1) Lee, your firm is working through a $3.64 billion Fund VI closed in mid-2012, buying businesses generating $50 million to $200 million in EBITDA in such fields as manufacturing, specialty chemicals, aerospace, energy, business services, healthcare, restaurants, consumer products and other markets. I’m sure you’d agree the buyout business is all about operational improvements today. Tell me about the Resources Group that you’re an executive in.
Right now we now have 22 full-time professionals. Most are based in the United States. We also have an office in Shanghai. We are organized almost like a functionally driven consulting firm. We have experts in a variety of functional disciplines. We’ve got people in strategy, operations, IT, human capital and then we also have an eight-person office in Shanghai, which effectively replicates some of those functions there. We hire people for the group that have a variety of capabilities. They have to be experts in their field. They have to be able to work well with a mid-market management team so that the team feels that person is there to help them, not impose something on them. That takes credibility but also humility.
2) Why have an outpost in Shanghai?
In 2006 our notion was to build the office there to help with sourcing. Everyone at the time was trying to reduce purchasing costs. We built that capability. But within a year we realized that we could provide as much value helping mid-market companies expand into the Asian market. It was very hard for our portfolio companies to field resources there. They tended to get into trouble when using local brokers. We built that capability there. The office takes portfolio companies and helps them grow and reduce costs.
3) In its early exams of private equity firms, the U.S. Securities and Exchange Commission has called out some sponsors for promoting operating experts as full-time staff only to later charge their services to portfolio companies or the funds. How are the executives in your resources group compensated?
They are full time employees of American Securities. They get compensated the same way as all of our deal professionals. They’re professionals in the firm just like the folks that execute our transactions. We’re all partners. There’s no real distinction.
4) Give me an example of the Resources Group in action.
NEP Broadcasting was a portfolio company that broadcasts major sporting events and entertainment events, and they do it through a fleet of broadcasting trucks around the country. We acquired that business in February 2007, and at the time the business was 80 percent sports broadcasting and 20 percent entertainment broadcasting and almost entirely U.S. based. The management teams of most companies we acquire come to the table with a lot of plans. They know the opportunities. In the case of NEP, the management team wanted to expand geographically, and we helped them decide that the best place to expand was Brazil. They didn’t have the capability to do it. Our HR leader helped them hire the expertise to expand into Brazil. Another one of our original goals was to shift the mix of business from 80 percents sports broadcasting to diversify more into entertainment. By the end of our ownership we had diversified from 80 percent sports broadcasting to 55 percent sports broadcasting and 45 percent entertainment broadcasting.
5) Why expand into Brazil and entertainment?
In both cases these are big growth markets. The Brazilian broadcasting market is growing at substantial rates. It was given a big boost by NEP broadcasting the Olympics there for NBC. Entertainment was more of an untapped market. NEP is the undisputed leader in sports. But they weren’t the undisputed leader in entertainment. That was the place where they could create a lot of value. During our ownership of the company, which we sold in December 2012, revenues at NEP grew by more than 70 percent and EBITDA grew by more than 50 percent.