Pat Niekamp: Private equity firms raise money in order to invest it and earn a return. They raise their funds from limited partnerships who are often institutional investors like pension funds, university endowments, or wealthy individuals. The money that’s been raised by a private equity firm is then invested, and those investments are typically buying all or a share of a company and then funding the growth of that company. Growth might come from buying new technology to expand and improve efficiency, add working capital, or even to acquire another company.
Peter Huff is a founder and managing member of the private equity firm Blue Sage Capital. Blue Sage is based in Austin and they have raised two investment funds totaling $200 million and have been operating since 2003. Huff has the investing philosophy of a generalist versus the private equity industrial model of specialization.
Peter Huff: We really need to focus on areas where other people aren’t. So, you know, in order for us to be successful we have to thrive in perfect information. So if there’s perfect information out there there’s a lot more private equity out there than there are good deals. They will find it and they will pay out for it and push returns down so that we generally stay close to Texas. We’ve stayed close to family owned businesses as opposed to institutional ownership. You have to stay close to companies that are in niche industries.
Pat Niekamp: Huff investments have included the largest tree transplanter in the world and the biggest mannequin company in North America. Since beginning his career in private equity nearly 20 years ago. Huff has seen a transition inside the private equity industry in the types of transactions being done and the valuations of the companies. While today’s sweet spot for private equity investors is in companies with three to $10 million of EBITDA, companies as low as $1 million of EBITDA are being looked at today.
Peter Huff: You’re definitely seeing that demographic shift where they don’t have anybody to take over in the past along the traditional way which would be to son or daughter or other family member to run the business. You’re also seeing just a wider variety of companies be suitable for private equity or M&A deals. You know in the past if you had a company that made cold storage units, you know, that wouldn’t be a private equity deal. That would be something else. And now you have the private equity real estate fund is this private equity funds for infrastructure. There’s private equity funds for everything.
Pat Niekamp: Blue Sage does like to look at niche and specialty manufacturers. The types of companies that make widgets with high tolerances for very specific products.
Peter Huff: Our autoclaves company would be a good example they make steam sterilizer for laboratories. Customer list this year, we just signed a deal with Yale, Stanford, Bayer… We’ve got some coming next month we’re selling to Texas.
Pat Niekamp: Peter Huff earned his undergraduate degree from Southern Methodist University, graduating at the top of his class. He earned his MBA from Stanford. His most valuable take away?
Peter Huff: People matter the most. You know a lot more than math or science or anything like that. In our business in particular. But I think in every business people matter the most. You’re surrounded at business school by an exceptional people. And you kind of want to think like Hollywood movies portray. Hey there’s a one or two people there’s one woman here and there’s one man there that are just so off the charts brilliant that it’s amazing. And it’s not quite true. I mean I haven’t I haven’t found that person yet. But if people work together then I think that’s where you get the real brilliance. I’m a firm believer that groups make much better decisions than individuals. So I can have five relatively average people and I think they’re going to make a better decision on a series of things than Einstein would by himself.
Pat Niekamp: So when it comes to building strong management teams to operate their portfolio companies, Huff has learned that team is the most important part of that phrase. Blue Sage works to build companies with complimentary skill sets and complimentary personalities.
Peter Huff: We believe in that team aspect. You think about it, like a football team, if you’ve got an entire team full of Super Bowl winning quarterbacks and you put them out there. They’re going to lose every game. They couldn’t win a single game because there’s no specialization. You don’t have an offensive line. There are no receivers, no kickers. You’re going to be you’re going to be a horrible team.
Pat Niekamp: Growing their investments for a future sale several years later is the end game for the private equity industry. To get there, Blue Sage often needs to add management accountability to their family owned business investments. A lot of family owned businesses don’t use measurement dashboards or institutional management methods. To stay on top of each business, Blue Sage has invested in, Huff has a standing phone call or face to face meeting every week with his portfolio company leaders.
Peter Huff: And we will go through whatever the key metrics are for that business. In one industry can be working capital in another one it could be, you know, three months forward bookings. It just really depends on the industry but we do we ask ourselves why do we make the investment what are the what are the five to ten most important things that we need to understand in order to make this investment. What do we need to track?
Pat Niekamp: For family members financially restructuring their company by bringing in a private equity investor might be challenging both emotionally and organizationally. Huff doesn’t see that very often.
Peter Huff: Generally the C-suite and the family that retains ownership want to try something new. You know they’ve taken some chips off the table and they’re looking to grow the business. And so we are pretty myopically focused on growing our businesses. And if they can grow that business with us risking our capital and them only risking 30 percent of their capital they look at us like a win-win. They can partner with us we’ll be financing a lot of the growth either through internally generated cash and putting more money in. They typically don’t put more money in. They can grow it on our nickel in and benefit from what we jointly sell.
Pat Niekamp: What advice would Huff offer to anyone thinking it might be time to sell their business? His first piece of advice is to find a trusted advisor and try not to make a deal on your own. The second piece of advice is to look at who you will partner with and not get stuck on the price of the company. Huff has seen owners make far more money on the second bite of the apple.
Peter Huff: A lot of these guys all they do is just look at price and that’s that’s not the way we look at things. When we sell companies, that’s not ever the top. You’re looking at certain to close. You’re looking at how they’re going to treat your people. You know all of these family businesses they’ve had loyal employees for decades. You want the next partner to treat them well and to maintain them inside the company. So there are a lot of things that are beyond price and I wouldn’t I wouldn’t be myopically focused on price at all. You know a lot of them seem like they just use that as the way to differentiate.
Sponsored in part by:
Pat Niekamp is the founder & publisher of Texas CEO Magazine. Pat began her career behind the microphone as a daily talk show host, then moved to the sales and marketing side of broadcasting. She has two decades of senior management in sales and marketing culminating in managing ABC affiliate TV stations in Ohio and Minnesota before launching her own business. You can learn more about Pat HERE.