Investors have had a lot to process recently — COVID bumps in their portfolio companies, whether positive or negative; supply chain issues; inflation impacting working capital, to name a few. While these issues are unique, in some ways it’s comparable to the routine challenges facing early-stage companies.

“I think that's why they made fund lives five years for investment, because you're always going to have something in that period that's not going to work for you,” says Blue Highway Capital Managing Partner Christine Jones, who spoke at this past year’s Philadelphia Smart Business Dealmakers Conference.

As a growth equity investor, she says Blue Highway made three investments during COVID in the first 12 months, and three in 2021.

“We're always looking at those same determinants: What’s the bump? What's the dip?” Jones says. “And we've used the opportunity, honestly, to invest in dips.”

For example, one of those companies had great structural contracts in place and was able to extract it from a corporate carve out and at a very attractive price and provide some of the working capital needs.

Additionally, she says there are some really aggressive ABL lenders out there. They have good banking relationships — a number of LPs that that are banks — that can be leveraged.

“Things really haven't changed for us, maybe because we're small, maybe because we're rural and the companies that are coming to us are coming to us for different reasons, having to do with the general macroeconomic environment, they're having to do with personal financial concerns or constraints, or wanting to move on,” Jones says. “Maybe that is COVID-related because they're tired, don't want to see another cycle. But I think the real critical element to all investing is the adaptability of a management team.”

When leadership teams can adapt, regardless of what they face, that creativity and mindset is what distinguishes a great investment from one that isn't.

“We always say investing is all about people but it's very much true and we saw it during COVID, especially, when people did amazingly innovative things to find money, to grow revenues to strengthen supply chain, to get employees,” she says. “It's really phenomenal and an attribute to all the people that ran the businesses in our portfolio, we’re very grateful because we have a nice portfolio.”

Rollover equity, earnouts and subordinated debt have a place for investors because, she says, anything that builds alignment is positive.

“Whether you're buying or selling, you’re thinking about the same thing from the outset — it's a very emotional transaction,” she says. “Getting to know the other side very closely and understanding what's important to them, not just financially but personally, helps you build a structure that, from the very beginning, is clear.”

That, she says, can change because disruptions such as COVID or a global financial crisis can happen. But its best if buyer and seller are philosophically and financially aligned from the beginning, potentially through instruments such as a seller note or rollover equity.

Alignment can also result in incentive options that trigger if the seller beats the plan.

“If we get a phenomenal return, we're going to share some of that upside after a certain return,” Jones says. “It's an orientation that you adapt at the beginning. I would call it just being creative, being flexible, being opportunistic — all of these things help you along the way. And any of these little tools can also be tweaked. It's just a beginning point.”

A great relationship at the beginning, along with some financial alignment, enables the parties to come to the table at different points along the way and talk. Those conversations, she says, could be about getting more equity into the management team, restructuring, or if the former owner wants to be bought out, an investor has the flexibility to execute.