2 min read August 2023 — In an interview with Invest:, Sundip Murthy, partner at Norwest Equity Partners (NEP), talked about the firm’s focus on working with family-owned, entrepreneur-run businesses, the thriving entrepreneurial scene within Florida and strategies it has used to navigate economic challenges.
What have been some major highlights over the last year?
We set up our presence in Florida in 2019, establishing a temporary location on Palm Beach Island while we waited for our permanent office location to be built at 360 Rosemary, a new Class-A building built by Related Properties. We officially moved into the new space in August 2021. This location serves as our base for investors in the Southeast region, with our headquarters still in Minneapolis. Currently, half of our senior investment team is based in West Palm Beach and the other half remains in the Midwest. We have several operations leaders and staff located in our Florida office location as well and our mezzanine strategy, Norwest Mezzanine Partners, also has a presence.
As such, our growth-focused, business-building approach in private equity stands out in the Southeast area, making us a distinct and appealing choice for entrepreneurs looking to sell their businesses. Lastly, we are excited to be in Florida and the Southeast market in general due to an increase in the number of privately-owned (and in some cases, family/founder-owned), middle market businesses.
What is the state of West Palm Beach’s market and what are some opportunities you are seeking to capitalize on?
Much has changed coming out of the pandemic period, particularly with inflationary pressures and the considerable change in the interest rate environment. As a result, both our mezzanine and equity strategies have been impacted. The interest rate environment has made it tougher to leverage businesses and raise debt to acquire them. Earlier in 2023, this had a significant impact on deal flow, with intermediaries being more cautious in showing deals. However, the situation is changing, and there is now a stronger pipeline of new deals coming forward.
Many sellers have capitulated somewhat as they are adjusting their valuation expectations during this changing environment, leading to more attractive opportunities for investment. While valuations were considered high during the pandemic period, the current environment presents a more balanced approach to deal-making. For Norwest Equity Partners, this presents an excellent time to invest as a growth-oriented firm as we are conservative in capitalizing businesses and focus on business building initiatives to create value.
What makes the South Florida market a unique and attractive place to do business in?
Personally, it’s incredibly exciting to look out of my office window and see the numerous cranes symbolizing the level of development and growth happening in West Palm Beach. Investments in infrastructure and commercial projects are outstanding. Beyond that, the area offers fantastic opportunities for visiting family and friends, making it a fun and dynamic place to be and live.
This growth dynamic has continued post-pandemic. One of the unique aspects of our position in the market is that we are often the first institutional capital investment partner for businesses. We often buy from families, founders, or smaller private equity investors, and not many other firms with our reputation, experience and growth approach are present in the Southeast market. Consequently, when we engage with businesses or owners in the region, the conversations are much more relaxed and comfortable. Many of them are eager to learn about what we do and explore potential opportunities together.
What I’ve found particularly refreshing about the Southeast business network, and particularly in Florida, is the strong sense of camaraderie and willingness to help one another. It’s not about elbowing each other out of the way but rather lifting each other up. As we’ve met more people, this sense of collaboration has only grown and we’ve been fortunate to build meaningful connections with others who share our vision and goals.
What challenges are you facing and how do you intend to navigate them?
The broader challenges we are facing are related to the macro environment and the changing dynamics in how businesses are bought and sold. There has been much talk of a potential deep recession, but it currently seems a softer landing is more likely. Despite these challenges, we see more opportunities ahead, as business owners have been more willing to moderate on valuations as well as invest alongside us with rollover equity, leading to increased deal flow. We have a long multi-decade history of successfully navigating through various economic cycles, so we are well-experienced managing through changing environments.
Regarding our Florida operations, we are actively building our team, attracting talent not only locally but also from other parts of the country. People are eager to move here and be a part of the growth and opportunities that the region offers. The growth in the region is also positively impacting other areas and helping to soften economic challenges in certain sectors. Additionally, the Florida market is experiencing investments in infrastructure, schools, and housing, all of which contribute to making the transition for newcomers smoother and more appealing.
What have been some key challenges that you have faced throughout the last two to three years?
With our investment approach, we primarily focus on equity investments, where we take a controlling position in the business and actively participate in their growth and development. Additionally, we have a separate strategy that centers around subordinated debt, Norwest Mezzanine Partners, complementing our equity-focused approach. This combination of strategies has proved successful for us, especially in navigating changing business environments and adding value to the middle-market businesses in which we invest.
During the pandemic, there was an unexpected but welcome surge in deal flow. Our firm’s long and reputable 62-year legacy, marked by over 400 investments in various companies, has contributed significantly to maintaining a strong network and reputation. As a result, we were able to access a steady stream of attractive investment opportunities despite the challenges posed by the pandemic.
While the pandemic presented its share of obstacles, our conservative and prudent approach to capital structures and leverage allowed us to manage effectively through headwinds. We use leverage thoughtfully allowing us to maintain flexibility of the businesses in our portfolio so they can effectively manage through such challenging environments.
Throughout the pandemic, macro-related challenges, such as global supply chain disruptions and labor shortages, had an impact on our portfolio companies. However, with our experienced investing and operating teams, we successfully navigated these challenges and remained focused on building value within our current portfolio. Through our equity strategy, we currently manage approximately 20 companies that represent a diversity of industries and end markets.
Despite the uncertainties, we continued to actively pursue growth opportunities during 2022-2023. As part of our strategy, we made six add-on acquisitions, bolstering our portfolio with businesses that align with our investment criteria and that support our growth objectives. At the same time, we strategically divested from four mature businesses that had achieved considerable value creation, and we have one pending sale. Furthermore, we capitalized on opportunities to acquire new platforms, expanding our investment portfolio and diversifying our investment holdings. During this period, we acquired two new businesses and there is another promising acquisition currently pending.
All in all, our commitment to navigating changing market dynamics and seizing growth opportunities makes us an attractive partner for middle-market businesses looking to achieve their growth objectives while also ensuring prudent and sustainable financial management for the long-term.
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