March 15, 2019

Company builders: How JMI Equity quietly helps grow software companies across the U.S.

By Holden Wilen  – Reporter, Baltimore Business Journal

Mar 15, 2019, 6:58am EDT

Higher Logic wanted to become a $100 million company. To get there, it needed cash and expertise its executives didn’t have.

That’s where JMI Equity came in. The private equity firm, headquartered in Baltimore and San Diego, invested $55 million in the Northern Virginia software developer and helped the company make four acquisitions in two years.

“The stuff they bring to table, JMI is in this position where they can really help take a founder-owned company to many levels beyond,” said Rob Wenger, executive chairman and founder of Higher Logic.

The Higher Logic funding is a small piece of the $4 billion JMI has invested since it was founded in 1992 by two former Alex. Brown bankers. JMI has even more money to invest after closing a $1.2 billion fund in December — its largest ever.

T. Rowe Price Group Inc., Legg Mason Inc. and Brown Advisory are typically among the first that come to mind when people talk about finance companies in Baltimore. But executives of fast-growing, middle-stage software companies looking to one day go public put JMI on top of their list.

Getting an investment from JMI is a big deal. JMI annually calls about 5,000 companies, meets with only 500, and makes just five to 10 investments a year, said Bob Nye, a general partner at the firm. JMI has made 145 investments since 1992.

“Where we operate is helping the best companies continue trying to grow at the rates they’re growing and become really sizable companies,” Nye said during an interview at JMI’s office inside the Legg Mason tower in Harbor East. “We don’t do turnarounds. We’re not value investors.”

Higher Logic was making less than $20 million in revenue before JMI came on board. Now the firm is doing $60 million and looking to grow to upward of $100 million.

Former Alex. Brown bankers Harry Gruner and Charles Noell partnered with John Moores, the founder and former CEO of BMC Software, to start JMI Equity in Baltimore. Gruner and Noell cut their teeth investing in companies like Microsoft and Oracle in the early 1980s. In addition to the billions JMI has invested, the firm has completed more than 90 exits and 19 initial public offerings.

Still, JMI is not a firm people walk around Baltimore talking about. JMI’s investors come to the firm as a way of diversifying their own portfolios, Nye said. They want JMI to focus on its software niche.

“In the general world, we have no brand and that’s fine,” Nye said. “In our little world, we do a pretty good job.”

Nye is one of JMI’s top investors. Originally from Downingtown, Pennsylvania, he moved to Washington, D.C., and worked at an economic consulting firm. He met Gruner through a friend at Goldman Sachs. Gruner offered Nye a job and he accepted.

When Nye joined JMI in 2005, the firm had 15 employees between Baltimore and San Diego. Today it has 60 people. All of the firm’s partners rose through the ranks, he said.

JMI’s investments range from $15 million to $125 million. The average company JMI invests in has $35 million in revenue and is growing 40 percent to 50 percent annually. Those companies are typically undergoing a lot of changes as they go from being an early-stage company to a bigger, more advanced enterprise. That means they are usually doing a lot hiring, creating governance policies and implementing new systems to help manage their growth.

“We tend to think about we get involved at stage X and our job is to help them become the business that they can be and often that’s multiple sizes of what they were,” Nye said. “We like to talk about [how] we don’t take venture risk, but what we take is a lot of execution risk. They’ve got a great product and are in a great market, now we’ve got to build the company together.”

Companies JMI invests in are either on the path to getting acquired or going public. JMI focuses on helping the businesses grow, Nye said, and does not try to predict which type of exit to pursue. JMI often gets a seat on a company’s board as part of its investment.

Nye points to JMI’s investment in Adaptive Insights, a Silicon Valley company that makes financial planning software. A day before Adaptive Insights was set to go public the company got bought by WorkDay Inc. for $1.6 billion.

For Wenger, working with JMI made his ability to grow Higher Logic easier. Wenger did not know how to go about doing an acquisition, so JMI helped with the research, pricing and modeling to make the deals happen.

“We both want growth and success for the company,” Wenger said. “A consultant just wants billable hours. Having skin in the game is part of it.”

Nye and Wenger speak highly of Gruner, who is JMI’s managing general partner. Nye calls him one of the “great equity investors” and credits Gruner with teaching him about investing and how to build relationships with entrepreneurs. Wenger said Gruner personally chats with him when he visits JMI’s office. Gruner has a knack for asking questions that make people think about things in a different way, Wenger said.

Gruner declined to do an interview, though he could be seen during the Business Journal’s visit walking around JMI’s office and talking on the phone through an earpiece. He said in a written statement that the firm is proud to call Baltimore home.

“With Baltimore as one of our two headquarters, we have been successful helping promising software companies grow into world-class businesses and meeting the investment objectives of the pension funds, endowments and other limited partners who have entrusted us with their beneficiaries’ financial security over many years,” Gruner said.

Nye said JMI operates as one firm despite its bi-coastal offices. JMI has a video conference meeting every Monday and never does individual coast meetings. The first time a new investment opportunity is introduced is during the Monday meeting.

Looking to the future, Nye said JMI will continue to focus on what it does best — helping software companies grow. He declined to say when JMI will raise money for its next fund but noted JMI has historically closed a fund every three or four years.

“We really like the part of the growth equity market we are in,” Nye said. “We will grow our fund on average about 20 percent each fund. That’s a good disciplined growth.”

JMI’s Investment Portfolio

JMI’s portfolio includes companies in 26 states, three Canadian provinces and multiple countries in Europe. Here’s a sampling of the companies:

Adaptive Insights (Palo Alto, California) — Was acquired by WorkDay in 2018

AlertMedia Inc. (Austin, Texas) — JMI invested $25 million in January.

Higher Logic (Arlington, Virginia) — JMI invested $55 million in 2016.

Level Access (Vienna, Virginia) — JMI invested $40 million in 2017.

Raptor Technologies LLC (Houston, Texas) — JMI invested an undisclosed amount in 2018.

DoubleVerify Inc. (New York, New York) — JMI led the company’s $33 million Series C funding round in 2011.

Yello (Chicago, Illinois) — JMI led a $31 million round of funding in 2017.

Lytics Inc. (Portland, Oregon) — JMI led a $35 million round of funding in February.

Classy Inc. (San Diego, California) — JMI led a $30 million Series C funding round in 2016.

PointClickCare Corp. (Ontario, Canada) — JMI and another firm invested $111 million in 2017.

Source: Pitchbook