We are business builders, not financiers looking to profit from extracting financial gain at the expense of our companies, communities, and employees. We are focused on finding companies where we can support our management teams in driving transformational change through an ardent focus on growth, executing on rigorous operational improvements, and tucking in complementary and accretive acquisitions. We are steadfast in our commitment to supporting and growing world-class manufacturing companies.
Criteria for Platform Investments
In the vast ocean of opportunities, it is helpful to be targeted and deliberate about what companies and situations suit Sky Island, and we strive to start with the following eight criteria when assessing new platform companies.
Headquarters & Primary Operations in U.S. or Canada
$5-15 Million EBITDA
Privately Held and Managed (Non-Institutional)
Sellers/Management Looking for a Partner (Not Just Capital)
Interest Alignment Through Rollover Investment
Asymmetric Risk Profile
* Please note that these criteria do not have to be present for add-on acquisitions or corporate carveout transactions.
Additional Company Attributes
In addition to the primary attributes listed above, we further narrow our deal funnel by assessing companies for additional attributes and ensuring each portfolio company ultimately exhibits a healthy combination of the following:
LEADER IN NICHE MARKET
Companies typically become market leaders because they have low-cost positions, sustainable competitive advantages, and develop moats that create strong barriers to entry or competition. Moreover, we believe that niche markets with minimal players tend to fly under the radar from investors and are less attractive for new competitors to enter due to the size and specialized expertise of the existing players.
STRONG MANAGEMENT TEAM
We believe that people are the critical factor in an investment’s ultimate outcome and strongly prefer to partner with existing management teams to keep the culture, secret sauce, and decades of knowledge that have made the company successful. We often strengthen teams with additional resources rather than replacing people as part of our “evolution not revolution” philosophy.
SIGNIFICANT ORGANIC GROWTH POTENTIAL
We seek companies with multiple avenues for significant organic earnings growth, through both revenue growth and operational efficiencies, that are identified during diligence and achievable during our desired investment period. To use a baseball reference, we also prefer some more easily achievable singles and doubles mixed in with some more difficult to achieve home runs.
Despite our focus on manufacturing companies, we want to avoid deeply cyclical companies and end markets. We do not attempt to time the market, but rather focus on companies that perform well relative to their competition in all economic environments.
DIVERSE PRODUCTS, MARKETS, AND CUSTOMERS
With a focus on asymmetric risk profiles, we are attracted to companies with multiple areas of diversity in their business operations, not only for the downside protection by not being reliant on any one customer, product, or end market, but also for the upside potential from being able to pursue growth across multiple dimensions.
ADD-ON ACQUISITION POTENTIAL
We pursue companies where we believe we have the ability to strategically transform the business and create significant value. While this can be done via organic business growth, we believe add-on acquisitions frequently represent the best opportunity to create value within the expected investment horizon. We look for add-on acquisitions that improve efficiencies through scale, provide access to new products or markets, remove excess capacity in the market, or expand market share through partnering with competitors.
BARRIERS TO COMPETITION
Sustainability of market share and cash flows are critical to an investment, and those are more easily achieved when there are barriers present that make it difficult for new companies to enter the market or existing companies to strongly compete. We prefer barriers in the form of capital, equipment, technology, trade secrets, customer relationships, high customer and vendor switching costs, and regulatory hurdles, among others.
HIGH FREE CASH FLOW
We prefer companies with high free cash flow due to high margins, low working capital requirements, and/or minimal capital expenditures. While most manufacturing companies require some level of capital intensity, the key is making sure that the company is able to achieve a fair return for the capital employed. One way to limit the capital intensity during our investment period is to target companies with significant excess capacity at the outset of the investment.
We take an active role in our portfolio companies but must rely on a talented and cohesive management team to execute the value creation strategy.
Creating sustainable, long-term value starts with a strong team with aligned interests working towards clear and achievable goals and it is our job to ensure we have the best possible team in place to execute our strategy.
With a history of working with family-run businesses, we understand the unique dynamics and fragilities of bringing in a financial partner, so it is our goal to keep the incumbent team together whenever possible.
We want to foster a culture of data-driven decision making at our portfolio companies, which requires robust financial reporting packages and real-time tracking of key financial and operational metrics (“KPIs”) unique to each company. We find “if you can’t measure it, you can’t improve it.”
The reporting package and KPIs then help drive discussions between us and management on a regular interval, including weekly update calls, monthly detailed financial performance calls, quarterly in-person board meetings, and annual offsites to discuss strategy, set budgets, and update our goals.
The approach to portfolio company operations is centered around safety, quality, and productivity.
In addition to evaluating safety, we focus on establishing a quality management system driven by documentation, designed to ensure consistent quality products that meet customer specifications.
Finally, productivity, measured by costs and efficiencies, can be tackled head-on through a series of workstreams, starting with a robust value-stream mapping exercise of the entire operation and then methodically implementing a lean manufacturing model throughout the organization.
Revenue growth is key to achieving our desired outcomes, and each of our investments must have a clear path to significant growth.
We must build a robust sales organization with proper compensation structures and provide the necessary tools for them to be successful. We find lower middle market companies often underinvest in this resource.
We also find that manufacturers often have lackluster digital footprints and a void in digital strategy. Websites are the front porch of a company and having a thoughtful digital strategy is fundamental for competing in today’s environment.
We evaluate every company for significant transformational opportunities that could lead to substantial equity appreciation.
Offering new products to new end markets and expanding geographies are common means for transformational growth, but our most commonly successful play is to find and integrate strategic add-on acquisitions that can increase scale, improve margins and strategic position, and infuse additional talent into our portfolio companies.
With more than 25 add-on acquisitions completed in our careers, we have the experience and confidence to execute this strategy across our portfolio.