Inside Eastman Kodak’s private equity program, where lower-middle markets reign supreme
Eastman Kodak’s Tom Mucha likes to invest in the lower middle market.
The longtime CIO of corporate pensions is fascinated by companies that make other companies work – and how investment managers can grow those providers.
“You start to see the world in a different way when you realize that behind almost every product or service you use, there are hundreds of different products and services involved in creating them,” Mucha said over the phone. “Learning about all these companies has been great fun.”
To wit: When Kodak’s eight-person team planned a co-investment deal in an ingredients supplier, they took a due diligence trip to Arby’s, just to make sure the curly fries and roast of beef were on point.
But this co-investment program – and its focus on lower middle markets – has long been in the works.
Kodak’s pension fund today would not be what it is without the company’s Chapter 11 bankruptcy in 2012. This restructuring resulted in changes to the organization’s portfolio, including a break with investments in private markets.
In 2015, Mucha relaunched the program in earnest, with a particular focus on lower-middle-market investment managers.
“These managers are really focused on supply deals,” Mucha said. “They’re constantly pounding the pavement looking for off-the-radar deals.”
In today’s ultra-competitive private equity market, it is particularly advantageous to be able to find transactions with little competition between bidders that drive up asset prices. Mucha noted that lower-middle-market private equity managers may seek to buy companies with more “attractive” valuation multiples.
“There are a lot of things they can do to grow them,” Mucha added. “Often these companies need professionalization such as ERP software and dedicated finance, sales and marketing functions. Often they have not focused on mergers and acquisitions. »
This means that these lower-middle-market managers are also able to more easily divest their investments, either to larger sponsors or strategic acquirers.
Two years after Kodak resumed investing in private markets, the pension fund added a co-investment program, which Mucha says is one of the strengths of the investment portfolio.
The Kodak team meets with hundreds of investment management firms each year, but engages with very few. The co-investment program is even more selective.
“We’ve built a very productive supply machine,” Mucha said.
Kodak’s co-investment framework requires that the organization has previously committed capital to the manager, that a minimum and maximum investment per transaction is set in advance, and that a predetermined governance process is followed.
Since the program’s inception, the Mucha team has made 18 co-investments, with approximately 1% of plan assets invested.
“One of the things I said to my committee was that the goal was not just to generate profits, but to deepen our relationships with our managers,” Mucha said. “When you get on a deal and watch the due diligence process unfold alongside your manager, you really understand in a completely different way how they do their jobs, how they think about different risks, and how they deal with different issues.”
So far, Kodak has pulled out of two such deals, generating a 3x to 4x multiple on the capital invested. Mucha noted that the organization has placed an explicit emphasis on investment multiples, rather than internal rates of return.
“We decided that if we were going to take on that amount of illiquidity and invest for more than a decade, we wanted to make a meaningful multiple on our investment,” Mucha said. “We wanted to be nimble and flexible about where we engaged.”