Private equity is keen on promo.

Within the last decade, private equity (PE) investment has had a seismic impact on the competitive landscape in the promotional products industry – fueling blockbuster mergers and acquisitions and helping to spur operational and technology advancements among big industry players.

Don’t expect that to change. While short-term macroeconomic headwinds may temporarily slow PE’s push into promo, market leaders and PE investors alike believe cash from private equity will continue, over time, to pour into the branded merch space.

“I believe that investment will continue and perhaps accelerate,” says Dan Pantano, CEO of promo’s third-largest supplier, PE-backed alphabroder (asi/34063), and a member of Counselor’s Power 50 list of promo’s most influential people.

And as more capital comes in, PE’s influence on promo will grow. It’s a divisive prospect.

Proponents say PE benefits the industry by promoting innovation, technology adoption and deeper end-buyer penetration. Meanwhile, critics say that PE involvement harms companies for short-term gain and negatively reshapes the market by elbowing out many mom-and-pop players and potentially challenging the traditional supplier-distributor model.

With private equity poised to play a bigger role, ASI Media delves into everything from why PE is attracted to the merch market and how some industry firms have benefitted from private equity investment, to the positions of detractors who are leery of capital infusions from investor firms.

PE’s Interest In Promo

Promotional products distributors generated $25.8 billion in sales in 2022, matching the previous all-time annual record set in 2019, ASI Research shows. While there are now billion-dollar firms on both the distributor and supplier sides of the industry, the fact remains that there are tens of thousands of small to mid-sized privately-owned companies that collectively make up promo.

This fragmentation within such a large market is a key reason why PE investors are drawn to the space. PE principals believe there are opportunities to partner with standout players in promo and then help them capture market share by injecting capital and expertise that powers organic growth and strategic acquisitions.

“When you have a big fragmented market like promo, that obviously opens it up to a ‘buy-and-build’ strategy for investors,” says Ken Mill, co-founder and managing partner at Chicago-based PE firm Monroe Street Partners (MSP), which recently acquired a majority stake in Richmond, VA-headquartered distributor Brandito (asi/325944).

That fragmentation is a core factor in why many PE pros and industry executives believe PE and the promo industry will become increasingly intertwined in the years ahead.

$25 Trillion
Gross assets managed by private funds, which include private equity firms and hedge funds.(The Wall Street Journal)

“As a large, fragmented industry, promo products continues to be ripe for investment and consolidation,” says Jeffrey Robich, a partner with Blue Point Capital Partners, a Cleveland, OH-headquartered PE firm whose investment portfolio includes Top 40 suppliers Next Level Apparel (asi/73867) and Spector & Co. (asi/88660).

Still, PE’s attraction is rooted in more than the potential for revenue expansion that comes with fragmentation.

“Blue Point Capital has a long, successful history of guiding companies to profitable growth in large, diverse and growing industries – which is exactly what we saw in the promotional products space when we made our investments in Spector and Next Level,” says Robich. “We like the recurring nature of revenue inherent in this industry, as well as the deep relationships and trust required in suppliers that create high barriers of entry.”

Mill shares that relatively high retention levels and the fact that the fundamentals of the industry are strong – with good overall growth prospects – are also part of promo’s appeal. “When PE scorecards an industry, there are quite a few checks in promo’s favor,” he says.

For sure, some investors are bringing their money to the table because they believe in the medium of branded merch and its effectiveness.

“Blue Point feels that leveraging custom promotional products is one of the most effective marketing and employee-engagement activities any company can partake in,” Robich says, adding that the firm pursued Spector and Next Level in particular because both are leaders in providing “premium higher-quality products that are developed based on modern trends and classic consumer needs. The premium products category has been stealing share from the commodity/cheap players, so we went after the absolute best players in that space.”

PE’s sweet tooth for promo may also partially be attributed to a “herd mentality” among the private equity community, says Mill. Successful partnerships between PE and businesses in a particular market can draw ample attention among PE investors, compelling them to take an interest in that industry.

“When you have a few successful exits in a space, other folks tend to want to copy the same playbook,” Mill explains. “It’s happened time and time again. There becomes a precedent, and sponsors [PE investors] see opportunity to replicate it.”

Even so, potential macroeconomic factors may curtail some near-term PE investment and expansion in promo. Elevated cost for capital – given high interest rates and tightening of marketing budgets amid a broader economic growth slowdown or recession – could contribute to limiting activity.

“As a large, fragmented industry, promo products continues to be ripe for investment and consolidation.” Jeffrey Robich, Blue Point Capital Partners

In an economically weaker high-interest marketplace, unbridgeable gaps could open between what company owners think their firms are worth and how PE values them. That could slow down the pace of first-time PE investments in companies, along with acquisitions made by merch businesses already backed by PE capital, says Alex Foshager, co-founder and managing partner at MSP. Reduced exit opportunities for PE firms in a weaker economy could inhibit investment, too.

Still, Foshager says there’s a counter perspective – one in which a bumpy stretch for the industry and the economy more broadly could actually compel PE-driven dealmaking. “If there’s a downturn, you might have strong players in promo, backed by private equity, who are in a position to invest in and bolster weaker players that need outside capital to continue,” he states.

Regardless of how things go in the short-term, leaders in PE and promo believe private equity’s presence will increase over time.

“The investment will continue because our industry offers stability and provides long-term growth tailwinds,” says Frank Myers, CEO of Top 40 supplier S&S Activewear (asi/84358), which is majority-owned by PE firm Clayton, Dubilier & Rice (CD&R). “There’s relatively low cyclicity, strong margin profiles, and opportunities to differentiate from a service and product perspective.”

The Benefits of a Private Equity Sponsor

Hub Pen wasn’t doing poorly by any means. In 2015, the family-run firm was the 33^rd-largest supplier in the industry based on the $46 million in North American promo revenue it generated the year prior.

Then Tenex Capital Management, a PE firm, invested in Hub Pen in the spring of 2016. It was a seminal moment. In the ensuing years, Hub would rebrand as HPG (asi/61966) and grow into what it is today: the eighth-largest supplier in promo, based on $268.8 million in 2022 revenue.

An ambitious growth plan, punctuated in significant part by headline-grabbing acquisitions of major industry players like former Top 40 firm Evans Manufacturing (asi/52840) earlier this year, Origaudio in 2018, HandStands in 2019 and others, propelled the massive expansion. Tenex’s support was essential to it all, says HPG CEO Chris Anderson.

$1.02 Trillion
Value of total U.S. private equity deal activity in 2022. That was down from 2021’s $1.27 trillion but above annual totals over the preceding decade, which never surpassed $765 billion in a year.(PitchBook)

“Our company, as it’s known today, would not exist without private equity,” says Anderson, a member of Counselor’s Power 50. “Tenex provided the capital, the access to lenders, and a proven identification-acquisition-integration playbook that enabled a business that started as Hub Pen to develop into a top-10 industry supplier with 11 locations spanning North America, employing over 1,700 team members.”

HPG's rise up the ranks of the Top 40 is illustrative of the financial success that PE-backed companies can achieve. It can happen when a company with strong fundamentals and a solid management team is wed with a good PE firm that aligns on goals. The PE partner can provide the capital-backing and expertise on everything from operations and M&A to technology to help companies reach summits they wouldn’t have been able to climb to on their own, say PE pros and certain promo leaders.

“PE investment helps companies build on their strengths,” says Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000) and a Power 50 member. “Our private equity partners have allowed us to make significant investments in technology, attract and develop top-tier talent, and build best-in-class distribution facilities. As a result, we are able to offer our account executives and their customers a much broader and impactful set of services and solutions.”

A forerunner in PE-promo partnerships, HALO first received private equity investment in 2003. The company steadily grew and was the largest distributor in 2020 and 2021; it’s currently one of only two billion-dollar distributors. HALO has engineered the impressive revenue results through both organic growth and one of the most strategically aggressive acquisition strategies in promo, with the company acquiring other former Top 40 firms including Sunrise Identity, Axis Promotions and BrandVia Alliance, among others.

Since investing in promo’s second-largest supplier, S&S Activewear, two years ago, CD&R has helped the Illinois-headquartered company execute major M&A, including the acquisitions of former Top 40 supplier TSC Apparel and TSF Sportswear. S&S CEO Myers says the growth-enhancing support goes beyond capital and M&A expertise.

“Over the past two years, CD&R has provided a wealth of experience and top-tier strategic guidance/counsel on a wide range of business-operations projects, including product, technology, communication and ESG efforts,” says Myers. “As just one example, our joint efforts have already led to some exciting developments that will bring groundbreaking technology into our operations to provide a better working environment for our employees and an improved customer ordering experience.”

“PE investment helps companies build on their strengths. Our private equity partners have allowed us to make significant investments in technology, attract and develop top-tier talent, and build best-in-class distribution facilities.” Marc Simon, HALO

Pantano extols other benefits of PE partnerships. “Our private equity sponsor offers inputs and ideas on how to optimize the performance of our business,” says the alphabroder CEO. “We are able to leverage resources from our partner to help in almost all functional areas of our business – free consultants with a vested interest in our success.”

Such potential advantages are why other industry firms have become open to private equity as of late. These include commonsku, which provides software solutions for the promo industry. In July, the Toronto-based company received a PE investment from Charlotte, NC-based Frontier Growth.

“We gain the advantage of their expertise,” says Co-founder/President Mark Graham, a Power 50 member who along with CEO/Co-founder Catherine Graham remains in majority ownership of commonsku. “We get to surround ourselves with smart people who support us on our growth journey – both the PE company itself as well as its portfolio of B2B software-as-a-service companies who are the ‘commonsku’ of their industries.”

Michael Lovern, president of Brandito, believes that the support MSP can offer the distributorship he founded will serve as a springboard for profitable growth. It’s why he entered into a deal for MSP to become the majority stakeholder of Brandito.

“We knew,” says Lovern, “that MSP’s strategic guidance, deep operating resources and equity capital will allow Brandito to create substantial value for what we value the most – our customers and employees.”

Competing Views on PE

On the day ASI Media reached out to Jo-an Lantz to discuss private equity and promo, the President/CEO of Top 40 distributor Geiger (asi/202900) and Power 50 member received another call, as well: It was from a PE firm interested in investing in the family-owned distributorship.

“We are often approached by firms representing private equity,” says Lantz, Counselor’s 2020 Person of the Year. “We’re in an industry that hasn’t consolidated to as great an extent as other industries. And, the diversity of the client base in promo is very attractive to PE – from global Fortune 100 companies to local businesses and educational institutions … everyone can be a client.”

Still, Lantz and the Geiger team aren’t interested in a PE sponsor.

“PE investment changes culture,” Lantz opines. “Being a family business is in our DNA, part of our ethos. We believe it gives us the flexibility to invest in people, services, support and technology for the long term, rather than short-term financial results. It is a matter of respect for all. We feel it’s also a differentiator as more and more firms align with PE.”

There are other industry leaders that believe private equity isn’t a good fit for their businesses. Expressing concerns raised by other executives, Andy Shape, Counselor’s 2023 Person of the Year, worries that a PE firm wouldn’t be a good partner because they’re more focused on short-term growth and profits rather than building long-term value. Often a PE investment in a company can fall in a range of three to seven years, executives say.

“The PE industry has a history of overleveraging businesses with debt, extracting onerous fees and simply trying to achieve an investment return,” says Shape, CEO of Top 40 distributor Stran & Company (asi/337725) and a Power 50 member. “They generally don’t care as much as owners about the business, its employees or customers, because it’s simply a financial transaction for most of them, as one of many in their portfolio of companies.”

PE investment changes culture. Being a family business is in our DNA, part of our ethos. We believe it gives us the flexibility to invest in people, services, support and technology for the long term, rather than short-term financial results.” Jo-an Lantz, Geiger

When evaluating how Stran could catalyze its next phase of major growth, Shape and his leadership team considered PE but ultimately opted to list the company on the NASDAQ.

“PE has financial targets to hit for investors and a relatively narrow time window to achieve those targets,” Shapes states. “That forces them to push companies to make acquisitions or strategic decisions that may not be right for the business.”

“In addition,” Shape continues, “PE will demand to have a significant amount of control, which is justified if they are the ones providing the capital. However, we didn’t want important strategic decisions to be decided by others who are more focused on the investment return for themselves than on the impact to the business, its employees and customers. … Also, when considering our next step, we didn’t think PE would provide the financial value to myself and my cofounder that we felt Stran was worth.”

Josh White says he sees a number of issues with private equity that should, in his view, make it only a “last-resort option.”

“They don’t know this industry at all,” asserts White, general counsel/head of strategy at Top 40 distributor BAMKO (asi/131431), which is part of publicly traded parent firm Superior Group of Companies. “They make decisions based off of Excel models, but lack the sort of intuitive and institutional knowledge that can only be gained through direct industry experience.”

“Another issue is one of time preference,” White continues. “Fundamentally, they look at your company as an asset – rather than a group of human beings with a distinct culture – and their objective is to resell that asset for the greatest return possible. They’re buying to engage in financial engineering within a limited time horizon before selling the company to someone else. When you know that you aren’t going to own a company for the long run, you make very different decisions than you would otherwise. Generally, those decisions come at the expense of employees, customers and the long-term well-being of the business.”

$50 Million
Median value of a PE deal in 2022 in the U.S. Through March 31 this year, median deal value was tracking lower – $45.3 million.(PitchBook)

Some think PE investment isn’t just potentially harmful for particular companies; they’re concerned it will contribute to what they characterize as negative disruption for the promo industry as a whole, such as eventually forcing small to mid-sized industry companies out of business or compelling those firms to become part of larger entities to survive.

“PE is creating a divide between the ‘haves’ and ‘have nots,’” says Shape. “The haves are able to invest in technology, infrastructure and people to build scale and increase market share. The ‘have nots’ will gradually become unable to compete because they are unable to make the investments that more and more customers are demanding, such as a more sophisticated technology stack and integrations.” Stran went public, in part, in an effort to compete in this evolving marketplace, while still under its own promo-experienced management, executives say.

PE could also push for vertical integration that challenges the traditional industry supplier-distributor model. “I believe PE will continue to invest in suppliers and distributors and perhaps try to combine the two together,” says Lantz. Adds Shape: “It’s not hard to imagine more large PE-backed distributors bringing more operations in-house or purchasing suppliers. That ultimately allows for more profitability.”

Even Pantano, a PE proponent, says that some equity sponsors could “create more disruption to how business has traditionally been done across the different constituents that operate in today’s market.”

Whether or not that will happen at scale remains to be seen. One thing many executives believe is a given, however, is that PE capital will continue to spur M&A. “There’ll be more consolidation that results in more large, poorly constructed companies that lack a cohesive identity or culture,” says White.

“We’ll see continued consolidation, more rapid adoption of technology, and investments in efficiency-generating equipment and facilities as a result of PE investment.” Chris Anderson, HPG

Promo executives who support PE agree that it will drive further consolidation, but disagree that it will result in “worse” companies. To the contrary, they feel consolidation could help raise the collective performance bar for the industry, making it more professional and a better collective ROI generator – a kind of rising tide that lifts all ships. “Private equity investment will have a positive influence on the industry by making companies stronger and more competitive, which will, ultimately, make the industry more relevant,” says Simon.

Anderson thinks similarly: “We’ll see continued consolidation, more rapid adoption of technology, and investments in efficiency-generating equipment and facilities as a result of PE investment.”

Robich of Blue Point Capital Partners says that when PE takes interest in an industry, it brings capital for growth and acquisitions, strengthening the industry through efficiencies and creating opportunities to break into new adjacent solution offerings. “For promotional products specifically, this can mean areas that include digital evolution, creator economy, affiliates and private label,” he adds.

Graham warns that the wrong PE partner can force short-term decisions that might not be in the best interest of customers and that may impact the quality of the promotional medium. Still, the commonsku president believes the right PE partner – one who is aligned with the company and that cares about its long-term viability, he says – creates stability and a platform for growth and innovation. Multiplied out, that can collectively benefit the branded merchandise market.

“I think we’ve seen more examples of successful PE investments than poor ones over the past 10 years,” says Graham. “This is encouraging to see.”

However, not everyone is convinced. “Ultimately,” says White, “I believe PE is looking to mine your business to strip out the maximum return on invested capital, without any regard for what’s left behind. They don’t particularly care about your business.”

Regardless of one’s view of PE in promo, one thing appears clear: Private equity’s influence is here to stay.