Due Diligence and Execution
Prudent Financial Structure
Value Creation and Monitoring
FCF actively manages each element of the transaction process including due diligence, the investment decision, transaction execution, portfolio company development and exit strategy implementation.
Sourcing/Investment Criteria. The Principal’s have generated a reliable flow of investment opportunities from extensive relationships including existing and prior portfolio company management teams, limited partners, corporate executives, lawyers, accountants, investment bankers, lenders and boutique, regional and national investment banks. Because the Principals’ have served the Wisconsin and Midwest market for so many years, many of FCF’s transactions are not subject to the investment banking auction process, especially where former owners and/or management teams wish to remain invested on a minority basis which is often the case. Where a sell-side investment banker is employed, the Principal’s at FCF have demonstrated an ability to position their local nature and expertise as a differentiating factor in the process. Target companies will generally have proven attributes such as a strong market position, barriers to entry to their markets, excellent growth opportunities and a proven management team with a strong record of accomplishment.
Due Diligence and Execution. The Principals in conjunction with the Executive Partners and Board of Directors, supplemented where necessary by outside consultants, perform the management assessment, market evaluation, customer and supplier interviews, and operational and financial audits. In addition to a thorough operational, legal and financial due diligence process, experience has taught the Principal’s that at the outset of the investment, prior to closing, sufficient time needs to be devoted to developing jointly with management strategic plans with clear financial metrics, setting clear performance and relationship expectations between the fund and management, properly aligning the equity compensation structure, and establishing a defined exit strategy and timeline. Given the relatively short investment horizon of three to eight years, management teams work with FCF principals to identify performance gaps which need to be closed within ninety days of completing the buy-out. This process helps to jump start the cultural and organizational changes necessary to improve earnings and operational cash flow at a pace which satisfies FCF exit parameters.
Prudent Financial Structure. The background of FCF Principal’s include substantial involvement with and knowledge of the capital markets including subordinated debt, leveraged finance, seller financing, mergers and acquisitions, commercial lending, leasing, etc. FCF capitalizes investments for growth, prudently utilizing leverage and providing for adequate levels of liquidity. A conservative capital structure not only reduces the financial risk of an investment, but also provides flexibility for growth and follow-on acquisitions, and earlier return of principal via recapitalization. FCF Principal’s understand that a prudent use of leverage accommodates growth, which in turn enhances the financial strength of the business and ultimately increases the returns on its equity investments.
Value Creation and Monitoring. Forming an alliance with the management team of a portfolio company is a critical element in the FCF operational philosophy. Through this alliance, management, FCF, and the board jointly develop the company’s strategic direction and associated goals. The combination of FCF investment professionals and Executive Partners actively participating in portfolio companies, along with strong entrepreneurial management teams, provide the framework for driving and monitoring the achievement of operational and financial performance targets. An important aspect FCF’s active involvement is the early recognition of either problems or the opportunities for enhanced performance. When either problems or opportunities develop, the Principal’s, acting with the Board and Executive Partners, will provide guidance and support to the management team. There are numerous examples where FCF’s active involvement has helped to identify follow-on acquisitions, the need for further investment in management resources, opportunities for process improvements, ways to generate better information for decision making, and other best practices to improve the business.
Exits. The Principals have demonstrated the ability to affect realization events in a variety of economic and financial market environments. Critical to that process is the creation of highly attractive and economically competitive companies with strong managements and focused strategies. FCF invests in a portfolio company only when it believes at the time of investment that a viable exit strategy will be available. Historically, the Principals have used the following methods of exiting investments in portfolio companies: (i) sales to strategic third parties; (ii) recapitalizations; and (iii) sales to management, usually with the support of a private equity sponsor.