Lower-middle-market private equity firm Riverside Co. sees growth in smaller portfolio companies despite recession talk

Lower-middle-market private equity firm Riverside Co. sees growth in smaller portfolio companies despite recession talk

The view from Main Street is not as bearish as the current outlook on Wall Street, private equity professionals at private equity firm Riverside Co said Thursday.

The Cleveland and New York-based company, with about $13 billion in assets under management in companies with an enterprise value of $400 million or less, said its 101 portfolio company CEOs remain more concerned about inflation than a recession at the moment.

But some uncertainty about 2023 remains after many unpredictable events over the past two years, from the COVID-19 pandemic to the war in Ukraine.

“It’s very difficult to predict 2022, but we’re going to stay on our toes and we’re going to stay nimble,” Riverside Co. co-CEO Stewart Kohl said during a breakfast meeting with reporters. “If we just look at how our portfolio companies are doing, we wouldn’t be talking about a recession.”

As of September 30, the 101 companies in Riverside’s portfolio reported a 14% increase in revenue for the first nine months of 2022, with an increase of around 5% in valuations. The Nasdaq, on the other hand, is down 29% in 2022 as of Thursday trading.

Headwinds the company faces include a tougher fundraising environment, in part because institutional investors in private equity funds remain over-allocated to alternatives.

Kohl said the higher cost of credit and wider price differentials between buyers and sellers could help reduce sales or exits from portfolio companies by the company in 2023.

“Most owners don’t sell their best businesses for a lower multiple,” Kohl said.

While the pace of its business sales may slow next year, Riverside Co. plans to keep its capital deployment in 2023 at the same level as in 2022, in part by focusing on smaller, complementary deals for businesses. portfolio companies. Larger companies may seek to shed smaller, underperforming units to reduce costs and raise capital. This trend presents another potential buying opportunity for Riverside Co.

“We think very micro…with very specific companies doing very specific things,” said Peggy Roberts, managing partner who leads the firm’s Riverside Capital Appreciation Fund.

Still, it’s a relief for Riverside Co. executives to take part in investment banker buy-and-sell processes that are less frothy than in recent years. Instead of Riverside Co. being one of dozens of companies invited to a sales process, it’s more common to see just a few interested parties on a deal these days.

Riverside’s focus on more recession-proof businesses such as residential plumbing, software-as-a-service companies that help customers improve efficiency, and healthcare-related businesses also helps the company perform during economic downturns, Kohl said.

Sean Ozbolt, managing partner who works on the Riverside Value Fund targeting companies with operational challenges, and Jeremy Holland, managing partner for origination, said the firm is exploring the possibility of offering employees of industrial portfolio companies holdings. It’s seen as a way to boost employee alignment as well as productivity, but it requires the full support of company leadership teams to be successful, they said.

Also Read: Natixis Sees Mild Recession on Horizon, Warns Fed Will Take Time to Tame Inflation

Pam Hendrickson, vice president of Riverside, said she continues to work on industry issues with regulators and members of Congress in her role as chair of the American Investment Council, the corporate lobbying arm. investment capital.

“The private equity industry still has an image problem,” said Hendrickson, who regularly meets with politicians to share data on how many jobs and investments private equity firms are generating in their neighborhoods. of origin.

Hendrickson said the regulatory environment for private equity remains challenging, with greater scrutiny from the Securities and Exchange Commission as well as the Federal Trade Commission.

Co-CEO Kohl said the company sees itself as a force for good because it helps generate jobs and growth at portfolio companies, as well as making small businesses more compliant with regulations. This makes holding companies more valuable when it’s time to sell them after an average ownership period of about 5.5 years, he said.

Riverside Co. also continues to improve its environmental, social and governance efforts, both as a way to make portfolio companies more valuable and to help attract employees to work for the company.

Read also : A credit crunch affecting M&A deals for targets and buyers

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