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How does a private equity firm work?

By Generational Equity

How does a private equity firm work

From time to time we like to bring you a real life case study that allows business owners to see how professional buyers operate. I learned recently that Wynnchurch Capital, a leading middle-market equity firm located in Chicago, had formed a new portfolio company (a.k.a. platform company) designed to invest in companies in a designated industry. So I thought I would provide you with some insight into how this type of equity firm plans to operate this entity.

This is how the press release regarding the new formation described the portfolio company’s focus:

Wynnchurch Capital, a $2.3 billion middle market private equity firm, today announced the formation of Wynnchurch Industries, LLC, a new platform company which has been established to invest in industrial materials companies.

John Hatherly, President and Managing Partner of Wynnchurch, said, "It is our desire to create a vehicle to deploy capital into high quality materials companies.

In addition to the newly formed Wynnchurch Industries, the equity firm has 19 other portfolio companies that it has invested in ranging from Burtek Enterprises, a market leader in the design, production, testing, and integration of complex systems and applications for mobile military ground vehicles, radar platforms and other defense systems, to Vista Pro Automotive, a leading designer, manufacturer, and distributor of non-discretionary aftermarket automotive replacement parts.

The common theme across nearly all of its 20 platform companies is this: “The team will continue to pursue growth in existing and new platforms, as well as through new product lines and add-on acquisitions.”

This is how the private equity firm describes the growth strategy:

Wynnchurch Industries will deploy a "buy, grow, and hold" strategy focused on material manufacturers that serve industrial markets. Target business traits include niche market leadership, proprietary competitive advantages, strong barriers to entry, stable core cash flows, and high margins.

The key point to both of these descriptions can be found in the phrases “add-on acquisitions” and “buy, grow, and hold.

Far too few entrepreneurs have a functioning knowledge of how middle-market equity firms like Wynnchurch effectively operate. Unfortunately, because the business press tends to focus on the billion-dollar transactions that often do not include a grow-and-hold strategy, business owners exclude equity firms when they begin to consider buyers or investors for their businesses. You see, folks running equity firms like Wynnchurch (and there are hundreds of them out there) know that they can generate the greatest return for the limited partners by successfully building up and adding on to a platform business. They do this all the time and are quite successful in doing so.

This is what Wynnchurch brings to the table for companies it partners with:

In addition to our proven track record, letting company management retain control when possible, flexible communication style, responsiveness and genuine concern about the companies we partner with, Wynnchurch Capital offers business owners and investors the tools and support to achieve their operational and financial objectives:

  • Collaboration
  • Deep financial resources
  • Ongoing support
  • Access to an extensive network of long-term relationships
  • Understanding and respect

The important thing to consider as you look at this list is the reality that equity firms in the middle-market truly seek out win-win scenarios where existing management is retained and investment in the form of capital, people, processes, and connections are made in order to help the newly acquired firm achieve goals that without the involvement of the equity firm would have been nearly impossible.

You will hear each of these fellows say essentially this: At the outset of their engagement with us at Generational Equity, the idea of a sale to an equity firm was a novel idea. But it turned out to be the best option for them, their company, and their future.

So when you hear about a firm like Wynnchurch creating a new platform business with the stated goal of “buying and building,” recognize the opportunity you may have if your business is a match for what they are planning to invest in.

That, of course, is the key: Finding the synergistic fit that works both for your business and the equity firm. Generational Equity dealmakers have been making that connection for years (for some of our older folks, decades).

Carl Doerksen is the Director of Corporate Development at Generational Equity, part of the Generational Group.

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