Jeffrey Kadlic is calling on Congress to enact legislation that allows more people to invest in private equity.
“The legislation says you have to be an accredited investor to invest in private equity,” says Kadlic, co-founder and managing partner at Evolution Capital Partners. “You have to be making at least $200,000 a year and have at least $1 million in net worth, excluding your home. You can see why somebody would say this is just for the really wealthy people. There are millions of private companies in the U.S. For everybody not to have access to all those companies that are out there, I think it’s a shame.”
Industry analysts earlier this year estimated there was $1.7 trillion already committed to PE firms. In a market flush with capital that is paying large multiples, there are deals to be done, especially in Cleveland, Kadlic says.
“There is an enormous concentration of institutionalized private equity capital in Cleveland,” Kadlic says. “Collectively, the private equity community is nationally renowned and has a real impact, both nationally and internationally, in the investments it makes. Because we’re a lot of little firms, it’s hard to measure. I think private equity is transformational, but I don’t think people realize how it impacts everybody. Net-net, private equity transforms and it creates jobs.”
Smart Business Dealmakers spoke with Kadlic about what could be done to open up private equity investment to more people, the common pain points he sees in the M&A process and one of his most memorable deals.
What could be done to open up private equity investing to more people?
Private equity often gets a bad rap because it’s viewed as only for the rich and wealthy and institutional organizations. It was designed that way with legislation back in 1933 and 1934, which is kind of the bedrock of the securities industry. My interpretation of the law, and I’m not a lawyer, is that if you were rich, you were smart. That’s what they thought when they wrote it back in the 30s.
You can see why somebody would say this is just for the really wealthy people. It’s designed to be that way. Most people if they have access to it, it’s only through their pension funds and not anything they necessarily direct. A lot of people in our industry would say that is unfortunate, that everybody should have an ability to participate in this industry.
There needs to be a concerted effort in Congress to change those rules.
In the Obama administration, they attempted to foster entrepreneurship and investment in small businesses through crowdfunding. I think crowdfunding falls in line with what my logic is. Why couldn’t someone invest $1,000 or $2,000 or $10,000 in these opportunities? My only gripe with it was that private equity funds are regulated. We have a track record. It’s a 24/7 lifestyle we dedicate our lives to. The problem with those programs was a lot of the brokers were not regulated. The companies they invested in were not prepared to accept the responsibility of the financial reporting, having shareholders and being a good fiduciary. It was the right idea, but funneling it through an already regulated PE industry is a better way to do it. Just change the rules so if you’re a young lawyer who make $75,000 a year, but you’re really smart and you know what you’re doing, you should be able to invest in private equity.
What are some keys to making a smart private equity deal?
We developed a professionalization process that a lot of these companies need to go through to unlock their potential and be attractive to the next echelon of buyer. We kept seeing the same problems over and over again. Accurate and timely financial reporting, putting together a strategic plan, getting the right people in the right seats, documenting core processes and accountability and measurement. Those are the five major themes we need to solve so these companies are ready for the next buyer and can finally maximize the potential as an organization.
The business grows to a point where it expands beyond your level of understanding or sophistication in each particular area whether it’s accounting, finance, operations or anything like that. When you get started, a bookkeeper or having some outside accountant do your books and getting those a month later, it’s OK because you can keep some of that data in your head. As the company grows, that becomes a limiting factor because there is nobody who can keep all of those numbers in their head and help their company advance. You need to get organized around your financials and understand how to use data to make better decisions.
What’s one of your most memorable deals?
We met a gentleman named Paul Doman on Halloween 2008. He is CEO of Accurate Group in Independence. When we originally met him, he had a plan without a business. We encouraged him to go find a small business to buy and we would hire him on to run that business. That business was located outside of Charlotte, North Carolina and was called Accurate Group. He was trying to transform the markets and the customers that Accurate Group served. It’s a real estate transaction services business and when we bought it, a lot of their customers were real estate agents and consumer bankers that were doing loans for individuals.
Paul wanted to take the business and call on large banks and financial institutions. The timing was very good. One of the rules that came about in the wake of the financial crisis was banks couldn’t continue to value their own real estate holdings. It had to be done by a third party. That was Paul’s vision of what this business would do, among other things.
We started with a business in Charlotte that had about 40 employees. By the time we sold it, there were 145 to 150 employees, with about 75 new jobs in Cleveland and the company is still headquartered here. We sold it to ABS Capital in Baltimore. All the management team still remains there, which is unusual, and they’ve more than doubled the employment base since we sold it.
How to reach: Evolution Capital Partners, www.evolutioncp.com
2017: The Year of the Seller — Piles of cash drive high multiples for businesses across the board
Find your focus: A look inside the mindset of today’s entrepreneur