Finding the Right Exit for a Fast-Growing Platform

“Finding the right transactions is one of the most challenging parts of our business,” says David Topham, co-founder of lower middle market private equity firm Tower Arch Capital. “You have a plan and you know what types of businesses you want to acquire to continue to build a platform, but it’s much tougher in practice to find the ones where the management team and our strategies are well-aligned. That’s why it’s so rewarding when you do find companies that are the right fit.”

Tower Arch recently did just that. In November 2018, the firm sold its portfolio company Softvision to public company Cognizant. The deal came just three and a half years after Tower Arch’s initial acquisition of SPI, a digital engineering and consulting company with clients like Estee Lauder, Macy’s, and Hudson’s Bay.

We spoke with Tower Arch co-founder David Topham about the deal, how they think about creating value in an organization, and their strategy for ensuring incentives are aligned in a transaction.

Tell us about how your initial acquisition of Softvision came about.  

We had previously purchased an IT services platform company called SPI, based in the U.S. and India, and we were looking to expand and diversify our business both geographically and in terms of the services we offered. We were introduced to Softvision after their M&A advisor, Palmeres Advisors, privately shared the deal with us on Axial.

We saw that Softvision’s services were similar to SPI’s, but that Softvision had more focus on mobile development, and the bulk of its employees were in Eastern Europe. The deal was a great fit: It had strong past financial performance, a track record of multi-year customer relationships, a diverse customer base, and a culture of commitment to high service levels. These are all important things we look for in an IT services business.

How did the process kick off?  

We met with the company’s broker and then its founder. We really like to see founders who are excited about rolling equity into the business. We primarily partner with individuals who want to continue to scale their businesses and become an investor alongside our team. Fortunately, Softvision’s founder was interested in doing exactly that and ended up rolling a meaningful amount of equity into the combined platform as part of the deal.

Why is rolling equity so important to you?

We think of ourselves as investing in people as much as in businesses. Especially for many of the businesses we look at, which are founder- or management-owned, those are the people who understand the customers, have created the culture, and know the employees. They’ve built every aspect of the business. If the founder cashes out of the business entirely, there’s a lot of inherent knowledge that we lose along with that person. In addition, we’re not a firm that has a stable of CEOs ready to step in. We look to sponsor and partner with existing management teams.

How did you integrate Softvision with your previous platform company SPI?

We ultimately made six acquisitions in the deal; SPI was our initial investment and we made five more add-on acquisitions including Softvision. Our goal was to deliver our customers a full-service solution and complete offering for digital transformation, in addition to delivering the highest quality services at the best price points. We ultimately decided to consolidate them all under the Softvision name and create both cross-functional and cross-geography teams that allowed our customers to draw on multiple skill-sets throughout the business.

You sold Softvision to Cognizant in November 2018. Tell me about that process.

We had received inbound interest from a number of different parties — both strategic and private equity funds. We decided to retain an investment bank to support these interactions and introduce us to a few more potential buyers. Cognizant was one of the early strategics interested, and after talking with them, it became clear that they’d be a great fit. For example, we had been able to scale quickly — we had real expertise, and a really strong value proposition, but we needed more talent to really fulfill the broader vision and service mandate. Cognizant is a massive global organization that’s able to recruit at a different order of magnitude and can offer a more comprehensive suite of services to Softvision’s customers.

Did you expect to exit the company so quickly?

It was quicker than we initially envisioned — we typically underwrite a longer hold period. But in this case, the inbound interest was frequent and fervent enough that it made sense to at least explore what a potential exit would look like. It was well ahead of schedule, but our ability to build the business and obtain the goals we had set out was also ahead of schedule. We’d done five add-on acquisitions in a little over three years and had pretty well integrated all of those. Ultimately, Cognizant was a really nice match for the business, and the deal just made sense for everyone involved. We were proud of our partnership with the Softvision team and even more so when we realized that Cognizant was a natural partner to continue building on the success and legacy of the management team at Softvision.