Q&A with Paul Johnson, Partner at Procopio, and Stefan Okhuysen, Partner at HCAP Partners
What are private equity and growth capital investors looking for when adding new companies to their portfolios? And what strategies are these companies applying to optimize capital? Paul Johnson, Procopio Partner and Co-Leader of Mergers & Acquisitions and Strategic Joint Ventures, delved into this topic in a Q&A with Stefan Okhuysen, Partner at HCAP Partners. We covered the current private equity landscape, value creation strategies, industry trends, and various investment structures.
Paul Johnson (PJ): Thank you for agreeing to interact with me, Stephen. Let’s take a look at the current landscape of private equity/growth capital investing. What do you think will happen at this point, especially given the recent economic conditions and market volatility?
Stefan Okhuisen (SO): I’m happy to answer that, Paul. In terms of the market, buyout and majority share restructuring transactions are weak in the first half of 2024. There is a lot of uncertainty in the market, primarily due to the Fed’s unclear position on future interest rates, a lot of geopolitical noise, and a very important election coming up. The consensus, from what I’ve heard from colleagues and from what we’re seeing, is that this year will be even weaker than last year. That said, we’ve seen relatively stable deal flow in healthcare, one of our key sectors of interest.
On the other hand, we’re seeing a fair amount of activity on the junior debt side. The gap between senior and junior loans is narrowing, and businesses needing capital for growth or financing events are finding it worthwhile to have more flexible loan structures at slightly higher prices. Masu. This trend is expected to continue as banks appear to be more cautious in their lending activities.
PJ: What strategies do private equity firms use to create value within their portfolio companies? Are there specific operational improvements or efficiencies that they prioritize?
SO: Every company is different and has different needs, so strategies will vary from case to case. Nevertheless, some of the key things we do is surround our existing management team with key experts and additional financial and technical resources so that they can professionalize, grow, and organize the company. is to support you in doing so. We have built an incredible roster of business partners who have served as CEOs, CFOs, CMOs, and more in successful companies that have gone through similar growth processes, and we work with them to create and implement value creation roadmaps. It helps the company achieve its goals and advance to the next level. These include organic growth initiatives, technology implementation plans, improved financial discipline and reporting, operational efficiency, and more.
PJ: Given the current economic climate, what would be a wise course of action to pursue working capital optimization within portfolio companies? What metrics should be followed to ensure efficient capital management? Need to track?
SO: Again, this will vary from company to company as not all companies are the same and cash cycles can vary widely. That said, we pay close attention to industry or macro events that may impact collection and payment cycles, supply chain disruptions, interest rates, industry-specific issues, etc. We work closely with companies to ensure they are getting it right. We emphasize conservative leverage ratios. We closely monitor and help companies monitor key debt metrics to ensure they remain financially sound and continue on a path to success.
PJ: Have you observed any trends of consolidation within specific industries or sectors? How are private equity firms positioned to take advantage of consolidation opportunities?
SO: We continue to see a significant trend towards integrating diverse services in the residential and facility maintenance sector, particularly in HVAC services. We keep an eye on these types of companies, keeping in mind that this consolidation has resulted in a significant increase in valuation multiples. For this reason, we are trying to look at other sectors that have received less attention and where there is still room to build meaningful platforms, while remaining within reasonable valuations.
PJ: What is the typical investment structure for your investments? What is the debt to equity ratio? Warrants?
SO: We’re a little different from a lot of companies in that we’re able to tailor deals across the capital structure to provide solutions for each specific situation. Most of our transactions combine debt and equity or equity-like instruments such as warrants. We can have minority or majority ownership.
PJ: Can you describe the typical portfolio company you look for, by industry and size, as well as other factors such as management team experience and growth stage?
SO: Our overall parameters are $3M-15M EBITDA, grown and established companies, experienced management teams. Our primary areas of interest are healthcare, business services, SaaS, and niche manufacturing.
PJ: You mentioned healthcare. What types of businesses do you currently think are worth considering in that area? How do you assess the risks and returns in this area?
SO: One of the reasons we like this sector is that it is less susceptible to economic fluctuations, which is also why we have developed so much expertise in the healthcare industry over the past 20 years . Nevertheless, the complexities and regulatory burden of this area make it not an area to invest in without sufficient expertise. We consider all of these factors when underwriting trades and include them in our expected returns.
We are actively seeking patient-facing healthcare services, especially those that leverage technology and have established models that allow us to scale and grow, and we are also interested in services that help reduce costs and improve patient outcomes, which are major trends in the industry.
PJ: That was very helpful, Stefan. Last question: What advice would you give to corporate leaders when talking to interested growth capital partners?
SO: Thank you for inviting me. That’s a great question to end with. I think it is important to interview and vet the companies you are partnering with. Every company is very different and offers different solutions. This includes different levels of involvement in operations and value creation, and different types of capital solutions and structures. Generally, most companies are open to prospective portfolio companies speaking with executives from existing and past portfolio companies for reference checks.
