January 19, 2014
Interviewed by: David Snow
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Arsenal and Chromaflo: Adding Value

The final in a series of three videos exploring the relationship between private equity group Arsenal Capital Partners and its portfolio company, chemical and pigment dispersions supplier Chromaflo. Arsenal’s Tim Zappala, Chromaflo’s Scott Becker and RSM’s Mauro Bonugli discuss the challenges of integrating a company into a portfolio and how leaders from the portfolio and parent companies communicate with each other.

The final in a series of three videos exploring the relationship between private equity group Arsenal Capital Partners and its portfolio company, chemical and pigment dispersions supplier Chromaflo. Arsenal’s Tim Zappala, Chromaflo’s Scott Becker and RSM’s Mauro Bonugli discuss the challenges of integrating a company into a portfolio and how leaders from the portfolio and parent companies communicate with each other.

Arsenal and Chromaflo: Adding Value
Anatomy of a PE Deal

David Snow, Privcap: Today we’re joined by Scott Becker of Chromaflo Technologies, Tim Zappala of Arsenal Capital Partners and Mauro Bonugli of RSM. We’re talking about the story between Chromaflo and Arsenal Capital Partners. Chromaflo is a portfolio company of Arsenal Capital Partners. Scott, you’re the CEO and Tim, you are the Operating Partner in charge of overseeing the shared value creation. Let’s talk a bit about after the acquisition is made, the plan is set, the process of communicating and coordinating as the company begins to grow or hopefully begins to grow. Mauro, of course, you’re going to be providing commentary as someone who’s worked with many private equity firms on similar processes.

Let’s start with a question for Scott: talk about the day-to-day, month-to-month communication that takes place between your company and your private equity sponsors.

Scott Becker, Chromaflo Technologies: Sure, I’d be glad to. At the very beginning, at the outset, it was almost weekly that I was speaking, if not daily. But once we get into a more routine process, we have two more formal processes. Number one, we present a monthly financial package and operational package to Arsenal that covers the whole gambit, everything from commercial to operations to IT as well as integration activities and overall financials. That’s followed up every quarter with a formal board meeting [taking] place at various locations around the world; it includes a quarterly review, but in addition to that and more importantly, there’s a lot of strategic intent around that meeting.

Tim Zappala, Arsenal Capital Partners: Because we have a designated interface point to the port we’re always available. So Scott can call at any time if things come up or an acquisition comes up that he wants to look at, or there’s a change in one of the integration plans and we need to spend money in a different fashion. It’s a major investment or something of that sort. That operating lead is that interface point, and it can be used at any time.

Mauro Bonugli, RSM: Then, Tim, internally at Arsenal do you also have an internal process to review the portfolio performance and—

Zappala: We do. We do that on a monthly basis. There’s an internal process within Arsenal where we capture the pieces of the strategic input that Scott’s providing on a monthly basis and then we debate and look at the total portfolio construction, including in this case, Chromaflo.

Snow: Tim, getting back to the point about different companies have different information that is critical, is there a customized dashboard or set of information that you request from Chromaflo that your firm looks at to really see how it’s going?

Zappala: Of course, there’s a core set of financials. It’s really whatever we put together within the core of those strategic initiatives on the commercial and technical side. We always go through those on a monthly basis. Sometimes, as in the case of Chromaflo, we had a lot of integration activity, so we had a whole section each month where we talked about how we are doing on the integration. Are there some things that are delayed? We had transition service agreements from the selling entities that we were trying to get off, so there’s a whole section there as well as whether we are capturing the synergies we expected from pulling the multiple companies together. Then, of course, we typically do a section around growth and acquisitions.

Snow: Tim, notwithstanding that your firm focuses on smaller to mid-sized businesses, is there sometimes a challenge in wrangling this incredible amount of information that could be shared among not just you and the portfolio company but, in many cases, the limited partners of Arsenal want to know at a very granular level what’s going on in the portfolio? Does that sometimes present a challenge?

Zappala: Yeah. Again, it’s the operating lead’s responsibility to keep the companies out of that mix to the extent they can. So we pass that information up through, out of the company and into our deal team. Then, our deal team tries to deal with that—going to your point—because we are dealing with small to mid-sized companies and we typically are rapidly growing a platform.

Snow: It sounds like things are going well with Chromaflo. You mentioned that you’ve quadrupled earnings over three years roughly, so that’s definitely a good story. Yet even while things are going well, sometimes complexities or things you didn’t expect to happen pop up. I’ll throw it over to you, Scott. Can you give an example of a challenging development that required extra communication and coordination between the two sides of the investment?

Becker: I still think maybe our biggest challenge—and the one I looked at and didn’t realize how difficult it would be—is the one I commented on, which is the IT integration. It’s quite significant. It’s a gigantic undertaking, one we’re still working on and should have complete in the next six months. But it’s very difficult.

Zappala: The other thing we see is companies that start in a North American base, and in the case of Chromaflo, all of a sudden, as we did these acquisitions, we were in 40 different countries. So, the breadth of geography—and going to Scott’s point, the requirement of being able to pull together the whole back office, which Mauro, I know you deal with fairly routinely. [Those are] the complexities that are fairly significant. Even though we’re aware of it and we deal with it relatively routinely and we plan for it, it normally takes us longer than we think in ultimately getting the team in place and the back office structure in place. The other thing we typically see is that it takes a period of time to get everything settled down to get the growth initiatives moving, too.

Becker: To follow up on what Tim said, when we carved out the business from this large European entity, all the back office activities in North America were done by that entity. So, in effect, the business I was running had to take on all those back-office activities. We ended up having to hire 50 people to do that, and that was a challenge in itself because you have to do it very rapidly and you have to find the right people along the way.

Bonugli: Yeah, and…that’s what we see in the market as well. The challenge always comes down to the people, right? It’s always how do you hire fast enough, right? Or how you get the people that sometimes have to do their day-to-day jobs in dedicated time to do the transition as well?

Becker: Exactly.

Bonugli: Right? This whole concept about having a separate team doing the transition—I’ve seen situations that didn’t really go well. You got the whole team, it is—

Zappala: Everybody’s got to participate. That’s right.

Bonugli: Yeah. Everybody has to participate and they also have to do their daily job. So it ends up being situations where you’re coming to an integration, and especially in a technology, you think, “I can get this done in four to six months.” And it ended up being 12 months.

Zappala: Right.

Becker: Right.

Snow: Mauro, just one more follow-up question for you. It seems like these two seem to continue to like each other, which is great for the future of the company. But have you seen when these projects take longer than expected or other unexpected issues pop up? Have you seen a strain develop between the management company and the private equity sponsor?

Bonugli: Oh, absolutely. Yeah. Many times. And the reality is the human capital component of the private equity portfolio companies is always very important. Sometimes you just have to recognize that certain leaders might not be a good fit for that specific job. What I’ve seen most commonly is if you ask around, most people would say, “I should have changed the CFO, the CEO, the CO faster than I did.” Right? Because, in many cases, what happens is that by the time you realize you want to make a change, the company might already be behind plan and by the time you hire someone, you’re behind what you were expecting to do.

Snow: You’re still happily involved with Chromaflo. Things are going very well. For those other corporate executives out there who are thinking of partnering with a private equity firm or have thought about it in the past, what advice would you give about making sure you’re picking the right partner and going into things with eyes wide open?

Becker: Right. I think number one is that you want to make sure your strategies are aligned—the company itself with the private equity firm’s strategy. Number two: you want to make sure you have a good cultural fit. And number three is, I would say, to do your due diligence. Make sure you understand your partner and that they understand you very well when you join up.

Zappala: The other thing to note is that, no matter how, we’ve done lots of acquisitions and carve-outs. The only thing we know for sure in every deal and every investment we do is that things happen during the process. So it’s very important that you build your team and plan ahead for things that are going to go wrong.

Bonugli: That goes back to the whole importance and criticality of having the operating executives within the private equity funds because, again, they’ve been through a series of those processes, right? Executing hands on, and they can help. Internally, the private equity funds really understand what can go wrong. Here are the risks and here’s how much it’s going to take realistically.

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