When Stewart Kohl first entered the private equity industry in 1988, he had never taken a finance or accounting course.
“I didn’t have my MBA and this is not an exaggeration, I could not spell EBITDA,” Kohl says with a wry smile. “So I had a lot to learn. But I was very fortunate. I was hired by the good folks at Citicorp and they had a great training program. I put my head down, I read a lot and I had a lot of people I could learn from.”
From those humble beginnings, Kohl has used his genial personality, along with his considerable skills and talents in the world of business to become one of Cleveland’s preeminent dealmakers. Riverside Co. is a global private equity firm that has made more than 520 acquisitions and has in excess of $7 billion in assets under management.
“Literally every day, I’m learning about a new company and a new industry,” says Kohl, co-CEO at Riverside. “There are so many ways to make money in our economy, so many ways to create businesses and there are new ones being invented almost every day. That’s a fantastic part of it. But the real payoff in private equity is using our capital — both financial and intellectual — to help a company achieve what it wants to achieve.”
It’s customary at this point to name a few of the most memorable deals that our featured dealmaker has been involved in over the years. That’s not easy to do with Kohl, however, because he’s done so many that were significant. He’s also had his share of deals that didn’t work out.
“I’m tempted to talk about some of our big winners — deals where we made three, five or even 10 or more times our invested capital,” Kohl says. “They are hard to forget. But there are also the losers. I see those scars every morning when I wake up and shower. It has been said that all good deals are fundamentally the same, but all losing ones are different. The ones that got away hound me at night.”
In this week’s Master Dealmakers feature, we sit down with Kohl to talk about how curiosity fuels his passion for dealmaking, how he judges the success of a transaction and the factors that determine the ideal amount of a capital to provide a young business.
The power of curiosity
If you’re curious, if you want to learn about what makes companies and industries tick, if you’re a corporate voyeur who likes to peer in the window, there is no better job. The dealmaking process can be extremely rewarding. It’s rewarding for our investors and for ourselves and that’s important or it wouldn’t be sustainable. But it’s also very rewarding for the owner of the business, the managers of the business, for the employees of the business and in many cases, even the community in which the business operates. It’s extremely satisfying to see those objectives met.
When we’re judging the success of one of our investments, obviously we first and foremost look at whether we made money and the rate of return for our investors. They are our bosses and we work for them. It’s very important that we deliver consistent returns because if we don’t, they’ll find someone else who will. We also feel that’s the bond, the covenant we have with our investors. But to do that, we almost always have to grow the revenues of the companies we invest in.
There are quite simply two ways to grow. You can grow organically, selling more and more of the same product for the same or higher cost to more customers and more geographies. Then there is inorganic or M&A-driven growth, which for us means doing add-on acquisitions. So we take a platform company and we build it up through more acquisitions. Topline growth is a critical metric, but it’s not enough just to grow the topline. That should translate into more profits, not necessarily right away, because sometimes you have to invest to get the growth. But that investment has to have a high return and ultimately, it needs to translate into earnings.
Returns driven by growth in sales and EBITDA are critical measures. But you can also look at figures like growth in employment at the company. You can look at whether we have sustained or better yet, improved the culture of the company. Is it a better place to work? There is a term that is commonly used called ESG, environmental, social and governance. Are you enhancing the company in these ways? As we do at Riverside, we have an additional letter: ESG plus V. The V is for values. Have we further enhanced the company as a values-driven business?
The key to finding the right amount of capital to provide starts with asking a question: What is the objective? Then lay out a clear strategy to properly quantify what that’s going to require in terms of investment into the existing company, as well as potential add-on acquisitions. It’s important that businesses have enough capital that they not be capital constrained. On the other hand, human nature being what it is, anything in abundance or provided for free tends to be squandered. I don’t think we want to starve businesses. But we also don’t want to make them too fat.
When we talk about private equity, we usually think first of financial capital. Money. That’s certainly an important part of what we do. But the older I get and the longer I’ve done this, now 30 years, the more I think about intellectual capital more than financial capital. Financial capital is important, but it’s kind of a commodity. Most peoples’ money is green and pretty much the same shade of green. But the intellectual capital varies widely. What industry expertise do you bring? What operating experience do you bring? What about your ability to help the company grow in new markets, to grow internationally? There are so many ways we can add value to these companies that is well beyond the money we invest.
Cleveland’s economic outlook
I’m more bullish on Cleveland’s development than I’ve been in my 30 years here in Cleveland. Decades ago, we thought growth was going to come from the biggest companies locating here and creating jobs here. Today, that’s been turned on its head. Today, we focus on the smallest companies, the newest companies, the growing companies as being the innovators and the job creators. It’s creating a much more organic, much more diverse and a much more healthy form of growth. It’s not driven by a few big projects. It’s driven by thousands of smaller ones.
We have some very exciting clusters in terms of economic development. Health care, of course, is the most important one. We’re blessed to have institutions like the Cleveland Clinic, University Hospitals and MetroHealth here. That’s created a whole ecosystem with organizations like BioEnterprise, JumpStart and Riverside where we’re an active health care investor. Admittedly, some other cities like Columbus have advantages too. They have The Ohio State University, which is a fantastic driver. But we have Case Western Reserve University and Cleveland State University and other institutions, including Oberlin College, my alma mater. Columbus has the state government, and it’s well understood that state governments are a big advantage for growth, particularly in down times. They tend to grow through the recessions. But I wouldn’t trade our health care cluster for anything else in terms of our ability for this region to grow and succeed.
The Last Word
Another positive aspect of doing business and doing deals in Northeast Ohio is that we have a remarkable business community and remarkable business leaders. I think of people like my friend Umberto Fedeli. I think about how open doors are, how open minds are, how much people are willing to collaborate to achieve their objectives. Cleveland is not the largest market by any means. But it’s very often on a pound-for-pound or dollar-for-dollar basis, the most philanthropic and the most engaged. You can see the evidence of that in everything from the United Way to the Jewish Federation. Cleveland punches above its weight in so many areas and we have this rich heritage that I think will bless us and benefit us in the years ahead.
How to reach: The Riverside Co., www.riversidecompany.com