Acquiring mind


Being responsible for half a billion dollars isn’t easy. Investments from pension funds, insurance companies and banks mean that the pressure for a good return is high, but Stewart Kohl, managing general partner for The Riverside Co., isn’t fazed.

With more than 60 acquisitions completed since the private equity firm was founded in 1988, Kohl has a proven track record of success. Investors have gains of more than five times their original cash investments.

Now established as a top performer and recognized as a “good guy” in the shark-infested world of private equity, the 1977 Oberlin College graduate knows how to find the gems hidden in Riverside’s niche, the smaller end of the middle market.

Smart Business talked to Kohl to learn more about his secrets to successful business.

What has made The Riverside Co. so successful?

The first thing I would point to is the quality of our people. We have been blessed with being able to assemble a team of motivated, creative and energetic people. These are very down-to-earth people. Some people in the private equity world have big egos and are prima donnas, but that’s not our style.

We’ve built a machine that is really structured to address the opportunities and mitigate the risks at the smaller end of the middle market. The machine has a number of key components. We have a deal sourcing team that identifies several thousand opportunities.

Each year, we can focus on 500, visit 150 and buy 15. We have a process to take the 500 opportunities and understand them well, and figure out which ones have a good risk-reward proposition. We have people that structure, negotiate, finance and close the transactions. I think we are good at partnering with the management teams of companies in ways that are mutually beneficial to both sides.

We don’t pretend to run the company. But we want to be active investors. We can’t be successful by doing drive-by investing.

As you’ve established your name and reputation, has it gotten easier to find investors for your funds?

Yes. I think the name recognition helps us with finding more transactions and investors.

How do you convince investors to trust you with millions of dollars of their money?

It certainly starts with a track record. We’ve been doing this for 15 years and I’ve been in the industry longer than that. The second thing is educating them to the processes we use. We let them meet our people. Nothing tells Riverside quite as well as the people. We encourage them to call companies we’ve invested in so they know what it is like to be in a company Riverside has invested in. I do believe there should be an alignment of interests between us and the investors. Our employees are also significant investors in our own funds.

That total package convinces them.

You get a lot of good feedback on your communication with investors regarding potential deals and past acquisitions. Why is communication important to you?

We pride ourself in it. Investors will be supporting so long as you tell them what you are doing and why and make sure you say what you are going to do and do it. During the late ’90s, buyout firms strayed from what they were good at and got into things like telecom, for example. It wasn’t what the investors expected.

They can accept that not all deals will work equally well. They can’t accept it when you do something you didn’t say you were going to do.

It’s like a good friendship or marriage. It starts with communication.

What makes a company an attractive acquisition target?

We are very focused on leadership. We want this company to be either No.1, 2 or 3 in its industry. Because we are buying smaller companies, we are talking about the niches they are in.

Then we are looking for companies with good growth rates. They need to show strong results and healthy margins. The team and people are critical.

We are looking for businesses with barriers to entry, where you won’t wake up with new competitors every day. We don’t like significant technology, regulatory or commodity pricing risks.

Do you focus on companies that complement your existing holdings?

When you think about us as investors, you have to think about us in two ways. We are always looking for the next great platform that fits the criteria we have in mind. Once we are in an industry and invested in a platform, we are looking for add-on investments. These are from a much broader pool of companies.

We might buy a very small company just to get a particular product line. We do try to be aggressive once we are in an industry.

Is the ultimate goal of these acquisitions to combine them and resell them?

When partnerships work well, we find ways to grow the business. We try to find ways to supercharge growth by doing one to three add-ons so when we go to sell the company, hopefully it is quantitatively bigger and qualitatively a better company. This appeals to the next echelon of buyers who are comfortable with the higher multiples.

Does a slow economy make for more acquisition targets or just add more quantity to the market rather than quality?

It’s interesting: When the market was really going, there was a tremendous amount of buyout activity. There were great companies for sale and prices were high.

When the world turned soft, for a period of time there were fewer opportunities and a lot of companies were not performing as well and didn’t want to sell. There were some owners with good companies that didn’t think they would get a fair price.

Now that we’ve been in a downturn for three years for the public equity market, people have come to terms that it is not as good as the late ’90s, but not as bad as 2000. And on the private side you always have opportunities because of death, divorce and estate planning.

On the corporate side, there are always large companies divesting themselves of companies that don’t fit the strategic plan. There are always opportunities.

What acquisition are you most proud of and why?

I was really privileged to partner with Bruce Harris (Founder of Twinsburg-based Conferon, now president of Conferon Global Services). He’s the kind of person that makes you feel good about humanity and makes you proud to be American.

Because of his own estate needs and his desire to grow the business, he needed financial partners. He had several offers and chose Riverside. We’ve done three more acquisitions and hopefully a fourth soon (Note: Riverside completed the fourth add-on, acquiring Frederick, Md.-based ExpoExchange May 19).

The meeting planning industry was tremendously challenged, even before 9/11. After that, it was a terrible challenge. But Conferon continued to perform well and is a great company

The second example is in August of 2000, we acquired Hammerblow. They make jacks and couplers for the trailer industry. The company was the leader in that niche. We partnered with the management team, grew the business and did three add-on acquisitions that basically tripled the size of the business.

We were approached by their largest competitor, that itself was part of a larger company. They had to own us and paid us a price that allowed us to return 3.6 times our investors’ initial investment with an average hold period of about two years.

We just sold the business in February of this year, and we were able to send a distribution to our investors. Investors haven’t gotten a lot from the private equity market lately, so I was very pleased to send it to them.

Final thoughts?

What’s so interesting is Cleveland has a remarkably rich private equity community given its size. After New York, Chicago, L.A., San Francisco and Boston, Cleveland is probably the next most active city in terms of private equity.

There are a lot of fine firms here: Blue Point (Capital Partners), Primus (Venture Partners), Morgenthaler (Ventures), Key Bank and National City also have active efforts. There are law firms here that have a remarkable amount of experience and talent, and that goes for the accounting firms here as well.

We all benefit from it. We are all lucky to have it. Riverside is not successful in a vacuum; we are part of a community. Hopefully, we will continue to contribute to it and it to us. How to reach: Riverside Co., (216) 344-1180