Operations: A Pillar for Growth
Mike Foisy, in a Q&A, shares HKW’s operational philosophy when it comes to maturing portfolio companies, addressing key risks, and positioning organizations for sustainable, profitable growth
Among HKW’s Four Pillar approach – sourcing, transactions, operations, and exits — the operational pillar interacts with the others significantly. Through assessing a company’s operational potential, the sourcing team is empowered to find diamonds in the rough and add-on opportunities. During due diligence, the Transaction and Operations teams begin to align on growth opportunities and risk mitigation. After the close of the portfolio company investment, the Operations and Exits teams begin collaborating with company management to determine the strategic initiatives they believe future buyers will value the most.
Mike Foisy understands the challenges faced by both portfolio company management and private equity professionals. He has previously held executive roles for Sensata Technologies, Honeywell, and Control Devices, Inc., the latter a former HKW portfolio company. And he is now Lead Operations Partner for HKW. In a wide-ranging Q&A discussion, Mike shares his approach in collaborating with HKW’s portfolio companies to develop a foundation that will support future growth.
Q: HOW WOULD YOU DESCRIBE HKW’S PHILOSOPHY AROUND OPERATIONS?
A: The private equity industry is structured to find and develop efficiencies for its portfolio companies. There are going to be economic spells of uncertainty that create windows of opportunity, as we may see amid the COVID-19 pandemic, but for the last decade, few if any investments could be premised on solely buying low and selling high. Against this backdrop, the industry recognizes that our role in the operations function is to create value. For operations professionals, that means we’re influencing the opportunity from the due diligence phase, through the holding period, all the way to the exit.
Today, multiple arbitrages stem from our ability to mature the organization and grow the business. Even at the earliest stages of a potential opportunity, we assess the needs of the prospective investment with our capabilities to support transformation and drive growth initiatives. And then, at the exit, we want to leave opportunities for the next phase. So during our hold, we work to create a solid foundation for future growth and hope this will set our portfolio companies on a trajectory that serves them well long after our ownership.
Q: WHAT’S DIFFERENT ABOUT HKW’S APPROACH TO OPERATIONS VERSUS OTHER PE FIRMS?
A: Much of what we believe differentiates HKW is driven by our Four Pillar approach to investing. We have developed processes within each of our pillars that support our strategy to find, create, and sustain value in our companies. We take a lot of pride in our collaborative approach between the pillars, which extends to portfolio company leadership. Beyond our operations team, HKW’s four pillars (sourcing, transactions, operations, exits) are also available and accessible to portfolio company leadership to provide support and resources.
Q: WHY IS THE LEVEL OF BUSINESS MATURATION SO IMPORTANT FOR GROWTH?
A: Most businesses need more than luck to be successful in the long-term; there must be a strategy, planning, organization, and execution. Many family-owned companies may bristle at the idea of becoming “too corporate” or “too structured” yet fully support the idea of growing the company by pursuing new sales initiatives. By failing to recognize the importance of the company’s foundational attributes (people, policies, processes, and systems), they could be limiting or even hurting the company’s potential.
As investors, we see many of the same scenarios. Companies can grow to a topping out point of activity, and then it breaks. In a lot of cases, companies backtrack when there is no foundation to absorb growth. This can result in employees becoming frustrated because they’re doing too much with too little, turnover becomes common, resulting in compromised quality. Clients can also become frustrated and turn to the competition, leading revenue to stagnate and, in some cases, fall back. The stress of losing clients and business will have a ripple effect across the entire organization.
Another potential challenge with founder-owned businesses is that they tend to owe their success to the passion and vision of their founder, who is undoubtedly a “doer and visionary.” The CEO will have their hands in 20 different tasks. HKW’s operations team provides the CEO with support and guidance to help build a complementary team to tackle the tasks. When the foundation is established, we attempt to position the company for growth by reinvesting back into the business. Collaborating with CEOs to support them as they grow their business is what gets us up every morning.
Q: HOW DOES A SITUATION LIKE THE RECENT COVID-19 PANDEMIC ALTER YOUR STRATEGY?
A: That’s a good question, but as much as it is an “operational” issue, these once-in-a-lifetime events are why we put in place a risk mitigation strategy with HKW’s rate360 methodology. From an operations perspective, though these situations cannot be predicted – whether it’s the September 11th terrorist attacks, the global financial crisis, or the coronavirus outbreak – all require constant communication and a proactive mindset to adjust and pivot quickly. These situations also demand a calm, “port-in-the-storm” approach to instill management confidence.
Every company’s situation was different in the case of COVID-19. Still, at a very high level, our priority was to provide resources if necessary, and along with the portfolio management teams, ensure employee-safety procedures were in place, and confirm business continuity plans were sufficient to meet ongoing client needs. HKW also encouraged portfolio companies to control expenses to strengthen their cash position and to implement 13-week cash-flow forecasts; this would provide the vision and thus the time to react to any shortfalls in liquidity levels.
HKW has been around since 1903, so as an institution, HKW has seen a lot of history. Our current team’s experience also provides us with a perspective that can offer comfort during periods of uncertainty and an understanding of how important it is to put employees first.
Q: ONE OF HKW’S DIFFERENTIATORS HAS ALWAYS BEEN THE COMPANY’S APPROACH TO RISK. CAN YOU DISCUSS HOW THE FIRM’S RATE360 METHODOLOGY PLAYS INTO THE OPERATIONAL STRATEGY AND, ULTIMATELY, THE FIRM’S EXIT STRATEGY?
A: Risk management is embedded in our entire investment process. For some context, rate360, which we officially introduced in 2016, refers to our systematic methodology to identify, measure, and monitor risks throughout the life of our investments. The Operations team, at the outset, provides an assessment to help discern risks, and then we help devise a mitigation plan to address the most acute threats. When our Exit Committee meets semi-annually, we assess and monitor our companies through changes in the risk scorecard.
When we consider value creation, rate360 is a core component. If we can reduce the value detractors, identified by rate360 – like customer concentration, regulatory risk, or potential competitive threats – that creates stability and value by preemptively addressing buyer concerns. Growth initiatives are structured to prepare the investment for the next phase in their evolution.
Q: WHAT IS YOUR ADVICE FOR LEADERS OR EVEN EMPLOYEES WHO MIGHT BE NEW TO PRIVATE EQUITY?
A: In my experience, having worked for a company that experienced several M&A transactions, both on the buy and sell-side, I understand how difficult it can be to adapt to constant change. In one case, most memorably, my company was sold to three different owners in one year. Others on our Operations team have had similar experiences, so we know first-hand how change can be unsettling and the importance of transparency with our communication.
But from the perspective on the ground, I learned that the best response to this sense of constant change is to be adaptable. When a company goes up for sale or is undergoing massive changes, it is not the end of the world. It is not an “end” at all; it is the next phase in the company’s evolution, which can be very exciting. And with commitment, collaboration, hard work — and a little luck — there can be a satisfying outcome; we can take pride in a job well done, which is always worth the effort.
Mike Foisy, Lead Operations Partner, HKW