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January 18, 2022

Eric Roth, Managing Director at MidOcean Partners: How Private Equity Is Bringing Digital Disruption to the Middle Market

Written by: Satta Sarmah Hightower
"I'd rather find the entrepreneur who has a great product, really understands the end market, has a great supply chain, and maybe the front end of it — just because that’s not where he comes from — isn’t as optimized as it could be. We can help deliver those resources to really inflect the business up from a demand generation, as well as a lifetime value retention [perspective]." — Eric Roth, Managing Director at MidOcean Partners

The retail and consumer goods industry has seen a surge in private equity investment activity in recent years according to Crunchbase. And, according to Modern Retail, PetSmart, Staples, and now even Fulfilled by Amazon (FBA) businesses are all backed by private equity firms.

Along with an infusion of cash, these firms often bring a wealth of expertise and an entire ecosystem to help their portfolio companies truly operationalize their processes, revamp their distribution models, and drive differentiation and growth.

Arguably, no one understands this better than Eric Roth, managing director at MidOcean Partners, a New York-based private equity firm focused on transformative growth opportunities in middle-market consumer and business services companies.

Roth joined a recent episode of the Unpacking the Digital Shelf podcast, "Building the Moat around Middle Market Manufacturers," to discuss his firm’s investment strategy, what makes a particular company a great investment in the digital age, and how MidOcean is helping mid-market companies innovate their business.

Investing in the Middle Market

Roth says his firm’s investment philosophy is pretty simple.

"We are very operationally focused … how can we put the right people in the right positions on the field and really get the heck out of the way," he says.

MidOcean Partners leverages its network to bring skilled operators into its portfolio companies. These people are "really there to be resources and partners to the CEO and the senior team at the board level — a sounding board, if you will," Roth adds.

The firm’s current portfolio companies include brands like toy manufacturer KidCraft, Casper’s Ice Cream, home goods company Hunter Fan, sports nutrition company NutraBolt, and TravelPro, a branded travel accessories company.

With many of its portfolio companies, MidOcean harnesses the operational expertise across its network to help these companies build their digital footprint and be more competitive in ecommerce.

"[We help them] see how some of these information technology systems are win-wins for them in the long term," Roth says.

Managing Unprecedented Business Disruption

Disruption has become a way of life for many companies over the last two years, and private equity firms investing in consumer goods companies have had to navigate these ever-changing dynamics.

For some of its portfolio companies, including KidCraft, MidOcean Partners has had to determine how to make the trends and sales spikes these businesses experienced during COVID sustainable — or at the very least, how to capitalize on this accelerated growth to build long-term relationships with consumers and grow their margins.

"The trick has been trying to create a thicker tail for that business coming out of COVID. It really does make you wonder how people are thinking about their wallet-spend." — Eric Roth, Managing Director at MidOcean Partners

For MidOcean Partners and other private equity firms, it’s likely the challenge going forward will be how to drive meaningful transformation during a time of seemingly never-ending disruption.

Streamlining Operations for Middle-Market Manufacturers

For MidOcean Partners, the answer to this question may lie in its investment philosophy and operational focus. The firm focuses on mid-market companies with enterprise values between $100 to $500 million.

"These are not necessarily push-button reporting-type companies, which we like, because we think we have an opportunity to help professionalize, to some extent, some of the systems and ways they go about their strategic planning," Roth says.

MidOcean loves to take businesses that are doing well but are scrappy in terms of their operations and pair them with operators who can help them be more strategic and empower their executive team to grow as leaders.

The firm often collaborates with third-party agencies and providers to make this happen.

A few areas it is increasingly focused on include multi-step distribution, direct-to-consumer (DTC), and demand generation — especially with shifting consumer behavior amid the pandemic and emerging variants that will continue to impact normal business operations.

A Multi-Step Distribution Moat

Roth says as his firm decides what companies to invest in, it’s often looking for a moat.

In the home goods space, for example, MidOcean looks for a moat around distribution and diversification in this area beyond the typical showroom experience.

"There are hundreds of great home goods businesses that have found a way to disintermediate multi-step distribution and typical multi-step distribution," Roth says. "We think the long-term trend for where these categories are going to go is going to be online. So, one, we love the under-penetration pieces, and two, we love having a moat around multi-step distribution that you can disintermediate a party by being more direct to the consumer."

Along with a diverse distribution strategy, Roth says it’s important for mid-market manufacturers to focus on demand generation. To accomplish this, they must invest in marketing.

Roth says many of the companies MidOcean invests in are primarily organic-driven businesses, but developing a paid search strategy — especially around emerging channels like TikTok — can help them accelerate demand generation.

"Being able to help them think through a strong testing regime with good fluid holdout testing and some of these different channels can start to show them that we're generating demand for the first time that didn't necessarily exist," Roth says.

Leveling Up Demand Generation

Roth adds that in today’s environment, demand generation is digital, so brand manufacturers of all sizes must focus on optimizing customer acquisition and retention.

The most critical thing, especially during a years-long pandemic that has redefined consumer behavior, will be to convert a one-time customer into a lifetime customer.

For many mid-market companies, particularly those with healthy gross margins like the businesses MidOcean invests in, this likely will mean reinvesting capital into demand marketing and building out a more robust DTC operation to bypass traditional distribution channels.

Transforming the Middle Market with Private Equity

Private equity firms will continue to look for attractive investment opportunities within retail and the consumer goods space.

What’s clear is that mid-market manufacturers who have already built stable businesses may benefit by partnering with operators who can help them digitize their operations, think more strategically, and remain as agile as possible during a time of continuous disruption. And this not only will be good for private equity firms looking for a tenfold return, but for consumers, as well.

Hear more of Eric Roth’s expertise by listening to the full podcast episode, "Building the Moat around Middle Market Manufacturers."