1. You just helped wrap up fundraising for Riverside Micro-Cap Fund IV with $650 million in commitments, ahead of the $500 million target. Any new team members for this fund?
A: Today we have 40 team members on the microcap fund, split roughly down the middle between transactors and operators. On the transacting side, we’re always hiring associates and our junior ranks have slowly increased over time. On the operating side, the size of the team depends on how many portfolio companies we have. The size of our portfolio has grown to 33 companies so we’ve been proportionally increasing the number of operating partners and finance directors as well.
2. Any deals that you’ve done recently that set the tone for this new fund?
A: We’ve made two investments out of Fund IV. The first is Dermatology Group, one of the largest dermatological providers in New Jersey. We closed that at the end of 2015. It represents our interest in investing in and consolidating provider groups within various sectors of healthcare. This one is dermatology. But we’re also interested in dentistry, behavioral health and ophthalmology. We have active discussions with companies in these sectors.
3. Any thoughts on how to avoid overpaying for assets?
A: Multiples are definitely well above the historical mean, probably by as much as 3x. The risk of paying higher multiples is that they may contract by the time you sell a company. The nice thing about being a growth investor – our companies are typically growing their top line by 20 percent a year – is that even if there’s multiple contraction, you’re able to still make good money because your growth rate is high enough to overcome it. When you’re buying a low growth asset, you can’t grow your way out of overpaying – it’s hard to remedy. We think our investment approach and our focus on growth is particularly good when you’re in a market with inflated overall values.
4. Riverside Co has one of the largest in-house sourcing networks of any PE firm. How does that help you now?
A: As an investor, the more deals you see, the pickier you are. Riverside’s global origination team is robust and we see almost all the intermediated deals that are sold in the North American market. We close on only one half of 1 percent of the deals that come through the top of our funnel. Great deal flow allows us to be pickier and patient. Further, our dedicated deal originators allow our investment team to focus on what it’s best at – buying, building and selling portfolio companies.
5. What’s the most rewarding thing about working with smaller businesses; how about the biggest challenges?
A: The magnitude of the growth that you can achieve when you start from a small spot is rewarding. In multiple cases, we’ve acquired a company with less than $4 million of EBITDA and sold them with more than $40 million of EBITDA.
Not only is it an amazing spectacle to watch, but it’s also rewarding to see our management teams prosper. The challenge? Core systems and infrastructure. When you start with one of these companies, it’s not unusual to put in new systems and processes by which the company is run. More often than not it’s also necessary to upgrade members of the management team which has its own set of challenges. We make these changes in staff early in the hold period. We make sure we have the right people in the right seats that are capable of running a much larger company.
Edited by Steve Gelsi
Photo of Loren Schlachet courtesy of Riverside Co