Winds of Change

An avid sailor, Steven Karol discusses how his company won the race by keeping its eyes on the horizon and sailing into the storm

The winds of change are constant in the world of business. Capitalizing on that change is the Massachusetts based Watermill Group, a private buyout organization that focuses on acquiring middle-market companies in transition.

The “transition” in this case can take any number of forms — it may be a traditional private sale by the founder or family, a corporate carve out, a secured party sale, or a bankruptcy auction.
The Watermill Group’s formula is as straightforward as it gets. The company looks for companies facing strategic or financial challenges and then applies transformational capital, strategic insight, adn managerial guidance to drive change.

It’s an approach that obviously works, as the firm’s partners have collectively completed more than 100 deals with a total transaction value of more than $4.1 billion.”

“Our passion lies in helping companies achieve their full potential through strategic transformation,” said Managing Partner and Founder Steven Karol, “We create vibrant and successful businesses out of assets or companies that were close to shutdown or liquidation, suffering from a history of severe operating losses, burdened with excessive debt, or at an inflection point in their growth trajectory.”

Karol attributes the group’s three decades of success to following a commonsense approach. The group first reviews the business envirnment and the lifecycle position of the company. Preferred are US or Canadian companies that require operating, strateic and capital resourcees to grow. Sales adn profitability declines are common in these companies, but many are growing modestly and need help to capitalize on larger opportunities.

Next, the group seeks to enhance performance through managerial guidance. While the existing management teams are retained in many cases, some situations require bringing in fresh blood. Other times, existing management teams are simply augmented with Watermill principals.

Here, Watermill emphasizes a values-based corporate culture, putting integrity at the forefront of all that it does. “When you’re managing other people’s money, if you have integrity and they trust you, you have much more flexibility and range to do what you need to do.”

An avid sailor, Karol had his eye on the horizon when the dark clouds of a troubled economy began appearing several years ago.

“We knew we were headed for rough weather, so we streamlined and cut costs,” he said. “But everyone else was doing that too. So, after we had battened down the hatches, we asked, ‘What can we do to make headway?”

Here, he knew Watermill had to attack strategically. “We put new capabilities into companies while others were taking them out,” he said. “With some companies, we invested in technology, with others it was making sure we had the right people, and with some it was updating machinery and equipment.”

In the end, Karol and company knew they had to sail into the heart of the storm with the belief that they wanted to be way ahead when the economy came out of thedoldrums. “A sailboat race is won on the upwind leg,” he said. “If everyone’s not working together as a team, the sails are not optimized; you lose wind adn, ultimately, lose speed.”

It was a strategy that has paid off handsomely. Without exception, Watermill’s portfolio of companies (which includes names such as Latrobe Specialty Steel Company, C&M Corporation and Preferred Compounding Corporation) have gained marketshare adn are now better positioned than when they went into the recession.

And, with the worst of the storm behind, Karol sees clearer skies ahead. “There’s dry powder in the market,” he explained. “Private equity firms have raised $600 billion more than they’ve spent. Many banks, corporations, and private equity firms are exploring how we can help them generate new investment opportunities as well as enhance their existing portfolio holdings, so we think next year will be a great one.”

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November 16, 2010