In the world of corporate finance, enterprise value - the total unlevered value of a company - is comprised of two components: tangible assets - such as accounts receivable, inventory, and fixed assets - and intangible assets, including workforce skills, customer relationships, and trade secrets.  

In the last decade, the later has come to be known as Intellectual Capital.  And it is increasingly becoming more valuable to the success of a company in the ever-evolving atmosphere in finance in the Knowledge Era.

Charles Smith, owner of Pegasus Intellectual Capital Solutions, LLC, believes that these intangible assets are what help investors create value in their companies. “It is crucial to understand the drivers behind the creation of Intellectual Capital if you want to understanding corporate finance in today’s world.  A study done at the Stern School showed that tangible assets return 7.0%, and intangible assets return 10.5%.  In 1975, only 17% of the value of S&P 500 was attributable to Intellectual Capital. Now it is 80%.  It’s clear that if you want to understand the creation of shareholder value, you have to understand what drives the creation of Intellectual Capital,” he said.  

Intellectual Capital – PegasusICS’s middle name - is the difference between the total unlevered value of a company and the value of its tangible assets.  Capital raising, mergers and acquisitions, and restructuring and reorganization all require an understanding of the drivers of the creation of shareholder value, and thus, Intellectual Capital, says Smith.  Methodologies such as benchmarking, strategic market planning and the evaluation of Intellectual Property are integral to gaining this understanding.  

Human Capital, one of the three components of Intellectual Capital, is the value that the employees of a business provide through the application of skills, know-how and expertise. It is an organization’s combined human capability for solving business problems. PegasusICS believes that Human Capital is the primary force in the creation of wealth in the Knowledge Era. “Innovation and creativity, in our view, are the result of hiring the right people and nurturing them in the right environment,” Smith noted. “In larger companies, human resource departments need to be revamped from a staff job to a line job, and in smaller companies, specialized HR skills need to either be brought in or sourced from outside.  It’s all about the people.”

PegasusICS keeps abreast of the developments in the private equity market and the companies they have been acquiring. “By the mid-1990s I made the switch from universal banking to straight investment banking.  I realized that someone had to source all of the M&A transactions that the PE (Private Equity) firms would need as they made the market more efficient in the upper middle market.  It was clear to me that they would eventually shift down to the lower middle market where there are a huge number of companies, the values are better, most are unknown, and a greater operational skill set is required in owning them” Smith told “The Suit”.

Smith spoke about the changes in the M&A market. “As the market has become more efficient in the large corporate and upper-middle market, we have transitioned to the middle-market and lower middle-market, where there are a vastly higher number of companies,” he said.  PegasusICS has intensified its search for target companies in the lower middle market where values are better and there is greater opportunity to increase value by focusing on the factors that drive the creation of Intellectual Capital:  Human Capital, Structural Capital and Relational Capital.  “The lower middle market is where we’re really putting our resources right now,” said Smith of PegasusICS’s strategy to capitalize on this trend.

PegasusICS’s has developed a unique methodology that is borrowed from medicine: conduct diagnostic tests, practice triage, prescribe courses of treatment, and monitor the developments for further analysis and improvement.   PegasusICS is fine-tuning their “search engine” to help identify sell-side clients and build shareholder value for both sellers and buyers. “We’ve made great progress in learning how to use innovative, collaborative techniques – that’s the Human Capital element – to help actually create quality sell-side candidates.  We work to develop companies years in advance. These are opportunities that PE firms may never have found on their own.” Smith explained.

Focusing on creativity and innovation, Smith integrates new information, technology, and techniques into PegasusICS’s existing business model and is constantly refining it. “One of our core beliefs is the Japanese principle of “Kaizen”- the belief in constant improvement. We believe that in the Knowledge Era, if we are not constantly innovating and changing everyday then we are standing still and soon become obsolete,” Smith told “The Suit”. “This (corporate finance) is not a static environment.”

As part of their M&A and shareholder value maximization solutions, PegasusICS offers their customers strategic marketing planning and analysis, including estimating demand by market segment, conducting competitor analysis, and improving marketing communications. Tools such as utilizing pay-per-click advertising or popular social media networks, for marketing, can give companies a competitive edge while also giving them a boost in Relational Capital as they reach out and build productive connections with customers or potential customers.  

PegasusICS has always provided capital raising – including the arrangement of senior debt, mezzanine and equity - and restructuring and reorganization, as well as M&A. This enabled them to thrive during the economic downturn. “The credit box tightened as a result of the financial crisis, the requirement for increased capital under Basel III, and the new regulations proposed by the Dodd-Frank Bill (legislation to help regulate the market after the financial crisis).  These have all helped make our business prosper,” said Smith. With PegasusICS’s creative abilities and constant brainstorming, their clients turned to Smith and his team to help find strong points and retool weak ones in order to adapt to the changing economic environment.

Since the company’s genesis, PegasusICS has serviced the agriculture, food, energy, transportation, auto, defense and manufacturing and distribution industries. “I can’t help but like it when a client brings us something that is right in the middle of our strike zone, but I love operating outside of it where few firms venture. ” said Smith.

Much like the company’s inspiration, Pegasus, the well-known winged horse in Greek mythology - known for his association with knowledge and being able to bring forth  a flowing spring of inspiration wherever he went – PegasusICS has been offering clients in the Chicago area and beyond the guidance and experience needed to thrive in the business world.

For more information, please visit: www.pegasusics.com