Communications

Profitability is on the mind of fund managers. Utah private equity firms are encouraging the slashing of costs, boosting of sales and new markets, and the paying down of debt. And it’s the CEOs that are in the hot seat. Private equity firms expect their CEOs to make the smart and aggressive moves that yield the required financial results. This often means making changes to management and culture to sustain those results.

“Utah firms are tightening up,” says Kent Thomas, founder of CFO Solutions. “However, there is still a lot of money circulating looking for good investment opportunities.”
In today’s tender economy, and with predictions of recession on the lips of financial pundits, private equity firms are treading lightly. Expect to see turnaround investments and buyout equity gain further traction because the price of companies will fall, while growth equity or “injection investments” will decrease.
“The fall out in the credit markets have made investors more cautious, but there is still reasonable activity in Utah,” said Fraser Bullock, co-founder and managing director of Sorenson Capital.
Despite the gloomy economic forecast nationally, private equity has made recent inroads in Utah. Sorenson Capital just closed their second fund, breaking a Utah record with over $400 million raised. Philanthropist John Huntsman Sr. and Robert Gay have started a new fund, Huntsman Gay Capital, with Steve Young, Richard Lawson and Ron Mika as key executives. In addition, Aries Capital, a new fund stemming out of Peterson Partners, has begun raising money.
“We’re also seeing a lot more interest in Utah from outside private equity groups,” says Jeremy Neilson, managing director of the Utah Fund of Funds.  “As Utah companies get more mature, and as CEOs and entrepreneurs demonstrate a track record of success, investments look a lot more attractive.”
Bullock agrees. “A great track record is the first thing we look for. Second, we want to see if the CEO can build a robust team of talent individuals. Third, we want to make sure the CEO has a clearly defined vision for the business.”
Although Utah’s economy ranks near the top, local firms are still focused on streamlining the operations of their portfolio companies. According to a recent Ernst & Young study, buyout firms replaced CEOs or CFOs at 17 of the 23 U.S. companies that they sold or took public in 2006. In order for CEOs to keep their jobs, it’s all about reaching the right benchmarks and the willingness to cooperate with these firms.
“Hitting the numbers and getting the desired results is most important,” adds Thomas. “However, the right attitude is vital. Private equity firms want someone they can work with. If a CEO has a big ego, is resistant to change and won’t take direction, the firm will drop them.”
That being said, private equity deals can be very attractive to CEOs and entrepreneurs. When buyout firms are typically looking to make three times the amount they invested, this can spell big money for the founder, CEO and exiting management team.
There are several examples of savvy Utah CEOs that have not only survived the private equity play, but thrived. Jim Thornton, CEO and president of Provo Craft Novelty, Inc., is one of these. Under the watchful eye of Sorenson Capital, Jim took over the company when it was failing to deliver the expected financial returns. In his first year he completely turned over the management team, personally took on all of their roles by himself to flush out the bugs, and reshaped it into a mega-profitable company. He grew the company’s revenue 38% in two years with an improvement of 227% in EBITDA, earning him an Ernst & Young Entrepreneur Of The Year for 2007.
“Working with the right private equity group is key,” said Thornton. “It’s a tough, scrutinized environment, but if you pull together the right team and focus on delivering the required results, it’s a win-win situation.”
Bullock says private equity firms want to act as advisors and counselors. “We don’t want to interfere with the daily operations of the business, but it’s important to have a CEO that sees us as a partner.”
Jonathan Coon of 1-800 CONTACTS is another notable example. In 1995 while completing an MBA program at Brigham Young University, he began selling contact lenses to other students. Seeing an opportunity he couldn’t pass up, he secured a business loan and raised a small amount of capital from a private investor. Last summer Coon successfully navigated the private equity waters and sold his company to Fenway Partners, a transaction valued at $347.87 million.
From the private equity point of view, they are looking to the horizon and the future of their investment. Period. They want a CEO who performs financially but is also tight on the softer skills, such as building teams, the ability to lead and inspire, and someone who will cooperate with them. If not, it’s often a deal breaker. The CEO is ultimately expendable.
To survive such a fate, Thomas advises that CEOs take their time courting the private equity group. “Do the research. Understand what the firm is looking for. They typically want their return within 2 to 5 years, and they’ll be very aggressive in achieving that.”