Picks and Shovels: The Golden Age for Service Providers to PE Firms is Now


Read time: 3-4 minutes

“When everyone is looking for gold, it’s a good time to be in the pick and shovel business.” (Mark Twain)



Metaphorically speaking, a company is said to be in the picks and shovels business if they are providing derivative goods and services in support of entities engaged in some primary activity.  Using the gold mining analogy, the idea is that while perhaps less glamorous, it may be a similarly lucrative yet less painful existence to simply hand out the tools than to be the ones tasked with using them.  I contend that we are amidst a golden age (or will be very soon) for service providers to the PE community, and we’re starting to see transaction activity (i.e. funds investing in their own service providers) that supports this claim.

In the U.S., private equity firms have an estimated $900 billion of unspent capital that needs to find a home.  The mandate to invest this money wisely and in a timely fashion is what drove funds to lace back up in the second half of 2020 and get creative about how to get deals done when the world seemed like it was ending.  And, as long as returns in the broader PE space remain attractive relative to other alternatives, capital will continue to flow into the system, fueling an ongoing gold rush dynamic.  The chart below illustrates the generally increasing fundraising trend for U.S.-based PE firms which has been the primary driver of elevated competition (2020 omitted for obvious reasons).


In response to increasingly crowded auction processes and rising valuations, PE firms started pulling out all the stops.  This resulted in the rise of the business development professional, CRM implementation, sector specialization, growing marketing budgets and a host of other behaviors that made PE firms start to look like real businesses.  As a peer in the PE industry lamented to me not long ago, “This is starting to feel like work.”  Therein emerged the opportunity for service providers to ride to the rescue with solutions that made workstreams more accurate, efficient, automated, and generally palliative to the plight of the investment professional.  And, to the delight of those offering their wares to the private equity community, they discovered a clientele that was fragmented, seeking tech-enablement, amenable to recurring revenue-denominated relationships and not especially price sensitive. This dynamic creates a fertile backdrop for the PE industry to begin foraging for picks and shovels businesses as investment candidates within its own ecosystem.

Read on for some examples of such businesses that I think will be primed for sustainable growth and, thus, investment by PE firms.  But first, let’s learn about the OG1 pick and shovel magnate, Levi Strauss.


The Levi Strauss Story

Levi Strauss
In 1848, Levi Strauss immigrated from Buttenheim, Bavaria to the United States where he joined his brothers Jonas and Louis who had begun a wholesale dry goods business in New York City called J. Strauss Brother & Co.  Levi learned the trading business from his brothers, and, upon hearing of the California Gold Rush, he ventured to San Francisco to seek his fortune and arrived there in 1853.  Levi set up a wholesale dry goods business of his own and served as the West Coast representative of his family’s New York firm providing clothing, bedding, combs, purses and handkerchiefs.  Levi’s company was eventually renamed Levi Strauss & Co.

Around 1872, Levi received a letter from one of his customers, Jacob Davis, a Nevada tailor who had developed a technique for making denim pants using rivets at points of strain to make them last longer.  Davis sought to patent his idea but needed a business partner to commercialize his products.  Understanding the appeal of more durable workwear to support gold mining, Levi partnered with Davis, and a patent was issued to Jacob Davis and Li & Company on May 20, 1873.  Consequently, blue jeans as we know them today were born.

What Levi Strauss didn’t do as an entrepreneur is almost as important as what he did do.  In other words, he participated in the boom of the Gold Rush but without panning for gold like everyone else.  Of course, panning for gold held the potential of a big payoff, but a more likely outcome for prospectors was coming home empty handed after expending a lot of time and energy.  In contrast, a picks and shovels (or blue jeans) business model ensures that you get paid every time as opposed to shooting for the moon and hoping to win big.  However, without the patent on the use of rivets, Levi Strauss may never have made the impact on the apparel industry that he did.  Therefore, I conclude that it’s not enough to just be a pick and shovel-style business supporting a growing industry, you also need to develop and commercialize your version of “rivets” that make your offering both special and defensible.

In 2020, Levi Strauss & Co. generated approximately $4.5 billion in revenue with around 75% of that revenue generated from pants.  The company’s brand remains one of the most recognizable in consumer products globally.  Can you even imagine jeans without rivets on them now?


“Pick and Shovel” Sectors to Watch

The private equity industry has long relied upon service providers to support the pursuit and execution of deals.  You might say, for instance, that M&A attorneys or accountants represent classic pick and shovel disciplines, which would be true.  However, my focus here is on the emerging class of, primarily, tech-enabled service providers cropping up to make PE firms better, faster, and stronger across their various workstreams.  Note that for each sector example profiled below I’ve included an idea about what a potential “rivet” could be – in other words, what could or should these entities be providing PE firm clients that would lock them in as essential partners.

PE “Pick and Shovel” Sector Investment Ideas
Category What They Do Potential “Rivets”

Deal Sourcing Support

Subscription services that assist with intermediary identification & management as well as proprietary deal sourcing. Customized information or deal flow that every other subscriber is not also receiving.  Example: One-off introduction to a business owner with a pre-established “buy it now” price.

Digital Marketing

M&A-focused agencies that help PE firms develop brand & content strategies and support the dissemination of marketing pieces across relevant channels Ability to independently produce high quality content marketing pieces in the voice of the PE industry without relying on the PE fund client to write them.


Purpose built, cloud-based platforms for managing interactions with targets & referral sources Dashboard automation that optimizes BD professionals’ time and travel-management strategy and eliminates unnecessary (i.e. time wasting) activities.  Example: automated report that highlights to which cities BD professionals should travel based on deal flow data2.

Workflow Management

Tech-based solutions that automate & quality control drudgerous and/or human-error prone activities associated with deal execution and portfolio company management Anything that streamlines tasks that are most frequently delegated to Analysts or Associates.  Examples: NDA mark-up, scheduling, soliciting preliminary leverage reads, teaser evaluation, etc.

Expert / Talent Identification & Management

Includes expert networks, executive search and HR strategy services tailored for PE investors and their portfolio companies Just-in-time provision of premier caliber human resources on a customized basis.  Another “rivet” might be branded, high-accuracy predictive behavioral / cognitive assessments.

IT Services / Compliance

Specialized technology service providers that manage cloud-based, on-premise and other IT assets on behalf of investment managers Intimate understanding of the PE industry’s specific needs pertaining to cybersecurity, compliance, technology adoption, etc. → all with rapid response times


The PE industry itself remains a fabulous place to make a career and a living.  It’s also true, though, that the amount of capital being managed, and the number of participants, has spawned an excellent opportunity for an array of service providers to serve a demanding yet high quality PE clientele.  An opportunity so compelling, that PE firms themselves may increasingly recognize that investment opportunities in high margin, recurring revenue generating, high retention, strong organic growth potential, low customer concentration, tech-enabled services businesses have been hiding in plain sight.

As always, please get in touch if this piece inspired any reactions, and I encourage you to share, like and comment on LinkedIn.


1Original gangster.  This is hip hop parlance for someone credited with being the primary or founding influence on a given profession or discipline.
2Anything that eliminates the indiscriminate participation in M&A conferences would be a big win and an undeniable “rivet”.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

How PE Firms Can Use Content Marketing to Source Deals

Read time: 5-6 minutes

“Mediocre content will hurt your brand more than doing nothing at all.” (Joe Pulizzi)



Content marketing is growing in importance for private equity. The logic goes something like this:

    • There are a lot of private equity funds
    • Demand for good deals exceeds supply
    • Capital is perceived to be a commodity
    • Therefore, if a fund wants to beat its competition, it needs to get better at marketing

Content marketing is defined as a type of marketing that involves the creation and sharing of online material that does not explicitly promote a brand but is intended to stimulate interest in its products or services. Said another way, content marketing is the misdirection of offering your target audience something of value so that your brand is consequently elevated. You might say that magicians discovered the power of sleight of hand, and marketers followed suit.

There’s some debate about the efficacy of content marketing, particularly within PE.  This is probably due to the fact that even a well-executed strategy can take between 6-9 months to germinate thanks to algorithms that reward those that regularly produce reliable information.  However, the data suggest that content marketing is indeed an effective way to drive lead volume.  For example, companies with blogs get 67% more leads than those that don’t1.  So, shouldn’t investors also incorporate blogging into their lead generation tool kit, particularly while it remains a differentiated strategy?  As the saying goes, “It only takes one deal.”

Thanks to the internet, the menu of content marketing options and distribution channels is robust and has given rise to not only blogs but vlogs, video testimonials, podcasts, infographics, E-books and other forms of media.  Just take a spin through your LinkedIn feed, and you’ll get a sampling of the major food groups of content marketing at varying levels of quality2.  For a time, content marketing in private equity consisted of basic press release posts which, if plotted on a graph where the Y-axis were “creativity” and the X-axis were “value-add”, this strategy could be found in the deep southwest portion of Quadrant 3 (see chart below).  However, some early movers are starting to raise the bar for M&A-related content to the benefit of the primary target audiences which include:

    1. M&A industry professionals
    2. Business owners, generally
    3. Business owners operating within an industry of specific interest to the PE fund

The tricky part for most PE firms is trying to figure out who is responsible for creating all of this great content.  Marketing firms, while good at their craft, are rarely staffed with former investment professionals that can employ the proper voice and perspectives of a PE industry insider.  If you then look to the PE professionals themselves, most would just as soon get back to sourcing and/or executing deals and outsource the creative work to someone with a Mac.  This creates a double bind unless you can either (i) find an agency that specializes in the M&A industry (there are a few), or (ii) cultivate in-house content capabilities.  Neither of these options is necessarily an easy path, but in the words of Tom Hanks’ character in A League of Their Own, “It’s supposed to be hard. If it were easy, everyone would do it.  The hard is what makes it great.”

So, I’d like to invite you on a journey to learn about the origins of content marketing, ways to develop high-quality marketing pieces and what to do with them once you have them to source deals.  But first, a limerick3:

There once was a firm that invested,
And one day the market suggested,
To put out content,
Or face a descent,
To the place where funds go when they’re bested.

Where Content Marketing Came From

Long before Bill Gates declared “Content is King” in his now famous essay, entrepreneurs and businesses were using early incarnations of content marketing to raise awareness of their products and services.  It turns out that Benjamin Franklin himself (of course) is credited with the invention of content marketing when he first published Poor Richard’s Almanack in 1732.  PRA contained things like seasonal weather forecasts, puzzles, clever quips4 and other amusements but was really intended to promote his printing business.  Some iconic brands followed suit and experienced similar or even better success.  Here’s a link to a great infographic that walks through a brief history of content marketing, and the following are some of my favorite examples (with one that I added myself):

Notable Content Marketing Examples from History
Brand Year of Inception Commentary
1732 Benjamin Franklin creates Poor Richard’s Almanack as a way to promote his printing business.  PRA ran for over 25 years and sold more than 10,000 copies annually.
1895 John Deere publishes The Furrow magazine which was established as, “A Journal for the American Farmer”.  The recipe was to incorporate stories that people enjoyed reading and information to help farmers with their own operations, including ways to increase profitability. It is still published today and has been referred to as the agrarian version of Rolling Stone.
1900 In an attempt to stimulate demand for automobiles and, consequently, tires, the Michelin5 brothers published a guide for French motorists that featured information about hotels, gas stations, restaurants and other places of interest throughout France.  By 1926, the Michelin Guide had standardized the now widely recognized star system for restaurants all over the world with three stars indicating that the cuisine was worth a special journey.
1904 Founded in 1897, it didn’t take long for the Jell-O company to get into the content marketing game.  Door-to-door salesmen distributed free copies of a recipe book that reportedly contributed to over $1 million in sales by 1906
1930 Procter & Gamble started to broadcast a radio serial drama sponsored by their Oxydol soap powder.  The company intended to build brand loyalty amongst adult women through this programming, and its success resulted in the birth of what we now know as the soap opera.
1965 Warren Buffett debuts his now famous Berkshire Hathaway Letters to Shareholders.  Early versions were, admittedly, pretty dry, but ultimately evolved to incorporate more approachable commentary and plugs for the brands in which BH was invested.  These letters don’t always get put into the content marketing category, but I think they are an excellent example.
2014 The debut of the Lego Movie arguably represents the first example of a major studio film doubling as a branded content marketing piece.

Content and the internet go together like lamb and tuna fish6.  In 1996, Bill Gates presciently analogized the arrival of the internet to the television revolution and dropped the following gems on us which have served as the north star of many a content strategy:

Selected Quotes from Bill Gates’ Essay “Content is King”
Quote Punchline
“Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting.” We’ve seen this movie before
“…the long-term winners were those who used the medium to deliver information and entertainment.” Content will trump hardware
“…anyone with a PC and a modem can publish whatever content they can create. It allows material to be duplicated at low cost, no matter the size of the audience.” Content publishing & dissemination will be democratized
“If people are to be expected to…turn on a computer to read a screen, they must be rewarded with deep and extremely up-to-date information…” Make your content good
“Those who succeed will propel the Internet forward as a marketplace of ideas, experiences, and products – a marketplace of content.” The winners will elevate the standard of content to the benefit of everyone

In summary, content marketing has been around for a long time, some very well-respected companies have used it successfully, and the internet was essentially made for the dissemination of content.  It’s time the private equity industry got on board.  The good news is that there are some tested and proven strategies that marketers have embraced in other arenas from which investors can borrow and that are profiled below.


How to Have Good Content Marketing

Here are some guidelines to enhance your odds of creating content that is informative, entertaining, humorous, alluring, memorable, shareworthy, vulnerable, etc.  These rules have been synthesized from some of the great writers, storytellers, philosophers, academics, entertainers, marketers and business minds that mankind has produced.

1.  Wait for Inspiration

With all of the content swirling around, it’s easy to feel compelled to just start distributing marketing pieces so that you can allay your FOMO and get in on the fun.  Agencies don’t help in that they will frequently push to get you on a content calendar for a consistent cadence of distribution.  Resist the temptation to do this. Rather, wait for the topic or idea that you just can’t shake.  Wait for the creative impulse that keeps coming back to you, and learn what it feels like when true inspiration strikes.  This is how you end up with marketing pieces that other people will want to consume.

2.  Solve Pain Points

In the fable of Androcles and the Lion, Androcles, a runaway slave, happens upon the den of a wounded lion from whose paw he removes a large thorn.  This act effectively tames the lion who then shares his food with Androcles.  Years later, when Androcles is caught and condemned to be devoured by the same lion, the lion refuses and unexpectedly shows affection to Androcles. This story is a useful archetype for how you want those in business who control your destiny to respond to you.  Consider this – LinkedIn posts with “How To” in the title earn a 46% increase in average views while posts that pose a question in the title (which introduce the pain of having to think about an answer the question) experience 15% fewer views than all other post types.

3.  Ethos, Pathos, Logos

Between 367-322 BC, Aristotle developed what is called the Aristotelian Triad, or The Rhetorical Appeals.  Rhetoric is defined as the art of persuasion, and its building blocks are Ethos, Pathos and Logos.  Ethos, in this context, refers to the character or reputation of the speaker.  The better the reputation, the more persuasive he or she is likely to be.  Pathos is the speaker’s ability to evoke emotion from the audience, and Logos entails the use of logic to make a point.  When coupled together, you’ll have the audience eating out of the palm of your hand.  Not surprisingly, the highest viewed Ted Talks are a master class on incorporating the Rhetorical Appeals.

4.  Be a Good Storyteller

Storytelling, in various forms, has been around for over 30,000 years, and there’s something about it that makes it effective in memorializing valuable information.  The science suggests that in response to a captivating story, the brain releases dopamine making the story easier to remember and with greater accuracy.  Therefore, a marketer’s motivation to be a good storyteller is to have their content sought after and remembered.  For some tips on being a great storyteller, check out Kurt Vonnegut’s classic “8 Rules…” list.  My favorite is Rule #1 – Use the time of a total stranger in such a way that he or she will not feel the time was wasted.

5.  “Quality is the Best Business Plan”

There’s too much cyber noise being secreted online by people that aren’t doing themselves or their brands any favors.  Pixar’s former Chief Creative Officer John Lasseter said, “Quality is the best business plan.”  Hard to argue with the Ethos (see #3 above) of a guy like that.  In a related sentiment, Steve Martin said, “Be so good they can’t ignore you.”  The point is that once inspiration strikes and you have something to say, put all of your energy into making your marketing pieces as good as possible.  You want your brand to be irrefutably associated with quality.

6.   Be Authentic

Sometimes it can be tricky to navigate an overly cautious compliance protocol, but do your best to stay away from using hyper-sanitized or inauthentic corporate speak in your marketing materials.  If you want to have any shot at evoking Pathos (see #3 above) in your audience, you need, at the very least, to be authentic, and it’s even better if you can be constructively vulnerable.  If you find yourself non-ironically using words / terms like “industry agnostic”, “value proposition”, “liaise”, “work hard / play hard” or “crossed my desk”, then stop what you are doing and start again.  And, whatever you do, don’t you dare employ humblebragging.  Remember, it’s the authentic humanity embedded within content that often makes it effective.

7.  Adapt to Changing Attention Spans

It’s been proven that the way people consume content changes based on the medium in which the content is delivered.  For instance, a person holding a physical book is more likely to comprehensively read the material vs. a tendency to skim and look for main points when reading online.  Therefore, make sure to consider where and how your content will be consumed and adapt accordingly.  Some quick tips for electronic consumption include the use of bullet points when possible, dividing your content into large and simple headings, and including imagery.


After arming yourself with the rules above, you then have to decide to which medium you’d like to apply them.  The chart below plots some of the typical PE firm content marketing varieties based on creativity (Y-axis) and value-add to the recipient (X-axis).  My present favorites are highlighted in orange.


What to Do with Your Content Marketing (and When)

Ok, so you’ve developed some nice content and are ready to distribute it to your target audience that’s awaiting your perspectives with the anticipation of a baby bird at breakfast.  Here are some options with the respective pros and cons of each channel from the lens of a PE firm.

Common Content Marketing Distribution Channels for PE Firms
Channel Firm Website Social Media Email Blast Direct Mail In Person Virtual
  • Logical place for marketing assets
  • Improves SEO
  • Stimulates engagement with other parts of your website
  • Exposes audience to your firm’s brand experience
  • Reaches wide audience
  • Stimulates engagement & new contacts
  • Keeps firm in the “conversation”
  • Can result in incremental deal flow
  • Reaches wide audience
  • Can segment marketing lists based on audience
  • Can drive traffic to website
  • High response rates (50%+) when done well
  • Differentiated in that it is not an electronic medium
  • Can introduce tangible personalization
  • Positions individual as a thought leader
  • Keynotes more powerful than panels
  • Humanizes firm
  • Reaches wide audience
  • No travel required
  • Builds brand association with specific industries / topics
  • Need to supplement with lead capture tech to be useful for deal sourcing
  • Sending only to subscribers will not reach as wide an audience as other channels
  • Time consuming to regularly post high-quality content
  • Content must be targeted / industry-specific to source differentiated deal flow here
  • Low engagement
  • Too easy to delete / ignore
  • People get too many emails
  • Can result in “unsubscribes”
  • Remote work may make it hard to reach decision maker
  • Increases lead acquisition cost
  • Must be highly personalized to elevate response rates
  • Typically, fairly episodic in frequency
  • Less feasible during COVID era
  • Audience needs to be sizeable and relevant
  • Typically, fairly episodic in frequency
  • Short bursts of activity before / after the event
  • TBD if will remain relevant in post-COVID era
Other Commentary
  • Look to management consulting websites for what PE websites should aspire to
  • LinkedIn is becoming Instagram for the business community → learn the game
  • Must use segmented contact lists so that recipients receive relevant content
  • Do whatever you can to stand out; make packages highly personalized
  • Would expect a flurry of in-person content marketing events post-COVID
  • Leverage LinkedIn to promote participation before / after event

Since LinkedIn is rapidly becoming Instagram for the business community (and with the corresponding addictiveness), here are some tips for how to optimize for engagement.  The most common question people ask is about the best day and time to post content.  The answer to that question is a bit of a moving target, so it’s good to stay current on the latest guidance.  Back in August 2020, Sprout Social published a great piece that examined the optimal times to post on the major social media platforms.  Based on the social media activity of over 20,000 of their own clients, they suggested the following pertaining to LinkedIn:

  • Best times: Wednesday from 8–10 am and noon, Thursday at 9 am and 1–2 pm, and Friday at 9 am
  • Best day: Wednesday and Thursday
  • Worst day: Sunday

The heat map below presents their findings visually:

Other LinkedIn Posting Tips

Here are some other useful LinkedIn posting tips8.  Those highlighted in yellow are those that I’ve incorporated into this blog:

  1. Make your titles 40-49 characters in length
  2. Include 8 images
  3. Use “How To” style headlines
  4. Divide your post into 5, 7 or 9 headings
  5. Make it between 1,900-2,000 words long
  6. Use neutral language (i.e. not overly positive or negative)
  7. Write at an 11-year old reading level
  8. Request likes to boost engagement

How to Measure Success

Vanity of vanities; all is vanity.  Ok, not everything is vanity, but guard yourself against “vanity metrics”.  Vanity metrics include things such as website traffic, open rate, click through rate, likes, comments, etc.  A good rule of thumb is to proceed with caution around any metric that feeds the ego.  Yes, these metrics exist in the upper realm of a funnel somewhere, but all you really need to measure is…





Even with all of this information, generating incremental deal flow from content marketing is still hard.  However, it’s like Tom Hanks said, “…it’s the hard that makes it good.”  If anyone hung in there to get to the end of this piece, I applaud your dedication and encourage you to like or comment on LinkedIn.  It would be great to hear from you.


1The average blog post takes ~4 hours to write, and there’s a positive correlation between amount of time spent on a blog and its effectiveness from a content marketing perspective.  This supports the notion that, “Quality is the best business plan,” a quote referenced later in this piece.

2The most irritating of which is the array of “double tap” posts that trick you into liking their content to artificially inflate their engagement stats.  Having fallen for this in the past, I feel it’s my duty to raise awareness of the genre.  Don’t do it.  It’s sort of like feeding a wild animal – it only encourages them.

3Why? Because it’s fun and challenging. And, I’m offering a TBD prize for the best (tasteful) limerick posted in the comments section.

4My favorite of which being, “Three can keep a secret, if two of them are dead.”

5Fun fact: The Michelin Man’s nickname is Bibendum inspired by the phrase “Nunc est bibendum” (Now is the time for drinking).  The idea was that a corpulent, fun-loving mascot would pair well with the epicurean ethos of the Michelin Guide.

6It’s from Billy Madison.  If you don’t get it, swap “lamb and tuna fish” with ”peanut butter and jelly”.

7While often silly and awkwardly acted, these videos go a long way in humanizing a firm.

8The artist in me doesn’t always adhere to these guidelines, but I try to whenever possible.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Creative Destruction: How Private Equity BD May Change Forever

Read time: 3-4 minutes

“Every act of creation is first an act of destruction.” (Pablo Picasso)



The pandemic is stress testing everything, and COVID-19 may finally kill several BD strategies already in decline.  This isn’t great news because finding good deals at reasonable prices is still challenging, and the menu of remaining strategies to stay ahead of the competition has become pretty limited.  Just ask anyone who has submitted an indication of interest in a traditional auction process recently.  It is not pretty.  

As it pertains to deal sourcing, investors that want to survive will essentially have two options.  First, they can go back to the well of the old reliable origination channels (i.e. intermediaries, executives, independent sponsors, direct sourcing, etc.) and commit to becoming truly excellent at the strategy or strategies where they think they have a shot at doing so.  That’s one option.  The other would be to invest in and treat deal sourcing like an innovation hub.  A laboratory, if you will, to crack the code on the next wave of technology- and marketing-driven strategies that will entice the fish to jump in the boat, so to speak.  I believe that the best originators in the lower middle market will start to approach the private equity game through the lens of a lead generator with the content and lead capture techniques to match.  More on this later – first, we have to pay our respects to the deceased. 

RIP Old BD Strategies

Not everyone is going to like or agree with what I’m about to say here, but it’s high time that we pour one out1 for a few strategies that just don’t move the needle anymore. For starters, the game of staffing up one or more business development professionals to focus their energies on literally the exact same strategy every other private equity fund is employing is simply dead. The famous investor Sir John Templeton once said, “It is impossible to produce superior performance unless you do something different.” This is sage advice as we usher in business development 3.0 and say farewell to the following activities that are sort of like rocking chairs – they give you something to do but don’t really get you anywhere.

  • Conference circuit.  With apologies to the ACG, it’s sort of an open secret that these events are generally not a great use of time for tenured business development professionals. And, conferences will have ever diminishing value as investment banks increasingly adopt CRMs and automatically include buyers that have expressed an interest in seeing their deal flow. Yes, there are exceptions to every rule, but the primary remaining benefits to conference attendance from my perspective are (i) allowing new business development professionals to get critically important in-person time with intermediaries that they have not yet met, and (ii) giving tenured business development professionals an opportunity to be seen and market themselves to the industry for whatever career opportunities that may produce. Outside of that, I would advise staying home, spending more time with your family and focusing on strategies that produce deal sourcing alpha.

  • High volume / low value city visits. Another travel-based strategy with diminishing value is the approach of picking a city with a critical mass of intermediaries and setting up as many meetings as possible to remind investment bankers that you have a fund and want to do deals. While investment banks may be more inclined to take the meeting since you are going to be in town, the net result of most of these meetings is the same. In most cases, buyers leave with information that could have been gleaned from a phone call and investment bankers go back to doing something more productive with their time. The key here is quality over quantity and activities that produce real relationship development. Go see people in person, but be intentional about it, and go long form when you can, particularly if you can do so somewhere outside of the conference room.

  • Book collecting. Many (of course, not all) business development professionals are tasked with hunting down as many CIMs as possible. Their firms judge the success of their BD efforts by the percentage of the addressable market of teasers / books that they capture. While an understandable initial approach, as firms evolve their deal sourcing capabilities, they ultimately realize that a robust top of the funnel is worthless if you can’t advance those leads through the later stages of the funnel. This is where leveled up2 BD professionals earn their paycheck. Good business development pros will analyze every deal that comes in the door through what I’ll call an “angle matrix” and elevate those deals with relatively higher probabilities of closing. In other words, before any deal is analyzed on the basis of its investment merits, a firm needs to first determine if they have an angle that will allow them to prevail. As a reminder, eligible angles include process dynamics (e.g. more intimate auction), executive resources to bring to the table, prior experience / investments in a related space, a previously developed investment thesis and geographic proximity. In the end, a thousand opportunities are simply academic if the firm cannot close on one of them.

Celebrating the Birth of New Strategies

All is not lost. Like a phoenix, or odyssey3 of phoenixes, the following strategies are emerging from the ashes of deal sourcing strategies past. Some have been around for a while with varying adoption, but with necessity being the mother of invention, get ready to welcome the following approaches to the world in a much bigger way.

  • Specialization.  This one goes out to all the generalists. Enough is enough. Pick a small handful of sectors on which to focus and become excellent at them. When a firm focuses, the brand becomes synonymous with the industries you care about and relevant deal flow will start to find you. The classic rebuttal to specialization is that a secular decline in one or more of the industries on which you’ve decided to focus could blow up your strategy if the timing doesn’t work in your favor. Solution: pick sectors that are specific enough to be memorable, but that are broad enough to offer room for pivots if need be.

  • Thesis development. Investors that put in the work to get off of their heels and proactively call their shots by developing investment theses have advantages over more reactive investors. I’m always amazed by how much incremental deal flow arrives when I market very specific sectors of interest to intermediaries and other deal referral sources. What’s also amazing is how long people remember that you’ve stated interest in a specific sector. I’ve had people call me years after I’ve ceased a search for deals in a given industry to ask if we are still looking. Thesis development also offers a sort of synthetic specialization to generalist investors to create advantages in sourcing and closing deals. The missing piece for a lot of firms, though, is knowing how to market their theses effectively.

  • Digital marketing for lead generation. If I could hold up one new deal sourcing strategy like a newborn Simba in the Lion King, it would be this one. The vast majority of private equity professionals could not articulate their firm’s digital marketing strategy despite an insistence that their portfolio companies have one. This creates a real opportunity for early movers to differentiate themselves with high quality content written for business owners that facilitates engagement. Despite an improving philosophy around PE website design that offers a more welcoming feel to business owners, funds still have a long way to go to make contacting them easier and less daunting. Hint #1: make it easier, not harder, for business owners to contact you. You don’t gain anything by being elusive. Post your e-mail address and telephone number on your website. My personal goal is to close a deal based on a lead that came in through a website form submission4. Hint #2: If you’re looking for a nudge in the right direction, look at management consulting websites for inspiration around content and website design – they are lightyears ahead of most private equity funds.

  • Own your local market.  Yes, Virginia, private equity funds can still do proprietary deals. The way to do so is by leveraging geographic proximity to your firm, particularly in the era of COVID. All else equal, doing a deal with a local entity feels inherently more friendly, safer. Whether or not this is true is certainly debatable, but it does create an opportunity to avoid an auction process. In all likelihood, the buyer will not get a screaming bargain, because the valuation has to be sufficiently high to forestall an auction. However, the certainty of close improves dramatically. The hardest part about this approach is figuring out how to allocate the time / resources to best market yourself locally. Here are some ideas for consideration: membership in YPO or Vistage, providing regular content / interviews for the local business journal, sending personalized invitations to business owners to luncheons / events5, and partnering with law / accounting firms to deliver value-added in-person content (they have marketing departments after all).


Think like Gretzky: skate to where the puck is going to be. Indeed, there will be deals that get done through the old ways of doing things, but it doesn’t mean that this will last forever. If this stimulates any ideas or feedback, please call, email or comment on LinkedIn. Stay healthy my friends.


1The act of pouring an alcoholic beverage on the ground as a sign of reverence for friends or relatives that have passed away.

2”Leveled up” is video game speak for having attained sufficient strength and abilities with your character to take on more formidable adversaries.

3While I had initially used the word “flock” here, it turns out that the collective noun for multiple phoenixes is “odyssey”. As an aside, my personal favorite collective noun for a group of birds is a murder of crows. But what, you ask, shall we call a group of private equity business development professionals? How about a blazer of BDs (nod to Brendan Burke at Capstone Headwaters for this one)?

4For anyone who scoffs at this aspiration, remember the words of Arthur Schopenhauer, who said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

5One last tip, if you are nearby a racetrack that offers an exotic car driving experience, your conversion rate on invitations for such an event will be exceptionally high.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Never Let a Good Crisis Go to Waste: Themes & Sectors to Watch During and After COVID-19

Read time: 3-4 minutes

“When written in Chinese, the word ‘crisis’ is composed of two characters.  One represents danger, and the other represents opportunity.” (John F. Kennedy)



I just read (and re-read) an article that suggests a third of Americans are now showing signs of clinical anxiety or depression according to Census Bureau data from May of 2020.  In response to one question about depressed mood, the percentage reporting such symptoms showed a twofold increase from when a similar survey was taken in 2014.  That means we now have just over 109 million people pacing around their homes in suboptimal mental states – a sobering barometer of the psychological burden levied by the Coronavirus pandemic and other factors.

So, I’m going to propose a new rule.  From here on out, let’s only see the glass as half full.  Let’s look for the silver lining.  No more dour clickbait headlines.  Only good news.  Per Winston Churchill’s advice, let’s figure out how to not let this crisis go to waste.  With that in mind, I wanted to share some reflections on sectors and investment themes that I think will be well situated for recovery and growth both during and after COVID-19.


Investment Themes & Sectors to Watch During and After COVID-19

As a disclaimer, I would expect that most sectors will experience revivals, to greater and lesser degrees, coming out of the pandemic.  The investment themes and industries profiled below are those that I feel show particular promise and could produce opportunity for investors ready to deploy capital with conviction.  Also, COVID has acted as an accelerant to many themes that have been underway for a while now, and several of the topics I mention below are simply calling out trends that have picked up and/or attracted more attention in the recent months.

Additionally, it’s been proposed that habits are formed or dropped over the course of about a month, and we’ve been quarantined for going on five months now.  So, the key here is first recognizing that behaviors have changed. Then, the idea is to focus on the areas where people aren’t going to just go back to the old ways of doing things once we can all take our masks off.  So, without further ado…


Investment Themes:

1. At-Home Convenience Services Pre-COVID, I had not once had groceries delivered to my door. Because I had always driven to the supermarket and walked up and down the aisles like everyone else, it hadn’t occurred to me that there could be a better way. Well, there is. Order your groceries online and let someone deliver them to you. It’s amazing. I’m never going back. Look for ways to disrupt old life patterns that suggested that you had to be physically present to transact when in reality you did not.
2. Recurring Revenue Yes, I realize that identifying recurring revenue as an attractive investment theme is tired and hackneyed at this point. But, boy are investors happy right now that have recurring revenue-driven businesses in their portfolio. Nothing like a once-in-a-lifetime, black swan pandemic to elevate the power of recurring monthly payments. Don’t take my word for it, talk to anyone, for instance, with a SaaS-focused investment strategy about how well they’re sleeping at night. SaaS isn’t the only way to participate in recurring revenue, though. What can be more interesting for investors is to identify de facto recurring revenue in sectors that have not yet thought about their business in that way.
3. Remote Monitoring Remote monitoring and other like processes that provide real-time data and analytics without requiring a human to be in the vicinity of what is being monitored are having their moment in the sun. Nothing like keeping tabs on something from the safety of whatever Coronavirus-free location you choose, and it’s an added bonus to eliminate the wasted time and monetary expense of air travel.
4. Small, Consummable Luxuries Times are hard right now, but a great way to boost morale is through small (i.e. inexpensive), consumable luxuries. For instance, we recently invested in an ice cream franchisor called Handel’s. For my money, nothing is going to pull me out of a funk faster than one of their extra thick strawberry milkshakes for around $6. It also gets the kids out of the house. As important, it gets me out of the house. Look for analogues to this in other areas where a relatively small monetary outlay produces an outsized happiness ROI on an ongoing basis.


Specific Industries:

1. Outpatient Behavioral Health You saw the statistic I referenced earlier – we’ve got a third of our population dealing with anxiety or depression. This is a staggering number. The good news is that the behavioral health industry is here to listen to your problems one empathetic nod at a time. There are a lot of ways to do good / do well in behavioral health, but I’m personally attracted to outpatient behavioral therapy services. Feels like the stigma of seeking help for things like anxiety, depression, relationship issues, etc. is coming off. Further, the onset of an array of start-up teletherapy concepts could provide a sort of marketing halo effect that raises awareness of the broader behavioral therapy industry, benefitting all participants.
2. Express Car Washes It dawned on me recently that owning an express car wash is sort of like owning a toll road except you have to spray water at the cars as they drive by. It’s automated, high margin, and recurring revenue hiding in plain sight, and the only reason many investors turned their nose up at the sector, until recently, is because we all saw Breaking Bad1 and observed how Walter White and his wife used their car wash business2. The beauty of the express wash model during COVID is that you don’t have to get out of your car. In other words, getting your car washed requires no (or very limited) human interaction. Many express car washes also sell monthly memberships which is a great way to play the recurring revenue theme.
3. Fitness Perhaps part of the reason everyone is depressed is because they haven’t been able to exercise as much (or how they would prefer), and exercise has been proven in some cases to be as effective as taking antidepressants. Once the doors of our favorite fitness concepts fling back open and we are comfortable engaging in a regular exercise regimen, the industry is poised to resume its gangbusters performance. Having invested in both the Planet Fitness and Orangetheory systems as franchisees, we’ve voted with our dollars about our view of the industry, and we see no signs of long-term headwinds.
4. IT and Other Tech-Enabled Services IT Services is one of those great industries that, in many cases, has continued to post growth amidst COVID. MSPs and other IT services companies have quietly pulled this off because a lot of their revenue is recurring, and a lot of what they do can be done remotely which captures two of the investment themes above. Look also to other tech-enabled services companies where recurring revenue and remote capabilities are present. My money is on tech-enabled services being one of the most dominant sectors to emerge from the pandemic. Investors with prior expertise with such companies will be well situated to capitalize on this trend.



Hopefully this has provided some food for thought. The easy part is identifying the trends and areas on which to focus. The hard part is actually sourcing relevant investments and deploying capital.

If you are a business owner that stands to benefit from any of the topics mentioned above, please reach out early and often! We’re here to help, so give us a call to start a conversation.


1Breaking Bad initially aired in 2008. If you didn’t catch it during its heyday, I would need to hear a pretty good excuse as to why. If, now that we’ve been quarantined for nearly five months, you still have not seen it, then the only response is to look at you disapprovingly with arms crossed and silently shake my head. Watch it.

2To be clear, I am not advocating the use of a car wash in a manner similar to Walter White and his wife.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

What Investors Want to See in an MSP

Read time: 3-4 minutes

“Information technology and business are becoming inextricably woven.  I don’t think anybody can talk meaningfully about one without talking about the other.” (Bill Gates)



Something is up in the world of IT services.  Investors are flocking to MSPs like the salmon of Capistrano1.  By my last count there are now approximately two dozen PE-backed MSP platforms in the U.S., and the majority of this deal activity has transpired within the last three or so years.  So, why now has a sector like IT Services, historically less of a focus for private equity investors, stimulated so many transactions?  Well, come along with me on a journey into the history of IT Services to find out where MSPs came from, where they are now, and the specific attributes that have compelled investors to place big bets on the sector.  To start, let’s define what an MSP is.

  • An MSP, or Managed Services Provider, is a business that, on an outsourced basis, provides the following primary services to businesses of all sizes and across industries:
    • Subscription-based management of cloud-based, on-premise & other IT assets;
    • Onsite project-based services (e.g. network design, deployment & repair); and
    • Hardware / software re-selling & implementation

In short, MSPs are delivering the same services your in-house IT guy2 used to offer onsite but now on an outsourced basis, and often remotely.  However, this wasn’t always the case.  In fact, MSPs weren’t even always referred to as MSPs.  The following section will explain how IT services companies have evolved into their current form.


A Brief History of the IT Services Industry

The need for IT support emerged alongside widespread adoption of technology, which in the earliest years simply meant a transition away from legacy communication and productivity methods to the use of computers.  And, with more computers came more opportunity for things to break.  Thus, the IT Services companies of the 80’s that initially focused primarily on hardware re-selling to participate in the rapid growth of business computing inevitably found their way to break/fix services when issues emerged that customers weren’t capable of or inclined to solve on their own.  So, if you’ve ever heard the term “VAR”, or value-added re-seller, this simply referred to an entity that provided hardware and/or software but also the ancillary services to assist with technology implementation, maintenance and repair.  What’s really interesting is that everyone saw the growth of IT Services coming.  In an article in the Washington Post from December of 1981, it was written, “Computer service technicians – the people who install, test and maintain the equipment – will experience the fastest job growth in the industry.” It just took a while for VARs to become MSPs.

The transition from VAR to MSP began in the 90’s, though this was well before any widespread awareness of what managed services was or would become.  This evolution was facilitated, in part, by the emergence of application service providers (ASPs) which allowed for the remote monitoring and management of IT infrastructure.  Initially, remote monitoring and support was focused on servers and networks, though the scope of service ultimately expanded to include mobile device management, managed security, remote firewall administration, security-as-a-service, and managed print services.

In 2005, the modern MSP business model began to take shape, and three individuals – Karl Palachuk, Amy Luby and Erick Simpson – are credited with having pioneered the new recurring revenue model.  In fact, both Paluchuk and Simpson published books on the topic of managed services in 2006, and the MSP model began to take hold with adoption led by enterprise-level clients.  Consequently, savvier VARs migrated their businesses to higher margin, recurring revenue models and tailored service offerings to the needs of the small-and-medium sized business (SMB) community.  Since then, SMBs have responded favorably to the MSP model.  The key drivers for outsourcing IT support in the current environment include a need for:

  • A more proactive and strategic approach to IT given that management of IT resources is non-core to most businesses
  • Maximizing “uptime” to mitigate the risk of disruption from technology malfunction
  • Enhanced risk management / compliance support in light of regulatory requirements that can put an outsized burden on SMBs
  • Cost savings / better forecasting – MSPs often provide for cheaper and more predictable costs (via fixed monthly fees) relative to in-house resources
  • Access to newer technologies to keep pace with change and cybersecurity needs

Today, the global managed services market is estimated to reach over $250 billion by 2022 with an expected growth rate in excess of 10%.


Why Private Equity Funds Like MSPs

PE funds are smitten with MSPs. One need only look at the large and growing volume of transaction activity in the industry to draw this conclusion.  The following graphic and supporting commentary will explain why.

  1. Investing behind technology growth.  Worldwide IT spending is expected to increase 4% annually through 2022, and a great way to invest alongside this growth without taking direct technology risk is to invest in MSPs.  This is because MSPs are not necessarily beholden to any specific technology and can nimbly adapt, and help their clients adapt, to inevitable technology change when it occurs.  Although the backdrop within the MSP industry is technology, the B2B nature of the service offering is comfortable for non-tech investors and will likely be a gateway for firms with less tech experience to get closer to technology plays.
  1. High fragmentation.  The most credible figure I’ve seen is that there are an estimated 3,700 MSPs in the U.S., the vast majority of which are owned / operated by individuals (i.e. rather than by VC or PE funds).  And, in most cases, the basis of competition is largely local or regional with no clear national leader serving SMBs.  Therefore, the sheer number of remaining independent MSPs bodes well for the ability to build regional leadership through a focused acquisition strategy.
  1. Meaningful “white space” remains.  Believe it or not, an estimated 30% or so of SMBs have not yet outsourced the management of their IT needs which suggests strong organic growth potential via new client acquisition.  Further, MSPs continue to offer a compelling value proposition for SMBs to outsource this service, so it’s likely that any slow adopters of the MSP model will ultimately see the light.
  1. Contracted, recurring revenue.  Contracts are customary in the MSP industry which provides good revenue visibility to investors and management teams alike.  Most MSPs will have some mix of recurring managed services revenue, project-based work and re-selling income, but the best MSPs will derive 50% or more of total revenue from MRR.
  1. Tangible benefits of scale.  Investors want to know that there are real benefits to scaling their MSP platforms aside from simply generating more profitability.  With MSPs, growth means the ability to better leverage fixed costs (e.g. Network Operations Centers (NOCs), internal software expense), achieve better pricing & mindshare from key product / software vendors, and access more resources to support customer acquisition which can be expensive when targeting SMBs (e.g. Sales force, digital marketing).
  1. Consolidating, but still early enough to grow via M&A.  To borrow a baseball analogy, we’re likely in the 3rd inning of the MSP industry’s consolidation.  Despite the fact that there are two dozen or so private equity-backed MSP platforms, many markets have little-to-no representation by consolidators.  In other words, secondary or tertiary markets continue to present opportunity for investors.


What a “Good” MSP Looks Like to a Private Equity Investor

With nearly 4,000 MSPs in the U.S. there are going to be good MSPs and not-so-good MSPs.  Fortunately, many MSP owners have readily embraced best practices and KPI benchmarking to maximize the valuation of their business.  Here are some general guidelines for what a private equity investor is going to look for in an MSP.

1. Higher Value-Added Service Offering There’s no faster way to determine how commoditized (or not) an MSP’s service offering is than to look at their Gross Profit Margins.  Ideally, you will want to see Gross Profit margins in excess of 30%.  Higher margin services include managed services and cybersecurity whereas less value-added services include things like hardware re-selling and routine project-based work.
2. Strong Recurring Revenue Profile Across all industries, companies are doggedly chasing MRR in the interest of maximizing the value of their companies.  MSPs are no exception – in fact, the most tangible benefit of IT services companies evolving from VARs to MSPs has been their ability to capture more recurring revenue.  So, investors are generally going to want to see 40-50% or more of an MSP’s revenue tied to recurring maintenance and monitoring services.
3. High Client Retention One of the benefits of the MSP space is a tendency for service providers to retain clients.  I would argue that MSPs doing a satisfactory job or better should not be losing accounts with the exception of those clients that go out of business or get acquired.  Therefore, annual client retention should be in excess of 90% for a good MSP.  Below that level, and MSPs will need to have a pretty good explanation as to why.
4. Longer Contract Terms are Better For the same reason that investors like recurring revenue, they also like contracts – increased certainty of future revenue and profits.  Contracts are customary in the MSP space, so suitors will typically want to see a minimum of 1-year contracts (particularly for any larger accounts) to provide more comfort around stability of an MSP’s clients.
5. History of (Successful) Acquisitions Insofar as M&A growth is a compelling way to rapidly grow the scale of an MSP, an investor will take comfort in the fact that an MSP has lived through at least one acquisition and integration exercise.  Anybody can talk about doing add-on acquisitions, but until you’ve done them, you won’t have the benefit of knowing the pitfalls to watch out for.  Interestingly, investors may even like to see that one or more prior deals didn’t go well such that you won’t make the same mistakes again.
6. Sophisticated Client Acquisition Engine The double-edged sword of high client retention is that it can be hard to unseat the incumbent service provider of a prospective client.  Therefore, a material portion of organic growth for an MSP will be the acquisition of clients that may have not previously had a relationship with an MSP.  This means that MSPs seeking to ramp up organic growth will have to invest in things like sales personnel, SEO and digital marketing with the attendant processes behind them to produce good outcomes.  An MSP with organic growth of less than 5% may not yet have cracked the code on client acquisition.
7. Client and End Market Diversity Most private equity professionals learn in Investing 101 that customer concentration is bad.  And, as a general rule, investors will pause if any customer accounts for 20% or more of total Revenue.  The beauty of the MSP space is that many MSPs are serving the SMB community which often translates into a very appealing diversity of accounts with limited dependence on any one or more clients.  Similarly, end market exposure can create risks if, say, an MSP is serving a preponderance of clients in a cyclical space that may put a swath of those clients out of business every time a recession hits.  So, investors will want to see a healthy mix of industries served and may hesitate around a focus on clients within sectors like Energy or Construction, for example.
8. History of Adaptation to Technology and Industry Change  One thing is for sure, there will be technological change to which MSPs will have to adapt in the future.  A good present example is the migration to the cloud and the implications that’s having on on-premise maintenance and hardware sales.  So, a good MSP will have proven able to nimbly react to prior periods of technological disruption and help their clients respond accordingly.  After all, the beauty of the MSP industry is that most MSPs are not beholden to any one technology and should be able to successfully adapt during times of change.  A negative sign would be if an MSP holds firm to declining service offerings in spite of clear signs that the world is changing.


In the Land of the MSP, the MSSP is King

Wait, what is that extra “S” doing in there?  If you’re like me, it actually took me a while to admit that I wasn’t quite sure how an MSP differed from an MSSP.  To eliminate any doubt, an MSSP is essentially an MSP that specializes in providing security-as-a-service offerings for their customers.  In other words, MSP + strong cybersecurity capabilities = MSSP, and the acronym stands for Managed Security Service Provider.  While MSPs have been around for nearly 20 years, MSSPs have only recently started to emerge as a more sophisticated variant on the traditional MSP model.  This is important because there will likely be an ongoing and increasing need for companies to embrace best practices in thwarting the cybervillain community lest they be subjected to ransomware or some other crippling attack on their business.  So, the mission critical and esoteric nature of cybersecurity is likely to create a high growth, high margin opportunity for MSSPs for the foreseeable future, and investors will react accordingly by demonstrating strong interest in both acquiring MSSPs and helping their existing MSPs get their extra “S”.  The challenge is going to be when MSPs simply start referring to themselves as MSSPs in an effort to elevate their valuations.  Investors will need to respond in kind by asking more granular questions about service offerings, creating an interesting cat and mouse game while it unfolds.


We hope this sheds some light on why private equity funds like investing in MSPs and what they’re looking for in an MSP.  As always, we’re here to help, so give us a call to start a conversation.


1Yes, I realize that the proper saying would have been, “…swallows of Capistrano,” but I couldn’t help myself3.

 2I must admit that one of the things I miss most about having an in-house IT guy at a prior firm were the colorful stories about niches of daily life not often frequented by members of the non-tech community.  My all-time favorite involved a lengthy diatribe about the alleged dangers of using ammonia to clean out a ferret cage given the potential to lose consciousness – an unfortunate experience endured by our IT guy on more than one occasion.

 3If you somehow don’t know that this is an homage to Dumb and Dumber, then you are likely terribly confused by the reference and should watch the movie immediately to enhance your awareness of an essential film in the canon of American comedy.

4The same article from 1981 also addresses the notion of technology-driven job displacement when one economist is quoted as saying, “What we’ll see is a large displacement of many people as more computers and computerized robots are brought into the workplace.”  If this sentiment sounds familiar, it’s because the idea of AI’s potential to eliminate jobs is presently top of mind for workers across most, if not all, sectors.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

This Too Shall Pass: A Message of Hope to Business Owners from Private Equity

Read time: 3-4 minutes


Hope is the only thing stronger than fear.” (Robert Ludlum)




To date, Coronavirus has claimed over 95,000 lives globally across 210 countries, the Dow Jones has lost approximately 20% of its value from a peak in February1, businesses across all sectors have been forced to furlough and/or lay off employees and, in some cases, close, and most states have ordered residents to remain at home to slow the rate of infection. And, these are not just lifeless facts and statistics – everyone’s lives have been personally upended to some degree by the current outbreak including many with connectivity to a loved one that has been infected.  That’s the bad news. However, this article is not intended to further contribute to the daily assault on our collective consciousness by ever worsening news headlines. To the contrary, this message is one of inspiration to business owners from investors that have persevered through adversity over a 20-year period since our firm’s founding. We are here to say that the lasting consequences of surviving a great trial include resilience, strength and depth of character.  This too shall pass.


Prior U.S. Epidemics and the Results


One way to foster optimism is to better understand what those before you have overcome.  As you might expect, the U.S. has encountered its fair share of disease over the past couple hundred years.  In some cases, diseases occurred in waves and spanned decades.  What may be comforting is observe the conclusion – in every case, medical and/or hygienic innovations resulted in the particular disease’s ultimate containment or outright end.  This is not to diminish the tragedy of each outbreak, rather to simply illuminate where we currently are amidst the Coronavirus saga as compared to other instances of disease.

Prior U.S. Epidemics





1793 Yellow Fever from the Caribbean Philadelphia

§  5k people died, 17k fled the city

§  Vaccine developed

1832-1866 Cholera (3 Waves) New York City

§  2-6 Americans died per day during the outbreak

§  Vaccine developed

1858 Scarlet Fever New England

§ 95% of the people who caught the virus were children

§  Improved hygienic standards ended the epidemic

1906-1907 “Typhoid Mary” New York

§  Over 10k people passed away annually

§  Vaccine developed

1918 “Spanish Flu” U.S.

§  Estimated 675k Americans died

§  Vaccine developed

1921-1925 Diphtheria U.S.

§  Over 15k people died

§  Vaccine developed

1916-1955 Polio U.S.

§  Over 3k people died from Polio during its peak in 1952

§  Vaccine developed

1981-1991 Measles Outbreak U.S.

§  Annual death rate fluctuated between 2-10k people

§  Vaccine developed

Source: Healthline.com


The closest historical parallel to what we’re currently experiencing is the influenza pandemic of 1918, often referred to as the “Spanish Flu”2.  In total, approximately one third of the world’s population caught the Spanish Flu which caused a severe respiratory tract infection.  Estimates of the global death toll exceed 50 million with 675,000 casualties in the U.S. alone.  The immediate economic consequences of the outbreak included the shutdown of major U.S. cities such as New York and Philadelphia as much of their population became bedridden.  As we’re experiencing now, businesses were closed, sporting events were cancelled, and private gatherings were prohibited to flatten the curve of transmission. Additional economic consequences included labor shortages, wage increases, deterioration in GDP, and increased strain on the social security system as a safety net. The losses were substantial and not at all to be taken lightly, but we pulled through.  What’s amazing is that despite the Spanish Flu’s ferocity many in the present era had not even heard of it until it became an oft cited analogue to Coronavirus.  It seems we can always count on the passing of time to bring healing.


Prior U.S. Recessions & Economic Crises


The Coronavirus-driven disruption to economic activity in the U.S.  and abroad is now expected to result in negative GDP growth for 2020 in the low- to mid-single digits.  This is on the heels of the longest period of economic expansion in our country’s history, the era following the Great Recession.  At nearly 11 years of GDP growth, many of us find it hard to remember what a recession even feels like, but we’re going to be powerfully reminded.  However, as was the case with prior downturns, we’re going to get through this.  The following chart highlights 12 recessions in the U.S. since the Great Depression.  Note that none of them exceeded 1.5 years in length and a couple posted declines well in excess of what we’re expecting for 2020.  That’s something about which we can be optimistic if history is any predictor of future events.

Prior U.S. Recessions Since the Great Depression
Name Period Range Duration GDP Decline (Peak to Trough)
Great Depression August 1929 – March 1933 3 years, 7 months -26.7%
Recession of 1937-1938 May 1937 – June 1938 1 year, 1 month -18.2%
Recession of 1945 February 1945 – October 1945 8 months -12.7%
Recession of 1949 November 1948 – October 1949 11 months -1.7%
Recession of 1953 July 1953 – May 1954 10 months -2.6%
Recession of 1958 August 1957 – April 1958 8 months -3.7%
Recession of 1960-1961 April 1960 – February 1961 10 months -1.6%
Recession of 1969 – 1970 December 1969 – November 1970 11 months -0.6%
Recession of 1973 – 1975 November 1973 – March 1975 1 year, 4 months -3.2%
Recession of 1980 January 1980 – July 1980 6 months -2.2%
Recession of 1981 – 1982 July 1981 – November 1982 1 year, 4 months -2.7%
Early 1990’s Recession July 1990 – March 1991 8 months -0.3%
Great Recession December 2007 – June 2009 1 year, 6 months -5.1%

 Source: Wikipedia


We’re Living This Alongside You, and We’re Optimistic


As current majority investors in eight U.S. businesses operating in diverse sectors across the economy, we are living these challenges in real time alongside you.  Coronavirus’ effects to our portfolio companies range from slightly positive to materially negative. Challenges across the portfolio have involved managing liquidity, compliance with bank covenants, revenue declines, supply chain disruption, staffing discontinuity and some extremely hard decisions around cost reductions.  However, the current pain we are feeling will subside, and business will resume as normal before long.  One way to view the glass as half full is to remember the sentiment shared by Winston Churchill when he said, “Never waste a good crisis.”  In other words, while times are hard right now, the key is to look for ways to emerge stronger and to grasp new business opportunities in the post-Coronavirus era.


In the Meantime, We Can Help You Solve Problems


If you are a business owner and are going through tough times right now, we would encourage you to reach out to us to share your story.  It’s likely that we have dealt with or are currently wrestling with similar challenges based on having invested in over 20 companies since our inception.  Please use us as a resource if you are looking for anyone to talk to about ways you might address any current business hardships.  Common areas where we see business owners presently needing help include:

Common Coronavirus-Related Business Challenges




1. Managing
Liquidity / Cash

Insofar as cash is king, this is a critical area to which businesses need to be attuned.  Many companies have chosen to draw on their revolving lines of credit to make sure they have sufficient cash on hand to weather the next several months.  There are other tactics that can be employed to preserve cash reserves until the Coronavirus runs its course that we’d be happy to discuss.

2. Compliance with Bank Covenants

Many businesses that were previously comfortably compliant with bank covenants are now having some difficult conversations with their lenders.  Having lived through the Great Recession, we are familiar with the nature of these discussions and can help you navigate those conversations to minimize the disruption to your business.  A proactive and transparent communication strategy with your lenders will allow you to spend more time focusing on restoring stability in the business.

3. Staffing
Continuity / Managing a Remote Workforce

Some businesses, such as those that continue to operate in more consumer facing arenas are experiencing a challenging labor environment due to a workforce that has either contracted Coronavirus or is fearful of doing so and have decided to not work.  This can be a challenging issue to solve for.  The same goes for managing a workforce that has historically come into the office and is now working remotely.  These are issues with which we are currently contending and would be happy to share our perspectives.

4. Revenue Declines

Most sectors are experiencing material revenue declines in the current environment.  While not permanent, it can be painful in the short-term, so it’s important to determine if there are quick pivots that can be made to generate incremental revenue while your traditional lines of businesses are taking a hit.

5. Supply Chain


Whether your supply chain has been significantly disrupted or is simply moving more slowly, the movement of goods is essential to product- oriented businesses.  We’re presently investors in several companies with complex supply chains that have been affected by Coronavirus and have had to respond accordingly.

6.  Cost Reduction

Perhaps the hardest decisions to make are surrounding if, when and where to make cuts to make sure the business remains on stable financial footing.  We’ve had to examine each of our portfolio companies through this lens and would be happy to share some reflections on best practices across the industries in which we are operating.




We hope this review of prior U.S. epidemics and challenging economic periods has given you some hope as to the impermanent nature of what we’re currently experiencing.  Rest assured that there will be good days ahead, and we will be able to share the war stories of surviving Coronavirus.  Please know that we are genuinely here to help anyone wrestling with current business challenges and would be happy to lend our expertise or just a sympathetic ear.  Please call us any time.  In the meantime, please stay safe, healthy and optimistic.



1Also, during Q1 2020, the Dow Jones posted its worst ever first quarter

2The Spanish Flu is referred to as such because it was first reported in Spanish newspapers


About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Back to School: The Current Opportunity to Invest in Private Preschools

Read time: 3-4 minutes

“The child is both a hope and a promise for mankind.” (Maria Montessori)


The basic definition of a “do well by doing good” industry is one where you can achieve financial success as a result of owning or operating a business that benefits society. Perhaps the most readily acknowledged sector that embodies this concept is education. For decades now, investors have flocked to for-profit educational products and services, and in many cases strong returns have ensued alongside the enrichment of students of all ages.

Presently, a growing recognition of the benefits of early childhood education (ECE) is stimulating entrepreneurship and investment alike in facilities focused on serving children up to around eight years of age. To start, children who attend preschool are more likely to have eventually attended and completed college. Further, preschool educated children are less likely to be arrested, more likely to graduate high school and less likely to struggle with substance abuse as adults. For these reasons and others, the evidence overwhelmingly points to the conclusion that preschool is a good idea, and parents are voting with their dollars. Another powerful driver of the industry’s growth has been the increased labor force participation rate of women which now sits at around 58% of the female population. This trend has elevated both the need for childcare as well as disposable incomes. Today, the U.S. ECE industry is around $28 billion and growing at a rate of 5% annually.

Back to School: The Current Opportunity to Invest in Private Preschools

The Different Types of Private Preschools

In this context, preschool generally refers to childcare centers with an educational focus. Preschools are typically more expensive than traditional daycare and charge tuition that is paid directly by families (i.e. not subsidized). When referring to the different types of preschools, more often than not, you’ll identify them by their pedagogy. If you weren’t previously familiar with the term pedagogy, it stems from Greek word paidagōgia which essentially means “to lead a child”, and the dictionary1 defines pedagogy as follows:

  • Pedagogy (pe-dә-gō-jē): The art or science of teaching; education, instructional methods.

The preeminent pedagogies include Montessori, Reggio Emilia, Waldorf and other / unaffiliated. In terms of the number of schools, Montessori has emerged as the leading branded pedagogy by a fairly wide margin. The following section provides a brief history of how Montessori schools came about followed by a high-level comparison to Reggio Emilia and Waldorf in the accompanying chart.

Back to School: The Current Opportunity to Invest in Private Preschools The Montessori educational philosophy was developed by Dr. Maria Montessori, an Italian physician and educator. The first Montessori center was opened in 1907 in an apartment building in Rome and enrolled 50 or so children of low-income working parents between the ages of two and seven. Through observation, Dr. Montessori took note of incidence of deep concentration, repetition of activity and a sensitivity to the order of the environment. It was in this first classroom that Dr. Montessori discovered that when given autonomous choice of activity, the children demonstrated more interest in practical activities and educational materials than in the toys provided for them. She concluded that a self-directed environment would allow the students to develop better self-sufficiency and reach higher levels of understanding. Indeed, four- and five-year olds educated through her methods quickly gained a proficiency in writing and reading far beyond what was expected for their age. These early observations led to the formalization and implementation of practices that became the cornerstones of the Montessori pedagogy. By 1911, the first Montessori schools were opened in the U.S., and by 1916 there were more than 100 schools in operation. The Montessori method later experienced some setbacks in the 1920’s based on criticism from William Heard Kilpatrick, a highly regarded educational figure, with nearly every school shuttering as a result. However, the Montessori pedagogy experienced a resurgence in the 1950’s, and today there approximately 5,000 Montessori schools operating in the U.S.

Common Preschool Pedagogies

The Thesis for Investing in Private Preschools

When strong industry growth, fragmentation and elevated profit margins collide, it tends to create a fertile environment for private equity investing activity. The following graphic and supporting commentary will provide some more color on why private preschools present a compelling investment thesis.

Back to School: The Current Opportunity to Invest in Private Preschools

  1. Compelling reason for existence. As one of the classic “do well by doing good sectors”, early childhood education benefits from both strong social and commercial tailwinds. Further, numerous studies point to lasting benefits of preschool that extend into adulthood. Early childhood education is just one of those sectors that’s hard to argue about – it seems to only offer positives.
  2. Large & highly fragmented industry with strong growth. As mentioned previously, the U.S. early childhood education industry is around $28 billion and growing around 5% annually. The industry is comprised of over 20,000 preschools with the largest direct competitor having an approximate 2% market share. So, given the fairly extreme fragmentation without the presence of nationally dominant competition, there exists an exciting opportunity to build strong local / regional / superregional preschool footprints.
  3. Private pay model. The variety of preschools contemplated here are private pay models that do not rely on government subsidy. This means that tuition is paid directly by families, and preschool operators will thus not be exposed to any political forces that could adversely affect revenue generated through government programs. Think of it this way, as an investor or owner of a private preschool, it would make for a less stressful existence not having to worry about uncertainties created during election years, and your school’s valuation will be better than one that has exposure to subsidies.
  4. Attractive unit economics. Generally speaking, a well-managed mature school can generate $2-3MM of annual revenue with 20-30% EBITDA margins. If you assume a build-out cost of $500k-1MM, then there is good rationale to grow via a greenfield, or de novo, strategy.
  5. Franchising potential. If you investigate some of the larger private preschool operators in the U.S., you will come to find that many of them have sold franchises to independent business owners. Franchising can be an excellent way to rapidly scale a school’s footprint by allowing entrepreneurs to invest the capital to own and operate their own schools. In our case, we’ve invested extensively in franchising, so this dynamic creates a merging of two arenas on which we are presently focused – private preschools and franchisors.

What Investors Want to See in a Private Preschool

With over 20,000 preschools across the U.S. there’s a wide spectrum of operating models and resulting performance. From an investor’s perspective, the following KPIs and benchmarks are generally indicative of a well-managed preschool.

1. Sufficient Child Capacity to Support Critical Mass There are exceptions to every rule, but we generally look for capacity of around 150+ students. Using basic assumptions around tuition, this allows for a critical mass of revenue and profitability on a per school basis.
2. Utilization Indicative of Parent / Community Satisfaction High utilization is generally indicative of parent satisfaction with a school, but you don’t always need to see that a school is 100% utilized. While full utilization is encouraging, it doesn’t provide for the best student experience or organic growth outside of tuition increases, so investors will generally look for utilization of around 85%+.
3. Reasonable Operating Tenure There’s something to be said for longevity. If a school has made it past the 3-year mark, it’s generally operating under a viable model. Investors may have some hesitation around schools that have not yet withstood the test of time.
4. Relevant Accreditation NAEYC accreditation is a great stamp of approval for a private preschool operator. It shows that they not only took the initiative to make sure their school met important threshold performance and curriculum standards, but that they also passed. Investors may also take comfort with certain pedagogy-specific accreditations (e.g. American Montessori Society, Association of Waldorf Schools).
5. Strong Reputation; Proven Results Schools with positive online reputations show that they both are paying attention to how their brand is regarded and that they have been validated by parents. Good sites for preschool ratings include GreatSchools.org and Yelp. Assuming a sufficient number of reviews to be statistically significant, it’s hard to see how an investor would get excited about a school with below a 4-star rating.
6. EBITDA Margins in Excess of 20% for Mature Schools Tuition for private preschool has reached a level that should create for healthy profit margins for school operators. Many families are now paying upwards of $10,000 / year (or more) per child to attend preschool. Investors will generally want to see 20-30% EBITDA margins for well-managed schools.
7. Multi-Site Presence For a private preschool operator to be considered a “platform” for an investor, they will need to have proven their ability to replicate results across a portfolio of schools. Using general estimates about profitability on a school-level basis, many investors will want to see around 5 or so schools to provide for both a sufficient base of profitability and conviction that the management team has the capability to expand the company’s footprint by opening and/or acquiring new schools. Given the fragmentation of this industry, and the propensity for owners to operate 1-2 locations, larger operators can be harder to come by.
8. No Headline Issues There is nothing scarier to a parent than the threat of something bad happening to their children. So, prior incidents at a school are going to make investors extremely cautious. Depending on the severity of the issue, an incident at a school could have an extremely damaging effect on a school’s ability to survive and thrive in a local community.


We hope this illustrates why investors are taking interest in private preschools and some of the attributes they will look for in a school operator. As always, we’re here to help, so give us a call to start a conversation.

1Per dictionary.com

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Why Private Equity Likes Founder and Family Owned Businesses

Read time: 3-4 minutes

“A big business starts small.” (Richard Branson)


If you speak with a lower middle market private equity fund about what they look for in an investment, their comments will often include something like, “We like to invest in founder- or family-owned businesses.”  Others may introduce more complicated jargon and say, “We prefer to be the first institutional capital into a business.”  These statements essentially mean the same thing.  Why, though, does this matter?  It matters because there are actually a lot of different types of entities from which you can buy a business, founders and families being one of them, and making an investment in each scenario may require a nuanced approach to dealing with the seller in question.  For the sake of illustration, the table below highlights the common entities form which businesses are acquired.

Seller Type Description
 1. Founder or Family Individuals or a collection of related shareholders that control a privately held company.
 2. Venture Capital Fund A professional source of early stage capital for founder-led businesses that show strong upside potential.
 3. Private Equity Fund Another source of professional capital though for established, profitable businesses.
 4. Employee Stock
Ownership Plan
Often referred to as an “ESOP”, this is a benefit plan that gives workers an ownership interest in a company.  ESOPs are overseen by a trustee who acts as a fiduciary to protect the assets of the ESOP for the beneficiaries.
 5. Another Business Other corporate entities that may seek to sell (or, “divest”, or “carve out”) operating units that are non-core or underperforming.
 6. Public Company Shareholders Public companies can be acquired from shareholders and “taken private” if they are willing to pay a premium to entice the shareholders to sell.

So, given that many private equity funds pursue founder- or family-owned businesses as a strategy, they have clearly determined that acquiring from individuals as opposed to other investment groups or corporate entities is an attractive approach.  This article will explain why, but first let’s understand where all these family-owned businesses came from by learning about the origins of entrepreneurship in the U.S.

A Brief History of Entrepreneurship in the U.S.

Ever wonder from where the word entrepreneur originated?  Turns out it dates back to 1723, and we adapted it from the French word entreprendre which means “undertake”.  Today, we define entrepreneur as follows1:

  • Entrepreneur (än-trə-p(r)ə-‘nər): One who organizes, manages and assumes the risks of a business or enterprise

In the United States, entrepreneurship has a rich history that spans hundreds of years.  Famous Economist and Nobel Laureate Milton Friedman once wrote, “Ever since the first settlement of Europeans in the New World, America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children.”  One could even argue that America, as a nation, was in a sense built by investor-backed entrepreneurs.  For example, in 1607 the Virginia Company of England sent three ships on a four-and-a-half-month voyage to colonize American plantations.  The 100 or so passengers that disembarked settled and developed what became Jamestown, Virginia.  Relevant here is that the Virginia Company was a joint-stock company which allowed for investment in ventures with limited liability if the business failed, which was a good thing because it ultimately went broke.  You win some, you lose some.

While not often regarded for his entrepreneurial skills, Daniel Boone could be considered an early archetype of the American pioneer / entrepreneur who in 1799 departed Kentucky for a fresh start and settled along the Missouri River on a thousand or so acres of land then part of Spanish Louisiana. It was the Western migration of Boone and others that is credited with establishing the foundation for capitalism’s success in America.  During this period, a majority of these pioneers were farmers, eking out a living on small family farms, and it’s important to keep in mind that the cost of failure for such pio-preneurs was not merely financial, many paid with their lives.  In the early years, Westward migration proved challenging due to the limitations of undeveloped routes amidst the wilderness, but ultimately wagon-based travel became feasible followed by steam-powered locomotives which revolutionized human transportation.  It was the railroads that were both fueled by and facilitated future entrepreneurship.  Interestingly, some also cite the railroads as the origin of modern managerial systems given that the expanse of the railroads’ operations required new methods for managing organizations with a distributed geographic footprint.

It’s hard to believe, but prior to 1811 there had been a mere seven companies incorporated in North America.  This all changed when New York State permitted incorporation by law upon filing out the proper paperwork which freed the process from bureaucratic legislative acts and politics.  As a result, the number of corporations started in the U.S. increased dramatically, and the state of Pennsylvania alone incorporated more than 2,000 businesses between 1800 and 1860.  Consequently, the American dream of being in business for oneself expanded to include small merchants and independent craftsmen.

During the latter part of the 19th century, further Westward expansion and government incentives for industries such as the railroads, banking, and land acquisition led to tremendous opportunities for profit, which allowed entrepreneurship to flourish. During this period, entrepreneurship can also be credited with propagating capitalists, innovators, prospectors, financiers, and businessmen who created and expanded existing businesses.  It was this period that gave rise to big business and many household name companies within oil, steel, tobacco, shipping, railroads and banking.  These industries were largely unregulated, though, which led in some cases to monopolistic power and the inevitable ensuing regulation to establish a more stable business environment for companies of all sizes.

Continuing a trend that began in the latter part of the 19th century, the 20th century ushered in a dramatic increase to the scale and complexity of business in the U.S.  In many industries, small enterprises had trouble raising capital and operating at a scale large enough to efficiently produce goods for an increasingly sophisticated and affluent population. In this environment, the modern corporation, often employing hundreds or even thousands of workers, further rose in prominence. This period was responsible for the formation and success of such businesses as Ford Motor Company (1903), Hewlett Packard (1939), McDonald’s (1940), Wal-Mart (1945), Southwest Airlines (1967), Microsoft (1975) and Apple (1976).

Fueled by the internet, the 21st century has been marked by lower barriers to business formation and the creation of a new array of tech-enabled manufacturing and service-based companies both large and small.  We’ve come a long way from the pioneering ventures of early settlers and those who sought better fortunes in other parts of the U.S.  While the look, feel and focus of American entrepreneurs has changed over the years, the drive to undertake and build profitable businesses has endured paving the way for the successful family businesses of today so frequently sought after by private equity investors.

The Benefits of Investing in a Founder or Family Owned Business

Finally, and without further ado, here are some of the main reasons why lower middle market private equity funds like investing in founder or family-owned businesses:

  • There are a lot of them. One estimate is that there are 28.8 million small- and medium-sized businesses (SMBs) in the U.S. and that 19% of them are family owned.  So, 28.8M x 19% = ~5.5M family-owned businesses into which private equity can flow.
  • Aging Baby Boomer business owners are seeking liquidity. Of the ~5.5 million family-owned businesses in the U.S., nearly 4 million, or ~75% are controlled by Baby Boomers.  And, given that Baby Boomers are defined as those born between 1946-1964, that means that the Boomers are now aged between 55-73.  To that point, 47% of family business owners now report that they intend to retire within the next five years.  So, we are amidst a wave of estate planning-driven business sale activity that is buoying the population of target companies eligible for PE funds.
  • Most family-owned businesses do not survive generational transitions. Sad but true – only 30% of family businesses survive the transition from first to second generation ownership. Even worse is that only 12% survive the handoff from the 2nd to 3rd  It’s like the old saying, “Shirtsleeves to shirtsleeves in three generations.”  Most business owners are all-too familiar with these statistics and related adages, so they are looking for a safe set of hands to usher their life’s work into the future while creating a lasting home for their employees to continue their careers.  In many cases, private equity funds are the perfect acquiror insofar as they manage companies by profession and will increase the odds of a successful change in ownership.
  • Ability to develop a rapport with the founder and/or owners of the business. When you acquire a business from a corporate entity or institutional investor, the discussion is largely around price as the chief determining factor in whether the seller will transact.  However, deal discussions with a founder or family are much more nuanced.  Founders, rightfully so, want to know that what they’ve bled, sweat and cried for is going to endure into the future.  So, this creates an opportunity to build a meaningful relationship with the founder to ensure that there is a shared vision and a strong working chemistry insofar as they will continue to be involved after the deal closes.
  • The founder or family will often retain some ownership. I don’t know about you, but the notion of buying 100% of a company from a founder who has no intention of remaining involved with a company post-closing is scary to me.  This would be like someone throwing the keys at you after purchasing a car, wishing you well and then screeching off into the distance never to be seen again.  Not a good sign.  The best transactions are where the prior founder or family retains a meaningful amount of equity in the company and is aligned to help continue building the company with you.  After all, these are the people who architected the vision, strategy and culture to get the company to the point where a PE fund would want to invest in the first place.
  • Tangible growth opportunities. Once a company starts to generate substantial cash flow, the incentives to grow it can be at odds with the perceived risks of disrupting a comfortable lifestyle that a business owner has come to enjoy.  Said another way, if an owner is generating $5 million in EBITDA and is making more money than they ever dreamed they would, why undertake the investment and risk associated with growing the bottom line?  This dynamic is prevalent with many founder and family-owned businesses and creates the opportunity for a PE fund to execute on numerous “low hanging fruit” growth initiatives that have not yet been pursued.

How Private Equity Helps Founder and Family Owned Businesses

1. Wealth Diversification For many entrepreneurs, their business represents their largest single financial asset.  This concentration of wealth created by the business creates an inherent risk to their net worth should something happen to adversely affect its valuation.  Therefore, a transaction with a private equity fund helps to diversify a business owner’s net worth by generating liquidity (i.e. cash) for the founder or family owner.
2. Team Development While many family or founder-owned businesses can generate strong growth and profitability for a time, they will ultimately stagnate if they haven’t invested in a team that can manage a larger organization with its new assortment and complexity of challenges.  And, we routinely see certain departments that have been under- or undeveloped such as Finance or Sales.  The good news is that private equity funds are in the common practice of helping companies supplement their teams with high quality talent who can help the business get to the next level.
3. Business Building Beyond team development, many founder and family-owned businesses have not fully embraced best practices regarding systems or process.  In order for small companies to become big companies, they need to be built upon a framework that will support the transition to a larger organization.  This applies to things like data capture & analysis, workflow management, compliance, and financial controls.  Given that private equity funds invest across a portfolio of companies, they have an excellent vantage point to identify and help implement the necessary systems and/or processes to help management teams drive their business forward.
4. Financial Sophistication Private equity funds have earned a reputation for taking an analytical eye to the businesses in which they invest.  Frequently, a founder or family-owned company’s prior reporting processes will evolve under new ownership to become both more strategic and granular.  Business owners will get a flavor of this during the due diligence process when an investor begins analyzing the business to better understand it.  A test of whether a fund is focused on the right things is if an owner gains new and valuable insight about their company that they had not previously considered.  The end goal is for a company’s investors and management team to know precisely where the key drivers of value exist and focus on the areas that really move the needle.
5. Capital For Growth Don’t forget that private equity funds often reserve capital to support the growth of their partner companies beyond what it takes to close the deal.  For many businesses, growth via the acquisition of smaller businesses in the same industry can be an excellent way to increase scale and profitability.  So, if you aspire to acquire smaller businesses and fold them into your organization, make sure to ask any investors with whom you are speaking about their ability to fund future deals.
6. “Two Bites of the Apple” In many cases, a private equity fund will want the founder or family shareholders to retain some ownership following a transaction.  The helps ensure that the person or people that drove a company’s prior successes are aligned with the new investor’s goal of supporting future growth. The amount of retained ownership varies for each deal but generally ranges from 10-30%.  By holding onto some of the equity in the business, owners stand to benefit from the next exit if the business increases in value.  In some cases, we’ve seen the proceeds from an owner’s second transaction, or the “second bite of the apple” exceed proceeds from the initial transaction.


We hope this sheds some light on why private equity funds like investing in founder and family-owned businesses.  As always, we’re here to help, so give us a call to start a conversation.


1Merriam Webster

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.