Corporate Growth Conference 2024: How to manage risk in waste investments

What is risk? It’s getting an outcome you don’t want, said Leon Vayntraub, director at Raymond James, as part of a panel discussion at this year’s Corporate Growth Conference, held Nov. 20-21 in Chicago. Is risk a good or a bad thing? It depends, he said.

As an investment banker, Vayntraub often acts as an intermediary between business, operators, entrepreneurs, the market, private equity and strategics, and he said he’s always found it interesting to translate different views of risk and what that means. What type of risk is manageable, and what type is more difficult to manage?

Moderated by Jeff Kendall, managing director of Laurel Mountain Partners, a Pittsburgh-based private equity investment firm, the discussion, Underwriting the Risk in Environmental Services, brought together panelists with varying perspectives on risk, including representatives from the private equity world, the lending world, investment banking, corporate acquisition and insurance.

Taking risk is not inherently a bad thing, Kendall asserted, but it’s necessary for investors to identify the risk during due diligence and then put together a plan for how to deal with it.

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Here are the most effective ways to manage risk, according to the panelists:

Avoid red flags: Joe Ursuy, executive vice president, national businesses for Comerica Bank, one of the largest lenders to the industry, uses 12 red flags to evaluate potential deals. These red flags include everything from covenant violations to using more than 70 percent of the credit line to relying on a single asset.

He said he’ll often see smaller companies relying on one big transfer station or one big material recovery facility, which is a risk because something like a fire could take out much of the business.

If a company triggers four or more red flags, the deal is reevaluated, he said.

Additionally, Comerica takes a long look at the leadership team.

We can do a bad deal with really good people and be fine, but we can’t do the flip,” Ursuy said. “It all comes down to evaluating owners and leadership of various companies, and we’ll do some pretty crazy things for people we really like.”

Embrace diversification: Having multiple outlets helps offset risk, Vayntraub said, and in the waste management industry, diversification looks like companies that are not beholden to one customer type.

“Seeing a mix of roll-off, commercial, rear load, front load, industrial waste is another way to manage risk and ensure you have multiple paths to achieve the desired outcome,” he said.

Find good partners: In evaluating potential deals, equity investment firms are looking to make money, said Rob Michalik, founder and managing director at Kinderhook Industries, a New York-based private equity investment firm. Kinderhook’s approach, he said, is to back executives to build businesses.

Kinderhook looks for disposal-neutral markets where independent haulers can grow share without having to own a critical asset like a transfer station or a landfill. He said he’s often looking to underwrite a growth plan for an entrepreneur with a vision to build a company in the market.

Company culture is also important, Michalek said, and it starts with management.

“When you are growing through acquisition, that means you are changing a culture every time you make an acquisition,” Michalik said. “Sometimes that acquired company is excited to be part of the bigger opportunity and grow with it and those people meld into the new culture easily, and sometimes it’s not so easy. Having the right leadership that you can meld cultures on a consistent basis, repeatedly, so that as you scale you’re building truly one company in a geography is really important. Certain people have the demeanor to create culture and others don’t. Culture is not created with an iron fist.

Prioritize compliance: When Commercial Insurance Associates (CIA), a Nashville-based independent insurance company, starts working with clients and prospects, the due diligence process often begins with evaluating compliance data, said Jimmy Whitehair, principal for CIA.

He will pull compliance violations from the Occupational Safety and Health Administration as well as the Department of Transportation’s safety records.

“Before you even ask for a quote, an insurance company will go online and look at DOT safer scores—which is all of all of your inspections whenever your trucks get pulled over,” Whitehair said.

Continued violations related to brakes and load securements might flag compliance issues for companies that have an otherwise stellar maintenance program, he said.  

Reward pride of ownership: Houston-based WM undergoes an extensive due diligence process when evaluating potential deals, said Joe Cassin, who serves on the company’s acquisition team.

WM typically looks at about 100 companies each year and moves forward on about 25 of those acquisitions, he said. As part of that process, WM uses a lengthy checklist to evaluate factors including safety culture and permits.

Appearance is one of the first things Cassin looks at, because he feels it speaks to pride of ownership.

“I’ll go online and look at Google Earth, and I’ll see how are those trucks parked? Are they all mishmashed in there?” Cassin said. “But then when you go out to the site, I generally get a really good gut feel from just looking at the trucks or seeing a truck drive by me on the way to the meeting. If there’s Post-it Notes all over the dashboard, it’s kind of a disaster, that’s kind of the first signal this might not be the right acquisition for us.”

Invest in safety: Safety is a huge risk in waste management, Kendall said, and the number one way to reduce that risk is to improve safety culture. It’s a solvable problem, in other words, just like taking care of employees with generous pay, 401K benefits and more, he said.

To do this, companies need high margins—Kendall points to the public companies with margins around 30 percent as benchmarks—and free cash flow.

“Cash flow is key to being able to treat people well, pay them well, and replace and improve your equipment,” which helps take the risk out of running a business, Kendall said.