InterGrowth 2017: Challenges beyond normal sticking points

A sea of investment professionals descended on Las Vegas earlier this week to network and examine the state of mid-market finance space.

As thousands of mid-market investors gathered in Las Vegas for the Association of Corporate Growth’s 2017 InterGrowth event, the attendees took up some of the most pressing issues before the industry today, which often went beyond the standard topics of deal terms, credit spreads and the like.

Public policy came to the forefront in several sessions as the industry faces the possibility of getting rid of a tax provision that lets businesses deduct interest payments from their taxes, which multiple panellists said would be detrimental to the industry.

The tradeoff proposed would be a 100 percent deductibility of expenses, which industry heavyweights, including The Riverside Company chief operating officer Pam Hendrickson, said would be favourable for businesses like manufacturing companies but not for mid-market financiers.

The provision disallowing the interest deductibility for businesses is in the tax plan offered by House Republicans, though it was not clear if President Trump’s proposal released Wednesday eliminated that portion of the tax code.

Cybersecurity and privacy were also discussed. Mary Ellen Callahan, the former chief privacy officer for the Department of Homeland Security and current partner at Jenner & Block law firm, discussed the pending European General Data Protection Regulation, a robust set of protections that could be a boon to EU citizens and pose a challenge for some businesses.

The GDPR, as the statutes are known, cover everything from the transfer of data to notifying consumers following a data breach. Businesses could face a penalty of up to 4 percent of their worldwide revenue or €20 million, whichever is greater, if they are found to have violated the statutes.

Callahan suggested that when investing in businesses that have operations in Europe, one of the key questions should be: how do you plan to deal with GDPR? That question, she said, should be asked when investing in business-to-business service providers as well as consumer-facing businesses.

The discussion extended beyond regulatory measures into ways firms can protect the transmission of sensitive documents and information through the deal process. Callahan said general partners should not wait until the due diligence process to take protective measures to safeguard the confidential materials distributed during the process. The pre-due diligence phase is where information is often the most vulnerable, she said.

The event ended with a “boot camp” in fundraising for mid-market investments, which included tips for ensuring an initial meeting with a limited partner goes smoothly. Among those was a seemingly simple concept: do your homework on the potential investor because, as one panellist put it, if a firm is not focused enough to do their homework pre-meeting, how diligent will they be when doing deals?

Not every aspect of a pitch may be perfect, and Ian Rice, a vice president in the mezzanine debt and private equity investment team of Hartford Investment Management Company, cautioned about blaming deals that performed poorly on individuals that have exited the firm. Rather, he said, general partners should own up to their track record and explain to LPs their firm bettered the process as a result of the bad investments.

Similarly, if a firm pursued a strategy change or introduced a new product, it is best to tailor those explanations to the specific traits or concerns of the LP. Rice used an example of an equity-focused firm that launched a distressed-for-control strategy, wherein it would buy cheap debt and end up with the majority of the equity in a restructuring. One explanation could be that a distress-for-control strategy is just another avenue to gaining a majority stake in a business, as opposed to a straight buyout.