Welcome back to PE Value Drivers.

In this issue, I am talking to Tim Lewis, a Partner at Southfield Capital. Tim joined Southfield Capital in April 2014. He has twenty-five years of lower middle market experience as a private equity investor, general manager, turnaround executive, and management consultant. Prior to joining Southfield, Tim was a Partner at Atlantic Street Capital, a middle market focused private equity fund.

Here are some highlights from my talk with Tim. Please view the video to hear our entire conversation.

• Southfield Capital is a private equity fund investing in lower middle market businesses with EBITDA between $4 and $15 million. Southfield’s investment strategy is to partner with successful, closely held, entrepreneur-built companies within the business services sector. The goal is to work hand-in-hand with the existing management team, unlocking their potential and driving value by professionalizing and institutionalizing their systems and processes.
• Throughout his career, Tim worked almost exclusively with lower middle market companies, first as a consultant to owner-operated businesses, then for five years at a family-owned company, and later as a turnaround specialist at CRG Group. Since 2009 Tim has been involved in the lower middle market as a Private Equity investor. The wealth of his experience allows Tim to respond quicker and more effectively to the situations Southfield Capital confronts when working with the smaller, closely-held business.
• Southfield Capital’s investment strategy favors businesses with both organic growth potential and add on opportunities. As mentioned above, Southfield generally partners with successful but raw owner-operated companies. With that said, the fund’s value creation philosophy has an overreaching theme of helping the companies grow by building a stronger in-house team, implementing more robust systems, and assisting the businesses with organic sales and add-on acquisitions. One of the main guiding principles when looking at a potential investment is evaluating the potential upon the exit four-five years later. Southfield expects to sell their PortCo’s to a larger PE fund or, in some instances, to a strategic buyer. Based on that assumption, this drives much of the criteria guiding tactical decisions during different stages of a build-out, to what the future buyer will perceive as valuable: for example, margins, recurring revenue, cross-selling, etc.
• Southfield Capital developed its own standardized approach to evaluating an opportunity and its potential for value creation that begins with detailed due diligence. At the very beginning, before closing, they start working closely and openly with the seller on a future investment strategy and a post-close 100-day plan. It allows the Southfield team to understand the seller’s willingness to evolve, ability to collaborate, and tolerance for change.
• During the 100-day plan implementation, Southfield will typically focus on administrative functions such as financials and accounting, HR and hiring, and IT. On the other hand, the team will work on implementing a few more exciting strategic initiatives. Doing so right out of the gate allows the teams to collaborate and put some early wins on the board.
• Over the years, Southfield has identified a trusted group of consultants and operating partners to help the team with pre-close due diligence or to assist during the implementation of the 100-day plan. Depending on the needs of the business, Southfield may bring in an advisor with a niche specialty to help with specific tasks or functions such as IT, finance, or HR. For example, most companies have a competent CFO or controller. But in almost every instance, they are unfamiliar with the new leveraged PE environment and lack the necessary capital markets experience. Therefore, Southfield Partners will bring an interim CFO or a consultant to help with the transition.
• The idea for any consultant is to work themselves out of a job and help hire a qualified full-time person for the position. At the later stage, when the management team is more settled in and deeper in the trenches, Southfield might bring an outside advisor for a specific function, such as a pricing or market study, for example.
• Evolving out of the 100-day plan and into the normal operating cadence, the management team focuses on the organization’s key strategic initiatives. With the sights set on the point of sale four-five years down the road, the team’s goal is to drive value through growth and strategic acquisitions.
• Tim’s advice to the sellers looking to enter a partnership with the Private Equity fund: don’t save the difficult discussions for after the deal is closed. For both parties, it is essential to spend time getting to know each other before entering into a partnership. It is important to be open and upfront from the beginning, working through the issues and aligning the vision for the business’s future and what the final exit looks like instead of focusing solely on the transaction.

Please view the video for the full discussion with Paul and be sure to check out the whole PE Value Drivers series. If you are interested in being interviewed for the PE Value Drivers series or have any questions, feel free to reach out to me at skobran@chiefoutsiders.com.