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By: Bailey McCann, Private Equity Strategies

In April of 2012, the Riverside Company, one of the largest and oldest global private equity firms focused on the small end of the middle-market, with more than $3bn in assets under management, announced that it was partnering with management to recapitalize Baby Jogger. Baby Jogger markets and develops baby strollers, bicycle trailers and related accessories. With that deal, Riverside will help Baby Jogger to build out product ideas already in the pipeline, and expand sales internationally. Private Equity Strategies spoke with Jim Butterfield, of Riverside’s Origination group, about how he found Baby Jogger, and how Riverside sorts through thousands of opportunities per year to find hidden gems.

Butterfield has been a part of Riverside’s origination team for 11 years. In this role he searches through thousands of deals, reducing that number to between 20-30 that then make it to the Letter of Intent Stage. In order to be one of those 20 or 30 companies, businesses have to present a variety of factors both quantitative and qualitative that add up to a good investment.

“Several things are going to make us enthusiastic about a deal,” he explains. “We want to see a big moat around the business – if that company went away, would people miss it? Are there broad based growth opportunities? Are the objectives of the management team aligned with our interests? Can we build the business, together with management, to three times its size? We also want to see how realistic the company is about its valuation. If any of those factors are too far outside of what we think is fair, we’re probably going to mutually decide to part ways.”

As a private equity firm, Riverside has a reputation for being generalists within a certain market-cap. Unlike some firms focused solely on health care, or consumer product companies, Riverside will look at opportunities across many industries. This makes their initial funnel considerably larger, but it has also given executives like Butterfield, the opportunity to develop specialties in certain industries without getting siloed into one area forever. The generalist approach also allows Butterfield and others on the origination team, to find opportunities through personal relationships, or even the odd cold call.

“A company we got involved with recently, was the result of an introduction from a trusted advisor and friend. 18 months later we bought the company, that happens more than you might expect,” Butterfield says.

Baby Jogger was the result of one of these relationships. The opportunity came through an investment banking contact, with whom Riverside & Butterfield enjoy a strong relationship, shortly after Riverside failed to win a competitive sell-side process for another infant-mobility branded consumer product company. “We had an industry-knowledgeable internal transacting team assembled and pursuing a branded consumer products deal, but we failed to prevail. However, when the Baby Jogger investment opportunity surfaced, we still had all of those resources in place,” Butterfield says.

“What appealed to us with this company was that baby strollers are not cyclical, not seasonal, and are quite price inelastic.”

He says when Riverside first met the company, there was the usual “get-to-know you” apprehension on both sides, but their approach helped them stand out. “When we visited the company, we brought pictures of our employees, worldwide, using the Baby Jogger products. We wanted to show that, not only were we investors looking to own the business, but we were actual enthusiastic consumers of their products.”

Riverside also has boots on the ground worldwide, which they use to provide support to their portfolio companies through more than just capital injections. With offices on four continents, and natives on the ground around the world, Riverside helps facilitate and accelerate globalization for its portfolio companies. From opening Asian markets and introducing new suppliers through their Hong Kong office to tapping regulatory or industry expertise on one continent and applying it to another, Riverside’s international team takes smaller companies to places they might not have even imagined.

Ultimately these factors, and a positive relationship with the management team, helped Riverside prevail and Baby Jogger to align itself with a like-minded investor. “So far we have been involved with Baby Jogger for one year, and we see significant opportunity. There are new product launches under development; and new international distribution relationships. We have also added new systems and reporting technology,” Butterfield says.

Typically, Riverside invests for an average of 4.5 years in a given company. However, Butterfield notes that the relationship can sometimes be longer if there is significant positive value being generated. They are currently considering selective acquisitions to expand Baby Jogger even more.

Deals like Baby Jogger represent the ideal scenario for an origination team, but what about the deals they pass on? Butterfield explains that one of the key issues is valuation. “Everyone thinks their company is worth more than it is,” he says.

“When you’re looking at 3000-4000 opportunities you see all kinds of stuff. We’ve seen valuations all over the place, depending on company specific and industry dynamics. That’s why it’s important for businesses to have a strong advisory team. Companies with a good advisory team come into these discussions with more realistic expectations.”

He notes that more entrepreneurial owners who choose to go without advisors often fail to advance in the deal making process, because they are unrealistic about their business. “Entrepreneurs are more informed than they were 10-15 years ago, but we still see folks who overestimate their value.”

Chemistry between the management team and a prospective private equity firm is paramount. “We’ve gotten far with deals we liked on paper, but you can be sitting at a table and just feel the chemistry is off and interests don’t seem to be aligned, and you have to walk away,” he says.

For his part, Butterfield also relies on chemistry at the early part of a deal - literally knocking on doors, or cold calling to find opportunities.

“Sometimes if I see a company while I’m out driving I’ll cold call them. It doesn’t always work, but sometimes it does, you have to take a shot. Just this morning I was dropping my son. AJ, off at school and I passed by a service truck with the name of the company painted on its door. I was intrigued because it listed all of its locations and its services and it triggered an idea. After some research, I called the CEO of the company, we chatted and turns out the business is quite large, profitable and is looking for an equity partner to help accelerate its growth. Who knows, it might lead somewhere for us…I’ll let you know in a year!”