From its early days dominated by buyout shops looking to cut expenses at any cost to the operationally focused world of today, private equity has undergone major shifts throughout its roughly half-century history.
Now Craig Enenstein, founder of Sawtelle-based Corridor Capital, says the industry is entering a new technology-driven era, underpinned not necessarily by cutting-
edge innovations but by incremental streamlining.
“It’s technology enabling businesses that might not have been technology centric,” Enenstein said. “The changes can seem small, but the effect is huge.”
Enenstein believes private equity will have an important role to play in the macro shift toward a technology-enabled economy, providing traditional American businesses with the capital and expertise to upgrade and stay competitive.
Corridor Capital’s founder has been obsessed with private equity — or something close to it — for much of his life. As a teenager, Enenstein said he was fascinated by Japanese trading companies.
These organizations, which include famous corporations such as Mitsubishi Corp., Mitsui & Co. and Toyota Tsusho Corp., differ from western trading companies in their scale and breadth of focus. They are sometimes compared to private equity firms because both models feature a range of businesses held by a central group focused on opportunistic investment and growth.
“I wanted to Americanize that model,” Enenstein said.
That fascination led Enenstein to learn Japanese and spend several years working for a Japanese trading company. He eventually left for graduate school where he first learned about private equity.
“I looked at this as the American version of the Japanese trading company,” he said. “I wanted to bring the best of both worlds. … That became the inspiration for my business career.”
One of the early differences Enenstein noticed between the Japanese and American models was the latter’s strong transactional focus.
For much of private equity’s early history, American firms were primarily focused on buying and selling companies, according to Enenstein, with little attention paid to operational improvement opportunities within portfolio companies. Today, “operations,” meaning operational improvements, has become a ubiquitous private equity buzzword.
Enenstein said that when he established Corridor Capital in 2005, most companies were still focused largely on transactions. This allowed him to set Corridor apart by incorporating a Japanese-style focus on incremental operational improvements.
The 2008 financial crisis made similar ideas appealing to other private equity firms, who were forced to take more active roles in their portfolio companies or risk seeing them collapse.
“I would argue today that most PE firms are transactional (businesses) who have dragged themselves to operations,” Enenstein said.
Yet, while this operational paradigm has dominated the industry for much of the last decade, Enenstein said it is fast becoming inadequate. Today, according to the Corridor founder, firms are slowly being forced to add a focus on technology improvements at portfolio businesses to stay competitive.
Companies are expecting their business-to-business vendors, which Corridor specializes in, to have similar capabilities to consumer-facing tech platforms like Uber, Enenstein said.
The necessary changes are often small, such as providing companies real-time views of their warehouse inventories, but can be complex to implement. The payoff, according to Enenstein, is worth it.
“I think fundamentally (technology improvements) are the underappreciated evolving priority in private equity,” he said. “If you look out 10 years ago, you wouldn’t have seen a lot of private equity people with operational backgrounds. I think in the future you will see more CTOs and people with technology experience.”
Corridor recently raised a new private equity fund focused, in part, on these types of technology-driven improvements. The $118 million vehicle has already been used to purchase two portfolio companies, both of which have added significant new
technology-driven capabilities under Corridor’s ownership.
“I think there won’t be such a thing as a company that doesn’t use technology in the future,” Enenstein said.
