Powered By Private Equity

For several years now, the deals have been proliferating. In June 2017, private equity firm H.I.G. Capital acquired Top 40 supplier BIC Graphic (asi/40480) for a reported $80 million. A year later, TPG Growth purchased Top 40 distributor HALO Branded Solutions (asi/356000) from another private equity firm for an undisclosed amount. In August, Blue Point Capital Partners, a Cleveland-based private equity firm, recapitalized Top 40 supplier Next Level Apparel (asi/73867). The move added to Blue Point’s promo investments, which already included Spector & Co. (asi/88660) and J. America (asi/62977) – deals made in 2018 and 2016, respectively. The Next Level agreement was announced weeks after Chicago-based private equity firm LaSalle Capital purchased National Gift Card Corp. (asi/73011) – a transaction revealed a few months after Florida-headquartered PE firm Liebman Group acquired a majority stake in supplier C-Slide (asi/43075).

The deals represent a sampling of what promo executives and private equity principals say is an undeniable trend – namely, that private equity money is pouring into the promotional products industry like never before. Expect the inflow not just to continue, but to accelerate. “The PE market is waking up to the underlying attractions in the promotional products sector – market growth, buy and build opportunities, efficiency opportunities, globalization, further penetration of corporate accounts, etc.,” says David Colclough, a partner with U.K.-based Elysian Capital, which acquired distributor Brand Addition (asi/202515) in 2017. “It’s a great sector to invest in with long-term positive growth drivers and opportunities.”

Suppliers and distributors connected with private equity companies say their partners provide investment power, business insight and operational expertise that’s helping to drive efficiencies and growth in sales and profitability. More broadly, the influx of private equity dollars is increasing consolidation across the branded merchandise market and pressuring middle-sized and larger suppliers and distributors, whether PE-backed or not, to scale up and become more streamlined, according to promo executives. In the eyes of some, private equity money also represents a potential threat to the longstanding industry model that centers on domestic suppliers selling to distributors, and distributors selling to end-buyers. In this report, Counselor examines the growing influence of private equity on promo – and what that means for the industry.

Why the Interest?

In 2017, the global private equity industry raised a record $453 billion from investors, according to Preqin, a data and intelligence firm. That filled PE companies with more than $1 trillion to invest – a number analysts expect to rise as more investors are enticed by the prospect of valuable returns. The swell of available capital is a key reason why more PE money is entering the promotional products space, and other industries too. “There is tremendous pressure to get the capital deployed because investors expect a return,” says Bob Herzog, CEO of Top 40 distributor Corporate Imaging Concepts (asi/168962), whose majority stake owner is Berkley Capital.

Even with the eye-popping reserves, savvy PE firms aren’t going to spray cash all over willy-nilly. They’re going to migrate their money to particular businesses and industries where they believe they’ll realize lucrative profits. The promo market fits the bill.

“There’s a history of successful private equity investments in the industry – HALO and Polyconcept, to name a couple.” Scott Finegan, Pfingsten Partners

While not the biggest industry around, the swag sector is large, representing $23.6 billion in distributor sales in 2017, and is growing and profitable. Annual sales have increased overall each year since the dark days of the 2009 recession. Profitability, Counselor SOI data shows, is solid, with distributor margins tallying an average of 35% in 2017 – the highest mark of the last decade. These industry characteristics are alluring to private equity firms, many of which say their research has led them to believe that more growth and strong profitability are ahead. “The industry has real staying power,” said Scott Liebman, managing partner at Liebman Group.

Meanwhile, private equity firms are also intrigued by the impressive results achieved by previous PE investments in promo. “There’s a history of successful private equity investments in the industry – HALO and Polyconcept (the latter backed by Charlesbank Capital Partners), to name a couple,” said Scott Finegan, managing director at Pfingsten Partners, which acquired Showdown Displays (asi/87188) in 2017. “Investors are always attracted to strong historical returns.”

Furthermore, the promo industry, on both the supplier and distributor sides, remains largely fragmented, populated by what some might describe as a plethora of small and medium-sized firms. The fragmentation makes the sector “ripe for consolidation” – a verbatim phrase used repeatedly by various PE principals and promo executives interviewed for this article. The potential for considerable consolidation, with the financial rewards it presents, is compelling private equity companies to search for acquisition opportunities in promo. “The fragmented nature of the industry allows private equity investors to execute buy-and-build strategies that they favor,” says Finegan.

PE firms also view the industry’s lack of consolidated power as an ideal chance to grow promo companies they acquire through organic means. “The fragmented base of suppliers to the industry offers opportunities to increase wallet share of existing customer spend, as well as to attract new potential customers to the platform,” Finegan says.

Will PE Investment Continue?

For the reasons already discussed, it’s a good bet that private equity investment will expand in this space. Certainly, PE firms that currently have a presence in promo are keen to lengthen their reach.

“Given that we believe the industry is an attractive place to invest, we’ll continue to look for both add-on acquisitions for our existing three platform portfolio companies, as well as new investments on a standalone basis,” says Jeff Robich, a principal at Blue Point Capital Partners. Elysian, Brand Addition’s backer, would consider additional investment, too. “Brand Addition is a great business and any further investment in the sector would be backing the team there to make further acquisitions,” says Colclough. Liebman Group is also open to opportunities. “If you can make an investment in a smart, private, rapidly growing company at a reasonable valuation – a company you can partner with and bring value to – you have a really good chance of generating attractive returns,” Liebman says.

Promo executives at companies with and without PE backing expect the current of private equity capital streaming into the branded merchandise industry to quicken in the years ahead. “Money always follows opportunity. Our industry is untapped. A few have seen how exciting it is, and the money is coming in,” says Brandon Mackay, CEO of Top 40 supplier SnugZ/USA (asi/88060), which is independent. “The PE money will continue to flow into our space.”

Norm Hullinger makes a similar assessment. “This is a large, stable industry with sustainable growth and a compelling value proposition for the end-user. Private equity will continue to enter our space and drive consolidation, promote efficiency and improve the overall customer experience,” says Hullinger, CEO of Top 40 supplier alphabroder (asi/34063), a portfolio company of PE firm Littlejohn & Co.

Spurring Consolidation

As Hullinger alludes to, private equity’s progression into promo is likely to propel wider-spread consolidation. In fact, the change is already underway. “The capital private equity investment firms make available to their portfolio companies allows these companies to become a platform upon which accretive acquisitions can be consummated,” says HALO CEO Marc Simon. “The consolidation our industry is currently experiencing can be traced, at least in part, to the participation of PE in our industry.”

Supported by several PE firms over the years, HALO has been aggressive in its acquisitions, especially of late. In August, the Illinois-headquartered distributor announced the acquisition of fellow Top 40 distributor Sunrise Identity (asi/339206). The deal followed the January-announced acquisition of another former Top 40 firm – Caliendo Savio Enterprises (now “CSE Powered by HALO”). A couple months before that, HALO revealed it had acquired distributor American Pacific Promotions. In 2017, HALO also bought Catalyst Marketing and Michael C. Fina Recognition – the latter a major player in the incentives and recognition space that’s since been rebranded as HALO Recognition.

“The PE market is waking up to the underlying attractions in the promotional products sector – market growth, buy and build opportunities, efficiency opportunities, globalization, further penetration of corporate accounts.” David Colclough, Elysian Capital

Of course, HALO is far from the only PE-powered company ramping up acquisition efforts. In December 2017, apparel supplier alphabroder was the talk of the industry when it branched out into hard goods by acquiring then fellow Top 40 supplier Prime Line (asi/79530). During the spring, Corporate Imaging Concepts made headlines when it bought eCompany Store (asi/185782), a Top 40 distributor as recently as 2016. With eCompany Store on board, CIC expects to generate $85 million in 2018 sales – $41 million more than in 2017.

“The big are going to get bigger,” says Bill Korowitz, CEO of Top 40 supplier The Magnet Group (asi/68507) and founder of TMG Capital, a private equity firm focused on promo supplier acquisitions.

“We’ve already seen consolidation in the last five years, but I expect it’ll increase significantly in the next decade on both the supplier and distributor side,” adds Rob Spector, president of Spector & Co. “The industry will have more large suppliers and distributors, and the landscape will be very different.”

The Impacts of Change

Consolidation is being driven by more than just PE money. As just one example, the investment required to compete is rising, compelling smaller firms to look for bigger, better capitalized industry companies to align with, whether those companies are PE-funded or not. Still, the consensus is that the industry’s amalgamation, which private equity is clearly playing a role in, will inexorably alter the swag sector. Some are concerned about the implications.

For one, Gene Geiger believes that consolidation, particularly at the top of the industry, will change how business is conducted – perhaps only to the advantage of the powerful few. “Firms that become large can and will act differently than firms that have less scale and less leverage,” says Geiger, CEO of family-owned Top 40 distributor Geiger (asi/202900). “A large distributor, for example, might use its purchasing power to extract concessions from a given supplier or seek to integrate computer systems to lower transaction costs. This might reduce opportunities for smaller suppliers, which don’t have the same breadth of product, buying power, or IT technology.”

While specifics remain to be seen, some industry executives anticipate that consolidation will heap pressure on mid-sized firms – a perspective Herzog articulated: “In the next 10 years, you’ll either be a big player in the industry or you’ll be a smaller niche player in the industry. I believe everyone caught in the middle will get squeezed hard by those two groups and the changing industry dynamics.”

From a different perspective, some take the view that PE capital is actually a vital means by which middle-sized businesses can prosper in a consolidating market. “Private equity can be key to helping smaller suppliers compete with larger suppliers by evening out the playing field in all aspects of business,” says C-Slide President Ron Gustaveson II. Beyond helping to fund acquisitions, PE firms can “give smaller suppliers more buying power with international manufacturers, which helps us compete with the big boys.”

On the whole, many industry executives see PE-fueled consolidation as a boon for the promo business. They say supportive, quality PE partners improve companies in which they’re invested, which raises the bar for the industry – a push for progress that will ultimately make promotional products more appealing to end-buyers, the thinking goes. That should help spark greater average annual industry sales growth. “Private equity is accelerating consolidation and making our industry more efficient,” says Hullinger. “Well financed, PE-backed distributors and suppliers can invest in the growth of the industry and drive the end-user value proposition.”

Benefits of Partnership

PE-supported promo companies Counselor interviewed say they’re experiencing competitive benefits through their partnerships. Foremost among those benefits is access to capital that pays for vital improvements. “The board of directors at H.I.G. really understands our business, and have approved much-needed capital expenditures in technology infrastructure, new decoration methods and system upgrades to enhance the overall customer experience,” says BIC Graphic CEO David Klatt, Jr.

Beyond capital, good PE firms provide expertise that companies in their fold can leverage to bolster operations in everything from technology to manufacturing and more, depending on a business’ needs. “Through the Berkley network, we have access to experts in finance, tax, regulatory and HR, as well as all of their other portfolio companies,” says Herzog.

At HALO, PE sponsorship over the last 15 years has allowed the distributor to increase scale, and thereby efficiencies. Enhanced efficiencies have led to more robust profit, much of which HALO has reinvested in the business to expand offerings and add value, says Simon. That’s directly contributed to sales gains. North American promotional product revenue was up 48% at HALO in 2017 over 2016. “Our momentum continues to accelerate,” says Simon.

PE firms have proved pivotal in directing sound business strategy, too. “Blue Point has helped us become more strategic,” says Spector. “We’ve crafted a five-year business plan with very clear objectives. In addition, their Shanghai team has helped us improve our Dongguan, China office by implementing a host of new KPIs to ensure they measure up to the new challenges of working with compliant factories.”

At alphabroder, Littlejohn’s strategic guidance has been essential to the supplier’s growth. For instance, the Connecticut-based firm helped alphabroder realize the intrinsic value of investing in its own private brand business. “Littlejohn helped us understand that marketing a unique brand offering to our customer base generates much more than the obvious value of additional revenue and gross profit,” says Hullinger. “It also builds strong brand loyalty and creates a meaningful drag-along/tag-along effect for basic products.”

The advantages PE-backed promo businesses are gaining from their partners are intensifying competition in the promo sector, according to industry executives. “There will be great pressure on both sides of the industry to grow and scale up,” says Geiger. “Those who fall behind risk losing relevance and ultimately competitive strength.”

As part of efforts to build, Geiger has made acquisitions that include this year’s purchase of U.K.-based BTC Group (now Geiger BTC Group) and the August 2017-announced purchase of select assets of PromoManagers Inc., a web-based distributor. It’s not just about acquisitions, though. Geiger believes distributors looking to grow could focus on everything from expanding market segments, such as e-commerce or programs, to branching out into adjacent but compatible services or product offerings.

On the supplier side, Mackay thinks independents like his SnugZ/USA must be nimble and innovative to vie with PE-backed competitors, continually developing excellent new products and providing an amazing customer experience. “Suppliers need to create a meaningful value proposition and blaze new trails in tech to keep on par,” he says.

A Little Leery

Given the potential advantages of private equity backing, some independent distributors and suppliers admit they’re interested in exploring possible PE partnerships. Others say it’s something they might consider, but not at the moment. “If it meant prolonging the legacy and improving the lives of our employees and customers, then perhaps, but I see lots of advantages to having autonomy,” says Mackay.

Meanwhile, others are leery of private equity money and the potential pitfalls it presents. “The true model of these firms is to turn a profit and flip the companies they invest in every three to seven years,” says Memo Kahan, president of Top 40 distributor PromoShop (asi/300446), which is not PE-backed. “It’s alright when business and the economy are going good, but if that changes, I worry that a lot of people are going to lose their companies.”

Like Mackay, Kahan sees ample upside to staying independent. “We don’t have to ask for permission to do the things we believe will make us more successful,” Kahan says. “And we don’t have to worry about someone telling us to do things that might have a negative effect on our culture and our business in the long term.”

“It’s alright when business and the economy are going good, but if that changes, I worry that a lot of people are going to lose their companies.” Memo Kahan, PromoShop

Gene Geiger feels PE wouldn’t be a good fit for Geiger. “Private equity places laser focus on driving sales and earnings growth. There are no sacred cows other than increasing EBITDA,” he says. “Our family business culture places considerable value on the long term, all stakeholders, and giving back to community and industry. Generally, these aren’t of value to PE owners.”

Even industry executives who’ve had success with private equity caution that connecting with the wrong firm could be detrimental not only to your business – but to the entire promo market, should such connections proliferate. To improve profit, for example, a PE firm could pressure a distributor to attempt to extract exorbitant fees and concessions from suppliers as a charge for getting the distributor’s business. But that’s not all.

“The wrong PE firm, one that’s not knowledgeable of the industry and supportive of its model, could pressure suppliers to improve profitability by selling direct,” says John Bruellman, president/CEO of Showdown Displays. “For the same reason, there could be pressure for distributors to go around suppliers to source directly from overseas and take inferior product. None of that is in the best interest of the industry or the model that we, as a company, are absolutely loyal to.”

Showdown Displays is fortunate, Bruellman adds, to have found an outstanding partner in Pfingsten – one that understands and respects the traditional roles of supplier and distributor. Bruellman’s positive assessment of his company’s private equity partnership was representative of the feedback from PE-backed promo companies Counselor interviewed.

“Investment in the promo industry is a great sign for future growth, and many company owners and founders will likely see some large investment returns,” says BIC Graphic’s Klatt. “As this investment and consolidation continues, it will strengthen the industry as a whole.”