PE ownership presents opportunities, challenges for portfolio companies – AVCJ Forum

Speaking to the AVCJ Forum, Colin Hill, currently chairman of CDH Group, recalled the decision to work with Navis Capital Partners in 2005 on a management buyout of Hill & Associates, the risk management consultancy of which he was then CEO. The company was seeking financial backing to build a pan-Asian risk assessment platform, and Hill saw Navis as a good partner thanks to its management team's experience with Boston Consulting Group.

"I immediately felt a chemistry," said Hill. "There was a good rapport, they were very direct and forthright with me, they listened to the story of the development of the business and my vision for it, and I thought they immediately grasped the opportunity that was there."

While Navis shared Hill's excitement for the potential of the business, the firm also foresaw some challenges. The company's employees were skilled, experienced investigators with good reputations, but none of them had any previous business experience. Navis recognized it would have to bring in new management to run the business and manage the finances.

Talent retention could also be a problem: as a young firm dependent on its employees' individual skillsets, Hill & Associates would be vulnerable to poaching by its competitors. Expanding the talent pool while maintaining the firm's proficiency at investigation would need special attention.

"That's not a natural fit for private equity – it doesn't have the stickiness, and it's a challenge to scale," said Rodney Muse, co-founder and managing partner at Navis. "But we thought that if you could become the dominant place for integrity risk issues across Asia, and if clients were prepared to pay a premium for the best, then this would inevitably become the choice both from an operation point of view but also as an acquisition target for some of the global players."

Achieving that value proposition would prove more difficult than anticipated, though, due to a number of factors. Navis had a hard time motivating Hill & Associates' employees, who were used to working at their own pace, to meet performance metrics and to see themselves as providers of a service. Financial pressure also mounted when the expected demand for premium services failed to materialize.

"As a result of that, we lost some of the best people, we had to get rid of some of the weaker people, and we had to put in additional capital when the institutional following didn't ramp up like we hoped it would," Muse said.

The private equity fund structure itself also worked against the deal, as Navis began to feel pressure from LPs to return capital from its fund following the global financial crisis. Though the firm would have liked to put in several years' more work on the company, it exited to global security solutions provider G4S in 2009.

Despite the setbacks, both parties remember the relationship as a productive one marked by complete transparency and consensus between GP and company management. Muse points to the G4S sale as validation of Navis' thesis that a strategic player would find the business valuable, and Hill believes that while the timing of the sale was not ideal, the years under Navis left a strong mark on the company's legacy.

"The performance was really starting to tick up. The value of that business could have three or four-fold in the next four years," said Hill. "But the good part is, we actually built a global brand. G4S historically has immediately rebranded any company it bought. Hill and Associates still stands today as the only company in G4S with a standalone identity."

The AVCJ Forum is being held in Hong Kong on November 14-16. For more information, go to www.avcjforum.com.

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