This episode features an interview with Nick Martino, former Operating Partner at High Road Capital Partners, and current CEO at High Road portfolio company John Henry Foster. Mr. Martino brings an extensive operating career doing turnarounds on distressed assets at the Riverside Company. He then served as a Group President for ITW, managing 37 companies in 17 countries before returning to private equity at High Road Capital.

Some key takeaways from our conversation:

About High Road Capital

• High Road Capital invests in the lower middle market with two funds totaling almost $500 million.
• The company focuses primarily on manufacturing, distribution, and the chemicals industry with revenue of $25 million to $100 million and $2 million to $10 million in EBITDA.
• Nick has been involved with High Road as a Partner for 5 years.

Success Criteria

• As an operating partner, Nick made sure to challenge and support portfolio company management on growing the business organically.
• His personal goal was to be at least 200 basis points above the market rate of growth.
• He was responsible for making certain that the company was innovative and creative in generating new value streams.

How to Be Effective as an Operating Partner

• It's important for operating partners to have had multiple experiences running P&L businesses, the more diverse, the better.
• Running a business that's making $300,000 of profit a day is significant.
• It taught him how to manage, how to prioritize decision making, where to focus his attention, etc.
• It was the precursor for being successful in mentoring CEOs of middle market and lower middle market private equity owned businesses.
• He has been exposed to all the challenges that they have.

Engaged from the Beginning

• High Road engaged from the first visit and would help to assess and evaluate the primary value drivers of the business and the capability and competency of the leadership team.
• Pre-deal, his job was to go with the letter of intent to verify the investment thesis and ensure that the organic growth perspective could be achieved and that innovation and targeted customer growth was paramount.
• Growing the business at the industry rate never worked. At least 200 basis points above the market rate of growth was critical.
• Post-deal, his job was to verify his guesses on the pre-deal and that he understood the management team and value drivers.

Surviving the Pandemic

• Portfolio companies that could be recognized and sell their products over the internet shined.
• Those that needed a customer facing visit to analyze the installation of capital equipment or something like that suffered.
• One of the businesses in High Road’s portfolio suffered in the second half of the year, not in the first.
• While the overall year was slightly down, it was still a healthy year for the business.

Playbook

• High Road has three primary drivers:
• Number one, they focus on the leadership team to make sure that they have the right capabilities, competencies, and hutzpah—the courage to run the business and drive it to the exit strategy identified in the investment thesis.
• Second, that there's the infrastructure in place, the right inventory, product offerings, and mix, and most importantly, the IT infrastructure to run the business as it grows from $50 million to $150 or $200 million, which is typically the exit strategy.
• Finally, to have strategically identified a pipeline of acquisition opportunities and bolt-ons to execute on typically in the first 18 to 24 months.
• Over the next two years, after all the bolt-ons have been put in place, they can show that the thesis is working and there's value being created by those add-ons.

Common Challenges

• All the experience and understanding and confidence you have in your decision-making ability doesn't necessarily translate to the CEOs. It's like pushing a string. It never goes in a straight line.
• Often, the entrepreneur wants to stay on but doesn't have the mindset of taking risk because they're spending their money, now the limited partner’s money.
• High Road and experts such as Chief Outsiders are used to gain the visibility that the decision and risk makes sense.
• Sometimes the biggest challenge is getting people out of their comfort zone and into their confidence zone to make decisions, take risks, execute and be responsible for it.
• Investments of $50,000 or $150,000 aren't needle movers. The challenge is to shift their mindset to think in bigger terms to exceed double-digit growth.
• Operating partners have had that experience and can bridge that lack of confidence.

Using Outside Resources

• Where we don’t have the internal intelligence, competency, or enough of the resource, we leverage outside help to get to the end game as quickly as possible.
• The longer it takes to get there, the shorter the time we have to exit, and the less value we're creating on exit. Getting there quicker creates value that probably enhances the multiple on exit.
• Using resources that we can't do ourselves gives us better awareness of the value and stimulates the internal team to grow.
• It's critical to have the expectations and the project well defined with the right internal leadership and support structure to be successful.
• We need to make sure that we are committed to the project and have it well enough defined that if the expectation is achieved, we can identify it.

Final Thoughts

• A lot of private equity firms don't use the operating partner role because they might have a very industry-specific focus and the internal expertise to do that.
• The people that use operating partners have seen at least a multiple to a multiple and a half improvement on exit.
• Everybody wants to laser focus on operating partners to make them a contributor with a CEO on the leadership team.
• They sometimes need a CEO’s leadership style to help mentor and grow them versus an understanding of the medical market or something like that.
• It’s critical that they look at the role they're seeking to fill.