After two years of uncertainty and unprecedented challenges as a result of the coronavirus pandemic, many hoped that 2022 would finally bring a return to some sense of normalcy. Indeed, the enemies businesses have faced this year are certainly more familiar, but that has not made them any less difficult to face. Record-high inflation and the Great Resignation are just a few of the many complex problems that organizations have been met with, and when coupled with constant rumblings of a recession it is clear that companies must approach 2023 with adaptability and creativity in mind.
A vision of Investor Mark Hauser
Founder-led businesses are by no means immune to these challenges, and indeed may be more vulnerable to them than those with established players at the helm. In today’s world if a business isn’t growing its shrinking, and in turbulent times partnering with a private equity firm could provide these types of businesses with a much-needed edge over the competition.
Upon first glance, this may appear to be an unlikely partnership: founder-led organizations more often than not are entrepreneur or family-run businesses that are significantly invested – both financially and emotionally – in the success of the company. Contrastingly, private equity investors are known for their hard focus on the bottom line – their primary goal from the very start of an investment is to sell it for a profit in just a few years time.
However, this doesn’t necessarily mean that the two business concepts are incompatible. In times of uncertainty, leaning into a private equity investor’s drive to change a business for the better could be exactly what the doctors ordered for founder-led organizations. Private equity firms reject the status quo, and their investment in a business means they have made a concerted decision to change it for the better. Founder-led businesses should take heart in knowing that while investment activity this year has fallen from the record levels it hit last year, the amount of capital going into U.S. businesses has remained healthy historically.
“Founder-led businesses are at the core of our investment thesis,” said Mark Hauser, founder and co-managing partner of Hauser Private Equity. “We look to invest with managers who are experts in their field at identifying proprietary assets and partnering with those operators and sellers to drive maximum growth.”
Hauser was commenting in a recent press release by his private equity firm announcing that ten of its fund managers were named to Inc. Magazine’s “2022 List of Founder-Friendly Investors,” which honors private equity firms with best-in-class records for successfully partnering with entrepreneurs, founders, and family-led businesses. Since its inception in 2008, Hauser Private Equity’s five funds have invested over $350 million in capital in privately-owned businesses nationally. With over three decades of investing and operating company experience, Hauser has facilitated the completion of over 500 investments and successfully realized over 150 of them.
One manager that made the list, North Castle Partners, has long been a top performer for Hauser Private Equity. The private equity firm has been partnering with entrepreneurs for over two decades, with most of its portfolio companies being led by founders. Currently, 65 percent of its partner companies have founders serving as chief executive officer or in another leadership position.
Hauser Private Equity operates as a hybrid private equity firm, making direct co-investments with firms such as North Castle Partners in businesses like CR Fitness. Hauser recently facilitated a continuation of the prior investment through the fund for the business, which has seen rapid expansion since North Castle initially invested in 2019. Today, the company’s Crunch gym has 45 locations across the United States including Florida, North Carolina, Georgia and Texas. Revenue has tripled over the past three years, its footprint has doubled, and through the recent investment projections see that number again being doubled over the next few years.
According to Mark Hauser, working with firms that have operational excellence is key to a successful partnership, both between the co-managing firm and the portfolio business. Founder-led businesses often have leaders who hold the passion and drive needed to successfully grow an organization, and by partnering with a private equity firm that has the ability to bring about strong operational improvements they can achieve significant growth.
Inc. said that in order to create their list of founder-friendly investors they meticulously interviewed founders regarding their experiences partnering with private equity firms, then utilized data to determine which investors truly created significant results. Benefits provided by private equity firms such as Hauser Private Equity include access to a higher level of the talent pool, development of new products, and rapid scaling. Inc. noted that some of the companies on its list of America’s fastest-growing private companies had done so as a result of embarking in a relationship with a private equity firm.
Private equity firms in the United States invested upwards of $400 billion in over 4,000 deals last year, making them a worthwhile avenue for founder-led businesses to explore. Despite these large numbers, private equity investors are notorious for their extensive due diligence process, with the median investor in private companies reviewing over 80 opportunities in order to make a single investment.
Because of this, founders can take solace in the fact that private equity firms do not take investments lightly, and those on the list like the firms Hauser partners with are looking to work with founders rather than against them, even if they take a controlling stake like many private equity investors typically do.
For private equity investors looking to realize gains, there are numerous benefits to investing in a founder-led organization. Executives who founded the firm often have a strong passion for the company they have helped to create, and as a result are highly motivated to consider its long-term growth rather than short-term solutions. Founders also typically have “skin in the game” having invested a sizable chunk of their own money as well as countless hours already toward the success of the business.
Holding the original vision for the company, founders can provide private equity investors with a unique perspective on their company that truly nobody else is able to deliver. While firms such as Hauser Private Equity may hold more operational experience, founders are still a useful asset to hold in an organization because they can actually be a source of stability in a company that is rapidly changing as a result of the investment.
According to a study conducted by researchers at Purdue University’s Krannert School of Management, the founder-led companies that are in the S&P 500 tend to be more innovative. Not only do they generate over 30 percent more patents on average, this generation does not result in dilution as the patents they create are also more valuable. Contrary to potential perceptions that founder-leaders are inflexible, companies whose chief executive officers are their founders were found to be more willing to invest in renewing and adapting their business models.
With the right pairing, a private equity firm and a founder-led private business can be a match made in heaven. Contrary to what is often thought about private equity firms, there are many out there looking to fully invest in an entrepreneur and their innovative vision. While a planned exit strategy is almost always in the mind of a private equity investor, this in no way means that they see a partnership as a purely financial investment. Firms such as Hauser Private Equity can bring great value to founder-led businesses, working with them rather than against them to create growth.