Buying Before the Theme w/ Triton’s Peder Prahl

[MUSIC] Many private equity firms today build their strategies around themes and/or subsectors. My guess tries to avoid them entirely. >> We like to invest in areas before they have become themes. >> That's Peter Prall, the founding CEO of Triton, one of Europe's most value-oriented and innovative investment firms. Over the past 30 years, Triton has been laser focused on investment opportunities across healthcare, industrials, and business services. Often discovering themes before the market has named them, let alone build strategies around them. But doing that consistently requires discipline, Peter says. >> One of the hardest things to do in private equity is to buy what everybody says, no. Or nobody else wants to buy it. But if you have the facts and done your homework, that is when you should buy it. >> Today on the show, I'll ask Peter how he has scaled that discipline across the organization. We'll also explore how Triton navigated the era of easy money. And why at the height of the cycle when the industry was speeding up, Triton chose to slow down. >> We saw that the prices were going way above average. And we invested our Triton 5 fund over six years when most people deployed two or three, doubling the sizes of the funds in that period. >> I'm Jim Humeck Arthur, chairman of Baines Global Private Equity Practice. And this is Dry Powder. >> Peter, welcome to Dry Powder and thanks very much for being on the show today. >> You, thanks for having me. >> Let's begin by talking a little bit about your personal journey. What do you do private equity in the first place and what exactly inspired you to launch your own firm? >> Sure. I really started working when I was nine years old. My mother who ran part of my parents' small little company asked me and my brother to pack shoes. They had a shoe business. So we went out every other night. One of us had to do it, pack shoes for a number of hours. I still remember standing there in the cold, my brother. But we made some money. And as part of that, I realized that some shoes kept coming back as rejects. Some of them had some dots on them. Some of them had a knitting which was wrong. But I really mean, somebody could wear these shoes. We didn't have to send them back to the United States where they came from, literally. And I started taking them to school or to friends or my hockey team and see if anybody wanted to buy them and they didn't behold whether they were parents or the kids. They started buying them. So I fairly quickly came to the realization that there are different ways of earning your living. One is work per hour. Another is actually becoming an entrepreneur and collecting something that's not valuable. And selling it to somebody who actually sees value in it. And in a way, you could say that that's kind of what I've been doing at Triton. Right. We look for businesses to buy that are not at their full potential. And then we, with our skills and ambition and entrepreneurialism actually makes that into a leading business. And I think being an entrepreneurial, that's probably also what kept us going for many years. When others in our industry, well, you're almost 60 years old and probably had some success. Why do you keep going? And I say, I love it more than ever because I like the leverage and the scale we get at Triton. But we're still entrepreneurs. We're still business builders and we're still investors. And putting all that together is the privilege to be able to do. It's fascinating. I've heard a lot of origin stories, Peter. But none of them have ever begun with shoes. And so that's a really interesting journey that you've been on during your life that gets you into the buyout business. Talk a little bit about that journey. It's really a 30-year arc that you've been on at Triton. How's the strategy changed over the years? And what kinds of industries are we looking at? What types of investment theses are you underwriting? What is the Triton way, if you will? Today, we're investing in industrials. We're investing in services. And we're investing in healthcare. We've been doing that for a long time. But within those broader sectors, we look at niches. And among the things that took longer for me to realize than it should have, much longer than it should have, was investing growing markets. Demand should be higher than supply. And ideally growing faster than supply. So when we look at our sectors, niches that we invest in, that's really important. Growing markets. Growing profit pools. We don't want to invest otherwise. The other thing we think a lot about is that everybody wants to buy a great business in a great market. We like great markets, but we actually look for businesses that are not great, that have some problems. That we then both can acquire at a more reasonable price, and then work to improve the company and then make it great. So what if you summarize our investment approach and strategy is buy well, then we say fix and expand to sell growth. Yeah. And that's counter to a lot of the prevailing narrative of value investing, especially as it pertains into the United States. And I particularly like the point that you made that you realize that having growing industries and growing profit pools is critical because I've worked with value investors for 30 years and most of them started out by saying, okay, let's assume the revenue line is zero. And then we'll go from there, we'll make all of our money on reengineering the cost. And that was the traditional value orientation playbook. And what happened as prices drifted up is that many value investors here realize some too late, but some smart ones like you on time that if I don't underwrite any growth at all, number one, I'm leaving money on the table. And number two, I'm not going to win the asset if I can't pay for some of that, because someone else is going to pay for revenue growth. I can't just do the zero revenue all the time. So I think that's a critical insight for value investors. You know what, we actually yes were value investors, but we want growing businesses. We want to do the revenue side and the cost side. That's been a big aha then and you said it perfectly. I mean, it did take a couple of decades for a lot of value investors to kind of realize, this is important. Like we need to figure out the top line. You're so right. For us, our learning experience in this, it took me 15 years. So in 2014, we had a few two investments who weren't working. So I kind of then said, let's possible that new investing and go back to look at what actually happened. What do we do? Why is something's not working as well as we wanted to work? And we came back with three conclusions from that. One is that we need to invest only growing markets and growing profit pools. The second thing we said was that we need to become more sector specialized driven. So that we know if the markets are growing and if the profit pools are growing and we not only think that. And thirdly, we had to fix and expand faster to work with the management team and make our full potential faster. And since then, it's actually worked out, but it all comes back to you can be a good value investor or a growth investor, but it's got to be in growing markets, growing profit pools. Otherwise, you end up in value traps. Right. And that's not where you want to be. Right. Totally. Great. And so when you figure out that a business should be great or should be a lot better than it is in these growing industries and growing subsectors that you're looking at, how do you figure out what that gap is and whether or not you can fix it and get to full potential. I think investing is about being future oriented. We are not investing in the current. We're not investing in the past. We are to invest in the future. So we at Triton, we are not thematic investors. You see a lot of them investors today. We like to invest in areas before they have become themes. And then we make a projection that they're going to become themes in the future. So we've invested, for example, in infrastructure in the fans long before it became very much invoked. And sometimes a bit too early, we thought electrification. This was going to hit five years before it did. So we had one company called Service. I think we owned it for 10 years. We made 10 times the money and 30% IRR. But for a while, we didn't make much money because the market didn't really come. So it's really important for us at least we call it where to invest and find those areas. Then we of course look at margins and there we get help from experts such as yourselves. We've invested a lot in installation companies. We were among the first in Europe to do this. Our average is three five X plus returns. And that's just by hold. It's buying businesses that might have CR 123% margins. But we know they can have six, a 10% margins if we put in the right leadership, if we put in the right processes, the right incentive structures and so on. So that's another way of saying we look at the margins going in versus what we think the operating margins can be when we're finished fixing the company. So it's a growing industry and a margin opportunity as well. So you've got revenue triggers and you've also got margin triggers. You mentioned often you need new management to make that happen. And how do you get alignment with management? How do you evaluate whether you've got the right team and how do you sort of kick the ambition level up to get to where you're going because zero one or two percent margins aren't going to be. to become sex unless everybody gets really motivated. Yeah, really concluding that being in a growing market is very important was kind of the lesson number one that took me 20 years to figure out. The other lesson that took way too long for me to figure out was that it's all about the people. The full potential exercise we do, which goes on for three months first and then for another nine months after we have acquired a business. During that period we have very intensive interaction with the CEO, with the CFO, with the second level and the third level and the fourth level also people within the company. During which we seek to agree on how do we get from X to three X and during that process it becomes very crystal clear whether the management that's there today first will have the desire. And secondly, if they have the skills and in 95% of the circumstances we will agree with the management team that's already there. You are the person to lead this going forward of no I don't really feel like doing that Peter. I'll help you transition. That's going to be too much change, too much work. I'm at the stage in my career where I'm not going to fly around but I'll make sure I'll sit around and help you when you find the new person to come in and do that work together with us. So again, we look for a consensus approach and we make sure we treat everyone the way we would like to be treated ourselves both in interactions, financially people get rewarded whether they stay or not as long as they're constructive and we disengage the people, the person from the facts and the matters that we have to work with. And we make that clear from the beginning and therefore I think we're very well received and well regarded by the management teams we work with and we recognize at the end that they are the stars. It's their company, it's their work and we support and coach them. Now as part of the process in making that happen I understand that Triton has an acceleration unit. Talk a little bit about what it looks like and what some of the roles or talents that you bring to the table are. So at the very early days of Triton since we're going to combine investing with operational strategic financial improvement we realized that and we had from day one at Triton so called operating partners. We had that specialists. We had financial tracking specialists. We didn't have tech specialists or AI specialists that we have now. And what's most embarrassing to me recognizes that the leadership and culture specialists that we have now were the last ones to come in. And they probably should have been the first ones to come in. But okay we recognize our mistake and then we move fast to correct them. So today it includes leadership and talent specialists that work with support our portfolio companies. We don't force them on them but we say we have this service we can provide to you. If you have something better on the external part that you'd like to work with go ahead but we see that in this field you're going to have to upgrade to meet the ambitious targets we've set. Can you take us Peter inside the deal as an example where your acceleration unit successfully partnered with management to create a great result? We have recently realized a company that's called Rank. Rank was a carve out from Volkswagen in Germany. It's an industrial company and we really transformed this company, cost structure growth acquisitions United States, Asia, our leadership and culture unit work with the new CEO we brought in to redefine how they worked focus more on the customer focus more on systems as opposed to costs or products. So leadership and culture unit had a big influence. We also worked a lot with financial tracking how much money does the company actually make on each product or each customer service just to name two examples in one company. It's really critically important I remember in doing carve outs 25 years ago there were lots of low hanging fruit, lots of things to do the prices were lower and it just kind of seemed easier quote unquote to make money. And now we have more complex transactions, lots of the value improvements are already priced in higher prices, higher cost of debt, harder to put more leverage on some of these things. In general, the Bains analysis shows that it's actually harder to make money in carve outs now than it was in the past. How does Triton continue to be a safe pair of hands and repeatedly make good returns in carve outs during these times? I think there are three parts to it. Number one, carve outs got massively overpriced. So our job then is to say if the price becomes too high, no, thank you, not for us. Now what we were good at as well over time was that many of the larger corporates in Europe for a period actually also tried some other firms. And they realized that those firms maybe weren't as complementary as we were where we live in the neighborhoods where we are and treated them as well as we would. So carve out is really a win, win. It's got to be a win for the party selling as well as for the party buying and then the employees working in there and so on. So we treat the corporates that we do carve out with a huge amount of respect. Our word is our bond. We don't go in and then cut the price. We don't go in and promise that we're going to treat the employees like this and then change it and they know that. And we also offer them often if you want to keep the stake, you can keep the stake. But we try to avoid frankly overpaying because then it's not a good exercise for anyone. And then we have as you mentioned, the skill sets to do carve outs because we've done so many, I think we probably know most in Europe over the last decade. So I guess it's a combination of getting the carve out at the right structure with the seller, the right price to kind of doing the right things with the business so it then becomes through independent successful. And so I mean, how do you confidently do that? Is that experience or is it a toolkit because pricing has gone up in Europe pretty substantially, you know, if we take a long view over the last sort of 20 years, we've kind of gone up to an average, you know, across the biote industry of 10 or 11 times EBITDA for a property. You're buying it considerably less than that. But that means you have to see value where others don't and you have to have the confidence that you're going to actually be able to realize that value. What does that look like? I think it comes from number one, we've done it before. But we also know what we should not try to do or not think we can do. So when it comes to acquiring carve outs where the product line is outdated or not modernized, dumb that, tried that. It took us eight to 10 years to fix these businesses because the products towards the customers had to be renewed, had to be tried, tested, sold, and before we could see the benefit from that, it took us 10 years. So we sort of warn everyone, don't do carve outs unless you know what you're doing. And you may well massively overpay. So we've created a bit of a box-taking system where certain things we just don't do. If the market is not growing, we don't do it. If the products are outdated, we don't do it. If the culture in the company is not good at the bottom up, we don't do it. All we do do are great companies that have great products, but not so good pricing, not so good sales, not so good systems. That we can fix in a reasonable period. And ultimately with your help. It's an interesting situation being a value-oriented investor. If I can call it that, you're looking for revenue growth, go to market improvements, you're looking for cost improvements, you're looking for ways to get better over time and roll up your sleeves and really make that happen, Peter. But of course, you can't pay for all of that upfront because you've got to execute and earn it. That's really the trick is seeing the value of, I like the way you said it, seeing the value of what's fixable and what you know you can fix. And what things are probably not fixable are going to take far too long for you to fix that you should actually stay away from. And I'm curious as to how you are navigating the interesting times we're having in the industry right now, given your strategy and given what Triton does. And obviously, I've talked about this a lot in various different places, but we've got a lot of exit pressure for LPs. We've got companies that have been held and buy out portfolios around the world and 40% of those companies have been held for more than five years. And we have a continuing issue with the cash back as a percent of nav being very, very low for the LP community across the industry. How are you navigating this situation, which is really, in my view, quite unprecedented and that it's kind of gone on for about four years now and LPs are getting frustrated overall with the buyout asset class? Yes, those are some big questions and maybe let's divide them into three. So one very important part of this is what we call the arrow free money. Let's call it from the decade from 2013 to 2023. You know, multiples tend to go between six and 12 in our industry for decades. And suddenly the multiples weren't way above that kind of range up to 15, 20, even 30 for some parts. And in certain areas of this industry in the mega space, there were seven times more money put out. At the end of that period, as opposed to the beginning, they were not seven times more companies to buy it. So of course, there's a few big rabbits in the snake that's going to have to come out and that's going to take a long time. If you ask us. So people often ask us, how do you think about returns and how do you think about investing? And then I will say, well, what period when and how? So that period we tried to be more disciplined because we saw that the prices were going way above average. So of course, that's going to be tricky. And I understand that the LPs are angry with the GPs. But I also have to say that the LPs gave the money to GPs to invest it. So we all have to take responsibility and accountability for our own actions. Our way of dealing with that was to slow down our investing. And we think we'll have really good returns in that period. We'll have some bad investments in that period too, but we'll have some really great investments and some really good ones. So our returns in that period will be more or less the same or perhaps even better than before. When we look at the market then today, and today I mean 23, 24, 25, 26 or so. In our view, we've gone from the arrow free money to new normal. And what we mean by that is that in the new normal, it's actually a very attractive time to be investing again in some parts. So we remain very disciplined still. And we think we should always be disciplined as investors. Yet we see very attractive opportunities now and coming. So what you said, if I'm understanding correctly, Peter is really extraordinary because you're describing that in an era, the era of easy money as you call it, which I would agree with a decade of essentially zero central bank interest rates. Where the capital cycle was accelerating, that means a lot of buyout funds weren't going and raising 20% more and four or five years. They were coming back in two years and raising 50% more because the capital acceleration and deployment and fundraising was demanding that you actually went in the other direction, which in my view is a much harder thing to do, which is increased discipline and slow down the pace of your investing and slow down the pace of growth. Because you're only finding a certain number of attractive opportunities at a certain price that you believe in and therefore, you know, everybody makes mistakes. Obviously, this is a bad thing average kind of business. You're trying to win more than you lose with good deals, but maintaining that discipline when everyone around you is deploying deploying deploying must have been fairly challenging inside of trying. Yes and no. I think it all comes down to when you set down and you wake up in the morning and you look yourself in the mirror and you say what kind of business person, what kind of investor, what kind of business builder am I. And as we set out in the beginning, we decided, almost, clouds, martin, who, myself, who own this firm and work together that we are investors. And we're not trying to build the biggest asset management firm. And as such, it becomes quite easy when the multiples suddenly are 50, 100% tired twice what they usually are. No, we're not going to make it money if we buy it that so yes, we had some people internally lower that it didn't have two, three decades of investing. And you said that, oh, what everybody else is paying 20 times or 25, I hear I have a company for 18 times and Peter, you should really buy it. I was like, no, because the average has been eight to 12. So I'm not going to pay 18 and I'm really sorry. Let's go look for something else. Interesting. We didn't find that that difficult and that's because we're investors because we see ourselves as stewardess of capital for our LPs. There are partners, they're not our clients. And perhaps we put a lot of our own money into it. So we like win, wins with the LPs. We don't like that. Oh, maybe we'll win on the fees and you'll lose on the money. That's just not us. I like the combination of entrepreneurialism and discipline that you talked about the fact that you slowed down when everybody else was speeding up and that you maintain price discipline and that there's a lot of rigor in what you do, but at the same time, the ability to see that value where others don't and know what you can't exploit and what you can't exploit. And being aggressive about doing that and building an ecosystem around Triton to actually realize that value. That's a really interesting duality in the marketplace, the entrepreneurial side and the discipline at the same time. Yeah, I've developed a little bit of thinking around that because most people that Triton, most people in our sector, they are ambitious. Otherwise, it wouldn't get there. They have a high level of energy. That's also needed and most have a high level of integrity and judgment and so on where I sometimes have lacked in discipline. And I realized that over the decades have become a very good investor or a business builder or addressing management teams. You have to come at it with ambition, energy, speed judgment, but you also have to come at it with the level of discipline. You can't just run and deploy and so take a step back and look at what am I really doing and apply discipline and discipline applies also to buying one of the hardest thing to do in private equity is to buy what everybody says no or nobody else wants to buy. But if you have the facts and then your homework, that is when you should buy it's actually as you discussed earlier in my book, it's easier to have the discipline to say no, because if you at the investment committee say no, you can stop it. But if you are just seeking to deploy and put money out, then maybe it is harder because then you have this pressure to invest and one of the things we decided to try to when we started was not to feel the pressure to invest. But we still have to have the discipline to buy when the buying is good and right now the buying feels pretty good. On the next episode of Dry Powder, I'll ask Peter how he's navigating a world of higher interest rates and far greater geopolitical uncertainty and why believes it's actually a more attractive environment for disciplined investors. We think the direction of travel is very clear where the world is going, but there's going to be a lot of volatility and changes in it and that's exactly the environment that provide great buying opportunities. I'm Hugh McArthur. Thank you for listening. [Music]