NewSpring: More, not bigger

Marc Lederman, partners with Michael DiPiano and the team at NewSpring Capital in Radnor, one of the Philadelphia area's largest stand-alone private-equity investors, brings us up to speed on the firm's recent expansion and prospects:

You know us: we are very operationally-oriented. Skip Maner is here, formerly of Inverness Graham, and TL Ventures. Jim Ashton, who was CEO of SunGard Financial for five years, and headed Premier before SunGard acquired them. 

We are north of $1.5 billion [assets under management]. It took us 10 years to grow from $90 million to $500 million, 5 years after that to get to $1 billion, less than 2 years to get to $1.5 billion.

Two recent funds:

- NewSpring Holdings is focused on what you might call lower-middle-market transactions, companies with $20 million to $40 million in revenues, and (profitable) EBITDA-positive. Plus we do some bolt-on acquisitions for portfolio companies. We look for companies, they may have debt, the founders have stuck around, and it's time to transition to the new team. The generational transfer is now hitting tech companies. At the typical company, cash is flowing nicely, there is no heir apparent. It's a solid business; the founder wants to pull out his cash. Maybe it's time to build into a new business...

- NewSpring Growth Capital IV, we had our first closing in the fourth quarter, we raised $300 million. NewSpring Mezzanine 3, targeted $225 million, in the fourth quarter we also had our first close. Growth Capital III was $250 million; 4 is not much larger. We like to keep our funds small.

(At larger firms like those at LLR, TA Associates, Summit Partners), their last funds are in a billion-dollar range. They've gotten into national security and healthcare.

We've had lots of suggestions that we (should) get bigger. But if we stay at $300 million, we can do (investments) that the bigger funds have abandoned. Instead of a few $100 million checks, we can do a lot of ($10 to $20 million) checks. (Larger funds don't expect to make money from such small investments.) There is less competition in our space. So we keep to our knitting. We've been successful.

There's a body of work that says smaller funds tend to outperform larger funds. There's a Kaufman Funds report, there's work by Andrew Metrick at Yale (formerly Wharton), he says funds (can optimize) in the $250 million to $300 million range.

IPipeline last year, that was a tremendous exit. We still aren't saying how much we made. I can say that a home run for us is when we make (at least) 5X our invested capital. They clearly beat that and Tim Wallace went into our CEO Hall of Fame in November because of how well they did.

Our three best yields ever are all Philadelphia-based. There was Mike Hagan's NutriSystems; Matt Gillin's Ecount; and Jack Tighe's TMG Health. iPipeline is our Number 5 for returns. Those guys, they go into our Serial Entrepreneur investment program. Matt Gillin's current company, Relay Networks, Mike Hagan's LifeShield that he sold to DirecTV -- (we investors) did all right, it wasn't NutriSystem but he did a nice job building the business -- those are companies we can support.

Bill Butler who was iPipeline's President (before Paul Melchiorre, who just left to run San Francisco-based Anaplan), he's now at Journey Sales, which MissionOG just led an investment in.

There's a thing you ought to notice. Melchiorre is like Bill McDermott at SAP -- they play humble roots but they are the smartest guys in the room. They are very good at disarming people...

In Philadelphia for some time we haven't had the corporate citizenship to be supportive of the entrepreneurial ecosystem.

That is changing... Comcast has become a big supporter of PACT, also SAP, and Independence Blue Cross. They sponsor events, hackathons, the big breakfast downtown for women in tech. Jen Morgan, president of SAP North America, moderated one of their panels last week. They are putting dollars in and getting their people involved.  

There is something in it for them: they can't count on being pseudo-monopolies. They have to figure out a way to be disruptive. To sustain them in what they see is the future. They need these technologies, these people...

They have power and resources. For Comcast, building that second tower is a huge commitment. They are going to have a lot of jobs here. They are, really, a huge tech company, trying to be more innovative. Dreaming of new services. The next Netflix.

There's still a brain drain in Philadelphia. We had to get Philadelphia to where it's hip. If Wharton MBAs don't have another nexus to the Philadelphia region [besides the school's West Philly location], it's hard to get them to stay. A few years ago they all wanted to go to San Francisco and of course New York. They are putting Philadelphia more in the mix now.

When I got out of college 20 years ago no one lived downtown. Today every one of our associates and analysts, and some of our VPs, live downtown. And they do the reverse commute. That never happened 20 years ago.

Here's how we find companies: We focus on deal sourcing directly from entrepreneurs or CEOs or key influencers. In Philadelphia you know for many years it has been the Steve Goodmans and the Howard Rosses (he's the R in LLR). Now it's also Andy Hamilton and Michael Heller and Chris Miller, guys at (Morgan Lewis and) Cozen and Pepper. Accountants like Andrew Jordan, the guys at Ernst and Young, Bob Fesnak at RSM US LLP, Tom Gordon at Silicon Valley Bank. 

We spend a lot of time building relationships with them so we can ID companies before they raise capital. For $10 million, or $20 million, you don't hire a [big Wall Street investment banking firm]. You go to a VC or ask your accountant, your lawyer. These founders, they want a fair process. They are busy running their business. We know them, we are well positioned to get a deal. Three-quarters of the deals we do (are located) in the Amtrak corridor. Boston to Northern Virginia.

As we build a brand and people from our ecosystem go to do other things, we have opened a satellite office in Chicago. There's a similar  entrepreneurial ecosystem there. A lot of buyout firms. Madison Dearborn. The people from Golder Thoma. There haven't been as many people who are tech-oriented.

We don't stay in the companies forever. We exited from iPipeline, from Quintiq, from LiquidHub. They recapitalized. Precyse sold to a financial buyer.

We are looking for our next generation of Matt Gillens and Mike Hagans.

RJ Metrics is doing some nice things. We have 12 younger guys tasked w trying to understand the start-up ecosystem (for example, the small firms visiting at PhillyTechWeek) a little better. Should we sponsor an event, should we host? The ecosystem is getting some core density downtown. We need to get a part of that.

One of the first companies out here in the suburbs to add an office downtown was Fiberlink. No one wants to commute to Blue Bell from the city. Since then Bentley, iPipeline, Linode have all added offices in Center City. They want to hire the young engineers, who like the apartments and the restaurants and the young people, who maybe think owning a car at this time in their lives is a hassle.

A lot of the firms that are in Philadelphia, you know, Ira Lubert's firms (Independence Capital Partners) are at places like the Cira Center. The tax abatement on that building is (expiring soon.) What happens next?