We sat down with Tony Brindisi, Managing Partner of RTC Partners, to explore key issues like value creation, talent management, and exit requirements. Read on for insights on these topics and more.

Q. On a scale of 1-10, how important is value creation for independent sponsors - 5 years ago, today, in 5 years? How and why is this area developing in relevance?

Value creation is 10 out of 10 important for independent sponsors today and will continue to be in the future. Gone are the days of the Barbarians at the Gate, where private equity investors could financially engineer returns by loading companies with excessive debt, aggressively stripping costs, and selling off the most valuable parts. While lucrative at times, that model is, and always was, unsustainable, risky, and unhealthy for the underlying businesses. Therefore, as investors dedicated to delivering market-leading returns and benefits to all stakeholders, we must rely on growth and value creation. 

The ability to generate growth and create sustainable value in acquired businesses is what sets the best independent sponsors apart in a crowded market. At RTC Partners, we focus on three primary levers for value creation: revenue growth, margin improvement, and corporate infrastructure development. 

Revenue Growth: In the highly acquisitive buy-and-build strategies that we execute, we use inorganic growth (M&A) to drive organic growth. We build investment theses around the synergistic benefits of bringing strategically complementary businesses together to create integrated, middle-market leaders with more comprehensive service offerings, broader client bases and end-market expertise, and expanded geographic footprints. The integrated sales organizations that we build as part of these strategies are able to leverage this greater scale and scope to accelerate growth through cross-selling and up-selling to increase share of wallet with key customers, as well as to increase market share by winning new clients. In addition to the value creation that is inherent in this growth, by increasing the recurring nature of our revenue streams and significantly diversifying the customer base we are further creating value. 

Margin Improvement: Economies of scale can yield myriad opportunities for margin improvement. Success in pulling this value creation lever starts with a detailed understanding of what drives margin in your given industry and what levels of margin achievement are possible/sustainable. This understanding will inform your diligence and underwriting, as well as your value creation plan. We typically focus on three opportunities for margin improvement: enhanced pricing models, improving gross margin through operational efficiencies, and economies of scale on SG&A costs. 

Corporate Infrastructure Development: Successfully running a larger, faster-growing, higher-margin organization typically requires significant investment in corporate infrastructure. Installing the right people, systems, and business processes to support our value creation theses is central to our playbook. We focus first on recruiting leadership teams that have proven abilities to build and operate best-in-class organizations, at scale, in our chosen industries. We then work with them to upgrade the business systems, often installing and integrating new technology from ERP and CRM systems to AI-driven tools for enhanced client service. We complement this with sophisticated talent management organizations, enhanced incentive structures, and robust programs for culture building, branding, and employee engagement. All of this enables success in pulling the first two value creation levers, while simultaneously creating inherent value in the companies we build, unlocking premium valuation potential at exit. 

At the end of the day, true value creation is what makes private equity investing a sustainable business model. It creates value for all stakeholders – employees, shareholders, and investors alike. 

Q. What are the top 3 steps that independent sponsors can take during the very early stages of a deal to ensure success on exit?

A successful exit is born long before the first transaction is executed. Investments should be rooted in well-researched investment theses, developed through a deep understanding of the relevant market dynamics, value drivers, and risk factors. However, even the best-laid plans can veer off in many directions, so here are three steps that we have found can help to ensure success. 

1. Secure the Right Leadership Early: Many experienced investors will tell you that the difference between their best investments and the rest of them often comes down to leadership. In Jim Collins’ classic management book, Good to Great, he keys in immediately on this tenet and details how the greatest performing companies have leaders who are humble yet driven, demonstrating a blend of personal humility and professional will. His research found that leaders who prioritize the success of the company over their success ultimately yield far greater results. Making sure you have the right leaders in place, not necessarily for the company you have today but for the company you want to be at exit and beyond, is critical to success.
   
   
2. Understand the Value Drivers: Early on, you must determine what the business should look like at exit to maximize your valuation potential. As early as the thesis development phase, it is helpful to identify and connect with potential buyers and understand their criteria for acquisitions in your chosen industry. You can then tailor your value creation plan to these insights and build with this end game in mind. Further, by maintaining a dialogue with these potential buyers throughout your investments’ lifecycle, and by allowing them to get to know the business as you build it, you can foster relationships between your leadership teams and their potential future partners, which helps to establish strong foundational demand for a successful exit.
   
   
3. Align Incentives: Having the right people in place and the right plan for value creation is critical, but you will not succeed without the proper incentives to align behavior to the desired outcomes. Therefore, it is essential to pinpoint the key levers that drive value creation and align incentives to behaviors that will activate these levers. You must set clear expectations from the start, implement systems to measure and monitor performance and work closely with management to ensure continuous progress towards these goals. We have found that a broad base of employee ownership can be highly effective in supporting this, as it helps to foster an ownership mentality across a larger group of leaders at varying levels of the organization. It is also important that you not overlook the intangible success factors, so you should seek to incorporate criteria in your incentive plans like employee retention, customer satisfaction, and the successful execution of defined strategic initiatives. 

Q. You're going to be covering the topic of 'building great workplaces' during your keynote session at the event - why and how is talent so important, and how do independent sponsors need to optimize their talent management?

Success in business, like in many aspects of life, fundamentally ties back to the people you surround yourself with. Building an organization where individuals feel energized, have opportunities for career growth, receive support to balance the complexities of work and life, and see meaningful upside aligned with the organization's success is crucial.

Independent sponsors often focus on sub-scale organizations that may not have the resources to invest in top-tier talent management initiatives like large-cap companies do — training programs, mentorship, career pathing, sophisticated incentive compensation plans, and enhanced benefits, as a few examples. However, bringing in outside capital and pursuing growth can change this dynamic. At RTC, we have consistently found that investing in talent management drives significant ROI through increased engagement, retention, and productivity. Ultimately, prioritizing your people is a strategic investment that fuels overall business success.

In the upcoming keynote session, we will go in-depth into some of the ways in which we have helped our portfolio companies optimize their talent management. 

Q. Why will you be speaking at iGlobal Forum's Independent Sponsors Summit in NYC on September 17-18?

At RTC we have been fortunate to achieve a lot as an Independent Sponsor, having acquired over 80 businesses across 6 platforms, and we have always been grateful for the strong community of peers and support organizations in the independent sponsor market for enabling that. iGlobal has been a great partner and we are excited about the chance to share some of our learnings and support this event.

Tony and his fellow Managing Partner at RTC Partners, Chris Lee, will join us for a Keynote Interview on ‘Creating Differentiation Through Value Creation To Win Deals In A Subdued Market.’ They’ll examine topics like value creation during the deal process, risk diversification, organic growth, building great workplaces, and pre-marketing to optimize exits. Register now to join us this September at the Independent Sponsors Summit.