In May 2004, local funding opportunities for Utah growth companies took a major step forward, when Sorenson Capital announced it would begin deploying its new $250 million private equity fund.  This equity, combined with leverage in making investments, could total as much as $1 billion in investments made by the Sorenson Capital team. $ Perceiving an opportunity to leverage an underserved market of established growth companies in Utah and the Mountain West, James Lee Sorenson pledged $75 million to help launch Sorenson Capital and attract an experienced, high profile investment team. The team has since more than tripled its funds under management. $ Sorenson largely credits the influence of Bob Gay, co-founder and former managing director of one of the world’s leading investment firms, Boston-based Bain Capital, for helping him decide to invest the initial funds to launch Sorenson Capital. “In the past, we have declined to get involved with venture capital in the region,” says Sorenson. “I have long been convinced that there are a lot of good companies and management here, but I wasn’t convinced we could find the investment team here to take full advantage of the opportunity.” $ Gay helped Sorenson identify and attract the team members to make the vision a reality—seasoned investment professionals who had succeeded on a national stage, but with the Utah ties to provide them an awareness of the state’s market and culture. Sorenson Capital’s five managing directors include three former CEOs and bring a wealth of investment experience to the region. $ The team includes Fraser Bullock—former Bain Capital partner, co-founder of Alpine Consolidated and COO and CFO for the 2002 Winter Olympics,  Ron Mika, a former managing director at Bain Capital; Steve Young, former NFL all-pro quarterback and former managing director of San Francisco-based investment firm IRR Partners; Richard Lawson, former CEO of Found, Inc. and managing partner of IRR Partners, which he co-founded with Young; and Tim Layton, co-founder with Bullock of Alpine Consolidated and former CEO of Medeco Security Locks, an industry-leading producer of physical security products. $ The firm’s managing directors were attracted by the chance to return to the Mountain West, further the growth of local companies and the region’s economy, and exploit opportunities in what they see as a largely untapped market. As Bullock says, “We all have ties to the Mountain West, especially Utah. We saw a gap in the marketplace for buyout and growth funding, and an opportunity to be part of a great team and earn very good returns. We hope to help fill an important void in a place that is very important to us, to help Utah companies scale what we sometimes call the ‘Wasatch Wall’ to leverage more resources and relationships from outside the state .” $ Recently Wasatch Digital iQ sat down with Sorenson and the five managing directors of Sorenson Capital to discuss their vision for the new fund and its contribution to Utah companies and to the economic growth of the Mountain West.

Let’s start by discussing the types of deals you are looking to get involved with and the role you intend to play. Will you emphasize companies in a particular industry, or a particular size or stage of development?

Bullock: The vast majority of what we will work with is the leveraged buyout (LBO), either a complete buyout or a share of ownership, usually 50 percent or more, depending on what is important to the owner. In some cases, the owner may want to remain with the company and help grow the business; in other cases he or she may want to cash out of the entire business.

The sweet spot for us is companies with revenues between $30 million and 300 million—it’s a broad range. We look for strong companies with strong earnings and growth prospects, and with a good management team, and then we partner with that team to help them get to the next level of performance. They will manage the company, but we will help with things such as acquisitions, capital structure and strategic evaluations to help them achieve what they probably couldn’t do on their own.

Layton: We are industry agnostic. We will look at technology, and we love traditional manufacturing companies and services. We are really looking for solid business performers in any industry.

What are the primary advantages of the LBO structure, for investors and for the management teams you work with?

Mika: By typically combining senior and mezzanine debt with the equity, we are able to buy a larger enterprise for less equity, which multiplies the returns on our capital in a safe and manageable capital structure.  It also provides the companies and management teams we invest in with access to less expensive capital, which they can utilize to grow their businesses.

Layton: We are often working with management teams and owners that need to find creative ways of raising capital and putting it to work. But we bring more than capital to the table; we help facilitate change in a variety of ways, such as modifying financial and business structures, estate and succession planning, and other business, personal and family needs.

What do you believe will be the economic development effect of increasing the later stage growth capital to the marketplace, such as yourselves, Peterson and MACC?

Sorenson: There are a lot of excellent growth companies with capital needs here. So when they don’t find it here, they go where it is. Often the businesses get relocated and we lose these jewels that were here to other places, and a lot of our brain power and management talent goes with them. You almost can’t overestimate the importance of local growth capital for our companies here.

Mika: There’s been $8-10 billion dollars invested in companies in Utah, Colorado and Arizona over the last 5 years. But those are in the earlier developmental stage of the business. Often Utah businesses find what I refer to as the “Wasatch Wall,” where they can’t find the final stage of funding that will allow them to realize their financial expectations for the value they have create. That is the role we intend to fill in this market.

Bullock: Looking at the big economic development picture in Utah, in 1983 our average wage rate as a percentage of the national average was 96 percent. We have been on a precipitous slide since then. We are now at 82.7 percent. We see this decline in our average rate driven by what Jim described—potentially large, capable companies leaving the state because they are being bought by people from out of state. That hurts Utah.

So having the growth capital we’ve mentioned can enable those companies to grow and meet their goals without leaving Utah. It is my hope and belief that having these strong companies here will allow the people we educate and train here to find high paying jobs and stay through a cycle of reinvestment and economic growth.

How do you feel about the current progress of economic development in Utah, and what remains to be done in the public or private sector to further improve the state’s business environment?

Bullock: We want Utah to have as fertile ground as possible, but the state is not very advanced in its economic development. It is not well funded, and we do not truly have an overall strategy. We are hoping that as things go forward there is a good strategic plan for economic development that then feeds into and marries with the efforts of private enterprise. That would be very helpful.

House Bill 240 (the Fund of Funds legislation) is very important to access to capital here. The Fund to Funds bill can greatly encourage investment in Utah. There are great companies here, there are great ideas and people, but there isn’t necessarily capital, especially in the gap that we are filling. Attracting this capital feeds on itself through reinvestment and the development of new companies. We hope we can play a significant role in helping companies get over that Wasatch Wall we have mentioned. Government and industry need to continue to work together to create opportunities to help our companies grow here.

Sorenson: That was really one of the greatest reasons we brought this exceptional team together—to help the companies and the region move to the next level of performance.

Some seem to believe that a large, sustainable company can’t be built in Utah. You obviously disagree. What do Utah companies need to do to disprove that notion—to scale to a half-billion or  billion-dollar revenue company, establish market leadership and maintain that position past the first generation of management?

Sorenson: The challenge is that you get past that first entrepreneur who is able to build a moderately successful business, then hits a wall of insufficient capital. To reach the next level, the company needs to think bigger and bring in resources from outside the area. The problem is that outside investors often move the company outside of the region. We invested a few years ago in one company [MyFamily.com] that was in the process of dismantling and relocating the company. This company really needed to be in Utah for what they were doing, but their investors had convinced them to move to Silicon Valley. The company was really on the ropes—it was just after the bubble had burst. But a number of Utah investors were able to syndicate a deal and bring them back to Utah, and the rest is history.

Mika: To grow and expand beyond a certain point, I believe Utah companies first need a global vision of their strategy that allows them to build from the base they have created in the region to develop nationally and internationally. Second, they need to have national and international relationships and partnerships. Third, they need funding for expansion and acquisitions. In the end, companies who grow up and do well here need to become buyers of other businesses, not sellers, to build upon the base here and expand their marketability to other places.

I believe we can bring several pieces of that puzzle. We bring more than just capital; we also have a staff of 15 people that includes three prior CEOs, six strategy consultants and six people who have been in the private equity business. We bring a global perspective of strategy, operations and capital to help companies in the Intermountain West grow and build the critical mass we have been discussing.

Do you believe that a lot of Utah companies have the potential to be much bigger than their founders envision they can be? Do some owners sell their companies too early or too cheaply?

Bullock: Certainly they can be much bigger. Often they don’t have access to or are not aware of the resources out there or the vision of taking it to a much higher level. So they settle for the single or double instead of the homerun they could hit.

Our hope is that we can help those companies realize those visions through thinking globally and providing relationships and capital to take their company to a higher level than they imagined. We love the scenario where an entrepreneur who has built up a great company wants to partially exit to diversify his or her net worth but wants to go on to a much larger and perhaps global strategy.

Young: It’s fun to meet entrepreneurs who have no idea how good they are at what they are doing. They know they are successful, that they have a good business, but they have no context. It is fun to build that trust factor and go into partnership with them. Some of them know that they dominate their region, whether it is Utah, Arizona or Colorado, but they don’t realize that they could dominate a much larger area. That has been the most fun, bringing these tidings of good news to the owners of these businesses.

Layton: One of the criticisms we have heard about Utah is that there is not good management here. We don’t believe that, and investors in our fund don’t believe it either. We have found completely the opposite. There are great companies here, with very innovative and progressive management. What is needed is better access to capital and better global relationships.

Sorenson: There are great companies and great upside here. It seems a compelling company pops onto our radar screen every day; sometimes they’re only a few blocks away. Founders that have held their companies for two decades or more and for the first time entertain the thought of leaving or partnering to take their companies to another level.

Lawson: In situations where a person is leaving to do public or religious service, it’s almost as if we become stewards of that business—partners to help manage an increase in wealth or leverage an investment. We don’t manage the company, but we provide access to our experience, perspective and our relationship base. We provide access and relationships. We want to be kind of a one-stop shop to help these entrepreneurs that decide to stay in the marketplace.

It is important to have all those contacts and relationships outside of the area but at the same time to be able to understand the culture in the Mountain West so you can relate to the companies here and build a common bond.

What do you look for in a management team? What qualities and dynamics does a team need to possess in order to be successful?

Bullock: I think it boils down to two things: the track records of the members of the team, and their ability to position the business strategically. First, what have they done in their past lives and brought to the table historically? Second, we look at businesses with strategic hats on. How is the business positioned? Does it have a strong or weak market share? A good or poor cost position? Does the team understand strategy, and can they articulate their particular strategy? If they can explain it to me, then I feel they can also do it for the employees and other stakeholders in their business, and it is more likely that they will be able to execute it. Those are my two rules.

Young: We are making bets on people. You do an analysis on the business but in the end you bet on the people.

I also have two main things I look for. The first is accountability. Many people work really hard, but I look for people who are willing to hold themselves and those around them accountable for their performance. Then I look for a kind of strategic vision, the ability to step outside yourself and get a broader perspective on the business. Sometimes that is two different people: a real operational person and a real visionary. Sometimes you find both in one person. But both need to be there on the team.

Bullock: I would add the importance of effective communication. Coming into the Olympics, we had some very talented people, but generally they weren’t communicating. There was a bit of a bunker or silo mentality, so one side of the organization didn’t know what the other side was doing. Trying to foster communication and get people to look beyond themselves to the good of the company is a big undertaking. But in any high performance organization you have got to get to that level, and once you do you really hit exponential growth in the capability of the organization.

Mika: Ultimately the most important decision is who is running the company. One mistake a lot of entrepreneurs make in looking for a CEO is they look no further than their bathroom mirror. There has to be a level of honesty about the type of leadership needed to get them from point A to point B and beyond, and people have to decide whether they want a job or a business that is worth a lot of money. There is no shame in starting a spectacular business and then bringing in a management team to supplement what is already there. That is a sign of maturity and oftentimes a critical element in creating value.

Why do you think so many founders struggle to see their limitations and refuse to pass the baton to another generation of leadership?

Layton: It is their baby. They do not want to give it up. That can be short-sighted, because in many cases they are creators and not necessary leaders in organizations; there are different skill sets that go along with each one. They may be visionary creators and immense talents, but they typically hang on too long, rather than handing off the leadership role while remaining involved in another key role.

Sorenson: Often people don’t have the confidence that their vision and methods can be transferred to other people. What it really boils down to is it has to be simple. You have to articulate vision and disseminate it throughout the organization and hold people accountable for it in order to scale it.

The good news is that these are skills that can be acquired if you are willing  to team up with the right people.

At the end of the day, what are you most excited and passionate about with this opportunity?

Young: I want us to be able to create a legacy. In five or ten years, I want to be able to look back and see a huge impact for the business climate here in Utah. We have been talking about critical mass. I want to make sure that the money we put to work gets leveraged in a way that helps Utah form critical mass. Ron talks about the money Bain Capital put to work in the late ‘80s. I want us to have that kind of impact, but focused on this region’s economy. That is what is different about this fund.

Lawson: I am most excited about helping the region and being measured against the targets we set. I feel very proud that we have got the team and the backing together, so we have proved half the thesis. Now we have a long road ahead in finding and executing good investments. That will be the greatest personal satisfaction for me—making this a successful fund.

Layton: I look forward to partnering with the businesses here. It is exciting to be in a position to offer help with the direction of the companies, helping them preserve, enhance and grow their companies and their legacy. I love to see businesses grow. I love to see them be successful. I love to see the people prosper. Being part of that cycle through our capital and expertise is what I am most passionate about.

Mika: Everybody has something in life that causes them to get up in the morning and get charged up about what they do. Some people climb mountains, some race cars. I have been in business for 25 years, and this is the most fun that I know—getting involved in business, being part of the team that helps it grow and be successful. That is my passion; to be able to do it with a team of all-stars like this is really exciting.

Bullock: I am excited about validating our thesis that this is a region with companies that are ready to move to the next level and become a force in the market. As everyone here has said today, we have embarked on a mission in the past year of putting this team together. We really believe in this region and in our approach of bringing later stage capital to the table and partnering with businesses here to grow their companies and the regional economy. We are creating a legacy of growth here, beginning with our earliest deals.