Success stories in middle-market private equity often fly under the radar, but one firm has consistently turned overlooked industrial companies into powerhouse performers, generating billions in returns over the past three decades. The Sterling Group, a Houston-based private equity firm, has carved out a unique niche in the industry, focusing on transforming middle-market companies into industry leaders.
Founded in 1982, The Sterling Group has built a reputation for its hands-on approach to investing. Unlike many of its peers, Sterling doesn’t simply write checks and hope for the best. Instead, the firm rolls up its sleeves and dives deep into the operations of its portfolio companies, working alongside management teams to drive growth and create value.
Sterling’s journey began with a simple yet powerful idea: to invest in and improve industrial businesses that others might overlook. This focus on the unglamorous side of the economy has proven to be a winning strategy. While tech startups and flashy consumer brands grab headlines, Sterling has quietly built an empire in sectors like manufacturing, distribution, and industrial services.
The Sterling Approach: More Than Just Capital
At the heart of Sterling’s success lies its unique investment philosophy. The firm doesn’t just look for companies with potential; it seeks out businesses where its operational expertise can make a tangible difference. This approach sets Sterling apart in a crowded private equity landscape.
Sterling’s target industries aren’t the sexiest, but they’re the backbone of the economy. Think heavy equipment manufacturers, chemical companies, and food packaging suppliers. These are businesses that might not make the front page of the Wall Street Journal, but they’re essential to keeping the wheels of industry turning.
When selecting portfolio companies, Sterling looks for specific criteria. They seek out businesses with strong market positions, defensible niches, and opportunities for operational improvement. But perhaps most importantly, they look for companies where their team’s expertise can add real value.
Once Sterling invests, the real work begins. The firm’s value creation strategies go far beyond financial engineering. They focus on operational improvements, strategic repositioning, and accelerating growth. It’s not uncommon for Sterling partners to spend significant time on-site at portfolio companies, working hand-in-hand with management teams to implement changes.
This hands-on approach extends to Sterling’s network of operating partners and advisors. These industry veterans bring decades of experience to the table, providing invaluable insights and guidance to portfolio companies. It’s like having a dream team of business consultants on speed dial, ready to tackle any challenge that arises.
From Rust to Gold: Sterling’s Success Stories
Sterling’s track record speaks for itself. Over the years, the firm has transformed numerous middle-market companies into industry leaders, generating impressive returns for investors along the way. Let’s dive into a few case studies that illustrate Sterling’s approach in action.
One standout success story is Safe Fleet, a provider of safety solutions for fleet vehicles. When Sterling acquired the company in 2013, it was a solid business with potential for growth. Over the next five years, Sterling worked closely with Safe Fleet’s management to implement a series of strategic initiatives. These included expanding the product line, improving manufacturing efficiency, and executing a series of strategic acquisitions.
The results were nothing short of remarkable. Under Sterling’s ownership, Safe Fleet’s revenue more than tripled, and its EBITDA (earnings before interest, taxes, depreciation, and amortization) grew by over 400%. When Sterling exited the investment in 2018, it had transformed Safe Fleet into a market leader and generated a significant return for its investors.
Another example of Sterling’s Midas touch is Saxco International, a distributor of rigid packaging for the wine, beer, and spirits industries. Sterling acquired Saxco in 2010 when it was facing challenges due to the economic downturn. Over the next seven years, Sterling worked with Saxco’s management to streamline operations, expand its product offerings, and improve customer service.
The transformation was dramatic. Saxco’s revenue nearly doubled, and its EBITDA more than tripled. When Sterling sold the company in 2017, it had become the dominant player in its market, delivering impressive returns to investors.
These success stories aren’t outliers; they’re par for the course at Sterling. The firm’s ability to consistently turn around and grow middle-market companies has made it a standout performer in the private equity world.
The Brains Behind the Operation
Sterling’s success isn’t just about strategy; it’s about people. The firm’s team of investment professionals brings a unique blend of financial acumen and operational expertise to the table. Many of Sterling’s partners have backgrounds in industry, giving them a deep understanding of the challenges and opportunities facing portfolio companies.
Take Gary Rosenthal, one of Sterling’s founding partners. Before co-founding Sterling, Rosenthal worked in the oil and gas industry, giving him firsthand experience in the types of businesses Sterling invests in. This blend of financial and operational expertise is a hallmark of Sterling’s team.
Another key player is Brian Henry, who joined Sterling in 2004 and has been instrumental in many of the firm’s successful investments. Henry’s background in engineering and operations gives him a unique perspective on how to improve and grow industrial businesses.
But Sterling’s team extends beyond its investment professionals. The firm has built an extensive network of operating partners and advisors, each bringing deep industry expertise to the table. These seasoned executives often serve on the boards of portfolio companies, providing guidance and mentorship to management teams.
This combination of financial expertise and operational know-how gives Sterling a significant edge in the competitive world of private equity. It’s not just about identifying good investments; it’s about having the skills and resources to turn good companies into great ones.
Standing Out in a Crowded Field
In the world of private equity, differentiation is key. Sterling has managed to carve out a unique position for itself, setting it apart from other firms in the space. While many private equity firms focus on financial engineering or quick flips, Sterling’s approach is fundamentally different.
The firm’s unique value proposition lies in its ability to drive operational improvements and accelerate growth. This isn’t just about cutting costs or financial restructuring; it’s about fundamentally transforming businesses from the ground up. This approach not only generates better returns for investors but also creates stronger, more sustainable companies.
Sterling’s track record speaks for itself. The firm has consistently outperformed industry benchmarks, delivering top-quartile returns to its investors. But perhaps more importantly, it has built a reputation as a partner of choice for middle-market companies looking to take their businesses to the next level.
This reputation has allowed Sterling to win deals even when it isn’t the highest bidder. Company owners and management teams often choose Sterling because they believe in the firm’s ability to add value beyond just capital. It’s a testament to the strength of Sterling’s approach and the results it has delivered over the years.
Looking to the Future: Sterling’s Next Chapter
As Sterling looks to the future, the firm is well-positioned to capitalize on current market trends in middle-market private equity. The middle market continues to be a fertile ground for investment opportunities, with thousands of companies ripe for transformation and growth.
Sterling has been actively raising new funds to take advantage of these opportunities. In 2020, the firm closed its fifth fund at $2 billion, its largest to date. This increased firepower will allow Sterling to pursue larger deals and potentially expand into new sectors.
One area of potential growth for Sterling is the technology sector. While the firm has traditionally focused on industrial businesses, it’s increasingly looking at companies where technology intersects with industry. This could include areas like industrial automation, Internet of Things (IoT) applications in manufacturing, or software solutions for industrial businesses.
Another emerging trend that Sterling is well-positioned to capitalize on is the growing importance of sustainability in industrial sectors. As companies face increasing pressure to reduce their environmental impact, there’s a significant opportunity to invest in businesses that provide solutions in areas like energy efficiency, waste reduction, and sustainable materials.
Sterling’s expertise in operational improvement could be particularly valuable in helping companies navigate the transition to more sustainable practices. This could open up a whole new avenue of investment opportunities for the firm.
The Sterling Legacy: Building Better Businesses
As we reflect on Sterling’s journey, it’s clear that the firm has carved out a unique and valuable position in the private equity landscape. Its focus on middle-market industrial companies, combined with its hands-on approach to value creation, has allowed it to consistently deliver impressive returns to investors.
But Sterling’s impact goes beyond just financial returns. The firm has played a crucial role in strengthening and growing dozens of middle-market companies, many of which form the backbone of the American economy. By improving these businesses, Sterling has helped create jobs, drive innovation, and contribute to economic growth.
In a world where private equity often gets a bad rap, Sterling stands out as a positive force. Its approach isn’t about short-term gains or financial engineering; it’s about building better, stronger businesses that can thrive in the long term.
As Surge Private Equity and Stellex Private Equity make waves in their respective niches, Sterling continues to set the gold standard for operational improvement in middle-market private equity. While firms like Silversmith Private Equity focus on technology and healthcare, and Sterling Private Equity navigates the UK market, The Sterling Group remains committed to its core strategy of transforming industrial businesses.
The firm’s success serves as a reminder of the importance of middle-market investments in driving economic growth and innovation. As VSS Private Equity and Graycliff Private Equity navigate their own paths in the middle market, Sterling’s approach offers valuable lessons for the industry as a whole.
Looking ahead, Sterling’s future looks bright. With its proven track record, deep expertise, and substantial capital base, the firm is well-positioned to continue its success story. As it explores new sectors and tackles emerging challenges, Sterling is likely to remain a force to be reckoned with in the private equity world.
For investors, company owners, and anyone interested in the power of private equity to drive business transformation, The Sterling Group offers a compelling case study. It’s a testament to the potential of patient capital, operational expertise, and a long-term perspective to create value and build better businesses.
In an industry often characterized by short-term thinking and financial engineering, Sterling stands out as a beacon of sustainable value creation. As Gemspring Private Equity and others continue to drive growth and innovation in middle-market companies, Sterling’s legacy serves as an inspiration and a model for the transformative power of private equity done right.
References:
1. The Sterling Group. (n.d.). Our Approach. Retrieved from https://www.sterling-group.com/approach/
2. PitchBook. (2020). The Sterling Group closes Fund V at $2B hard cap. Retrieved from https://pitchbook.com/newsletter/the-sterling-group-closes-fund-v-at-2b-hard-cap
3. Saxco International. (2017). The Sterling Group Completes the Sale of Saxco International. PR Newswire. Retrieved from https://www.prnewswire.com/news-releases/the-sterling-group-completes-the-sale-of-saxco-international-300572060.html
4. Safe Fleet. (2018). The Sterling Group Completes the Sale of Safe Fleet. PR Newswire. Retrieved from https://www.prnewswire.com/news-releases/the-sterling-group-completes-the-sale-of-safe-fleet-300591986.html
5. Mergers & Acquisitions. (2019). M&A wrap: Sterling, Builders FirstSource, BMC, Clearlake, Wellspring, Wind Point. Retrieved from https://www.themiddlemarket.com/news-analysis/m-a-wrap-sterling-builders-firstsource-bmc-clearlake-wellspring-wind-point
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