Security — two of Apollo’s existing portfolio companies
— allowed the combined business to leverage the initial
digital investment better. Roughly a year after the $7
billion ADT deal, Apollo began prepping an IPO for the
company that could be valued as high as $15 billion.
Of course, not all deals are successful so quickly, but it
reflects the role financial buyers can play.
Entrepreneurs don’t necessarily have to give up full
control. A number of growth-oriented private equity
firms have emerged in recent years that aren’t pursuing
highly leveraged buyouts, per se, but seek to pair equity
with smaller debt facilities to fund specific initiatives.
This option allows companies to maintain flexibility
in their capital structure, which can be critical during
periods of transition.
Beyond activating digital initiatives, private equity
is also keen to back the disrupters or companies that
can help other legacy businesses facilitate the needed
change. Ironically, these companies will become attractive acquisition targets for larger strategic buyers looking
to build out their own digital capabilities.
Ad Theorent, for example, is a digital advertising
company that uses big data and machine learning to
help advertisers identify the audiences most likely to
engage with a given digital advertisement. The company
also has an SaaS offering that helps brands understand
their advertising ROI across all channels. H.I.G. Growth
Partners recently invested in the company, a deal that
included a senior credit facility and equity co-invest-ment from Monroe Capital that will go toward ongoing
investments in resources and technology. It’s the type
of transaction in which management leverages both the
resources and expertise of a financial sponsor.
Whether borrowers are funding acquisitions or
looking to build out digital capabilities organically, the
key is to create a capital structure that can account
for the unknown unknowns. Every sector is effectively
going digital. For those in transition, patient and flexible
capital has more pronounced importance today than
ever before to ensure management teams can see these
efforts through, regardless of market conditions. abfj
MARK SOLOVY is a managing director of Technology
Finance at Monroe Capital.
Whenever a company reaches a certain scale, just about
every initiative of significance hinges on the question:
to buy or to build? In the middle market, particularly for
founder-owned businesses, most executives will choose
to build the necessary capabilities organically. Having
funded several companies that have undergone digital
transformations, I have several observations.
Business leaders who don’t have digital backgrounds will often underestimate the time required to
put comprehensive, enterprise-wide digital initiatives in
place. Many also overlook the potential ripple effects
that can spread across the business during the rollout
and after the initiative is complete.
Panera Bread, for instance, first began testing its
kiosk and mobile-ordering platform in 2012, but it
took another three to four years to roll these advances
out completely. While some media billed the effort as
replacing workers with machines, in reality Panera had
to add back-of-house staff and re-engineer certain operations in order to keep up with digital order flow. Five
years later, digital orders now account for more than a
quarter of total sales.
The complexity of digital transformation demands
domain expertise. As part of the underwriting process
to capitalize these efforts, it’s also important to make
sure that the company has the right team in place, or
at least a plan to recruit the right team. A company can
possess the best intellectual property or patent portfolios and still fail if it doesn’t have capable managers to
set a vision and execute upon it.
Lenders will, of course, zero in on the ways a digital
transformation will alter a company’s balance sheet
and cash flow statements. The initial investment in
technology often takes far longer than most executives
anticipate and creates new recurring annual costs. The
reason digital companies tend to fetch higher valuations is because they should be growing at a faster clip.
But lenders are also very cognizant of what can happen
with too much leverage. Top-line growth should be
directed toward reinvesting in the platform to continually reinforce the technology backbone, not paying
down excessive debt.
The decision to sell the company can be one of the
harder choices for business owners. Given the alternative of obsolescence, however, more companies are
teaming up with financial buyers that can bring both
equity and strategic oversight to develop a digitalization
plan. Beyond the capital infusion, private equity will also
traditionally bring in advisors or consultant resources
that can help executives create strategic roadmaps.
When Apollo Global Management acquired ADT,
for instance, the company was already in the midst of an
initiative to raise its profile in the connected, smart-home
market. Consolidating ADT with Protection 1 and ASG
Whether borrowers are funding acquisitions or looking to build
out digital capabilities organically, the key is to create a capital
structure that can account for the unknown unknowns. Every sector
is effectively going digital. For those in transition, patient and flexible
capital has more pronounced importance today than ever before.