Ospalik joined Baird Private Equity in 1999, after two years in Baird’s Investment Banking Group. He also is a director of the Pentagon Technologies Group. In an interview with IVCA, he talked about the current investment climate, the Baird Private Equity approach and middle market portfolio challenges.
IVCA: Congratulations on your recent promotion to partner with Baird Private Equity. What investment goals do you have for the firm, and is the first quarter optimistically in line with those goals?
Rob Ospalik: Baird Private Equity (BPE) has had a very active start to 2010, having completed an investment in Fellon McCord, a Louisville, KY based provider of energy management services, and the simultaneous acquisitions of Rea Brothers Mid-South Auto Auction and Charleston Auto Auction to form American Auto Auction Group. In addition, we have a couple of additional investments pending within BPE over the next few weeks, so I feel very optimistic about our deployment targets. BPE takes a very proactive approach to deploying capital through a targeted sector approach which results in deal flow in sectors we really like, partnered with great resources. I attribute our strong deployment to this discipline. Overall we feel that the current environment will prove to be very favorable for deploying capital at reasonable multiples in good companies.
IVCA: Baird Private Equity is a global concern with satellite offices in Europe and Asia. Where, in your opinion, are the greatest untapped global markets for investment and why?
RO: We have four core funds based across those geographies and each office has a dedicated investment team focused on investing in that market. We feel very strong about the prospects for the emerging growth of both China and India and have a team of more than 15 on-the-ground operating experts to support our portfolio companies’ strategies in those regions. We have been in both of these countries for several years and, in addition to operating resources, we have a dedicated investment team in China, Baird Capital Partners Asia. We are seeing investment opportunities directly in these regions, as well as ways to help our portfolio companies take advantage of the revenue growth and cost reduction opportunities that exist in the region. We’ve added over $10 million of operating profit contribution to our portfolio companies as a result of our Asia-based operations team, which is a core piece of how we grow value in our companies, regardless of where they are based.
IVCA: What social, cultural or technological factors in China and India, in your opinion, has made it most conducive to the economic change that has occurred in the last generation?
RO: You find a great sense of entrepreneurial spirit in both countries. In China this has been coupled with a tremendous investment in infrastructure which is rapidly expanding their system of roads, bridges, ports and railroads. Finally, the level of productivity in both countries is expanding significantly, even as real wages rise, the unit productivity costs make these countries extremely competitive and will continue to do so for some time to come.
IVCA: With health care reform the biggest news story in the last month, how does health care effect an economy and investments overall and how do you feel reform will play out within the marketplace and general economy in the next five years?
RO: Clearly the inflation of healthcare costs is and has been an issue for some time. The healthcare issue is one that is relevant from a portfolio management perspective as well as in assessing the impact from an investment perspective. With respect to portfolio management, it is an area of pain where we consistently see our portfolio company finance and human resource executives struggle. As a result we undertook an initiative last year to work with our portfolio companies on a combined basis to consolidate procurement of health and related coverage. We were able to generate meaningful savings for our companies in this way. On the investment side, it is a mixed picture – we generally feel that several of our companies are poised to take advantage of the large increase in the number of participants in the health care system, but we are concerned along with many others regarding the increased cost burden to companies in general.
IVCA: As the investment marketplace shakes off the downturn of the last several years, what circumstances will still give the PE industry some sleepless nights?
RO: Many firms will find that they have not fundamentally taken the steps to build sustainable value in their companies and will only emerge weaker from the downturn. It is not enough to slash costs and hope for the best, managers must be increasingly active with their portfolios to make sure their companies have appropriately-sized cost structures and that they are poised to begin driving revenue growth as conditions improve. We have several opportunities in our portfolio where we are working with our operating partners and bench of resources to actively review our sales organizations, channels, talent, tactics and management. Now is the time when revenue growth should contribute highly to the bottom line, but I suspect many may be surprised when this does not occur because they have not taken the right steps with their companies.
IVCA: What is the consensus at the firm for what makes a strong management team in consideration of investments? What do you look for specifically?
RO: It’s an area where we spend significant time to make sure we have the best talent we possibly can. Unfortunately there is no magic formula for what makes a great manager and you really need to make sure that you do your homework up front in assessing the management team, with a goal of identifying past success at what you need the individual and team to do in that role. Reference check relentlessly and find the people who will give you candid feedback. Then you need to set the proper governance structure so roles responsibilities and authority are understood and accountability is established. Last but certainly not least is to provide clear, targeted and measurable objectives and compensate against those.
IVCA: You wrote last August in Deal Magazine of the need for having a 'tool kit' for strategies in investment for middle market portfolios. What do you find is the most common tool a PE firm can bring a portfolio company during a restructuring?
RO: We’ve been investing in lower middle market companies for over twenty years and will be doing so for years to come. During that time we’ve learned that companies in this size range have a number of areas where you can commonly find value. The great thing about the companies that we invest in is that you can make a big impact on these companies through some very targeted and straightforward initiatives.
We were extremely focused on cash optimization during the downturn as the most important thing to do to make sure you control your own destiny in a tough environment. One example that stands out in particular is a targeted working capital reduction program implemented at one of our manufactured products companies. We generated cash through real improvements in the cash conversion cycle that led to the company reducing their senior debt balance by over one third! Success became an addiction for the management team. Wins like this are what make my job really fun.
IVCA: What approach does an investment team use for wary management teams to put them at ease in initial meetings for plans described above?
RO: You have to take a partnership approach with management teams. We want to attract and retain the very best management talent so we collaborate on all of these initiatives. If there is a compelling value proposition smart management teams will recognize the opportunity and welcome the chance to realize the benefit.
IVCA: What are the advantages of being a Midwest-based PE firm? What business characteristics do you find here and nowhere else?
RO: I certainly would not disparage other areas of the country, but as a lifelong Midwesterner, I do feel that we thrive on great core values – work ethic, integrity, ethics and teamwork. These are the things that have kept me at Baird for the past twelve years and allow us to win as a team, not individuals. Finally, dealing with a Chicago winter helps put everything in perspective.
IVCA: What part of your education focus best prepared you for your subsequent career path? What are you recommending now for potential employees in the industry that are still in college or post-grad?
RO: All of my core studies certainly laid the groundwork for my career, but learning to interact positively with different people – personalities, regions, cultures – is really one of the most important things impacting my day-to-day. I would counsel students with a real interest in the industry to make sure they really understand the industry and its dynamics, as I find there are many misconceptions, and then find a firm where the culture is one in which you will thrive.