator. And to do so in such a way that the owner maintains enough skin in the game where they're not just going to walk out one day. Using the prior example we talked about, if they can sit there and 2.5 times their money on that 20 percent ownership, then everybody's high-fiving and everybody's happy. So that's the private equity model — buy a business, bet on the existing ownership, motivate them to stick around by giving them enough equity in the business going forward that they want to help win together, make it easier to win, and in doing that, give the seller enough liquidity they don't have to ever worry about money for their family again.
Q. Can you give me an example — without naming a company, let's just do hypotheticals, but the realistic, I guess, valuations and returns of one that just exceeded your expectations, that just blew through the roof, and one that didn't work out quite as well and maybe blew through the basement?
Green: Yep, we ran a process and sold a business for $70 million. The sellers kept 20 percent of their business. So they received $55 million in cash up front. They kept $15 million in stock, and within three years, that $15 million was worth $80 million. They did better on the 20 percent than they did on the initial 80 percent up front.
Q. And then what would be — and I guess let me just ask you this generally — what would be The Capital Corporation's payout for that?
Green: We only earn a fee on the initial transaction. We typically don't earn a fee on the double dip.
Q. Is there one that maybe was hugely disappointing?
Green: I don't know if we've had a hugely disappointing one. We've had one where the private equity fund got involved. They bought it — I think it was for $40-something million. The seller walked away with $32 million in cash, rolled $8 million, maybe $10 million into stock. The company's doing fine. It's just kind of flatlined. It hasn't grown, but it hasn’t contracted. And so the equity value has been preserved, but it hasn't done what the owner and the private equity fund counted on. That one is an example where the private equity fund’s investment thesis did not work, but we haven't seen one just combust or break apart. I haven't seen that in the almost 20 years I've been doing this with The Capital Corporation.
… We're in the process of selling one (company) right now. We have 230 private equity funds we're going out to for just one company. We're running an auction process, and so they're all bidding on this one company. And that 230 doesn't even include strategic buyers. We have another 100 — no, on this one, 83 strategics we're going to on top of the 200+ private equity funds. So we're going to well over 300 buyers, including international buyers, for this one company. … We're talking to the private equity guys every single day — what they're looking for, what are their investment criteria, what are their scar-tissue issues, what are the value drivers they want, how do they structure the legal documents, and so on.
… I think of qualitative and quantitative. Qualitative represents things like what are the barriers to entry, what is the management experience, how strong is the company’s brand, is the company a product or service company or are they more of a solutions-provider, where do they add value in the value chain, and so on? Do you have multi-year contracts or not? Do they have any intellectual property? What’s the sales cycle time look like and what degree of density does the competitive landscape have?
And then the quants are things like, what’s the growth rate, profit margins, lifetime value per customer, recurring revenue, and things like that? What’s the acquisition cost per customer? How does that compare to the lifetime value per customer? What kind of free cash flow conversion do you have on EBITDA? Those are all the nerdy quants that we can use to quickly assess the business and the market receptivity.
And if it’s not obvious everyone’s going to love it, that’s where it gets fun, because we segment out the buyer universe knowing a lot of what these buyers want, and some of them, it’ll fit. And that’s part of the process — separating the pretenders from the contenders and then driving it home.
Comments
No comments on this item Please log in to comment by clicking here