Full Article - The Riverside Company

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SUNDAY, APRIL 6, 2008
SECTION D
THE PLAIN DEALER
ON THE RECORD
WITH STEWART KOHL
JOHN KUNTZ
THE PLAIN DEALER
Riverside Co. co-CEO Stewart Kohl stands next to a photograph titled “Powerhouse Mechanic,” part of a collection of work portraits taken by photographer Lewis Wickes Hine in the 1920s and 1930s.
The photo is one of many vintage portraits and artwork lining the walls of Riverside’s Terminal Tower offices in Cleveland.
Seeking gems in a haystack
That’s how Riverside Co. co-CEO Stewart Kohl describes one of Cleveland’s biggest buyout firms
S
tewart Kohl likes to mix metaphors when he describes the mission of Riverside Co., one of Cleveland’s biggest and most active buyout firms.
“Our model has been alternately described as
looking for the jewel in the rough, or the needle in the
haystack,” Kohl says. “Perhaps it’s a combination. We’re
looking for the jewel in the haystack.”
If the last several years are any indication, Kohl and his
staff of 160 aren’t having much trouble finding gems.
Riverside’s buying pace last year was dizzying — snapping up 28 businesses, or one every 12 days, in a year in
which private equity spending tailed off considerably at
the upper end of the deal-making spectrum. In 2008, the
company already has made nine purchases.
Its secret is its niche. Riverside buys companies at the
smaller end of the middle market — ones it can acquire
for $150 million or less — and then tries to double or triple them.
Kohl, 52, is Riverside’s co-CEO, sharing the title with
Bela Szigethy, who runs the firm’s New York office. It was
Szigethy who founded the company in 1988 in his Manhattan apartment overlooking the Hudson River.
They’ve been acquaintances since their undergraduate
days at Oberlin College in the 1970s but didn’t decide to
join forces until 1993, when Kohl left CitiCorp Venture
Capital in Cleveland. Neither wanted to move so they
opted for co-headquarters, talking by phone every day
and looking for deals in their geographic areas.
“We still talk every day,” Kohl says. “We still source
from our offices, but now it’s 17 of them around the
world.”
Today, Riverside’s portfolio boasts 62 companies with
combined sales of $3 billion and employing 11,000.
Kohl sat down recently with Plain Dealer reporters and
editors to discuss everything from his Golden Rule for
working at Riverside to a $5 million gift he and his wife,
Donna, gave to construct a new home for Oberlin’s jazz
studies program. This interview has been edited for space
and clarity.
see KOHL D3
On the Record is a series of interviews
with top Northeast Ohio business
leaders. Watch video of Stewart Kohl’s
interview at: cleveland.com/ontherecord
You will also find past CEO interviews with:
R Eaton Corp.
R Diebold Corp.
R FirstEnergy Corp.
R National City Corp.
R Grand Prix
of Cleveland
R Invacare Corp.
R RPM
International Inc.
R KeyCorp
R Developers
Diversified Realty
R Cleveland Clinic
R University
Hospitals
R Cedar Fair
R Third Federal
Savings & Loan
R Nacco
Industries Inc.
R NASA Glenn
Research Center
R Malley’s
Chocolates
R FedEx Custom
Critical
PLAIN DEALING
Fixing electronic overpayment to AT&T from bank account requires weeks
Q: Recently, I paid my phone
bill through my online bank account. The bill was $49.91, but I
forgot the decimal point and
mistakenly paid AT&T $4,991.
I contacted AT&T as soon as I
discovered the error. It said it
Sheryl
could be two to three weeks beHarris
fore it sends a check back. My
last bill from AT&T showed a
$4,941 credit.
I’m a prisoner of bureaucracy.
Todd Harford, Solon
A: You can’t really blame AT&T’s computer for accepting the payment you sent.
The bill from AT&T — the one that noted the
$4,941 credit — wasn’t an effort to taunt you. It’s
just an acknowledgement that it received a huge
payment from you.
AT&T’s policy is to wait two weeks to issue a refund check to make sure the original payment
clears the bank, said spokesman Bob Beasley.
That blanket policy — one shared by many companies — is intended to protect the company from
fraud, Beasley said. It applies, he said, whether
payments are made electronically or by paper
check.
You had been in correspondence with AT&T for
a couple of weeks before I got involved, so your refund was already in the pipeline. After I called,
AT&T agreed to overnight the check.
The online banking system isn’t designed to account for human error — at least not when the erring human is the consumer.
The Electronic Fund Transfer Act protects you
from errors made by your bank, said Kevin Mukri,
spokesman for the Office of the Comptroller of the
Currency. But there’s no carved-in-law protection
when the error is yours.
“Banks have a fiduciary responsibility to pay as
the customer directs,” Mukri said.
Still, the minute you notice an error, you should
contact your bank immediately, because there
might be a way to limit the danger of avalanching
overdrafts.
In your case, you paid a $10 fee to transfer funds
from your savings account to your checking while
this was being sorted out.
Mukri says the longer you wait to involve the
bank, the more difficult and expensive it becomes
to fix the problem.
You’re certainly not alone in making a mistake
while paying a bill online. Judging from the calls I
get, a common error consumers make is paying the
wrong creditor by accident.
It’s frustrating when money goes out of your account almost instantly, while refunds take weeks,
and companies that accept electronic payments
should seek a faster way to fix consumer errors. In
the meantime, there are a few tools you can use to
help “mistake-proof” your bank account.
see HARRIS D6
Sunday, April 6, 2008
The Plain Dealer
ON THE RECORD
Birthplace: Leonia, N.J.
Residence: Shaker Heights
Family: He and his wife, Donna, have a
daughter and three grandchildren.
from D1
Riverside co-CEO
discusses investments
Q:
A:
Why is it that your business
doesn’t seem to be affected yet
by what’s happening in the economy?
I’m glad you said “yet” because, as
we speak, the effects are being felt.
There has been a wrenching credit contraction. If we were doing large buyouts
where we needed to raise large sums of
debt in syndicated transactions, our
business would be shut down.
The advantage we have in this environment is that we’re dedicated to the
small end of the middle market. We can
work with a handful of banks with
whom we’ve worked for up to 15 years.
We’ve bought about 180 companies.
About 100 were new platforms where we
raised new debt. We’ve only lost money in
five of those, which is a very low percentage. Banks view us as a good credit risk.
In addition, we have a large pool of capital, about $1.8 billion, to do deals.
In a period like this, we’re focused on
the quality of the company we’re acquiring. If we’re buying a great little company for its fair market value, and if we
have ideas for how to double or triple
that company over the next three to
seven years, we’ll be delighted to buy, almost regardless of the capital markets.
Q:
A:
How do you go about doubling
or tripling a company?
One reason I still love what I do is
because there is no cookie cutter.
Every deal is unique.
GreenLine Foods Inc. in Bowling
Green, Ohio, is an example of just one
way it works. Founder and owner Jeff
Twyman wanted to take some chips off
the table so he could diversify his personal wealth, which is a pragmatic and
correct thing to do. If you met Jeff, you
would see he’s not the retiring type. He’s
on a mission to spread green beans
throughout North America, and maybe
someday, around the world.
Already together, we’ve made an addon acquisition. We have other acquisitions in our pipeline, which would give
him the ability to add geography to
cover the whole continent and the opportunity to offer other vegetables, using the same logistics and distribution.
Q:
Are you simply looking for complementary businesses that enable portfolio companies to increase
market share?
That’s an important part of what
we do. It’s typical for us to do one,
two or three add-ons during the life of a
Riverside investment. The companies
we’re investing in are not growing 50
percent or 100 percent a year. They’re
not high-risk technology businesses.
The businesses we’re acquiring are
growing somewhere between 5 percent
and 25 percent a year. When add-ons
are done right, you can find ways to
make one plus one equal three.
A:
Q:
A:
How long have you been invested in GreenLine?
We made the original investment
in 2006. Riverside investments
typically have a life of three to 10 years.
Three would be quite short, and 10
would be quite long. More normally, five
to seven years.
The industry as a whole would be a
little shorter and for good reason. They
start with larger companies. They have
less work to do to build them up. We invest heavily up front to position a company to make it bigger and better.
A recession, a downturn, will add two
years to the hold period across private
equity. That doesn’t trouble us. It’s a
phenomenon we saw in 2001 and 1991.
Q:
A:
Who are your investors and
are they patient to wait
through longer hold periods?
We raise money from large institutional investors — pension funds,
insurance companies, banks, college
and non-profit endowments.
We have investors like Traveler’s or Liberty Mutual or Northwestern Mutual Life.
Locally, National City and KeyCorp would
be investors. Stanford University and the
Getty Trust also would be investors.
To some degree, we attract high net
worth individuals who operate more like
a small institution in the way they allocate their assets and invest. It’s professionally managed. It’s not the individual
doing his or her own investing. These
folks have made a decision to allocate a
portion of their assets to private equity.
They understand it’s a class which has
the promise of higher rewards. That’s
what they’re striving to achieve.
Q:
A:
What is your average rate of return to investors?
If you measured the returns on
companies we bought and sold, that
would translate into about a 55 percent
compounded annual return. But it’s not
the only, or best, way to evaluate our performance, even though it’s quite factual.
The reason is because we own many
more companies we haven’t sold. You
Education: Bachelor’s degree from
Oberlin College.
Citicorp Venture Capital Ltd. in
Cleveland.
Career path:
R Became co-chief executive officer of
Riverside Co. in 1993
R Before that, he was vice president of
Community involvement:
R Serves on the board of directors of
Oberlin College, the Museum of
Contemporary Art in Cleveland, and the
Rock and Roll Hall of Fame and Museum.
could worry that we sell the winners and
hide the losers. Sophisticated investors
will say, “Let’s look at the value of all of
your deals. We don’t have a fact for what
they’re worth today, but we can do some
valuations.” When they do that math,
they conclude our returns are about 35
percent. That’s an excellent return.
Our investors are comfortable with
our unique business model — our dedication to the small and middle market.
With all the resources we bring to that,
we can continue to generate returns to
them that will be no worse than the high
teens and could be as good as the low
20s. That’s more than they’re going to
get from the public equity market.
Q:
A:
Has your investor pool changed
over the years?
It has completely changed. We
didn’t have a fund of our own
until 1995. Before 1995, we would find a
company fitting our criteria, put up our
own money, which was relatively pennies, and find an institutional equity
partner to put up the bulk of the money.
In those days, Society Venture Capital,
which then became Key Equity Capital,
was our partner.
In 1995, we said to ourselves, “We’ve
done some deals. They’ve worked.
Wouldn’t it be great if we could have our
fund?” We went out and raised $34 million. We invested in six companies over
the ensuing three years.
Come 1998, we were ready to raise
our next fund. This time we raised $107
million from that same group of investors. We invested in 11 companies over
the next 21⁄2 years. At that point, we said,
“We’re really ramping up. We’re finding
a lot of great little companies.”
Our existing investor base, which I’ll
define as our friends and family — not
literally, but people who knew us and
liked us, was not going to be big enough
for what we needed to do.
We did 200 presentations in a year.
We targeted to raise $250 million, but
ended up with $413 million. We had finally established our real investor base.
Q:
A:
Were you selling the same niche
that you target today?
It hasn’t changed in 20 years,
which is amazing. What has
changed is the world’s view of the niche.
When we went out to raise money in
1999, venture capital was all the rage and
people were interested in where they
could make 10 or 100 times their money,
not two or three times. We were the guys
in the corner at the cocktail party who
talked with the serving staff because nobody else wanted to talk to you.
As we went on in our fund raising, the
markets cratered and venture capital
was significantly affected. A few smart
investors said to themselves, “Where are
the other niches in private equity?” They
concluded this small end was a niche.
By the end, folks wanted to talk to us at
that cocktail party.
Q:
A:
Didn’t your success bring more
competition?
We have a lot of competition.
There are 1,500 private equity
firms in North America alone. Many of
them do small deals. The difference is
we are the only one that does the number of small deals we do on a global basis, bringing all of the resources that we
bring — 160 people, $1.8 billion in assets, 17 offices, a team of 20 operators
who can help businesses succeed.
Our more institutional approach resonates with a group of investors. What’s
interesting is that same story that resonates with investors also resonates with
a group of owners, sellers and managers
Q:
Riverside’s deal count has been
going up annually — 28 last
year, 26 the year before and 17 in
2005. What kind of pressure is there
to up that count every year?
There is no pressure from our investors. Our investors are focused
on our returns and the quality of the investing, not quantity.
All of us at Riverside are investors in
our own funds. Five percent of all of the
money Riverside raises comes from Riverside employees so we’re also concerned about quality and returns.
At the size range we’re interested in,
there are millions of businesses. Even if
you’re choosy, there’s still hundreds of
thousands to consider investing in, and
tens of thousands you covet. If there is
pressure to do more, it’s because we see
a lot of opportunity.
In 2007, our deal sourcing team found
3,500 opportunities for us to consider. Of
those, we visited 400. That’s about eight a
week. It’s a very active program of kicking
the tires. Of those, we bought 28. That
gives you a good sense of the numbers.
A:
Q:
A:
Why do business owners decide
to sell to private equity?
Sellers decide they’re sellers for
many different reasons. It could be
a death. We’ve bought from estates.
We’ve bought from owners with fatal
cancer diagnoses. It could be a divorce.
It could be retirement or lifestyle
changes or estate planning.
Often, sellers are not classic sellers.
They’re like Jeff Twyman at GreenLine
or perhaps even closer to home, like Tim
McCarthy at WorkPlace Media in Mentor. They want to see their business
grow and succeed, and they still want to
Q:
We photographed you next to a portrait of a turnof-the-century-style manufacturing worker flexing his muscles. That’s just one of many interesting photos lining the walls of your offices. Is there a theme
you’re trying to convey?
More than half of the art is of our companies. We
gather things that we think displays what our companies do. We put them on the wall as a way to remind us,
and educate our visitors, of what we really do, which is have
the privilege to invest in these crown jewel businesses.
The black-and-white photos, including the one in your
photograph, are of a series done in the 1920s and 1930s. It
revolves around the theme of work in America.
That is a fascinating period from an economic, political
and social perspective. It shaped the world. There are some
lessons in it that are worth thinking about — boom and
bust.
be a part of it. In those situations, called
recapitalizations, we’ll buy a majority
interest and we’ll work together to double or triple the size of that business by
bringing our capital and our know-how.
What they’re focused on is the fun
they can now have with more resources
behind them. When it works, the second
bite of the apple — the first bite came
when we bought 60 percent to 80 percent — when the rest is sold can be bigger and sweeter than the first.
Q:
A:
What has been your single best
investment?
In Europe, we had the opportunity
to invest in a recapitalization of
Welltec, a very interesting company that
had come up with a better mousetrap in
a classic sense. It’s a tractor that could
crawl down into a well, oil or natural
gas, and clean it out, perform a variety
of functions, and keep the well operating at high productivity.
It was already a successful, profitable
business. We did an add-on in Calgary
to give access to the rapidly growing Canadian and Alaskan market. The company grew splendidly.
We invested $17.6 million. Our gross
cash-on-cash was just about 10 times.
That means we turned $17.6 million
into almost $176 million.
Q:
A:
Looking back, should you have
kept that investment longer?
Most of the companies we’ve sold
have done well or very well for the
next owner. We do track it, and we
never look back. We never second-guess.
If we delivered a large return to our
investors, that’s what they paid us to do
and we did it. The world is risky and unknowable, and our investors don’t want
us holding things forever.
We think our reputation is enhanced
by selling excellent companies. When a
buyer buys a Riverside company, it’s not
a pig in a poke. All we ask is that they
show the love in their purchase price.
Q:
In pursuing your international
strategy, how do you size up
small companies in new markets overseas?
We are never a foreign buyer. We
are always a local buyer because
we’re always operating locally.
If you were to visit Riverside in Tokyo,
you’d meet with Japanese. If you visit us
in Munich, you’d meet with Germans.
We pay attention to local culture and
norms, but we bring to it a process and a
set of resources that’s global. It’s our
variation on think local, act global.
It does make managing the firm
harder, but we don’t feel we’re taking on
extra risk because we’re doing it locally.
If I were sitting in Cleveland and acquiring Shinsouki, a parking lot operator in
Niigata City, Japan, as we did in January, I would be scared. I’m not doing it.
The team in Tokyo is doing it.
When you think about Asia, it’s easy
to say you should go to China and India
because they’re big and they’re growing
fast. The problem is we’re cowards.
Those markets scared us. Despite what
we do for a living, we’re pretty conservative. We want to study them and watch
them, but we’re not ready to be investors in those markets.
We researched Japan, South Korea,
Singapore and Australia. Those capital
markets are excellent from a safety and
security perspective. Importantly, the
rule of law applies, and they fit a little
informal criteria that we use within Riverside. We like to see two free, unfettered elections out of a country before
we invest there.
It’s a bit glib, but it’s a good proxy for
what we’re trying to get at, which is we
don’t want to take political risk. We
have to be absolutely confident that five
to seven years from now there will be a
good market that will fully value the
types of companies we own.
A:
A:
Q:
A:
You and your wife, Donna, recently gave $5 million to Oberlin College for a new jazz studies
building. How did that come about?
The motivation to make the gift was a confluence of
factors. Things rarely happen for one reason.
I’m on the board at Oberlin and recognized that Oberlin
needs more resources. We are blessed with an $800 million
endowment, which sounds large. But relative to 2,800 students, a college, a conservatory and a museum of art, it’s Stewart Kohl and his wife, Donna, donated $5 million to
Oberlin College for construction of a new building to
not that large.
Oberlin doesn’t have the advantage that Ivy League house the college’s jazz studies program.
schools or other top liberal arts colleges have. We take
fewer students from wealthy families, and fewer of our ing. People feel ownership. They feel what they do matters.
We break our whole group of 160 into bite-sized groups
graduates choose to pursue careers that lead to wealth.
Everybody recognizes Oberlin as the first school to admit called tribes. Every tribe has its chief, its elders, its new memAfrican-Americans, and the first to be co-educational. Many bers. Every tribe sits around the campfire every Monday
people don’t realize our commitment to access didn’t end morning.
there. The way you get an economically diverse group of
What is the Monday
students is provide more scholarship assistance, which we
morning campfire?
do. That means more resources.
Every Monday, we have what we call the meetings of
All of this led Donna and me to realize we have an opporthe minds, or MOMs. It’s kind of an Oedipus thing.
tunity to make a difference. Our hope was that through this
gift we would give the jazz program a home, give the con- We have multiple MOMs at Riverside. We start out early in
servatory more resources and help increase the culture of the morning with the European MOM because it’s Monday
giving at Oberlin. That’s exactly what has happened. The $5 afternoon in Europe. Then we have a couple of MOMs from
million is less than a quarter of the total now. Others have North America during the afternoon. In the evening, we
have the Asian MOM because now it’s Tuesday morning in
stepped up.
As for the specific choice of jazz, we’re consumers of jazz. Asia.
These are meetings of the tribe. Videoconferencing is
A dear friend of ours, Phyllis Litoff, died of brain cancer a
few years ago. She was a jazz musician and a music educa- used to bring the people who are involved in that product
tor. She and her husband, Mel, owned Sweet Basil, which or that fund together. We talk about all of the deals we’re
was, in its day, the premier jazz club in New York, which working on, new deals that came in that week, companies
meant it was a premier jazz club in the U.S., and arguably we visited the prior week, deals we’re chasing hard. Fifty
the world. People came from all over the world to hear the times a year, we sit together. By using technology, we break
down what otherwise could be distance and barriers.
best jazz musicians at Sweet Basil.
Several times a year, we bring the tribes together in perDonna and I wanted to honor Phyllis. When we heard
that one idea would be to build an expansion to the conser- son. Once a year, we bring the whole firm together.
vatory to be a home for the jazz program and music education, what better way to honor her.
On a scale of one to 10 with 10 being hardest,
how would you rate your job?
How did you become friends
It’s probably not a one. It’s not a 10. It’s not a seven.
with Phyllis Litoff?
I work in a heated and air-conditioned office. I don’t
You’re pulling on interesting strings. Mel Litoff, her do manual labor. Very few people die at what I do. It’s endhusband and co-owner of Sweet Basil, was the assist- lessly interesting intellectually. When it works, the comant superintendent of schools in Leonia, N.J., when I went pensation is good because it’s heavily based on return on inthere in the 1970s.
vestment.
In 1972, I signed on with a group of students who, under
I’m ruined for life. It’s probably the last real job I’ll ever
the leadership of Mel, created an alternative high school in hold unless somebody wants to make me ambassador or
Leonia. The alternative school movement was big in governor or something. And that doesn’t interest me very
the ’60s and early ’70s. Sometimes it’s referred to as open much.
schools.
If it’s hard, it’s hard for two reasons — it’s busy and
We did it, unusually, within the public schools, basically stressful, and it’s judgment. Is this the right company, in
saying we’re going to create an alternative program for stu- the right industry, led by the right management? None of
dents who want to learn and achieve in a different way. Mel those is a black or white question. The older I get, the more
became a mentor for me and a lifelong friend.
shades of gray I observe and the harder those judgments
become.
Your company’s guiding principles cite the importance of having fun at work. How do you go
So the
about doing that?
number is?
We push down a lot of responsibility, which we think
Three and
does actually make work a lot more fun and rewarda half.
Q:
A:
Q:
A:
D3
R Serves on the council of advisers of
ShorBank.
R For nine years, he has been a “heavy
hitter” participant in the Pan Mass
Challenge bicycle fund raiser for DanaFarber Cancer Institute.
who want more from their private equity investor than just green dollars.
BEYOND THE BOARDROOM
Q:
A:
Business
WITH STEWART KOHL
Age: 52
KOHL
Breaking news: cleveland.com
Q:
A:
Q:
A:
Q:
A:
Much of your success comes
from the people you hire. Who is
the ideal Riverside job applicant?
The common thing you would find
around the world with Riversiders
— in addition to being consummate professionals — is that they are people of
character and value. The key is hiring
folks who innately want to do business
that way.
We have a written set of business
principles, and if I overly simplify them,
they really just say two things. One is
live by the Golden Rule, and the other is
leave great references in your wake.
The golden rule is basically doing
what our mothers told us to do when we
grew up. Not every private equity firm
behaves that way. If we just wanted to
do a deal or two a year, we could pillage,
too. When you want to do 28 or more
deals a year, you’re going to quickly be
known by how you treat people.
Leaving great references in our wake
really didn’t start as a business development scheme. It started because it just
felt like a nice way to do business. When
you treat people fairly and live by your
word, people want to do business with
you again and again.
This “On The Record” interview was conducted by Business Editor Paul O’Donnell
and reporter Alison Grant.