|IVCA Feature: New Member Profile of NewSpring Capital|
IVCA Feature: New Member Profile of NewSpring CapitalThe expansion of the Illinois Venture Capital Association continues in 2017, which benefits both new members and the current IVCA membership, in taking advantage of the networking and association opportunities. The latest member to join the association is NewSpring Capital, which invests in dynamic companies with a goal of partnering with the management teams to develop those companies into market leaders.
The following is a Q&A profile with NewSpring Capital, which explores the firm’s background and their expectations for interacting with the IVCA.
New Member: NewSpring Capital
Representative: Glenn Rieger, General Partner
IVCA: What is the background and history of NewSpring Capital?
NewSpring Capital: We were founded in 1999, and originally were a single strategy growth equity fund centered in the Mid-Atlantic region of the country. That fund was originally $90 million. We grew to what I would now refer to as a small family of funds, with a diversified healthcare fund, a mezzanine debt fund, a controlled buyout strategy and a growth equity fund. The aggregate of all those funds together now is $1.6 billion.
As we’ve grown – and this is relevant to the IVCA – we’ve opened a small office in Chicago, which is staffed by Kristin Lee, a principal in our mezzanine debt fund. Plus our growth equity fund has two investments in Chicago, in DialogTech and Velocidata, and I work closely with Irv Shapiro at DialogTech. Our view is that there is a lot of opportunity in Chicago, and as we expand our horizons in the Midwest, it’s important to us to be part of the environment in the city, and be part of the IVCA.
IVCA: The NewSpring Capital philosophy is to partner with your portfolio company management teams to create success and market leadership for those companies. How has this strategy evolved and developed over the years, and how does the firm maintain flexibility within the different dynamics of these funds, strategies and portfolio companies?
NewSpring Capital: First of all, all four of the funds and strategies I mentioned are highly differentiated and unique. There is a dedicated partner group that manages each of these strategies. And besides our dedicated partners for dedicated strategies, in most cases we have dedicated LPs for each fund.
Growth equity is on its fourth fund. Mezzanine has raised three. Diversified healthcare is in the midst of raising its third. Our holdings ‘strategy’ is not a fund, it’s an LLC holding company, and they’ve raised separate money from a separate pool of investors. We can be highly focused on our individual strategies, plus maintain offices and focus in different geographies.
IVCA: How did you expand to Chicago in accordance with your strategies?
NewSpring Capital: Our base of operations is Mid Atlantic, and that’s the vast majority of our deal flow. But we’ve found Chicago to be a very interesting and underserved market at the growth equity level. They is a lot of early stage investing going on, and PE/buyout in Chicago, but there is not as much at the growth equity level. We saw this as an opportunity to establish a presence.
IVCA: Regarding the four funds and strategies we’ve spoke of, conversely what is the common thread through how these funds and strategies are managed that also defines the overall philosophy of NewSpring Capital?
NewSpring Capital: I’ll talk about three common elements – first, regardless of the strategies between the four, they are all ‘growth-y’ in nature. For example, our diversified healthcare fund does not go out and do early stage drug development...it is later stage, growth-y healthcare opportunities.
The second element is that in every one of our strategies, we have a highly focused operating emphasis. At least one or more of the Partners that operate a strategy are former CEOs. We get a very detailed operating focus with those contributions.
IVCA: And the third commonality?
NewSpring Capital: We have a group that we call our ‘Value Creation Team,’ which are not employees of NewSpring, but colleagues of ours who act as advisers to us in either diligence or consulting issues, which we can bring to bear in any of our portfolio companies or any of our strategies.
IVCA: Let’s do some micro-focusing. What is an example of a Chicago-based portfolio company that NewSpring took a chance on, that is becoming a success story based on their interaction with the firm?
NewSpring Capital: Let’s talk about DialogTech [Adams Street, Chicago]. It used to be called ‘If By Phone.’ We led an investment in that company two years ago, it was a $30 million dollar deal, but $25 million of that financing went toward an acquisition in Cleveland, Ohio. Our capital was the genesis that allowed them to acquire this business, which combined two of the six largest players in the call tracking and attribution marketplace. By merging the two, we instantly moved to number one in that particular business.
So in your backyard, the investors in DialogTech included Bruce Barron at Origin Ventures, Wayne Boulais at Apex Venture Partners and Kapil Chaudhary at I2A fund, plus Robert Heimann of River Cities Capital Fund out of Cincinnati. We came in and led the last round of capital to bolster the company with the acquisition. Personally, I sit on the Board of Directors and chair the Compensation Committee, and the company has grown at a nice rate for the last couple of years, and in addition we’ve helped with management and consulting. It’s well on the right path for continued growth.
IVCA: You speak on your website about how NewSpring Capital has managed the funds and companies during many different economic cycles. With presumably pro-business executive and legislative branches now in place in Washington, what does the firm anticipate its strategy to be in an economic climate that has a strong potential?
NewSpring Capital: Here’s the answer I can give you. The four activities a fund needs to manage are one...we raise money from institutional investors, two...we source the companies to invest in, three...we manage them during the ownership period, and four...ultimately we harvest them. All four of those steps are affected by economic cycles. That said I believe two and four are most affected.
In making new investments, the number one thing is stay disciplined. We have gone through cycles – like 2001 to 2002, and late 2008 to 2010 – where we didn’t make a single new investment...it was like trying to catch a falling knife. Valuations were dropping, and there were underperforming companies across the board. Every time we thought it couldn’t go any lower, it went lower. Discipline and focus are absolutely necessary.
IVCA: How does your philosophy of discipline help to get through those times?
NewSpring Capital: Our LPs like our discipline strategy. We’re not going to make an investment unless we’re moving in the right direction and acquired the company at the right value. That’s proven to pay substantial dividends for us. Our LPs might bug us as to when we’re going to make our next move in investments, but when we explain why we’re not, they are very supportive.
As we sit here today, we’ve never had a fuller pipeline of new deals. But right now the problem is valuation. When the markets are hot, our entrepreneurs read that same news. They are looking higher valuations, and that makes it harder for us.
IVCA: What does NewSpring Capital hope to achieve in their interaction with the IVCA?
NewSpring Capital: For starters, Kristin Lee in our Mezzanine Fund is physically located in Chicago, and we have a number of investments all over the Midwest. From a deal sourcing point of view, we have geographically-focused teams in Boston, Philadelphia, New York City and D.C., and our fifth team is in Chicago.
I recently attended an IVCA luncheon with three CEOs talking about raising their next round of capital, and subsequently we wanted to be become more involved in that type of Chicago ecosystem. One of the best ways to do that is to be a part of the IVCA and attend events, to let our presence be known. We view the membership of the IVCA as be an active way to be part of the ecosystem in Chicago.
For more information on NewSpring Capital, go to www.NewSpringCapital.com