The Riverside Company believes true private equity is done down in the trenches, in the mid-market with companies you've never heard of, using little leverage and being as picky as possible.
The private equity firm, based in Cleveland, Ohio, took that message to the US Congress recently in an attempt to illustrate the benefits private equity brings to small and mid-market companies and take some attention away from the big deals that hog the headlines.
“We have a lot of skin in the game; our future as a firm is based on our track record,” Pam Hendrickson, Riverside's chief operating officer, said in testimony before the committee on small business of the US House of Representatives. “Just as companies compete for our capital, so we have to compete for the investment capital of our limited partners, and it is a very democratic process. It isn't based on who you are in status or where you went to school. It is performance driven.”
KEEN TO TESTIFY
Riverside was keen to testify before Congress because politicians have tended to focus on some of the notable failures of private equity in the past few years and not the everyday deals that are the backbone of the industry, according to Riverside's co-chief executive Stewart Kohl, in an interview.
Kohl's fear is that politicians will be quick to craft legislation to regulate the industry that punishes successful firms.
“The biggest deals have a certain flair and bring about certain emotions,” Kohl says. “Meanwhile, every day people are working on the bread and butter deals. Private equity has a great story, a great American story about value creation, a story that resonates with people here at a time when people are very disappointed in business.”
Private equity has a great story, a great American story about value creation, a story that resonates with people here at a time when people are very disappointed in business
In late March, Treasury Secretary Timothy Geithner proposed registration requirements under which leveraged private investment funds like private equity firms and hedge funds with assets over a certain threshold would have to register with the US Securities and Exchange Commission.
“What if we get broadly lumped in with hedge funds and firms that engage in derivative activities and it creates an expensive regulatory framework for us to operate in?” Kohl asks.
Hendrickson gave several examples of ways in which the firm has helped small businesses. She referred to CPI, a job safety training company in Brookfield, Wisconsin, that the firm acquired in 2006. The founder of the business was dying of cancer and wanted to sell the business quickly. This was achieved, with the existing senior management team amply rewarded.
Since Riverside acquired the business, CPI has increased sales by 25 percent through the addition of new training programmes, international growth and modest price increases, she said.
“Most of the companies we acquire, 60 percent in fact, are sold to us by the companies' founders or family owners, who are seeking liquidity,” Hendrickson said. “These entrepreneurs have the majority of their net worth tied up in their company and need access to that money, most often for retirement and estate planning.
“Taking their companies public is not typically an option with such small companies,” Hendrickson added. “Without private equity, these founders would have drastically reduced options for continuing their businesses.”