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HGGC’s Rich Lawson eyes ‘huge opportunity on the take-private side’; sharing profits with employees on the rise

Good morning, Hubsters. MK Flynn here with today’s Wire.

Fingers crossed the Federal Reserve’s strategy will slow inflation, but even a mild recession is likely to renew scrutiny of the wealth gap and income inequality in the US.

On that note, it’s encouraging to see that more private equity firms are sharing profits with the employees of the companies in which they invest.

Wealth at work. An example this week can be found in Altamont Capital’s sale of Excel Fitness, an operator of Planet Fitness gyms, to Olympus Partners. The Bay Area PE firm and Excel’s management team created a bonus pool that ensured every employee received a payment at closing in recognition for their contributions. Read more here.

Altamont is a founding partner of Ownership Works, a recently launched nonprofit organization that partners with companies and investors to provide all employees with the opportunity to build wealth at work. Launched in April, Ownership Works is backed 60+ partners, including investment firms KKR, Apollo, Ares, Goldman Sachs, Silver Lake, TPG, Warburg Pincus, and pension funds, such as California Public Employees’ Retirement System and Washington State Investment Board.

Ownership Works is the brainchild of Pete Stavros, co-head of private equity for the Americas at KKR and a long-time advocate of employee ownership.

In May, KKR announced the sale of CHI Overhead Doors, a manufacturer of garage doors, to Nucor Corp. in a transaction valued at $3 billion. All 800 employees of CHI will benefit financially from the sale. At exit, in addition to approximately $9,000 in dividends received since 2015, hourly employees and truck drivers will receive, on average, approximately $175,000 as a payout on their equity – with the most tenured employees earning substantially more.

I hope, and expect, to see more of this trend.

Opportunity of a lifetime. HGGC is entering a rich deal environment with “plenty of dry powder” after closing a fourth flagship mid-market offering at $2.54 billion, CEO Rich Lawson told Buyouts’ Kirk Falconer. HGGC Fund IV is the largest fund the Palo Alto firm has ever raised, almost 38 percent larger than its predecessor, which secured $1.85 billion in 2016. In keeping with past practice, the GP was a top investor, Lawson said, committing “well above 3 percent.”

Lawson told Kirk he’s pleased to have “fresh capital to invest,” as economic uncertainty and volatility begin to ripple through the deal market, creating an “opportunity of a lifetime.”

In a deal environment facing headwinds, HGGC’s focus on buy-and-build, business transformation and organic growth strategies will take on a “different complexion,” Lawson said. “There will be a different patina on the deal.”

For example, while the firm did relatively few public-to-private deals in the high-valuation markets of 2020 and 2021, it expects to see a “huge opportunity on the take-private side,” he said. HGGC also anticipates playing an investor role in growth companies “when sellers’ expectations finally moderate.”

A differentiator of HGGC’s strategy is its so-called “advantaged investing” approach. This helps it source and invest in businesses with strong positions in defensible niches through close partnerships with founders and management teams, LP co-investors and co-sponsors.

“Our goal is to create a better company under our ownership,” Lawson said. “We do that by trying to be a flexible, creative problem-solver.”

The approach has contributed to HGGC’s market reputation as a source of “good guy capital,” he said. “We’re not masters of the universe looking to effectively beat up on other financial sponsors or competitors. We’re very collaborative.”

One measure of this is the PE firms “we tend to go back to,” he said. Examples include Harvest Partners, which in 2019 partnered with HGGC to recapitalize Integrity Marketing Group, a provider of life, health and wealth solutions. In December, Silver Lake led a $1.2 billion investment in Integrity, with Harvest and HGGC retaining stakes.

For more, read Kirk’s full story.

GP search. PE Hub subscribers might have noticed something different about our database this week. That’s because we’ve given it a shiny new upgrade to make the database easier to use and more informative than ever before. At the top of our home page, hover over the Database tab and click on “GP search” to look up profiles of private equity firms.

Operational Excellence. Calling all operators. Do you know a best-in-class operator? It’s not too late to nominate them for Private Equity International’s Operational Excellence Awards 2022. The deadline has been extended to Friday, 24 June.

Find details and entry form here.

That’s all for now. PE Hub’s Aaron Weitzman writes the Wire on Fridays, so I’ll see you Monday!

All the best, MK