Case study by Blue Wolf Capital Partners
- Through ESG due diligence, a GP can identify efficiency and economic gains.
- By improving working conditions, a GP can reduce employee turnover and improve worker safety.
- A GP can work constructively together with a company’s unions and workers to improve the bottom line, while providing workers with increased compensation, benefits and other non-monetary opportunities.
Blue Wolf Capital is a private equity firm that takes control stakes in mid-market companies and works with those companies to resolve complexities and achieve sustainable growth. Blue Wolf invests in strong businesses whose value can be increased by constructive resolution of complex challenges, particularly those involving financial or operational distress, troubled labour relations, or governmental or regulatory issues.
Approach to responsible investment
Blue Wolf’s investment strategy incorporates ESG issues throughout the investment lifecycle. Blue Wolf staff have the government, labour relations, and operations management experience to understand how ESG issues impact multiple stakeholders in all businesses. Blue Wolf also has expertise in resolving issues borne from organisational and operational mismanagement and/or corporate governance failures.
Example: Acquiring Healthcare Laundry Systems (HLS)
HLS’s predecessor company was established by a consortium of not-for-profit healthcare systems in 1973 to provide dedicated laundry processing for its owners, who represented some of the largest healthcare institutions in the Chicago market. In 2002, HLS’s former owners commissioned a new facility which operated at a low capacity, creating operational and financial distress. HLS represented an attractive investment opportunity because it was a regional leader with ~30% market share (almost twice that of the next largest player), had strong customer relationships, long-term customer contracts and significant excess capacity. As part of due diligence and active work with HLS post-investment, Blue Wolf identified numerous opportunities for improvement across the company.
Economic sustainability and governance
HLS was previously governed by a Board of Directors composed of representatives from its constituent owners. Management was fully outsourced to a third-party. The Board was not active at the company and moreover viewed HLS as an affiliated service. Consequently, HLS consistently undercharged their institutions for services and did not pursue profitable growth. Through active governance, the acquisition of a complementary business located 90 miles away, and the alignment of interests between Blue Wolf and management, Blue Wolf altered the business focus from providing not-for-profit services to a profitoriented mentality, resulting in increased revenues of over 40% and profitability of over 220% over 27 months.
During due diligence, Blue Wolf recognised that there were certain constraints between HLS and two of their three union relationships which needed resolution in order for the business to thrive. The first involved a severely underfunded multiemployer pension plan which numerous employers had exited, leaving a massive liability that was being borne by the handful of remaining companies. The second concerned the labour agreement with the union representing the majority of hourly workers. The work rules in the labour agreement needed to be revised to allow for additional shifts and other changes to accommodate the anticipated growth in the company’s business.
During the acquisition process, Blue Wolf negotiated for HLS to cease being a participant in the underfunded pension plan by paying a significant withdrawal liability and creating a new defined contribution pension plan for the affected employees with identical levels of employer contributions. This shift was overwhelmingly ratified by union members.
In negotiations with the second and larger union representing hourly workers, a new collective bargaining agreement was negotiated prior to closing, and certain work rule changes were agreed upon to allow HLS to more efficiently manage the expected growth in laundry volume. The new work rules and procedures also included a renewed labour-management effort to improve worker safety that was embraced by the hourly workforce.
During ownership, Blue Wolf recognised that HLS’s labour policies and practices could be improved and therefore engaged a law firm to evaluate all employment documentation, resulting in a workforce turnover of about 60%. Blue Wolf worked collaboratively with HLS’s unions to ensure a fair document evaluation program and, despite not being obliged to do so, negotiated severance benefits with HLS’s unions for the affected employees. The law firm also provided all HLS managers and Human Resources professionals with training on best practices in documentation review and hiring processes and ensured that HLS was in compliance with all employment laws. HLS’s employment practices were subsequently audited by the federal government, which concluded that HLS was in compliance with the law. Blue Wolf also placed increased emphasis on safe production practices, and through initiatives to reward safe behaviour and spotlight poor production practices, the incident rate was reduced by 9%.
Blue Wolf evaluated HLS’s environmental impact and consequently authorised capital spending to reduce water and energy usage, e.g. investing in a water recycling system to reduce the amount of water used per pound of laundry by 20%, and increasing the amount of laundry processed per unit of energy by 9%.
The investment in HLS is an example of Blue Wolf’s approach to investing in highly complex situations with opportunities for improvement in various ESG factors. By resolving the ESG fundamentals of a market leader with a stable customer base, Blue Wolf was able to sell HLS within 27 months of investment for a robust profit. Blue Wolf’s commitment to concrete ESG actions throughout the lifecycle of an investment was also demonstrated by the donation of a vacant HLS property to The Nature Conservancy upon exiting HLS; this both helped Blue Wolf to sell HLS and allowed The Nature Conservancy to meet its goals for a very prominent fundraising campaign.