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BluePoint Capital’s Jim Marra

Specialization has become the name of the game in private equity investing

Jim Marra

November 8, 2018

By: Mark Scott

When Blue Point Capital Partners bought Area Wide Protective in 2008, it was a small company with a simple concept, says Jim Marra. The owner of the business had identified a business opportunity in providing personnel who could direct traffic where road work was being done.

“That struck me as fascinating that somebody could make money doing that,” says Marra, director of business development at Blue Point. “As it turns out, it’s a service that is in demand and AWP has figured out a way to make its customers very happy and has become a very dependable provider of that service. It can be a very difficult thing to do, but AWP has done it.”

AWP had a presence in Ohio, Pennsylvania and New Jersey in 2008. Since that time, the company has quadrupled sales, increased EBITDA by seven times and expanded throughout the Great Lakes, Mid-Atlantic and Southeast regions of the U.S. It now has more than 1,000 employees, a fleet of 1,500 vehicles, a number of regional offices and a string of its own successful acquisitions.

“The opportunity to be exposed to those sorts of business plans, those sorts of businesses is endlessly fascinating to me,” Marra says.

In this week’s Dealmaker Q&A, we spoke with Marra about the challenge of competing in today’s private equity market and the best strategy to minimize risk with your investments.

How has the private equity market changed?

Thirty years ago, we could afford to be generalists and buy any business that seemed like it had a good management team and provided a good product or service that wasn’t going away anytime soon. Because we were paying so little for it and putting so little equity into those businesses, we had a lot of latitude to screw up. Today we don’t.

Take a $10 million EBITDA business. That business 30 years ago would likely sell for $50 million. In that transaction, we’d put up $5 million or $10 million of equity and we’d borrow the rest. So our $10 million bought a $10 million EBITDA business and we would buy it without a whole lot of competition.

Today, with literally thousands of private equity firms looking at deals, with intermediaries, with sell-side M&A advisers making an efficient market for businesses to come up for sale and willing to help them sell their businesses, with those dynamics in place, that same business might sell for $100 million. And instead of putting $10 million in equity into the deal, we’re putting more like $50 million into the deal. The stakes are much higher in every transaction. We’re simply putting a lot more money in and we have a lot more at risk.

What steps have private equity firms taken to adapt to the new landscape?

A lot of PE firms are moving toward specialization, those industry verticals where we have some experience and where we might know managers who can help manage the business if that’s necessary. We don’t have to spend weeks understanding the dynamics of the particular industry we’re getting. We can look specifically at the company and have a framework to analyze that business and to place it in the industry that we know already.

If it’s a company that does business in Asia and is either exporting to Asia or bringing in product from Asia or it’s got manufacturing over there, we have a tool that can help that business. We established an office in Shanghai back in 2004 that maybe half of the businesses in our portfolio utilize to help them better manage their Asia-based supply chains. That’s an angle. If you look across PE firms across the country, you’ll see many private equity firms have specific businesses where they do best. The things they know, the experience they’ve gained and the connections they have made enable them to be better owners of that business than most other PE firms. It’s incumbent for us to find where those businesses are being sold, who is selling those businesses and how to get in front of those sellers early.

Does market specialization carry it with more risk?

It depends on where your angle is. There are angles you can deploy that span multiple industries. There are plenty of different businesses across multiple industries that source from China. There are all sorts of distribution businesses and industrial products that address multiple end user markets. When we think of specialization, we think about end user markets. If you can cut across multiple industries, that mitigates that specialization risk. On the other hand, if you become really good at automotive deals and you focus strictly on automotive — and there are PE firms that have automotive as an industry they focus on very carefully — you do bump up against the possibility of  problems developing with multiple companies in your portfolio at the same time.

Another angle we have is buying businesses from owner-operators rather than from other private equity firms. All things being equal, we’re attracted to being the first-time institutional capital in the deals that we do. That cuts across any industry. Businesses all across the American economic landscape are owner operated and are being sold by owners who may want to continue working and own a piece of that business, but would enjoy the opportunity to get some liquidity for the value they’ve created.

So if your specialization is industry focused or industry centric, you have to be a lot more careful about balancing your portfolio so your businesses don’t all cycle down at the same time. If your angle is broad and can be applied against multiple types of businesses, addressing a variety of end user markets, you don’t have to be quite as careful.