Dealmaker SPOT•LIGHT© Q&A with Pamlico Capital’s Managing Partner, Scott Perper

July 24, 2011

Reprinted by permission from dealmaker SPOT•LIGHT©. Published weekly on-line

Managing Partner
Pamlico Capital

Scott Perper shared his views with Global M&A Network on the Healthcare Bill's influence on buyout investors’ readiness to pay premiums for healthcare businesses, the Dodd-Frank regulation prompting cutbacks in private equity investments by banks, the competition in the private equity industries effect on deal sourcing and valuations, along with his views on how Pamlico's investments reflect their core values in generating value and returns as shown by NewWave Communications and MACTEC deals.

Q. Pamlico Capital was the principal investing arm of Wachovia, and is currently an independent private equity firm.
What has changed per your investment strategy and operations as an independent mid-market private equity firm?

Mr. Perper: Our strategy has not changed over the past decade – we are lower middle market growth equity and
buyout investors. At a strategy session in 2002 while we were still on the Wachovia platform, we took a hard look at
ourselves and what our vision for the business was for the next decade. While our primary investing focus had
always been in middle market companies, we were fortunate to have generated a superior investment track record in
a number of different asset classes.
However, we decided that in order to really control our destiny in the future we were going to need to diversify our
investor base beyond Wachovia. To attract outside capital, we felt new investors would want to see a single focused
strategy. Over the next five years we exclusively grew our middle market investing track record and raised our first
outside capital in 2007. After Wells Fargo acquired Wachovia, it was a natural evolutionary step to then become an
independent Pamlico Capital.

Q. What is the level of competition among the American mid-market private equity firms and dynamics driving

Mr. Perper: The private equity business has always been very competitive and today’s environment is no exception.
Despite the “new normal” economic conditions on the road ahead, valuations have continued to increase.
I attribute this to a number of factors – nearly $400 billion of committed but unfunded capacity at private equity firms
that will expire over the next several years and a very cheap cost of debt which has come roaring back into the market
even for lower middle market companies. There is also a belief that it is easier to drive growth and returns in the
middle market. However, I believe smart investors find ways to deploy capital and get excellent returns through all
market cycles.

Q. How do you think the uncertainty of the market has affected private equity businesses?

Mr. Perper: The markets are surprising competitive right now given the economic environment. That is worrisome to
us because high going in multiples can have a dampening effect on the returns our portfolio companies can generate
for our investors. But the flip side of that equation is that we can potentially attract cheaper and more efficient risk
capital to those businesses that need it.
At Pamlico we are spending lots of time discussing new angles to find and win new investments at attractive
valuations. Our efforts include backing proven executives to execute on build-up strategies, more pro-active cold
calling in less active niches and deep research into emerging parts of our industry focus areas.

Q. What can private equity firms, such as Pamlico, do to advance American businesses competitive position and

Mr. Perper: There has been a lot of talk in the press and Washington about how to make more credit available to
American businesses. What businesses really need to grow, however, is risk capital. Sometimes this can be
accomplished with debt, but often the best form of risk capital, and the hardest to come by, is the equity provided by
firms like Pamlico.

Q. How has Pamlico Capital’s portfolio performed?

Mr. Perper: Pamlico Capital has been extremely successful in building interesting businesses in partnership with
management. We recently looked at the 33 deals, where we have been the lead investors over the past decade. On
average, EBITDA was $12.3 million at the time of our investment and was/is $30.9 million currently or at exit – a 36%

Q. How does the firm’s portfolio company growth affect local businesses and community?

Mr. Perper: As we analyze where the portfolio generated that earnings growth about half came through acquisitions
and half from organic growth. Due to this growth, these companies have generated attractive jobs for their
communities. Pamlico believes these young, dynamic, and growing businesses are exactly what the economy needs
in terms of job growth and generators of capital expenditures while also producing excellent returns for our investors.

Q. What is the business case for investing exclusively in the business & technology services, communications and
healthcare sectors?

Mr. Perper: We have focused on these three sectors for over 15 years. Our team has always subscribed to the
theory that industry specialization will make one a better investor. Through industry focus we can find attractive,
growing niches where we can invest. Further, it makes us smarter during due diligence and gives us a network of
industry managers to pull into the process – either upfront, as independent board members or potentially as future
members of the management team.

Q. What is the level of competition in the firm’s core sectors today and how do you spot your investment

Mr. Perper: These areas are definitely competitive, but we have found that our long history and experience in those
industries allows us to compete effectively for those situations we like. We start by looking for large fragmented
industries that have target rich middle markets. Within those industries we try to find growth niches that are
expanding faster than the industry as a whole.

Q. How do you source your deals especially in Palmico's target industry sectors?

Mr. Perper: In 2010, we reviewed over 1,000 new opportunities. Those new potential investments came from cold
calls, investment bankers and brokers, attending conferences and our industry and portfolio company networks.
We do not approach deal sourcing any differently across our industry groups. Through are industry specializations
we want to see every situation in our size parameters and we work our network, which we have built over the past
20+ years to achieve that goal. Like everyone else we prefer to find that new proprietary situation but that is
increasingly unrealistic – everyone seems to hire an advisor before selling.

Q. What are the risks as a "first institutional capital" to family or founders owned companies?

Mr. Perper: The biggest risk is that we are bringing change to an organization and, in general, most people struggle
with change. In many situations change includes the introduction of a more professional management approach to
the business, supplementing the current management team with talented individuals who have industry experience
or generating strategic ideas that that can accelerate the growth of the business. While this transformation can
initially be disruptive, we have found that management teams come to embrace the challenge presented by new

Q. What are the toughest and the easiest parts of executing transactions with a family owned business?

Mr. Perper: The toughest part of executing a transaction with a family/founder owned business is just getting to
‘yes.’ Giving up control of their business is a truly significant step for these owners, which you can easily
understand. The easiest part is getting from ‘yes’ to the closing. Generally, once they have gotten over the hurdle
of selling and realize a transaction is going to happen, they just want it finalized.

Q. What is the effect of the Healthcare Bill on private equity enthusiasm to invest in this sector?

Mr. Perper: I think the reaction to the legislation in the private equity community has been mixed. Based on the
increase in M&A valuation multiples, the overwhelming majority of PE investors have become increasingly more
enthusiastic paying up for businesses across the entire healthcare spectrum. Others, like us, are taking a more
measured view, which is based on our historical knowledge and experience.

Q. How will the Healthcare Bill further influence the industry?

Mr. Perper: The healthcare reform bill is basically insurance reform versus true healthcare reform – it expands
coverage and leaves cost drivers largely unaddressed. The bill will increase the demand for products and services
ensuring future healthcare inflation and the country’s need to enact major healthcare “expense” reform legislation,
which could have a huge impact on industry fundamentals.

Q. As an investor in the healthcare sector, where are the best investment opportunities for Pamlico?

Mr. Perper: As an investor, we are trying to identify companies that are positioned to take advantage of the
change which has occurred without being caught in the potential downdrafts of the future. We are optimistic that
healthcare companies with great management teams, innovative business models and access to capital can find
success even in this changing, complex and difficult to navigate industry.

Q. As a sizeable mid-market private equity firm, what are your thoughts on the impact of Dodd-Frank regulation on
private equity industry?

Mr. Perper: A lot has been made of the risk and illiquidity that Private Equity has brought to bank balance sheets
which has in turn generated new restrictive regulations on the industry.
However, I am extremely confident that a careful examination of the impact by private equity investments to bank
shareholders would determine that private equity has been value enhancing. During Pamlico’s history on the
Wachovia platform, our IRR was approximately 25% on the over $3.0 billion we invested over 22 years. Further,
today there is an ever growing and increasingly sophisticated secondary market, which can provide private equity
investors liquidity in size on all or portions of their PE portfolios.

Q. In your opinion, what are the real risks if any posed by the PE industries to the financial markets?

Mr. Perper: I think it is unfortunate that private equity has been painted with the same brush as those products,
which generated huge mark to market and real losses for the banks. The most noticeable impact on us from
Dodd-Frank has been the increased regulatory issues we now face and the dramatic cutback in PE investing by
banks. It seems ironic to us that the same people who complain about the lack of credit being extended by banks
to small and mid-sized businesses would then want to make it much harder for banks to extend the toughest and
most critical part of the balance sheet, especially since that class of capital actually performed pretty well through
the downturn.

Q: What are the important elements to an "investor group" acquisition?

Mr. Perper: In general, we prefer to be the lead investor or share control with another private equity group. In
those situations where control is shared, it is critical that both groups know each other well and enter the
investment with the same vision for the business. Inevitably as we are working with management to build these
companies there are any one of a number of issues that can create speed bumps – and hopefully that is all they
ever are.

Q. What is the role of the investor groups on the Board level of the portfolio company?

Mr. Perper: The Board deals with acquisition opportunities, operational strategies, management personnel issues or
even how and when to exit, there must be confidence at the front end that the firms working together can steer
through even the most difficult of situations. We have been fortunate over the years to have partnered with a number
of firms such as Nautic Partners, M/C Venture Partners and Great Hill Partners without any difficult “group” dynamics
that I can recall.

Q. Congratulations on the sale of MACTEC to British-based AMEC plc. How was this cross-border deal originated?

Mr. Perper: Thank you for mentioning MACTEC, it was a great outcome for the management team, Nautic and
ourselves. This investment was a lesson in patience and the importance of positioning yourself to endure both a
difficult economic environment as well as some tough operational issues. AMEC represents a strategic buyer that
saw MACTEC as a great additional leg to their strategic stool.

Q. Per sale of MACTEC, is there a change in deal-making between private equity fund and strategic buyers recently?

Mr. Perper: More important than the cross-border aspect of the transaction, is our experience that strategic acquirers
have become more aggressive in the market during 2011. Over Pamlico’s history, our best success with corporate
acquirers has been when they approached us outside of a process. That was the case with AMEC’s approach to
MACTEC and represents the kind of tactic we are seeing more often at our portfolio companies.

Q. Pamlico Capital’s investment strategy is to be “true partner not just a capital provider” in working with its portfolio
companies’ management team. Could you please explain what you mean by the term “true partner?”

Mr. Perper: If all we bring to the table is capital, then we do not think we are giving ourselves or our portfolio
companies the best chance at success. By “true partner” we mean that we want to align our capital with management
teams that share our goals and to bring value to the table beyond just money.
If a team just wants the highest valuation and then to be left alone to keep doing exactly what they were doing before,
then we are probably not the right partner. This is one of the reasons that we like being the first institutional capital
into a business.

Q. How do you bolster the portfolio company's management to drive grow and create value?

Mr. Perper: We have found that most management teams want to form a real partnership with their investors and do
not view our capital as a commodity. They are often picking a partner to take control of their closely held business,
which is a lot different than just picking a price. In those situations, we feel like can often be a great fit because we
believe that our approach and core values really do differentiate us in the market.

Q. The firm’s “core values” includes intellect, which is identified as "challenging the conventional thinking." How has
Pamlico challenged conventional thinking?

Mr. Perper: Everyone says that they want to be contrarian and ‘think outside the box,’ but it is harder than it sounds.
We struggle with it every day and consciously try to force ourselves to keep an open mind and not just follow the herd.
We don’t always get it right, but we believe that we ask the right questions and try to look at situations from a number
of different angles. When we defined our core values, it is about striving to do and be. Therefore, it is not just about
how we approach transactions, but also our internal dynamics.

Q. Pamlico has also believes in asking “hard questions” as part of its core value system, could you share some of
those questions?

Mr. Perper: When we say “hard questions” we often mean the questions we ask each other. Such as, “Is this the
sort of transaction our LPs want us to invest in? Is a certain decision in line with commitments we have made to our
management team? Is that the sort of business where we think we can bring value, beyond just capital?” Every
transaction has its own hard questions and they are not always just about valuation and risk/return.

Q. Could you provide a deal example that had tested the firm’s core value system?

Mr. Perper: One example is NewWave Communications. We backed a team whose last cable company had failed in
the wake of the Adelphia bankruptcy. We backed them to acquire a very small, rural cable television platform, at a
time when small-market cable was out of favor due to the implosion of both Adelphia and Charter.
As you can imagine, all of those factors led to plenty of “hard questions,” but we had done a great deal of work
researching the industry and we believed there were still great opportunities in cable. We also believed that the
NewWave team would be great partners and had the exact right strategy for how to build and grow an advanced
broadband company both organically and through acquisition.

Q. How has the firm created value to NewWave?

Mr. Perper: Today, NewWave has over $50mm of EBITDA and is generally considered one of the best operators in
the industry. We are incredibly proud of stories like that, where we feel like we have gone against the common
viewpoint and found success.

Q. Pamlico had also made a majority investment in CLEARLINK Technologies this year. How does the firm
determine whether to make a minority or a control investment in a company?

Mr. Perper: We always prefer to be the control investor when we invest. We have found that we can develop a
closer partnership with management around a shared vision for the business. But that is not always possible.
Sometimes the situation just doesn’t allow it for any one of a number of reasons such as the selling shareholders do
not want to give up control or the investment is too large for us to complete on our own. We have successfully
partnered with management teams, founding shareholders and other PE groups a number of times across our
history. In situations we like we are not going to shy away because we are in a minority position.

Q. What are the differences between the two styles of investments and the deal structures?

Mr. Perper: The biggest single difference when structuring a minority investment is getting the documents right. You
just have to think through so many potential future issues in order to insure that you have protected your investment.
Generally speaking this can be accomplished through negative controls but it is difficult to contemplate every possible
scenario on the front end of the investment.

Q: Is Pamlico Fund II’s $1.1 billion USD fund fully deployed, and looking ahead where do you see the greatest
opportunities for investing across the three target sectors?

Mr. Perper: Pamlico Capital Fund II is about 60% invested. We think we can invest in about five-to-six new
opportunities. We are actively looking at new investments in all three of our industry areas. If I had to guess the
remaining Fund capacity will be deployed similar to historical patterns with equal weighting between Business and
Technology Services and Communications and Healthcare slightly smaller as a percentage of dollars invested.

Q. In closing, what book are you currently reading?

Mr. Perper: I’m currently reading Unbroken by Laura Hillenbrand, who authored Seabiscuit. It is the story of Louie
Zamperini who would today probably be described as the best mile runner in United States history had World War II
not interrupted his track career. The war commences while he is training for the 1940 Olympic Games. When the
games are cancelled Zamperini enlists in the Army Air Force where he is assigned to a B-24 bomber crew. On May
27, 1943, his plane crashes into the Pacific and what ensues is the chronicle of endless days endured on the open
ocean in a life raft followed by his hardship while serving as a Japanese prisoner of war is engrossing from cover to
There are many incredible lessons to be taken away from this captivating story but, for me, it is Zamperini’s resilient
optimism and unyielding fortitude no matter what the situation or circumstances. Zamperini strikes me as someone
who would have been extremely successful in private equity.