by Steve Klinsky
NEW YORK – (Harvard Business Review) – Twelve years ago, in 2010, my private equity firm, New Mountain Capital, acquired a little-known Wisconsin software company, RedPrairie, for $565 million. In September 2021 we sold that same company, now named Blue Yonder, to Panasonic at a total value of $8.5 billion. About $5.7 billion of the gain had come from organic growth, not acquisitions.
That success wasn’t driven by some stroke of luck, technology breakthrough, or new product. Rather, it was the result of continual investment and improvement in the company’s management, strategy, and governance—the same approach that best-in-class private-equity firms have employed for years across dozens of industries and thousands of companies. By explaining how New Mountain transformed Blue Yonder, I hope to show exactly how private equity firms create value for businesses and for the economy and to underscore how much the PE industry has evolved since its inception.
A New Form of Business
Private equity was first “institutionalized” about 40 years ago. Indeed, in 1981 I cofounded Goldman Sachs’s original private-equity group. I later became a partner at Forstmann Little from 1984 to 1999. When I joined Forstmann, only about 20 private equity firms were in existence. They all had small staffs (I was initially one of five investment professionals at Forstmann, including the three founders), and most of them relied heavily on leverage to generate excess returns.
Private equity has changed dramatically since those early days. According to PitchBook, the United States alone now has about 5,000 PE firms, and they collectively own and oversee some 30,000 companies, employ 11 million people, and account for 6.5% of the country’s gross national product. Over the past five years or so the industry has invested approximately $5 trillion of capital, generally in companies that would have been too small or “unexciting” to access public stock markets. Private equity has also in recent years generated the highest returns of any asset class for pension funds and endowments, even after accounting for all fees and carried interest, and has had less volatility on the downside than traditional public equities have.
To be clear, PE firms are not corporate raiders. Companies to be sold choose us as their preferred partners on an entirely voluntary basis. PE firms are not hedge funds either: We own and manage entire companies for years; we don’t regularly trade in and out of stock positions. Nor are we venture capitalists, which may make lots of small investments and anticipate numerous failures as they seek some companies that perform extremely well. At New Mountain we aim to preserve and protect every business we buy, without portfolio theory, and help each one grow.
Private equity is most like an entrepreneur who is buying a business—but in place of one person who takes the helm of one company, our organized teams of professionals buy and build many companies. That means we offer the advantages of a large corporation—including strong, central, specialized teams and expansive networks—along with the flexibility and long-term mindset of an entrepreneur or a family business owner. That combination allows us to achieve success across many companies and over many years.
I left Forstmann in 1999 to launch New Mountain out of a one-man rented office with a metal desk. Since then it has expanded to more than 200 people (including both operators and financial experts) at headquarters, more than 55,000 people at the companies we own, and a wide range of allies and advisers. Over the past 23 years New Mountain has acquired or founded more than 60 companies, about 30 of which we presently own. Across all our current and past portfolio companies we have added more than 49,000 jobs (net of any job losses); spent more than $5 billion on research and development, software, and capital expenditures; and generated many tens of billions of dollars in enterprise value while never taking a company into bankruptcy or missing an interest payment. We now oversee more than $35 billion in assets and funds.
Private equity firms have varying styles. New Mountain looks to build businesses in secular growth (or “defensive growth”) industries, with a flat hierarchy and a nonpolitical, respectful, and intellectually honest culture. Some of the sectors we emphasize include life sciences, health care (with companies that lower costs), water and power (with companies that upgrade the U.S. grid), digital transformation enablers, and data and data analytics enterprises. We generally use acquisition debt sparingly, and in some cases not at all. Before making any investment we develop a long-term growth plan for the target company. Once we’ve bought it, our assigned team works closely with management to continually update and achieve that plan.
Our experience with Blue Yonder highlights many of the techniques that we and other top PE firms employ to improve the companies we acquire. We offer the capabilities and access to capital that a large corporate parent would, without forcing companies to become part of a conglomerate culture. At the same time, we bring a fresh, entrepreneurial vision to strategy, talent, R&D, technology, and corporate alliances.
As Blue Yonder continues to grow as a large and important division of Panasonic, now operating on a global scale, we won’t seek to take credit for its future success. But we do take pride in having helped turn RedPrairie’s little business into a much more significant one that we hope will thrive for decades to come.
The Blue Yonder Story
In 2010 RedPrairie was by all accounts a solid but somewhat sleepy company, one of three niche leaders in the supply chain software and logistics sector, with earnings before interest, taxes, and depreciation of about $60 million. We found it through a deep dive into the software space, following a previous success with a similar business, Deltek. We were attracted to the potentially rising demand for supply chain offerings given the spread of e-commerce and to RedPrairie’s defensible market position, which included an installed base of 34,000 systems across 650 customers worldwide. We developed plans to accelerate the company’s growth, including more sales and marketing, an increased emphasis on international business, and add-on acquisitions. We funded RedPrairie’s purchase price of $565 million plus transaction costs with $335 million of equity from one of our funds and $240 million of debt set at only four times EBITDA. We reserved an additional $150 million of our fund equity for future growth investments.
The acquisition got off to a solid start, with New Mountain and RedPrairie’s legacy management working closely together. Sales grew at a 17% compound annual rate from 2009 to 2012. We invested $25 million more in the company in 2011 to help fund the add-on acquisition of Escalate, further strengthening RedPrairie’s product offering in e-commerce and multichannel retail. By 2012 we were able to pay our investors a dividend of $123 million, reducing risk.
Then came the type of opportunity that a traditional private company could not typically pursue without the support of a strong private-equity sponsor. With our assistance, RedPrairie acquired one of the two other leaders in the supply chain space: JDA.
Headquartered in Arizona, JDA was a publicly traded company and larger than RedPrairie. We negotiated to buy it for $1.9 billion in November 2012, creating a combined business with more than $1 billion in revenues, the 14th-largest software company in the nation, and the potential category leader in the end-to-end supply-chain space. New Mountain put $250 million of additional equity into RedPrairie to help fund the purchase, plus $125 million more from coinvestors. The decision to buy JDA was driven by the potential for a stronger combined product line, a larger total sales force, and cross-selling opportunities. RedPrairie’s legacy management heartily recommended the acquisition, with the JDA team slated to lead the combined company, which would retain the JDA name.
The logic for the merger was sound, but the initial execution was flawed. Some top talent became disaffected; a sales force reorganization was counterproductive; and new competitive technologies threatened to catch us or pass us by. I went to the company’s national conference personally to assure employees that New Mountain would not abandon the business; rather, we would double down on our efforts to turn the company around and achieve success.
From that point on our team took an increasingly hands-on approach. This is another advantage of modern private- equity firms like ours: We have teams of functional experts on staff in every area from implementing IT systems to advanced procurement, from financial planning and analysis to understanding the newest Covid-19 regulations.
We took one of our own trusted internal operating partners—Baljit Dail, formerly a senior-level technologist and executive at McKinsey and Aon—and installed him as the company’s new CEO. We also kept adding skills and team members to New Mountain itself, which we made available to help JDA and our other companies as needed. We have grown from 62 investment professionals in 2012 to more than 100 today, including software and supply chain experts such as Nadia Shouraboura (formerly the head of Amazon’s supply chain), Robert Weiler (formerly an EVP at Oracle), Lawrence Jackson (formerly a senior executive at Pepsi and Walmart), and others. Nadia and Lawrence served on JDA’s board. Others helped guide decisions. And in 2016 JDA regained momentum, showing sales and bookings growth and rising customer-satisfaction scores. Working with its leaders, we began crafting an improved strategy for the years ahead.
In December 2016, bolstered by those positive signs, we organized a new preferred-stock investment in JDA from New Mountain and Blackstone and used those proceeds to reduce the company’s debt. New Mountain remained the controlling shareholder while Blackstone added capital and expertise. The ability to arrange that kind of sophisticated financing on favorable terms for existing shareholders—in a way that also benefits the business and its employees—is another skill set that private equity firms provide.
Then, in January 2017, we installed a new CEO at JDA, Girish Rishi. Girish considered Ed Breen, the CEO of DuPont, to be a mentor. Ed and I had worked closely together in the 1990s to build General Instrument, a Forstmann portfolio company, into a global leader in advanced communications technology. Ed had been a supporter of New Mountain since its launch and had recommended that another executive, Raj Gupta, join us. (We and Raj then had strong success at a company now called Avantor, which was acquired and transformed by New Mountain and has grown from a value of $290 million at purchase into a new member of the Fortune 500.)
That Girish agreed to join us reflects a principle I call the talent per dollar ratio: PE companies can often attract extremely talented and valuable managers to businesses that those executives wouldn’t consider otherwise. They offer significant ownership opportunities (whether to purchase shares outright or to receive them as incentives). They also protect managers from the 90-day reporting pressures of public companies and the nepotism and professionalism issues they might see in family-run businesses. Girish worked with us and Blackstone to make other key additions, including a new CFO, Sue Savage; a new CMO, Kevin Iaquinto; a new chief development officer, Desikan Madhavanur; and a new head of sales, Mark Morgan.
With this team and a refined vision for growth, JDA could go on offense. It evolved its legacy products into software as a service (SaaS); added AI and machine-learning capabilities; and pioneered new products such as the digital fulfillment platform Luminate, which provides a “control tower” to optimize real-time decision-making across end-to-end global supply chains. Blackstone teams (led by Michael Capellas and Martin Brand) and New Mountain ones (led by Pete Masucci, Jack Qian, Bill Haley, and Raj Merchant) provided continuing value at the board and ownership levels. The company renamed itself Blue Yonder (a name taken from one of its AI-oriented add-on acquisitions) to reflect a fresh vision for the future. We soon attracted the attention of Panasonic, which purchased a 20% interest in the company in July 2020 and became a board member, owner, and partner. Blue Yonder continued to prosper in 2021, helping clients navigate the supply chain disruptions created by the pandemic.
After Panasonic acquired the rest of the company, last September, Girish and the other Blue Yonder executives invited their PE partners to dinner. We had a lot to celebrate. Since New Mountain’s initial investment the number of its employees had grown from 1,100 to about 5,500. Lucrative SaaS bookings had grown from near zero in 2010 to 18% of the company’s total in 2017, when Girish joined, to 79% in the second quarter of 2021. Recurring revenue from that business had been growing at a 79% average annual rate and was nearing half a billion dollars at the end of FY21. Under our and Blackstone’s ownership the company had invested more than $1 billion in R&D over the prior 10 years and had built a portfolio of 400-plus patents. Blue Yonder had also won a 2021 Microsoft Partner of the Year award, an AI Breakthrough Award, and numerous honors, including for humanitarian efforts during the pandemic and for diversity, equity, and inclusion.
About 450 past and present members of company management were equity owners who benefited from the sale to Panasonic, and Girish read letters from some of them. Meanwhile, the multibillion-dollar payout to New Mountain went primarily to its limited- partner institutional investors: mostly pension funds, state retirement plans, and sovereign funds that represent hundreds of thousands of workers and retirees around the world. And although we’re no longer involved with Blue Yonder, and Girish recently handed the role of CEO over to Mark Morgan as he moves on to pursue new ventures, the company continues to grow.
A Replicable Process
Private equity involves no single magic bullet or trick. Firms like ours succeed when they do many things right:
- Carefully choose which industries to enter, constantly skating to where the puck is moving
- Bring fresh thinking and new strategic perspectives to legacy businesses
- Focus on the long term, with multiyear planning horizons
- Recruit and install top-quality managers and board members, even at companies that start small
- Provide centralized resources for various functions
- Serve as professional, objective shareholders whose interests are aligned with those of our portfolio companies’ management
- Push hard to help every portfolio company grow and generate returns
- Stay flexible with the balance sheet and capital structure
- Apply the networks, knowledge, and skills needed to create corporate alliances, execute strategic M&A, and make VC-style investments to provide higher returns
In the late 1800s corporations became a new form of ownership and governance, supplanting small hands-on shareholders with large professional teams. Since the late 1900s private equity has begun to emerge as an alternative, increasingly able to offer the best of both worlds—hands-on shareholders plus broad expertise. Blue Yonder is just one business that has gained value under PE ownership; private equity has produced trillions of dollars’ worth of gains overall.
As members of this thriving ecosystem, and drawing on the strategies described in this article, we at New Mountain will strive to build many more successful companies in the future. We expect and hope that lots of other firms will join us.