Much has been written recently about the challenging economic climate for private equity M&A. The perfect storm of rocketing borrowing costs combined with underlying business problems in portfolio companies creates an acute risk to their financial stability. These conditions have renewed scrutiny of how PE firms engage with their portfolio to address operational challenges and build resilience. For Acacia, rolling up our sleeves to solve operational problems together with our portfolio colleagues has been our mantra since we started in 2016.
Private equity has enjoyed a prolonged period of low interest rates and rising valuations, both substantial drivers of investor returns. However, that often came at the expense of private equity doing what it is supposed to. That is, supporting management teams to drive organic growth and operational excellence, building more resilient and valuable companies capable of withstanding financial instability. According to this year’s global private equity report from Bain & Company:
“Success [in today’s market] will be less about piling on ‘max leverage’ and playing multiple arbitrage and more about improving operating leverage and generating organic growth. The most effective firms are already in motion. They are organizing themselves to boost exit multiples from the inside out by driving real improvements in EBITDA.” 1
The Economist recently expounded a similar perspective on the current private equity landscape:
“Those able to strike bargains, and funds with deep industry expertise and lots of skilled operating professionals, could prosper. Pretenders previously lifted by rising valuations and cheap leverage during the past decade will certainly not.” 2
From day one, Acacia’s sole focus has been to use our deep industry expertise and operational experience to help transform founder-owned B2B and B2G technology services and product businesses in the lower middle market. We know these markets intimately and consistently invest with a clear thesis in mind, often in areas underserved by other investors. More than anything, our success rests on our deep collaboration with management teams as partners in building strength and resilience in strategy, leadership, talent, brand, culture and innovation.
The Acacia team uses its diverse range of professional skills and commercial experience to support business leaders. Our know-how reaches beyond the M&A and financial expertise that you would expect of a PE firm. Acacia team members have professional backgrounds in brand communications, technology R&D and engineering, organizational design and business integration, contracting and legal affairs, amongst other disciplines key to achieving operational excellence and creating the conditions for sustained growth.
Over the years, we’ve consistently applied that experience to achieving transformational results for portfolio companies, their employees, clients, and co-investors. Take our former business ID Technologies, acquired in 2017 as a value-added reseller of technology products to the U.S. government. Over four years, we worked closely with the company’s executive to transform the business and its profitability. We redefined the strategy to focus on organically developing market-leading product IP, rebranding and repositioning the company in the market, growing a managed services business, and investing in new talent. This work ultimately resulted in the company’s acquisition in 2021 by a leading U.S. multinational, delivering an IRR of over 100%.
Our work with the team at Column Technologies tells a similar story. We acquired Column, an IT services business, and its sister company Highmetric, a ServiceNow partner company, in 2019. The companies had particular strengths in information security, managed services, and IT Service Management. However, profitability was low, and the companies were punching below their weight in terms of brand and market presence. We unified the leadership team and brought the businesses together under a vibrant new Highmetric brand to showcase the company’s full range of capabilities. With additional investment in sales and marketing and well-executed operating efficiencies that took care not to harm the business, we transformed Highmetric’s profitability over two years. In 2021, its ServiceNow business was acquired by a large PE firm, again delivering a 100%+ IRR. With our continued backing and involvement, its successor, MajorKey Technologies, is now one of the largest and most capable businesses in the U.S. identity security market.
In both cases, a core Acacia team remained involved throughout, calling on other team members with the requisite skills for the various stages of the transformation process. We continue to work that way today. We apply our understanding of what it takes to sustain financial stability, manage change effectively, build resilient cultures and create compelling brands. By partnering with portfolio colleagues, we achieve authentic value that delivers stronger returns to stakeholders. We consider it a privilege to hold such productive and collaborative relationships with all of our business leaders, establishing the mutual support and respect that are the lifeblood of our firm. We wouldn’t have it any other way.