David Hellier, a Partner at Bertram Capital, describes his firm’s strategy of “marrying” venture capital business-building techniques with lower-middle market companies. In a market in which some GPs are “desperate to deploy capital,” Bertram has consistently close about one deal per quarter, most recently from a $500 million fund, according to Hellier. Also discussed: Why the Bertram cares more about business plan than sector, and why so many companies are challenged by their IT infrastructure.
Privcap: What are the greatest investment challenges you face today?
David Hellier, Bertram Capital: You know, knock on wood, we’ve had a really good run of finding exceptionally interesting businesses. We’ve done that through really building close personal relationships with a very broad swath of investment banks. And we’ve invested in those direct relationships. We go and visit them on a very regular basis. We have incredibly deep relationships. And so we feel we tend to find more interesting opportunities that are a little less trafficked based on those relationships.
It’s not that we don’t participate in the broad auction process, but we tend to find our best opportunities where there’s two or three private equity firms involved. I think that some of the challenges out there are you’ve got firms that haven’t been able to deploy capital that are now desperate to deploy capital. We’ve actually averaged-, since the founding of our firm, we’ve averaged about one transaction a quarter so we’ve kept very, very busy, and that’s just knowing what you want to do. I think you’ve-, so you’ve had firms that are trying to get capital out. You’ve got firms that are trying to have realization so that they can go raise money, and that’s been very challenging, so you get lower quality opportunities out in the market when you’re trying to see a win. I think that LPs are really focused on firms that have stayed very true to strategy, that have had consistent capital deployment, and have done that in a few managed way, and in a way that they’re communicating what’s going on, on a regular basis. And we’ve been able to do that.
Privcap: What is Bertram Capital?
David Hellier: So the firm was founded in 2006 by Jeff Drazan. Jeff was a venture capitalist for 23 years, really saw that market going in a direction that he wasn’t overly excited with. And he really felt he could apply the same business building methodology and business growth kind of experience to companies that actually had cashflow. So he raised his first, which was 350 million dollars, in 2006, put a small team together, and we started building Bertram. And the focus was to really find kind of solid companies, not big growers, but solid performing companies, probably owned by an entrepreneur or a family, that we could apply what we call the “Bertram High Five” to the business. And we apply a series of operating tactics. Anything from improving and extending management, to building a very strong add-on, and MNA structure, to improving their intellectual property portfolio, to improving sales and marketing. And then another key area is really focusing on information technology as a driver. And we apply those five kind of applications to a business to grow it. And we’ve now moved into our second fund with is 500 million dollars. We raised that in 2010. And we’ve had nine platform companies. We just bought out tenth. And business has been going along the lines that we intended.
Privcap: Bertram claims to “marry” venture and private equity. Can you describe how that works?
I describe it as a yin and yang model. So you have Jeff, who has this incredible background in venture and Jeff’s seen more business models than most people will see in a lifetime. And he’s really brought this kind of creative entrepreneurial approach to business, where really we focus on what can we do to grow that business. And he brought a team of three people, one for each of our focus segments: consumer, business services and industrial. And my three partners came from more traditional private equity background. And what they brought was the discipline and rigor around analyzing and managing business, and combine that with Jeff’s growth and entrepreneurial vision, and what we get is I think a perfect blend of both worlds. You can apply that exciting growth model and that growth you will see with a venture backed type of investment, but we do it with a business that’s generation cashflow. And we will readily reinvest that cashflow in the first year or two years into a business to really facilitate that growth.
Privcap: Does Bertram focus on a particular sector?
David Hellier: You know, we tend to concentrate on three primary sectors: consumer related businesses, business services, and industry. For us it’s more around the business model rather than the particular sector. There’s some sectors that we’re less interested in. We don’t have background in restaurants. We’re not going to do real estate. But what we look for are businesses that are either performing well or maybe slightly under-optimized that those five characteristics, that we call the Bertram High Five, that we think we can really augment that business and supercharge it for growth.[0.06.36] I mean, we look in those segments for businesses that we believe we can grow “3-to-5 x” in three to five years. And so we really focus on the underlying opportunities that the business really hasn’t unlocked, and then we really work to help them unlock that potential. So our partners, our investment team partners, they will spend 40 to 50 percent of their time along with their team working directly with the businesses that we’ve invested in. So there’s a significant commitment by Bertram to work side by side with our management teams.
Privcap: You provide operational support to your portfolio companies through something called Bertram Labs. What is it?
David Hellier: It was started about a year and a half ago. And what we saw was there’s really three things that lower to middle market businesses lack. They typically lack good financial controls and a good CFO. And the investment banks usually take care of that or help start fixing that. The second area is really good sales and marketing discipline, understanding their channels and how to expand there, having good product development discipline. And we’ll bring in-, we have team members that help in the sales and marketing area. We have one operating partner that’s particularly good in that area.
But the area that we find that almost every company, say sub 250 million dollars of revenue, has challenges in is information technology. They’ve either brought on the wrong software and it’s not working property, or they’ve cobbled together and built their own software that just doesn’t work properly or doesn’t scale. They don’t have any commerce strategy. They don’t have an online strategy or social media marketing strategy. We started running into this in the first couple investments we did. So Jeff, being the creative venture background person that he is, said, “We’re going to do it ourselves. We’re in Silicon Valley. We have access to the best talent in the world with respect to software.” And we started building out a team. And so we built up Bertram Labs to go into our businesses and, one, help with diligence so we understand what the opportunities are from a software standpoint.
But then, unlike an operating partner that may come in and say, “Well, you need to do this.” or “You need to fix this piece of software and let’s go hire a really expensive IT consulting group to do it.”, our guys come and say, “We can help you redeploy this software. You need to write some code here. And we’re going to go do this for you. And we’ll do it in 90 days.” And so we’ve applied that approach to all of our companies. And really what it does it generate incredible value in intellectual property with our business. It’s a huge margin generator for the business.
So, as an example, we have a huge portfolio company called One Distribution. And One has a brand of sneakers called Supra. And it’s grown almost three-fold since we’ve owned them-, since we bought them in 2010. And they did not have an ecommerce strategy or platform. We worked together with the management team. We built the platform. We integrated it with their ERP and financial accounting systems and now it’s roughly, in about a year and a half, it’s about 15 percent of total revenue. So it’s completely accelerated the company. It’s significantly contributed to the bottom line, because it’s very high margin business. And it’s allowed us to drastically expand our brand. So we had I think somewhere around the number of 40 to 50 thousands likes on Facebook with Supra when we started with the company, and now we have well over a million likes. So it’s really-, it’s been our team that’s helped them build and implement that strategy. And we’ve done it faster, at a lower cost, and added significant value to the business.