By David Dykes
Editor
Devin Green, chief operating officer of The Capital Corp., based in Greenville, South Carolina, contributes over 20 years of business experience, including investment banking, private equity, and C-level operations.
These three complementary backgrounds allow him to appreciate each perspective involved in a given transaction, including sellers, buyers, financiers, and business owners.
Green began his career at Bank of America Securities, where he closed over 30 change-of-control and financing transactions. After several years in the investment bank, he advanced to Bank of America’s $2 billion private equity group, Bank of America Capital Investors. There he served as a private equity buyer, participating in a series of mezzanine and equity investments across a variety of industries.
Interested in learning firsthand how to start and operate a company, Green then left corporate America, and launched the wireless technology company ESP Systems.
As CEO and chairman, he successfully raised eight figures of growth capital, secured recurring revenue contracts valued in eight figures, and established international operations, ultimately ranking in the “Top 40 under 40” in the U.S. by U.S. Venture Magazine.
He has worked with both product and service companies in a wide variety of industries, including e-commerce, aerospace and defense, value-add distribution, staffing, software, telecom, datacom, manufacturing, retail, professional services, health care services, and others.
Green graduated magna cum laude from Vanderbilt University with a double major in economics and human and organizational development.
In an interview with Integrated Media Publishing Editor David Dykes, he discussed capital raising and investment strategies for growth, and risk-management solutions to enhance financial stability.
Here are excerpts from the conversation.
Q. What are the trends you’re seeing in PE activity here?
Green: I’m not seeing a dip in private equity investing. In some ways, we’re seeing even more aggressiveness on the PEGS (Private Equity Growth Strategies), and I wonder if it’s because of a number of things. But the tariffs, I think, created a lot of uncertainty and slowed down some of their capital deployment cycle as well as their exits.
But more macro level, uncertainty is not a good thing for M&A. And when you have some macro-level event like tariffs ripple through supply chains and industries, it can cause private equity buyers to pause on investing, and it can cause private equity funds selling companies to not be able to get what they want. So it kind of pushed things right on the timeline with some of that recent tariff ripple. That’s not the only variable, but that’s part of it.
Q. How important do you think PE activity is to South Carolina’s investment pipeline? The reports I’m reading think that the pipelines are pointing towards stronger growth. Is that your reading?
Green: We do. It’s a major catalyst and contributor to South Carolina. South Carolina compares well to a lot of states manufacturing-wise. It’s one of the top-ranked states for manufacturers, so private equity loves South Carolina in various sectors. … South Carolina is near the top of the pile in a number of key sectors. So I think private equity is aware and becoming more and more aware of South Carolina and its differentials in certain sectors, manufacturing being one.
Q. What about the investment shifts? Is funding now concentrating in later-stage middle-market companies?
Green: Private equity funds have their own investment thesis on what size companies, what stage companies, and that doesn’t really change. If you’re asking, are private equity companies or private equity funds moving up and down the spectrum of size deals and (types of) companies they work with, that’s always evolving some, but not as much. They raise a $500 million fund, let’s say, and they have an investment thesis. They’re not changing that thesis for the next seven years. They took their limited partner’s money, they’re going to invest it. They’re going to stick with that. So I don’t think private equity changes their thesis year to year. It’s a seven-year cycle for these guys to change kind of where they’re targeting after they take the money.
Q. What about, is there an average check size you can point to in the Southeast?
Green: It just depends on the fund. … The sandbox we’re playing in, just anecdotally in case that’s helpful, is we’re working on companies with $25 million to $150 million enterprise values. That’s the purchase price the private equity guys close on. And those private equity guys are putting in 40 percent, give or take, of that value in equity.
Q. Help me from a layman’s perspective draw in the comparison of the connection between private equity and venture capital activity.
Green: Good question. So venture capital and private equity, think of it this way. Bifurcate the ecosystem of companies into two groups. One is early stage startup or early stage pre-revenue, or just post-revenue kind of stuff, that’s venture capital. So venture capital comes in earlier. It’s higher risk for that venture capital fund because the company’s not established as much as it could be, but it’s higher reward. So that risk is commensurate with return, usually. And then private equity is not the early-stage venture capital stuff. It’s more established companies that are usually cash-flow positive. They’re profitable, and they’re later in their development cycle of the business cycle.
Q. What am I not asking you about that you think is important for South Carolinians to understand about private equity?
Green: A couple things. Some of your readers are going to read this and they’re going to — there’s a stigma associated with private equity sometimes where they’ll hear — they’ve heard stories about a private equity company buys a business and breaks it up into pieces and sells it. That’s something I hear somewhat often. There’s a stigma that private equity will buy a company and run it into the ground, and not purposely, but just screw it up. And those two things I often hear from business owners, and those two things can happen, but it’s, you know, I don’t know how to put a quant on it, but it’s 10 percent of the time. That is not the core competency of private equity.
Q. My basic understanding is smart money is hunting for cash-flow positive industrial innovators in the middle market rather than unicorn valuations.
Green: Well, yeah, that’s right.
I’m going to use an example. They raised $500 million. They get that money from what’s called, if you want to get technical, limited partners, LPs. Those are the investors. You have GPs, general partners, which are the private equity professionals. They’re the guys doing the work with the LPs’ money. But the $500 million raised, the LPs are universities, pension funds, wealthy families, basically people with pots of money that want to target a higher return than what they can get in the stock market.
Q. Is there a minimum investment in most of these deals?
Green: There’s always a minimum and just depends on the fund. But they’re passing the hat, they raise $500 million with a group of LPs, and those LPs have an expectation that this is going to be an illiquid investment here. It’s not like a stock market where you put money in and out every day. It’s, you park this money, you give us whatever it might be, seven years, to get your money back.
Now, the private equity fund, depending upon the fund and depending upon the thesis — it’ll have its own thesis — we’re going to target these industries, the logic is based on these trends, and that will all be part of the plan that these investors sign up for. And the private equity company will disclose to the investors what kind of return they’re targeting. They might say we’re going to target 2.5 times your money in five years or seven years. So if you put in a dollar, our goal is to get you $2.50 in five to seven years from now. Let’s say seven years from now. So more than double your money.
That is an example of private equity. To go backwards, venture capital might say, “give us a dollar and we’re going to try to get you four to five times your money in that same time frame.” It’s higher return, but it’s a higher risk. You could lose all of it.
That’s the private equity model. They buy companies, existing companies. They try to grow them. They’ll sit on the boards of them once they buy them. They’ll bring in relationships to try to help accelerate the growth, or they’ll bring in experience on how to make it run smoother, more profitably. They’ll help sometimes bring in team members to augment the team with expertise and networks. So they try to enhance what the company has already been proven successful to do, but they’ll try to make it grow faster and smarter. It’s not to tear it down … and it’s not just to run it into the ground. Now, that happens, but the vast majority of the time, these private equity guys are very successful. So that’s what they’ll do. Now, the sellers of the company to the private equity guys, sometimes — let’s talk about that— sometimes the sellers will sell their entire company and go off to the Bahamas. So that’s scenario A. But more often than not, the private equity guys are not operators. They don’t know how to run a business like these owners do.
So they will say, we’ll buy 80 percent of your business, we’ll pay you cash for 80 percent, but the other 20 percent we want you to keep in stock and roll forward with us.
So the seller has skin in the game. Their big issue on that, or their big goal on that, is aligning interests with the owner. And the owner has enough skin in the game where they’re not just going to walk out one day. And if they can sit there and 2.5 times their money on that 20 percent, then everybody’s high-fiving and everybody’s happy. So that’s the private equity model — buy a business, bet on the existing ownership, motivate them to stick around by giving them enough equity in the business going forward that they want to help win together, make it easier to win, and in doing that, give the seller enough liquidity they don’t have to ever worry about money for their family.
Q. Can you give me an example — without naming a company, let’s just do hypotheticals, but the realistic, I guess, valuations and returns of one that just exceeded your expectations, that just blew through the roof, and one that didn’t work out quite as well and maybe blew through the basement?
Green: Yep, sold the business for $70 million. The sellers kept 20 percent of their business. So they got $55 million in cash up front. They kept $15 million in stock, and within three years, that $15 million was worth $80 million. They did better on the 20 percent than they did on the 80 percent up front.
Q. And then what would be — and I guess let me just ask you this generally — what would be the Capital Corp.’s payout for that?
Green: We only get a fee on the initial transaction. We don’t get a fee on the double dip.
Q. Is there one that maybe was hugely disappointing?
Green: I don’t know if we’ve had a hugely disappointing. We’ve had one where the private equity fund got involved. They bought it — I think it was for $40-something million. The seller walked away with $32 million in cash, rolled $8 million, maybe $10 million into stock. The company’s doing fine. It’s just kind of flatlined. It hasn’t grown. And so the equity value is preserved, but it hasn’t done what the owner and the private equity fund counted on. We haven’t seen one just combust or break apart. I haven’t seen that in the almost 20 years I’ve been doing this with the Capital Corporation.
… We’re selling one (company) right now. We have 230 private equity funds we’re going to for one company. We’re running an auction process, and so they’re all bidding on one company. And that doesn’t even include strategic buyers. We have 100 — no, on this one, 83 strategics we’re going to on top of the 200+ with private equity funds. So we’re going to well over 300 buyers, including international, for one company. … We’re talking to the private equity guys every single day — what they’re looking for, what are their investment criteria, what are their scar-tissue issues, what are the value drivers they want, how do they structure the legal stuff.
… I think of quantitative and qualitative. So quantitative is numbers and analytics and metrics for me. Qualitative could be what are the barriers to entry, what is the management experience? What are the contracts? Do you have multi-year contracts or not? How strong is the brand? What’s the sales cycle look like and the win rates?
And then the quants are things like, what’s the growth rate, what are the profit margins, what’s the lifetime value per customer? What’s the acquisition cost per customer? How does that compare? What kind of free cash flow conversion do you have on EBITDA? Those are all the nerdy quants that we can use to quickly assess the business and the market receptivity.
And if it’s not obvious everyone’s going to love it, that’s where it gets fun, because we segment out the buyer universe knowing a lot of what these buyers want, and some of them, it’ll fit. And that’s part of the process — knowing the pretenders from the contenders and driving it home.