February 20, 2013
Interviewed by: David Snow
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LLR Partners: Evolution of Middle Market Investing

Mitchell Hollin, a Partner at Philadelphia-based LLR Partners, discusses the evolution of the lower-middle market, including important trends around private equity firm specialization and the involvement of operating partners in adding value. He also describes the business verticals that LLR targets.

Mitchell Hollin, a Partner at Philadelphia-based LLR Partners, discusses the evolution of the lower-middle market, including important trends around private equity firm specialization and the involvement of operating partners in adding value. He also describes the business verticals that LLR targets.

Privcap: What is LLR, and what do you invest in?

Mitchell Hollin, LLR Parnters: We’re based in Philadelphia. We’ve been around about 14 years. We define ourselves as lower middle market private equity, and by that we mean that we invest generally in companies under $100 million of revenue and generally enterprise values under $100 million.

We invest across a broad range of sectors, really across five business services sectors, including education services, health care services, financial services, software and technology, and other outsourced business services. And we also invest in both control situations as well as minority growth capital situations, but I’d say the consistent theme across the entire element of what we do is we’re growth investors. We’re seeking for our returns to come from ultimately top line growth, whether that’s organic growth complimented with acquisitions or independent of acquisitions. So it’s much more of a growth mentality as opposed to a leverage mentality.

It really fits the mentality that we have organizationally, which is it takes a certain kind of focus. We focus on revenue growth as opposed to expense management. It’s a different mentality that we focus on, trying to save every last penny. And while we’re conscious of expense controls, we’re much more focused on where we can make the investments longer term to ultimately grow the top line.

Also when you have that mentality of focus on growth, you really are inhibited by leverage, because growth is an expensive proposition, both to make the investments, but also to fund the working capital requirements. And when you’re inhibited with leverage, it really constricts what you can do in your freedom to really grow those businesses.

Privcap: How much has the business changed since your started 14 years ago?

Hollin: A lot. It’s just like most industries. It’s matured, and as businesses mature, they become more competitive. And as businesses become more competitive, it requires really a heightened level of specialization.

So I think that people before could be smart generalists, invest across a broad range of sectors, and if they had good instincts, do well. And I don’t think that is sufficient in this day and age. I think it requires being a smart investor, good analytics, but on top of that, you really need industry expertise. You need to be able to understand underlying dynamics that’s impacting those industries, and you really need a set of relationships and contacts and insights that are relevant to the specific sectors in which you’re investing.

So I think that today, you’re forced to be much more of a specialist as opposed to being a generalist, and I think you’re also forced to bring a level of operational expertise to situations, as opposed to just relying upon a management team that’s in place and having a hands-off approach. I don’t think that that is really an acceptable way to run this business in the day and age that we have and the competitive landscape that we operate in. Everything is tougher than it used to be, and it just requires being that much smarter.

Privcap: What else has changed with the business?

Hollin: And a big part of what we have done is really beyond the investment partners that have always had is really bringing in a team of operating partners as well. We have an operating partner that’s now the executive chairman of Orbis, and he brings a very strong background of education services companies. In the case of Physicians Immediate Care, we have a health care operating partner that really helped us study that space so much and became so excited by the platform that he actually moved from being an LLR operating partner in health care to being a full time CEO of this company. And in the case of Ultimus, we have another financial services operating partner that has joined the board and really helped us build out that the sales and marketing element of that.

So the presence of an operating partner in our organizations and the roles that they play is becoming increasingly important, and will continue to be so over the next several years.

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