Insights & Reflections

Growth & Resiliency in Uncertain Times

Around this time last year, we described ourselves as being in the middle of the fourth major macroeconomic correction in Berkshire Partners’ nearly 40-year history. While uncertainty about the economy remains, we have thus far dodged recession in the US and may achieve the Fed’s desired “soft landing,” as unemployment remains very low, with strong growth in most sectors and inflation easing. Equity markets have tilted strongly positive as interest rates show signs of softening. However, these bright spots appear against a backdrop of rising global geopolitical tensions, fueled by wars and atrocities in two strategically significant regions as well as sometimes precarious relations with China. Add to that the lack of clarity in domestic politics and continued concerns in addressing climate issues, and we face a particularly challenging investment environment.

Unsettling times like these can yield exceptional opportunities for patient long-term investors. Indeed, we would argue that now is a propitious time to invest and innovate. We seek mid-market companies with attractive growth attributes and well-positioned, resilient business models that we can help scale into market leaders over the course of our investment chapter.

Our focus on thoughtful prospecting, value creation, and forging trusted relationships that has served our firm well continues to pay off in terms of sourcing opportunities. In 2023, we invested in five new companies, bringing our private equity portfolio to 35 companies.

We seek mid-market companies with attractive growth attributes and
well-positioned, resilient business models

Creativity in the face of financing constraints has contributed to our optimism coming out of 2023. Because we look for growth and resilience in prospective investments, we believe we can surface compelling opportunities even when financing markets are less favorable. Our approach this past year has been to retain existing capital structures and not seek to maximize leverage, which even in the best of times we see as merely an enhancer of equity returns.

Given the challenges noted above and the tough IPO market, some would say this is one of the worst times for realizations of private equity holdings. But we believe it’s possible to make good investments and achieve good sales in any environment. While part of our job is investing capital well, it’s also important to provide liquidity to our investors over time. Over time the past three years, we continued to find liquidity opportunities while deploying capital in new investments.

On the public equity side of our business, Stockbridge had a strong year, with AUM topping $5 billion. If you are not familiar with our public investing strategy, be sure to read the Partnership section on how we seek to harness the power of having both public and private asset classes under the Berkshire Partners umbrella.

This past year, as artificial intelligence exploded from being an intriguing idea into a critical business tool, we launched a firmwide initiative to reimagine our business using AI. This exciting effort includes looking at how we might harness AI through the investment lifecycle, apply AI internally to support firm operations, and help our portfolio companies strategize and accelerate AI implementation.

There’s no doubt 2023 was a challenging year, and we feel cautiously optimistic about the outlook for 2024. Yet we remain confident in our ability to succeed in an unpredictable environment, guided as always by our core values, creative thinking, and collaboration.

We are grateful for your partnership as we build on our legacy of enduring success.

Portfolio Activity

New investments

A leading provider of onsite first aid, fire protection, and life safety services

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Provides software application inventory and deployment solutions used by IT professionals

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A data center site acquisition and development company led by an experienced team of digital infrastructure experts

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A rural-focused fiber-to-home provider

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A wireless infrastructure platform with towers spanning 24 states across the Midwest, Northeast, and Southern United States

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Portfolio Company Add-On Activity

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Enterprise value

Number of portfolio companies represented

Exits

Mielle Organics is a natural haircare and beauty brand focused on providing innovative, natural products for the textured hair category and historically underserved customers.

TransDigm (NYSE: TDG) is a leading global designer, producer, and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft.*

Advanced Drainage Systems, Inc. (NYSE: WMS) is a manufacturer of high-performance thermoplastic, primarily high density polyethylene (HDPE), corrugated pipe and a suite of related water management products for drainage solutions in construction, infrastructure, and agriculture markets.*

* Stockbridge continues to hold positions in TDG and ADS.

Company Spotlight

EP Wealth Advisors is a fee-only registered investment adviser firm serving mass affluent and high net worth families, primarily in the western half of the United States. Founded in 1999, EP Wealth has grown to be a leading wealth management advisor in its markets, with more than 120 advisors and 400 employees nationwide. The company’s unique culture underpins its approach, which includes acting as a fiduciary at all times; leading with a broad range of financial planning services (including retirement, tax and estate, small business, and other life planning); operating as an adviser-owned and led firm and fostering an entrepreneurial and team-based environment. EP Wealth’s Women in Investing initiative focuses on reaching colleagues, clients, and community through a variety of partnerships, philanthropic efforts, and other programs.

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Case Study

Helping Companies Reduce Emissions and Energy Expenses While Simplifying Sustainability Reporting

One of our most exciting portfolio company add-on investments this year offers a timely solution for organizations grappling with the challenge of tracking their energy usage and progress toward meeting sustainability goals.

Since our initial 2021 investment in Tango, we have been focused on adding a sustainability and energy reporting capability to help extend the company’s global leadership position in the market for cloud-based real estate and facilities management software.

With its August 2023 acquisition of WatchWire, Tango now offers customers the most comprehensive integrated energy management and sustainability platform in the industry, enabling companies to automate the collection and validation of key data needed for reporting and compliance purposes while identifying new opportunities to reduce their carbon footprint.

WatchWire’s user-friendly sustainability dashboard allows management teams to track progress on multiple dimensions, including greenhouse gas emissions, renewable offsets, utility usage and costs, and waste and recycling performance.

Founded in 2008 and based in Dallas, Tango provides a leading-edge solution that unites real estate, lease administration and accounting, space management, desk booking and conference room scheduling, and facilities management software into a single platform. WatchWire, founded in 2000 and based in New York City, serves many of the same customers, including commercial and corporate real estate portfolios; Fortune 500 industrial, manufacturing, and retail companies; and government, healthcare, and educational facilities.

In June 2023, Berkshire Partners released its first Responsible Investment report. The report provides information on the firm’s commitment to building long-term, sustainable value for stakeholders, including investors, employees, and portfolio companies. For more about our climate change strategy and progress toward net zero greenhouse gas emissions, please see our 2022 Responsible Investment report and keep an eye out for our next report, which will be published in June 2024.

Portfolio Support Group

Accelerating AI
Implementation Across
the PE Portfolio

Our Portfolio Support Group works collaboratively with portfolio company management teams to determine how best to create and capture value.

Recognizing that no two engagements are alike, we tailor our approach based on the unique needs of the company, prioritize the biggest drivers of value creation, and bring the right resources to bear ‒ including expertise in strategy, talent development, finance, capital markets, risk, IT/cybersecurity, sales, marketing, legal, and responsible investing.

Over the past few years, we invested in building up our data & analytics and AI capabilities and supported multiple portfolio companies on a variety of topics. Given this foundation, we were well positioned in 2023 to move very quickly on AI as it became clear that Generative AI would have the potential for significant, wide-ranging, and not entirely predictable impacts across all businesses, large and small (including our own).

Staying on the cutting edge of AI is tough enough for large enterprises, let alone for the middle-market businesses in our portfolio. Our focus, therefore, is on helping to develop capabilities and playbooks that can be deployed broadly across our portfolio companies. To that end:

Starting in May, we ran a series of teach-ins led by our data analytics experts within the Portfolio Support Group, with guest speakers from OpenAI, McKinsey & Company, Google, and smaller start-ups, among others. The audience for these sessions, delivered through a combination of workshops, discussions, and videos, included our portfolio companies as well as Berkshire Partners staff.
We created an AI Working Group of 50+ executives from across our portfolio companies who are actively exploring AI and how to adopt this technology across their enterprises.
Our Portfolio Support Group had discussions with 75+ potential partners to identify reputable vendors in this rapidly changing landscape. Based on these discussions, we have drawn up a shortlist of resources that portfolio companies can tap for help with implementation of AI use cases.

The net effect of all these efforts is that most of our portfolio companies are now exploring how to implement AI use cases. We are seeing four common use cases across our portfolio: customer service, knowledge management, developer productivity, and predictive engines. While a number of these are still in the proof-of-concept stage, some companies are seeing the potential for significant productivity gains in initial pilots.

In parallel with productivity efforts, companies are also deploying AI to enhance their value proposition. Curriculum Associates, for example, acquired SoapBox Labs, which powers Grades K-12 tools that support early literacy, reading fluency, and other equity-driven learning experiences for students. Curriculum Associates is also focused on developing an Educator Co-Pilot offering to improve student outcomes and educator effectiveness. Tango Analytics, our real estate and facilities software platform, is leveraging AI in its product in two ways: first, improving user experience by extracting actionable intelligence from the platform; second, using large language model (LLM)-based technology for lease contract abstraction of key terms across its portfolio of more than 500,000 leases. Ensemble Health Partners, meanwhile, is exploring multiple AI initiatives to transform the revenue cycle, including conducting LLM co-pilots at different stages of the revenue cycle. These efforts are intended to lead to better outcomes for payors, providers, and patients.

Provider of technology enabled end-to-end revenue cycle management solutions for health systems Learn More

Provider of K-8 educational assessment and instructional software Learn More

Provider of real estate lifecycle management and integrated workplace management software Learn More

Partnership

What makes the Berkshire Partners Private Equity and Stockbridge partnership unique?

We are not the only investment firm to have both private and public equity businesses under one roof; nor were we the first, and we believe having both public and private asset classes offers a competitive advantage.

We believe the deep collaboration between Private Equity and Stockbridge leads to deeper industry expertise, smarter investment decisions, greater agility in the market, and ultimately, better outcomes.

In both Private Equity and Stockbridge, we tend to think similarly about investing, despite the different dynamics of each asset class. We are united by a focus on long-term performance that comes from our private equity heritage.

We speak the same language when it comes to investing. If you were to pick up one of our weekly internal investment packs and redact the company names, you might not be able to tell if the work was led by Private Equity or Stockbridge.
Across the firm, we have a long history of sticking with high conviction companies. Berkshire Partners has been involved as a private and/or public investor for more than a decade in several companies; including, Advanced Drainage Systems, Asurion, SRS, and TransDigm.
We are organized to facilitate collaboration throughout our firm. Our team-first culture and compensation approach are both intended to support and reward the active sharing of intellectual capital and insights; subject to rigorous compliance oversight and guardrails, of course.

As one of our Stockbridge Managing Directors stated, “We leverage the experience and expertise from our partners in Private Equity and it can help give us a head start on our work and lower the risk of getting it wrong.” Ensemble Health Partners represents a good recent demonstration of the firm’s collaborative approach.

CASE STUDY

A Recent Example of “Better Together”

In 2019, our Private Equity business evaluated an investment in Ensemble Health Partners, a leading provider of technology-enabled revenue cycle management solutions for health systems; however, we were not the prevailing party. When the new owners announced plans to take Ensemble public in late 2021, the firm’s familiarity with the company enabled Stockbridge to better evaluate the IPO, which did not result in a public listing. But Berkshire still had a positive view of Ensemble reinforced by Stockbridge’s updated research, so when Private Equity had another opportunity to invest in the private company in March 2022 as a co-investment with Warburg Pincus, PE was positioned to act quickly and with conviction. This collaboration between the PE and Stockbridge teams exemplifies the seamless way we work together, all to the benefit of our stakeholders.