We sat down with John Burrows to hear his views on how HBM’s long-term, patient capital strategy has impacted the strategy and vision of Delavau.
About Delavau: For over 150 years, Delavau has been relied upon as a premier supplier of food, pharmaceutical, and nutritional technologies to major nutraceutical, pharmaceutical, and food brands.
Please introduce us to your company and yourself.
Delavau is composed of two distinct businesses: Delavau Pharmaceutical Partners is a contract manufacturer for vitamin-mineral-supplements (VMS) and over-the-counter (OTC) pharmaceutical products essentially bringing shelf-ready coated tablets, chewables, and over-the-counter products to consumers. Delavau Food Partners is supplier of “clean label” shelf life extension ingredients to the food industry.
I am the current CEO of Delavau and have had a career serving in senior leadership roles at both private equity firms and various private equity sponsored companies in the pharmaceutical and chemical sectors. As a result, I have a pretty good understanding of the pros and cons of working with a traditional private equity firm from the perspective of a business owner.
Can you give some background overall on HBM’s style of working with its portfolio companies?
HBM’s involvement in Delavau is unlike anything I had experienced working with other investment firms. They ask a lot of questions to gain an in depth understanding of the company and assist with implementing changes that benefit the organization in the long-term. HBM understands that it takes time for a company – especially one like Delavau experiencing a challenging period of radical change and aggressive investment – to reach its potential.
In the first three years of its ownership of Delavau, HBM has invested an additional 20% – 25% of its initial investment in modernizing and upgrading our facilities, demonstrating their long term investment approach and commitment to creating value here at Delavau.
Would you be able to provide an example of how HBM’s patient capital approach has impacted your business?
This attribute is one of HBM’s unique selling points.
Pharmaceutical manufacturing processes are generally antiquated and very labor intensive. Borrowing ideas from other industries, our Operations and R&D teams have developed state of the art, cutting-edge technology that produces better quality products, faster and at lower costs. This technology also allows us to reduce inventory and improve customer response times. But the payback is not immediate. There are no other pharmaceutical companies doing what we do, and therein lies the challenge to an owner – take a risk on a new, promising, unproven technology with a longer payback or do what everyone else does.
Our team presented the idea to HBM, who was not only receptive, but enthusiastic in supporting this major investment despite the longer return period. Most private equity firms would have declined to invest because of the technological risk associated with an unproven new process and the longer financial payback. We are in the process of building out this new technology now but it is already clear that HBM’s decision was a good one.
HBM places high value on people development, not only at the holding company level, but also at each of its portfolio companies. Have you seen this firsthand?
HBM is concerned with the welfare and development of the entire team, not just senior management. In my experience, private equity firms don’t do organizational development; their timetable doesn’t permit it. Their attitude is that if someone isn’t perfect for their role, replace them. With a longer time horizon, HBM takes a different approach – build a team for the long-term. It is usually a good decision, just not one with the quick payback a private equity firm is looking for. In complex businesses, such as ours, institutional knowledge is critical to our success, and current employees have the operational and market knowledge to help us avoid repeating past mistakes and help identify opportunities to improve and grow the business. The wise owner recognizes the value of continuity and, by visibly investing in the organization, engages all employees in the task of building greater company value.
Please comment on the overall cultural fit you have found with HBM.
In many ways, HBM is the antithesis of the private equity stereotype. They recognize they don’t know everything about your business and are willing to listen and learn. They have been in our shoes running challenging businesses and HBM portfolio companies benefit from that experience and know how. They also provided us with access to specialized resources we could never afford. On the other hand, they are similar to every investment firm in expecting above market financial returns on their investments and expecting exceptional performance from the leadership of their portfolio companies. It’s a good balance.