Why Babette Henagan Founded Her Own Private Equity Firm and Her Lessons from Multiple Economic Cycles

Babette Henagan is the co-founder of private equity firm Linx Partners. She’s been in the business since before the term “private equity” even took hold, and has watched the arc of the industry through multiple economic cycles and evolutions.

MMR: What made you jump into private equity in the first place?

Babette: I graduated as a biology major from Princeton in 1981, right in the middle of a recession and 20% interest rates. I was young and naive. I had hoped to go into venture capital to invest in the recombinant DNA technologies that were just coming out, but I could not find an entry. I took a two-year job at Bradford as the low man on the totem pole. Bradford was doing “bootstrap financing” at the time, making equity investments into family-owned, entrepreneur-led businesses. That “two year job” turned into a career.

MMR: What led to the founding of Linx?

Babette: I moved to Atlanta when I started my family. While raising two young children, I transitioned my role at Bradford to maintaining my portfolio investments but not making new ones. Eventually, however, I wanted to get fully back into private equity.

In Atlanta, there was only one other PE firm and they were fully staffed. I started my own firm out of need. I had known Peter Hicks, my co-founder, for many years. He was an investment banker who had sold many of my portfolio companies. Schroders had bought his bank and the timing was right.

We thought that there was room for a second PE firm in Atlanta focused on the small market. We believed that we could help companies by bringing discipline around better monitoring and data systems — in essence bringing some big company approaches down to smaller ones, leading to better capital allocations. We raised a $50M fund and got started.

MMR: Were you always doing buyouts?

Babette: Yes, always buyouts. You learn from the scars of challenging deals. I had done some minority transactions in my previous life and swore not to do another one. When you combine a minority investment with strong protections, it creates an adversarial situation with management. We wanted to be side-by-side with the operating teams at Linx and create true partnerships. We are always the first institutional capital coming into a platform company, and we want the entrepreneur to retain 20% to 40% of the business.

MMR: What kinds of investments are you looking to make these days?

Babette: We continue to focus on family and entrepreneur-led businesses where our approach to partnership and professionalization aligns with the management team. We focus on businesses with $6 to $10 million of EBITDA operating in the industrial space. For us that means manufacturing, distribution, and business services companies.  We have done a number of platforms in the transportation and logistics space. We focus on businesses with strong macro tailwinds, but that need some professionalization and capital to achieve their growth objectives.

MMR: What are the biggest lessons you’ve learned over the years?

Babette: I’m continually trying to lower risk by returning capital or paying down debt. While leverage has its place, we don’t like to over-stretch the balance sheet. Paying down debt or returning capital allows you to weather economic cycles. We don’t buy our businesses with 5x to 6x multiples of debt and I don’t want to change that.

Markets continually change and you have to prepare for the unknown. We have to maintain discipline on the buy. That often means we’re bridesmaids in a deal — and that’s ok.

I also believe that while better data makes for better decisions, at the end of the day a person has to make a decision. As a result, quality people make you money. The best thing you can do is surround yourself with people smarter than you, but who hold the same ethical standards.

MMR: How have you tried to solve for this?

Babette: For any new investment, three of our four partners have to meet the management team. We have two women and two men partners, so we often get different reads on the same team. That helps us get a better understanding of the team we are looking at partnering with.

It’s also important to break bread with the other side, and of course you learn a lot in the negotiating process. It is hard in compressed time frames, but you need to learn how management thinks and their operating style. You have to listen to your gut and act on it if any red flags come up.

I think it’s important to have a quality sounding board around you who doesn’t fall in love with a particular company or deal, and who can be an objective observer and call you out. That is why we always keep one partner on the outside of any new deal. Their job is to be objective and look at the deal with fresh eyes.

One of the biggest lessons you learn in this industry is that you don’t have all the answers. Listen to people and listen to young people, because the world changes and you can miss both trends and risks.

MMR: How has this market changed beyond just sheer scale?

Babette: Technology now allows an intermediary to send a book out to over 200 people, if they want to, in a cost-effective way. The cost to send out your message has significantly declined, but sellers still have to decide what they really want: money? Help? A partner?

On the investment side, when I started you could buy at multiples that — even if things got screwed up — you could still do okay. With prices so high now, you can’t make many mistakes. It’s a much more efficient market, and a lot is being driven by low interest rates.

I also think you will see fund structures and transaction structures evolve with the new tax code. We’re looking at new ways to take advantage of this. You’ll see some legal and tax engineering in this industry that you didn’t see 4-5 years ago.

MMR: What’s the biggest challenge that you have faced?

Babette: The easy answer is that if you have a deal go wrong and you don’t know how to solve it, it’s humbling. Fortunately that hasn’t happened often.

More complicated is encountering inappropriate human behavior. We’ve come a long way over the years, both in terms of spotting fraud and theft, but discrimination and gender/racial inequality still exists today in most work environments. As a woman in private equity, you get a tough skin and learn to deflect well.

I was given advice a long time ago to save enough money so that you can be true to your values and say what you think, and not be afraid of risking your job. I tell this to a lot of young women because you need to be able to say “this is wrong.”

MMR: Is there other advice you give to young women who want to break into this industry?

Babette: I think this is important — if you’re not making the investment decision, then you’re outside the room. I always tell young women that if they want to be leaders in this industry, then they have to get on a deal and get to investment committee.

MMR: Lastly, has the pace of disruption and change affected your world?

Babette: We’re trying to figure out how to use robotics so we can use our dollars and cents for intellectual property and human capital in more sophisticated ways. If you’re not forcing your teams to think about it, you can bet your competitors are.

Disruption is also why we like logistics. You still need to transport material from point A to point B. It can’t get there in 1s and 0s. We want to be in industries where if you go away that’s a problem for your customers.