10 Lessons from 1,000 Deals
By Béla Szigethy and Stewart Kohl
When we founded The Riverside Company in 1988, private capital was still in its infancy. Our hope was to scrape together some capital and find a handful of companies that we could buy relatively cheaply. We focused on dinky companies because that’s all we could afford and even for these we needed other people’s money.
Like many firms back then, we enjoyed some early wins. Even if you just grew the company a tad and did some financial engineering you could get a good result. The newness of the private equity model made us all innovators on some level, and there were so many levers to pull to generate good outcomes. Thousands of private capital firms have come and gone since those easy days, and those that have survived have had to adapt, earn lots of battle scars and build their own path to sustainable growth.
We’re not different. While we remain laser focused on what we have now defined as the smaller end of the middle market, just about all our tactics have had to change in the last 35 years. It got us to thinking about the most important lessons we’ve learned along the way. Here are 10 that stand out to us.
1. How you do business matters
One of our guiding principles is to follow the Golden Rule. Working in capital markets in the 1980s and 1990s, we witnessed some situational ethics and less than admirable behavior. We wanted to make money for ourselves and our capital partners of course. But we also wanted to sleep well at night, so we decided to treat everyone fairly and endeavor to leave great references in our wake. Turns out, treating people the way you want to be treated makes them more willing partners, more interested in working with you and keen to build a career with you. Speaking of that…
2. Build a great culture and attract great people
A great organization is impossible without great people. Great people are attracted to companies with distinct values where ethics are lived – not just boilerplate. Now that the market is demanding clear action on diversity & inclusion and ESG, most of the private capital industry, which has really cleaned up its act since those founding days, is recognizing that it really does move the needle. Talking about culture and living culture are not the same. Culture is created through consistent actions and can be undone quickly by carelessness.
3. Giving back pays off
We have been incredibly fortunate in our careers, which has allowed us and many of our colleagues to give back. We have long held a volunteer day and supported Riversiders in volunteer efforts, but the COVID-19 pandemic lockdowns provided an impetus to do something more. We created RiversideGIVES, an employee-led initiative that continues to make a difference.
4. The world never ends
If you’re around long enough, you get to see plenty of ups and downs. That’s true in life but especially true for any capital partner. We were just coming off Black Monday of 1987 when Riverside started, so we figured it would be a while until the next stock market shock. Then the 1990 Gulf War happened, helping spark a years-long recession. The Dot-Com bubble burst less than a decade later, followed by the Great Recession in 2008, which for many of us really did feel like the end of the world. Surely, nothing could top that… until the pandemic of 2020, which put the world into a self-induced coma and continues to disrupt it. But it did not end it. In fact, each shock offers a chance to take stock, learn some lessons and do better next time. That’s why we…
5. Embrace failures
Losing money is an awful feeling. Losing money with absolutely nothing to show for it is a missed opportunity. That’s why we immortalize our mistakes at Riverside. Each time we experience a loss of our investment, we dissect what went wrong so we can apply the lessons to the future. And lest we forget those mistakes, we post them on the walls of our office restrooms, dubbing them Lessons From the Loo. We are in the risk capital business, so losses are going to happen. Embracing them as an opportunity to become better capital partners is up to us.
6. Innovation wins
When Riverside started, it was relatively easy to do well in private equity. Now that the industry has matured and the landscape has grown incredibly competitive, standing out from the crowd is deeply challenging. We’d have disappeared decades ago if we didn’t constantly innovate and work to stay ahead of the curve. For example, our large, dedicated Origination team identifies great opportunities — typically more than 5,000 a year. Similar stories exist across operating, management and other critical areas.
7. Leadership is vital
All disappointing investments have different reasons for going sideways or down, but one common thread is a lack of the right leadership for a specific company at a point in time. The wrong people in the C-suite can kill even the best of companies. We have learned to prioritize putting the right people in the right slots as soon as possible and make changes without hesitation when the need arises.
8. Alignment of interests
We love the private equity model, which helps drive outcomes by aligning interests. One way is by motivating all stakeholders to share the same goals. We believe in baking bigger pies so that everyone gets a healthy slice. The outstanding mega-firm KKR pioneered a group called Ownership Works, a nonprofit that helps provide all employees with the opportunity to build wealth at work. We’re proud that Riverside is part of Ownership Works, which we believe can create better outcomes from the top down.
9. Specialization is critical
Like almost all private capital firms, Riverside started with a generalist model but has evolved as a specialist in industry sub-sectors. We make investments in a limited number of industry verticals where we have experience, extensive talent and strong confidence. Knowing an industry inside and out before investing helps you hit the ground running, delivering value from deal selection through exit. There is simply no time for climbing a learning curve anymore.
10. Love what you do
Private capital is hard work, and though we don’t feel old Father Time says we’re getting there. It’s not unfair for us to get asked when we’re going to hang it up, and we could have and would have years ago, except for one thing – we love doing this stuff! Investing is an endlessly fascinating puzzle and the industry, macroeconomic landscape and the entire world is changing faster than ever. We find that incredibly exciting and invigorating. It makes coming to work fun, and we are always looking forward to tomorrow.
It's been a wonderful ride through 1,000 deals and 35 years. We can’t wait to see what the next 1,000 investments look like.
(Béla Szigethy and Stewart Kohl are Co-CEOs of The Riverside Company.)