Private Equity A Classic Case Study Of How Entrepreneurship And Private Equity Score Big

Wednesday, February 1, 2006 - 01:00

The Editor interviews Christopher J. Dean, Principal, Summit Partners.

Editor: What is your role at Summit Partners?

Dean: My colleagues and I make investments in privately held companies and serve on the boards of these companies to aid in their growth.

Editor: What is the investment philosophy of Summit Partners?

Dean: We are a private equity and venture capital firm that was founded in 1984. We have three offices - the Boston office where I work as well as Palo Alto and London. Over the years, we have raised over $9 billion in capital and invested in more than 275 businesses. Our investment strategy is to invest in later stage, mature, privately held companies that are already profitable.

Editor: Do you do only equity investments?

Dean: We make equity investments using preferred stock. We also make subordinated debt investments. We have raised nine equity funds dedicated to making equity investments with combined capital of $7.4 billion and three subordinated debt funds totaling $930 million. We also have two venture capital funds totaling $470 million.

Editor: Do you leverage your investment with senior debt from banks or other institutions, and do you place the debt in a transaction?

Dean: When we do borrow on behalf of a portfolio company, it is modest leverage because we do not want to overburden the balance sheet at the time of our investment. While many of our investments have no senior debt, if they borrow senior debt as part of the financing structure, we will raise it from a third-party bank.

Editor: What factors do you look for in potential investment opportunities?

Dean: One factor is big, fast-growing markets. Second, we look for management teams that are experienced in the industry, as in the case with OnSite's Mark Hawn. Third, we look for companies that have grown without raising outside money. This factor connotes a level of operating discipline that we like in the companies we invest in.

We strive to build companies of extraordinary value and can invest from $5 million to in excess of $500 million per company. The firm supports outstanding management teams that have self-financed their companies to profitability and market leadership.

Editor: Why was OnSite E-Discovery a company that fit your model of investing?

Dean: Mark Hawn, the company's CEO, was successful in this industry before, having built and sold a company in the same industry in the '90s. We are pleased to partner with people who have been successful in the past. Second, the company was growing very fast, with over 30 percent growth rates in the last couple of years. Third, OnSite is serving a large and growing industry which includes companies involved in litigation who need to produce or be responsive to requests for electronic information. OnSite has developed a state-of-the-art technology platform to assist companies with their electronic discovery efforts. That combination of factors made us very excited about the opportunity to partner with this company.

Editor: Do you sometimes look for high growth markets and then look for companies within that industry?

Dean: We look not only for high growth companies. We want that company to be within a fast growing industry. If the company is growing fast but the industry is stagnant, you worry about head room. We like companies with plenty of potential market share to expand into. If the industry is growing, the size of that market opportunity grows with it.

Generally, our investment approach is more company-driven, than top-down. We will identify a company that is growing fast and then study the industry to decide whether those dynamics support the opportunity to make a good return on our investment.

Editor: What investments do you have that have characteristics similar to OnSite?

Dean: We have lots of investments in the business services arena. For example, I am involved with PSC Info Group which provides outsourced statement processing services to other businesses. This business is similar to OnSite because it provides an outsourced service to businesses that is hard to be moved offshore. Their customers do not view the service as a core competency, so they outsource the billing and statement processing function to a third party. OnSite is similar because their customers do not view electronic discovery as a core competency. When a request comes in to produce electronic evidence, they outsource it to OnSite.

Editor: What IP do you bring to the table to help guide the companies you invest in?

Dean: The key is that we have a lot of experience with companies that are growing fast in industries that are fragmented and large. Our experience is not in the litigation support business but it is in the business of building companies. Helping Mark and his team put in infrastructure which includes people, accounting systems, HR functions, and a national presence is something we have experience in doing. We plan to bring that experience to help Mark grow OnSite into the number one player in the industry.

We also are able to put OnSite in contact with other companies in our portfolio that have made important technology decisions.

Editor: What is your exit strategy for your investments?

Dean: We encourage our companies to grow and be the number one players in their industry. At the appropriate time we work with the management team to figure out the best plan for continuing that growth. Some companies reach the point where they believe that taking the company public is a positive thing. Others decide it is better to sell to a strategic acquirer who can grow the infrastructure and extend the platform. We do not have a preconceived plan for our investments' future. We focus on growth and market leadership.

Editor: Do you set up compensation and audit committees for the companies?

Dean: We do that. We want the company to act and behave like a mature company. Part of that is putting in place formal processes at a board level that are consistent with Sarbanes-Oxley and any guidelines by which public companies should operate.

Editor: What is your time and personnel commitment to growing this company?

Dean: I am involved with three to five portfolio companies. That allows me to work with each company and provide the time needed. We also have three other people from Summit who are involved with OnSite. We are actively involved in trying to help them find new growth opportunities and potential acquisition opportunities. That is where we will play the biggest role. We spearhead the business development activity that the company will pursue as part of its growth strategy.

Editor: Why is electronic discovery an exciting field today?

Dean: Electronic information is proliferating at a fast pace. It is hard to keep up with the amount of electronic information, whether it is emails, documents, or voice mails. Digital media within an enterprise continues to multiply exponentially, and plaintiffs are using that to their advantage when they sue companies. They look for the smoking gun to win their case. It is the responsibility of corporate America to maintain this vast amount of electronic data so that they can be responsive to lawsuits as they arise. OnSite plays a leading role in terms of helping to organize that effort and to search the information to find the responsive data.

Editor: Do you focus on one particular industry for your investments?

Dean: It is a broad industry focus. Summit invests in growth industries including business services, communications technology and services, consumer products, financial services, healthcare sciences, industrial products, Internet and information services, semiconductors and electronics, and software.

Editor: How many partners does Summit Partners have?

Dean: There are fourteen partners and sixty investment professionals. The total head count across the three offices is more than 100 people.

Editor: Would you describe one of your other success stories?

Dean: Our most successful investment is E-Tek Dynamics. E-Tek Dynamics manufactures fiber optic components for communications networks using Dense Wavelength Division Multiplexing, allowing networks to increase their carrying capacity. We made the investment in 1997 with the company going public in 1999. E-tek was acquired by JDS Uniphase in 2000. At the time it was acquired it produced a return to the firm of $4 billion, a lucrative investment for us. We invested in the middle of a cresting wave in terms of demand for communications infrastructure. As a result, the company grew fast and produced significant gains for the firm.

Editor: Do you co-invest with other equity firms?

Dean: We do from time to time. In most cases we are the sole investor as is the case with OnSite. We work with intermediaries as well. We find out about some of our investments through investment bankers, lawyers, accountants, and other professionals with whom we have strong relationships.

Please email the interviewee at cdean@summitpartners.com with questions about this interview.