[Music] Hello and welcome everyone, I'm Peter Lerman and this is Masters in Small Business M&A. This show is an ongoing exploration into the vast and undercovered world of Small Business M&A, where we interview both the proven and the emerging owners, operators, investors and advisors, whose strategies and methods for transaction success have been put to the test. The show aims to surface the nuanced intricacies, the key ingredients, and the important factors that can improve your decision-making in your own journey in the world of Small Business M&A. This podcast is produced by Axiel, an online platform that makes it easier for business owners and their M&A advisors to find, research and privately connect with a diverse mix of professional buyers of Small Businesses. In addition to learning more about Axiel, you can find this podcast show notes, edited transcripts and many other related resources, all for free at Axiel.com. [Music] Hey folks, welcome back. This is Peter Lerman from Masters in Small Business M&A. Really excited to have two founding partners of LP First Capital joined today, Thomas Inns, Logan Lowry. It's great to have you guys on the podcast, we're a couple weeks out from the flurry of Maguire Woods and Dallas Conference, so it's a great time to connect with you all. Appreciate you guys making time and getting on the recording studio with me here. Thanks Peter, thanks for having us. Thank you. Looking forward to it. Are you guys both in Austin right now? We're all in Austin pretty much one guy's in Denver, and we have some of our BDT's across the country, but everyone is here in Austin. I want to just get started. Just asking you how you decided to name the firm, LP First. It's a seven-year-old name. I'd love to get into the origin story a little bit by just having you explain how you chose the name. What does the name of the firm mean? What does it come to mean? Now that you guys are seven years in, maybe it's taken on more meaning now than it did when you first had it. I'd love to just start the origin story question and conversation there, and then we'll get into the business and the businesses and the team and all the things that you guys have done in the last seven years. In 2018, when we started up, at the time I was growing a holding company and had that four different businesses in it. I was really more monotonyner getting in, becoming a sponsor. I first went out on the Infinite Sponsor model underneath a holding company name and tried to raise underneath that. I just didn't see it get resonated with the investor community at that time. I thought it needed to create a separate brand as an independent sponsor because I really had this holding company. I was just thinking about the brand. I guess a couple of themes with LP First was, if you always provide value to people and serve others, you usually get value back in return. There's a theme of that with this here that we're here to provide value to investors and not just think about getting rich off of fees and that was sort of my perception at the time. At the time, also, I thought I'm going to be happy with a structure that's very similar to like you see in any waterfall structure, a most independent sponsor deals at the time. My perception at the time, was everything was two and 20 in the Infinite Sponsor world. Part of the name LP first came from that angle with Trionish set of structures to where there's very little carried fees till you achieve two X or something like that. Another theme of the name was investing in founder-only businesses, providing investors access to that in the market. The fourth theme was whenever you're a searcher and Infinite sponsor and you're starting out, you don't really have much of a track record. You have to sometimes fake it till you make it and there's an element of indicating that you have money when you're still forming those connections. I think we've been able to do that over time now that we've closed on the 70 deals. You guys feel like the incentive structure has been fundamentally different from day one in terms of the way you thought about structuring the transactions and structuring incentives. Sounds like that's an important one of the answers. With our investors and management teams, we're going to be largely very similar to a lot of other Infinite Sponsors. And how things are structured in terms of a waterfall you'll typically see. So I would say that we're closer to market there versus something on one end of the spectrum or other. What's interesting, you mentioned Peter that the name might have taken on different meetings as the firm has progressed. I think that's very much true. One thing that we probably didn't appreciate in the early days of LP first capital was how many different types of LPs we would eventually come to have here. So as an independent sponsor, some of our investors or other committed private equity funds and a certain investment for us and other instances we're working with institutional LPs, we're working with family offices, we're working with individuals, we're certainly working with founders and sellers who are reinvesting back alongside of the mix of LPs that are in our investments is quite large and it varies by company. We try to think about that mix of LPs first to use the cliche naming in every instance in sense of how we capitalize our deals on the front end, making sure that we have the right type of LPs in a specific investment for our objectives. That's not always the case in the independent sponsor community oftentimes. The sponsors are pressed for capital, they're on tight timelines and it's the first capital that you get a term sheet from wins the deal for you. But we've found over time that there's misalignment there. So just thinking through how do we capitalize our deals and then once we're in the investments making sure that we understand what the objectives of our LPs actually are for the investment. Of course, everyone wants to generate a high return and return as much capital but there's new on to there's timelines to consider there's capital deployment requirements. Thinking through all of that and thinking through your LPs and what their objectives are and putting them first to use the naming convention. I think it's just a general mindset that hopefully leads to better outcomes for everyone. Us as the sponsor, them as the LPs and then obviously the management team and everyone involved. So we probably didn't appreciate how important that would be when the name was first made but it's something that took time and experience and some bumps in the road of misaligning capital with objectives to sort of come around to that being a core part of what we're trying to do here at the firm. Would you be up for maybe talking a little bit about how different deals call for different potential LP mixes and do you guys have any general frameworks or just templates if we're doing a transaction like this we're buying a business like this we're probably going to solve for an LP composition like this whereas a different kind of transaction it's either longer duration or it's got a different capital structure day one or unlever versus lever. I'd love to just hear how you guys have thought about the LP mix on a deal by deal basis and the extent to which you sort of have come up with rules of thumb for how you think about different LP compositions for different kinds of businesses that you guys are excited to buy. I think the most simple answer Peter starts with what is the amount of capital that you're trying to deploy. For example, some of our investments were trying to deploy 50 to $100 million dollars of equity capital which is for us as a good sweet spot for our size firm. You obviously can't deploy that much capital if you're raising it in 250 to $1 million chunks. You need to go get larger institutional LP so you can write bigger checks. So I think it starts there and then the second thing is I think it's really important to align with investors who have experience in the type of investment thesis that you're going after. So clear example for us is we do a lot of buy and build investment strategies where the portfolio companies are highly acquitted. We want to make sure that investment partners that we're partnering up with have done that before not only because of the speed of deployment of the capital and how it can sometimes be sporadic. We might have a lot of acquisitions in one year and slower in the next. We want them to be comfortable with some of the integration and the timelines it takes to roll in a number of different acquisitions. In full transparency sometimes when you're doing that you'll see a little bit of a trough of EBITDA. In some of that's by design you're building teams you're adding new infrastructure. It's all intended to be for growth in the long term. If you're partnered up with an investor and LP who hasn't done that before intuitively people understand that that might be a part of the strategy but when you get in that trough if you've never been there before you don't want to be going through that your first time together as an independent sponsor where there's a significant amount of the capital coming from a different group. So I think that's important. If you model it out a lot of times it makes sense to bring on debt early on and start off nicely levered but we've found over time when you're doing a viable it's nice to start off and we close a number of deals all equity and as time goes on we lever up as we go and that helps out a lot and the independent sponsor model. In our opinion because if there is a trough you have the ability to have debt and then acquire your way through it. Let's just say if you bought a business for 3 million EBITDA and you hired a million corporate overhead a new management team and you grew the underlying business 500K over 10% in the first year everyone's going to look at it's went down everyone's like what happened it's hard to explain that narrative I mean you can segment it out and it's hard to go out and raise deal by deals I think it's a lot harder to raise 3 million dollars than it is to raise 30 and if you start off
over-equitized, all that additional free cash flow can be redeployed and to and allocated to the parts of the business that have the greatest growth initiatives and we start off with a good organic growth story and then you lever up as you go. I don't know if we would do that if we had a fund always but we actually probably would. We like that model a lot. We like to bring it on debt closer to 10 million of you would have than 305. A lot of our deals we want to get to that 50-100 million deployed but we might start off with a smaller check because we do a lot of off-market sourcing. We don't participate in an auction processes. We are very thesis oriented so we pick an idea and work on it and that often sometimes leads to off-market deals and the 3 million EBITDA range or two and not a bank process prices and we found that like close a few of those all equity looks a lot better if we have to bring on additional equity later on. We just close on a restoration platform last month and close all equity on that one. We hopefully will close on the second hat on this week. We'll close all equity on that. Then we'll bring on a lender and acquire as we go. That's our typical playbook that we like to deploy and so having an investor like Logan saying that wants to do it is really important because we've done some deals in the past where we get it closed but then a lot of the investors aren't lined up ready to go for the next add-on and scenarios like we describe where we built up the team to go do it and then you spend an extra amount of energy and time trying to get the equity lined up for the next add-on if you've levered up initially on and no one's really geared to doing buying builds. Are you guys calling additional equity for this restoration add-on or do you sufficiently equitize from the original transaction? Is that part of how you plan it out? We have basically two sleeves of capital so one part we're calling the other sleeve is more of our anchor investor. We haven't announced it. I hope by the time this podcast goes out we have the press release we'll probably release it next week. Denker is a line collaborate and they've been a great partner. They're just committed to the strategy I would say and so everyone's expected to close the equity on the next deal. That's one where we will close the first two and then we're going to bring on a lender. We like to say start off grass fed and then corn finished we're going to fatten it up as we go. We'll have eventually bring on additional equity when it makes sense but if you have a line of sight to 10 million of you but though we found that's a lot easier to get a good DDTL, a good non-banked lender end that's really excited about doing a buying build. If you start off in the sub 5 million range it's sometimes hard to get that lender on board at that time and you spend a lot of time trying to refinance a mal later to do a buying build. I know you guys are co-GPs and in some cases you have significant LPs full fledged private equity firms who are your partners in the LP stack. I think it would be really interesting to hear you guys talk a little bit about how you're partnering with private equity GPs as your LP just because I think that's the area where there's the most amount of co-option between independent sponsors and private equity funds. We just released this big survey, this axial independent sponsor research survey and there's no question that the family office category is I think the primary category that independent sponsors tend to raise capital out of but there's a significant amount of capital being raised from private equity funds by the independent sponsor community and I would love to hear you guys lay out some of your experiences there. How do you guys do that? How do you get comfortable doing that? How do you guys think about the competitive elements of it and how do you guys deal with some of the maybe economic issues related to it? I think it's just an interesting area. I haven't heard anybody talk about it on a podcast yet so I love to give it some visibility if you guys are up for that. We have partnered with at least four to five different private equity firms off the top of my head. I hope I'm not missing one and they've all been really great relationships. I think in the independent sponsor community there is a tendency by independent sponsors to want to shy away from committed private equity funds for a couple of different reasons. One, there's this narrative that the economic structure with GPs is not as good. I would argue that that's not the case. I would say it's at least equal in most cases assuming the underlying investment opportunities a good one as well. It's just as good as we get if not better in some instances than what we get from a family office or other institutional alping. That's a narrative that we don't really subscribe to. The other tendency why I think some independent sponsors and this is just my opinion have shyed away from it is I think there's a tendency to want to do everything yourself as an independent sponsor and there's this perceived notion of you're giving a board control. You're giving up governance control when you partner with a GP and ultimately we all know if the GP is putting up the bulk of the capital. They have the right to make the final say on any decision that comes to a head that maybe there's not group alignment on. There's a tendency to want to avoid that. I think we've thought about it a little bit differently and leaned into that in certain instances and how we've done that as we've partnered with four or five different firms that we spend a lot of time getting to know before we partnered up with them on probably at least half if not more than half of the occasions where we partnered with a GP. We might have worked with them for six or 12 months prior to our first investment developing a thesis with them meeting with them weekly, sharing with them updates around what we're doing, building a buy box, letting them run their own traps on the thesis and talking within their network. They're sourcing opportunities alongside us. So there starts to be a good relationship here where we know that the GP ultimately has control but at the same time there's a mutual respect around what we bring to the table the value that the independent sponsors bringing and we have a seat at the table. I would say in all of our GP relationships we certainly have seats on the board. I think our voice is as loud and as meaningful and carries as much weight as any other person on the board and they've just been great relationships for us. So we'll continue to use those relationships in certain instances. Typically those tend to be instances where we're trying to deploy more capital and we can get it all from one source. We'll kind of lean in and develop a thesis, work with the GP and then ultimately hopefully tie them up with one. I would look at as a partnership and these are deals that often when we're doing this we're working on that thesis for a while we're not coming to them with an individual deal or working together, coming up with it together and you don't really even go out bound in those instances. We have in some cases where we've negotiated like a 20% sleeve or 10% sleeve that we can raise with committed relationships that we have just so we can bring some committed capital to the table outside of that relationship and one thing that's maybe a little different, there's some deals like say this restoration deal we didn't take it to any GPs. We've had a number of GPs because we've had to work with some new ones of reached out and we want to get into the insurance broker's space or pest these hot sectors. We've thought about some of those but sometimes it's a little bit like there's an element of absolute value versus relative value and we're more in absolute value camp often but we can see the path of 5X, 3X playing the relative value game. They've been outbid their minimums 10 million VBIT and they're like we're not really geared to go out and buy a lot of two, three million VBIT companies can we team up and do it with y'all. That's the camp that we will normally work with the GP on going forward or blockbuster type ones we're taking those to family offices or pools of capital like Align Collaborate which is the best of both worlds. With them they give you all the board seats you have all the control you want but there's also additional resources because they're associated with Align Capital that if you need some additional help on sourcing a CFO they might have some relationships that you don't have which is helpful. So you have like three main economics. There are ones that we always know about closing fees, management fees, carry but you can also get paid in experience and knowledge. That's something a lot of people don't think about and you can learn a lot working with other groups and we found that collaborative approach being very helpful. How are you guys deciding who to do this with? Logan you were mentioning there's four or five firms now that you've worked with that are full fledged private equity firms. How do you end up deciding to work with them? It sounds like you get to know one another for a while and I'm just curious how that process unfolds, how you decide to move ahead or their elements of trust that are part of the equation. How does it get out of the blocks? How do you decide to spend your time and your people's time working with them? I'd love to just sort of hear how you guys leg into the partnerships with a given private equity firm on a given thesis. The first thing that we're trying to figure out is have they worked with an independent sponsor before? There are certain GPs in my opinion that have very established track records of working collaboratively with an independent sponsor. There's another wave of GPs that have entered into the market in the last couple of years as the independent sponsor community is growing. You mentioned McGuire Woods that conferences exploding. It's brought a lot of new GPs to the space they want to work with independent sponsors but I'm not quite sure they fully appreciate the value that an independent sponsor can bring. They more look at independent sponsors as just a deal sourcing funnel for them that really we're going to bring a deal and then you guys are going to run with it. So the first thing I'm going to
always trying to figure out is what types of decisions do you guys want to make versus what type of decisions do you want us to be making day to day, hour to hour in an investment? What's the cadence of how we're going to operate and asking very detailed questions around okay if we source an opportunity what is your process for submitting an L.O.I. Do we have to go to multiple iterations of your committee or do you, whoever the lead partner that we're working with, do you have the discretion to make certain decisions what decisions do you want us to make? So it's getting a little bit more in the weeds. I mean certainly economics are important but I would say that's one of the least important factors of what we're trying to do. What are their processes and procedures? How they work with independent sponsors in the past? What have been the outcomes of those independent sponsored partnerships? Not necessarily what was the economic return but more so was the independent sponsor involved in the entire process. How much of the work did the independent sponsor do versus how much did you guys do and why was that? Whatever the answer is and every independent sponsor brings something different to the table so it's not always an Apple Staples comparison but you start to peel back the onion you can figure out really quickly whether you're working with a partner that wants to lean in and use the independent sponsors a way to accelerate returns and maximize returns versus just deploy more capital because they're a deal sourcing funnel. Do you guys feel like there's something specific about your posture and your position that makes you particularly advantaged at LP first to do certain things? Is there a natural complementarity to the partnership that you seek or is it really case-by-case? Does there tend to be a typical role that you guys are seeking to play and that you're looking for your private equity fund GP partners to play or does it really vary from one transaction to the next and your experience so far? We have tried to develop and build our firm to where we look more like a lower middle-market traditional private equity fund where we have skill set to do anything and everything within an investment. We're proving out that that's possible and that we have half of our if not more than half now of our investments we're not partnered with the GP and so one thing that we really look for is a GP who certainly is collaborative we want to use all other resources we want to work hand in hand with them we're not trying to claim that we're the smartest people in the rooms by any means to Thomas's point around them bringing education experience to the partnership but one thing that I think we look for times occurs to get your thoughts as well is just how much room are we going to be able to run? Are we going to have a GP sitting over our shoulder questioning every decision or are we going to be able to build a level of trust where you let LP first go out and do what we do? We feel like we're very good at sourcing we're very good at working with management teams and bringing those teams to the table and then also working with our management teams on integration on the backside investment. One thing I'm always looking for is are you going to let us do what we think is our value proposition and our skill set because if not then it's not going to be a good partnership we're going to be wanting to do more and you guys are going to want to be holding itself. There's no right or wrong answer to any approach that a GP takes but making sure that you have that alignment is key and I think that we probably compared to most independent sponsors have a broader skill set just because we bring a bigger team to the table not that our skill sets better than any other independent sponsors just we're staffing three four or five percent deal teams to all of our investments. We can do a lot. I've talked with other independent sponsors who are great operators they have great operational experience and backgrounds but they don't really have sourcing and M&A capabilities and so I've been curious and like hey really partner with the firm that wants to lean in and help you on that aspect of the investment and so it's certainly case by case. We're talking a lot about our GP relationships here and I guess we have four deals right now. Our mindset is we work really well with others I guess we're very collaborative. We've developed a lot of trust with our GPs and we've been very blessed with firms that we've worked with and we move with great speed and urgency and have a lot systems around sourcing and also have a detailed operating playbook that we like to deploy and how to integrate the businesses that we require and have a lot of unique skill sets amongst our team with operating backgrounds that seems to be very valued with our partners and there hasn't ever been a big disagreement with any of our partners and I can see how with some groups of could go wrong. We've been very selective and we had other options to close these deals outside of the GPs but we thought hey they wanted to deploy 100 million we like that they like the thesis we like it and a positive bindle models it's a good fit. The PE model lends itself to get more bureaucratic as you get big when you have a five billion dollar fund or something like that. We can move in act on opportunities faster outside of that system but be connected to it. It's been complimentary I think to the model and we're finding opportunities diligence and creating the deal memo getting final sign off on it from them in those cases but moving outside their current systems which I think has led to a lot of velocity having us paired up with some groups that we've worked with. Can you talk a little bit about the speed and the urgency that you just mentioned that sounds interesting and deliberate and sounds like something that has been a priority for you Thomas and for you Logan. What are you talking about when you talk about speed and urgency? Why have you prioritized it and how have you created it? It's actually one of our core values speed we always try to answer emails every day and respond. If you look at say a hundred gills occasionally you'll find one that really gets your hair standing up on your arms and you get excited about and in those instances I think we're pretty quick to go on a call with the advisor or the owner and get on a plane and go out meet with them. That's proven helpful to winning a lot of deals. We're not always winning deals because of speed but if you're acting in should and moving quick people value that. Why does it everybody do it then? It's really hard everyone's busy it's hard to put the kids down the bed and answer emails to 12.39 and wake up the next day and do it. Also prioritize activity. There's a formula it's A times E equals R activity times effectiveness equals results. We try to produce lot activities and also think about the method of how effective those activities are that ultimately provides results. During this call here we should have 30 outbound calls that happen with some BD guys that have a list that was prepared the day before. If you're deliberate in the restoration space we have a list of our billboard one under that we would be honored to partner with. That takes time and effort to generate that list. There's other targets outside of that but if you know who the owners are cell phones emails reach out and deliberate fashions you source good deals like that. En sourcing creates a lot of value in our opinion. We tend to be very thematic only working on one to two investment thesis at a time and in those we'll have very definitive by boxes of what we like and what we don't like and so when we see an opportunity that pops up pretty quickly we can figure out whether or not it's a good fit for what we're trying to do. We're not chasing ten or fifteen different things at one time we're chasing one or two. That helps you to move with speed. The other thing I would say that we try to prioritize is making sure that we're understanding our audience on the other side of the transaction meaning the seller and a seller's broker if they have one. Every independent sponsor works on different size transactions and as you move up market you get more sophistication generally speaking but we're playing in the lower middle market. Mostly companies we're buying or one to three million of EBITDA. You have to make sure you speak the language of the seller. You have to make sure you curate your information requests towards a way that they can receive it and respond to it well. You can't send over 50 item diligence requests list on your first meeting. 90% of their decision is going to be around who the person is that they're dealing with. Of course terms are important but just being able to develop a relationship with them quickly. One thing I always tell our guys is can we get to the right decision with only 70 to 80% of the information. I think that's one thing we try to do well is get most of what we need and as it gets to a go or no go decision the other 20% of the information is important. We'll find it out at some point in our diligence process. Do we really need it now or can we wait a month from now and that's very hard to do because obviously you're not trying to be reckless or misdiligent items that's no one's intent but that's how you can move with speed and I think a lot of our competitors get too bogged down and trying to know everything about a company and you can just wear a cellar out and they will have deal fatigue with you right out of the gates and I think that's where we try to disconnect with sellers faster and get to the go or no go decision really really quick. It's simple as it sounds it's actually a loss art in our opinion in this space. That restoration platform that we close our last month we started to work on that like last March 18 months ago or so. It took a while to develop it our ideas in around the space changed over time and we talked a lot of bankers, former sellers. We just worked on a good bit and we were gonna do it. It doesn't matter if we were looking at one company in that past we're gonna eventually get that done.
We've done that before and walked away from a space, but as long as we like the sector, we're going to keep after it. We're in Austin right now. If we drove across Austin and the other end, you probably wouldn't notice a purple truck driving or a polar car. But if you were looking for them, you'd probably see them. So you tend to find opportunities there and that compounds over time. You talk to people. They always open another door for you. You talk to a consultant. They might connect you with an owner or maybe another consultant. And you just keep on acting interested and curious about the space because you are and each conversation leads to another conversation and another door and eventually find your platform. And you might talk to someone that's been hit up by PE firms five times a week for the last year. But I think that dedication and dream and enthusiasm and knowledge about the sector comes through when you meet them. It helps you win competitive deals. I was going to ask you guys, could you get into the buy box that you guys draw? Could you talk about a buy box, explain what an LP first buy box has in it. I understand the term. I think the term is well understood conceptually by the trade. But what defines the LP first buy box and how does the LP first buy box try and lean into some of these elements that you just mentioned Logan getting to a yes-no with only 60% of the information. I'd love to hear some specifics to the extent you guys are good to share it. It's different when you are looking at a platform versus an add-on. We don't always have to have a founder. We've done some without a founder staying on our management team. But we really love it. We get a lot of excitement part of it. If we keep on looking in the space and we find someone with a sparkle in their eye that really lights up if I did building a $300 million revenue platform that might be a 30 and they just get really excited about rolling over a ton, going something. They've been in the sector for 20 years and they're still a lot of gas in their tank. We love that and we love when the management teams are like that too. Aside from I think making a good investment case doing that, it's just sort of fun like finding someone with a dream that you help achieve their dream. That individual may not always be the CEO long term. They might know their limitation. They might be the CEO. We've done that. We are often looking for our platform team. It's not just the business. It's something like that. We might have ideas on the right service mix of the business, where in the trades a lot, you don't want to have a high percentage of construction revenue, so like that. All the typical characteristics and KPIs that you would expect and that most year listeners are familiar with Peter or in the buy box. It's revenue size, it's EBITDA size, it's geography, service mix that's applicable to the industry, all of those basic things. To Thomas is point, I think you can be more flexible on that in a data on scenario. Maybe you've got an existing management team in the region so that owner operator is not as important or maybe you have synergies there that you can think about. Outside of the basics, it almost always comes back to the individual on the buy box. Maybe that's a little bit different about our firm versus other firms that are larger than us. We're often times looking for platforms that are just below in size, what most traditional private equity firms in the lower market are looking for. So, they're very rigid. We don't go below 4 million of EBITDA as a platform. Well, that's great. We know that. I've heard that a hundred times. I want to get in the high threes then because there's often times really successful owner operators who just haven't quite met the criteria, but with a little bit of assistance and helps can become a rising star. That's where I think we play really well. And again, it all comes back to the person. We can find a perfect fit business with really stable cash flows that is in the industry we want with all the characteristics, but if the individual running the business is not someone that we can get excited about working with, then more times than not that's not really a good fit for our buy box. And that's hard to put on a sheet of paper and define it. It's more twinkle in their eye that you're looking for how they talk about their dreams and aspirations, what's their background, what life experiences have they gone through to get them to where they are today, who are their friends, what are their hobbies, what books they read, what podcasts they listen to, all that subjective stuff is what the types of questions that we're going to be asking to see if they fit our buy box. And do you think that that varies meaningfully? Do you think that that's a point of variance between you and other buy boxes to really be very focused on finding a super energized founder or founder for the platform? To me, it seems like there's no question that the search community doesn't really look for that because that's their plan. But it seems to me that a lot of private equity is not excited about buying a business where they feel like they're going to have to turn over the key operator near term. And they're looking for a similar profile to you guys there. My sense is that private equity doesn't like to turn over the CEO post transaction unless they have to. I think that's a general role of them, absolutely. I would say you're right that every private equity firm, if they write down what they want to do, absolutely. They would say the operating leader, the seller that's going to work with those clothes is a very, very important part of that. It's table stakes. And not to suggest that we can evaluate those sellers any better than anyone else can. I think it's just making sure that that person fits our buy box and how we like to work. Everyone can perceive value in that individual differently. Some people want college degrees and Harvard MBAs and this needs to be your second iteration. You need to have already sold business, all those type of things. And there's not a right or wrong way for anyone to look at it. There's probably case studies all across the board of success with different profiles of individuals. I think it's more aligning with how Thomas thinks, how I think, how our team thinks. The speed and urgency that we like to move with, does that match well with the founders day to day, just cadence of how they respond to emails and when they work and how excited they are about an investment opportunity, making sure it's a good culture fit. Regions of the country, people think differently. They have different hobbies. We're going to end up spending tons of time with this individual. We want to make sure it's an individual that we connect well with and that has that twinkle that we view as perceived value. It's very hard to quantify and going back to our GP relationships or even all of our investor relationships. There's been owner operators that we've been right and we've been wrong in certain instances. But in many cases, we've liked an operator and said we think it's going to be a great fit for the business. If you go take that same individual to another private equity firm, we've been point blank told some of our most successful businesses are run by CEOs that other investors have said this is the worst CEO that I've ever heard I've listened to. It's like, well, he's grown in the business every single quarter and he's turned it around and he executes on every initiative. It's finding the diamonds in the rough. That's what's the hard part about this industry. It is different for a buying grow model versus a buying build. Buying build is very entrepreneurial when you're buying multiple to three million EBITDA companies and consolidating to and growing to get to 15, 30 million EBITDA. As you're doing that, you have to be able to create relationships along the way and create systems and be very hands-off often. You're sure starting off with not a lot of resources as you're building the team at the field service operation. We've had some CEOs that have had great successes in the past, but they came in at higher levels and in some ways it's a little bit more entrepreneurial starting off how we start off below 5 million EBITDA. Not every CEO that has run a 5 million EBITDA business, that skill sets translates down to that level. There's a saying, I think from the 3G guys, 3G capital, PSD, like poor smart and desired to be rich. A lot of times people start off and they have a level of urgency and young, hungry energy to do it in the experience a lot, but then when you build a bigger organization that it's hard to rebuild that flame and come down into the lower middle mark, we have acquired some platforms with a 6, 7 million EBITDA, but often times we're starting off on sub 5. It requires a lot of energy and effort to build a platform where builders at heart, often times the founder is not that person. That's going to eventually take it to the promised land, but they're on the bus and we're supplementing around that. That's how we do that. We don't want to force that upon our founder because it's a lot of work, but we've had some successes with people doing that. Could you guys talk maybe a little bit about how you think about holding on to the businesses that you've bought versus exiting those businesses? What's your general point of view on long-term compounding of businesses that you've worked hard to buy and build up? There are lots of arguments around just the power of that, power of long duration. There's a lot of value in delivering liquidity to investors. There's a lot of value in that. There's a lot of predictability and trust that comes from that and that you build up over time with investors by being a source of liquidity and being able to return capitals to them relatively expediently. How have you guys navigated that spectrum of considerations and what are your thoughts?
thoughts on it, what have you learned, what's changed as you've confronted those decisions across the portfolio? Starting off, I was a big long-term whole co-compounding guy. I'd be down, that's who I am now. potentialX just creates lots of excitement. We have a young team with growing families and I get a lot of excitement thinking about how our partners can have a good outcomes in the management teams underneath. So I think right now I want to season of doing long-term, whole co-compounding and I think I was doing that before that sort of became trendy because I was coming into that 2017-18. Now I'm more of the pendulum like we're building platforms for middle market PE funds that are integrated, growing, great management teams, inquisitive industries, it's like a platform with voice for the middle market PE funds out there. We're going to have a shelf of platform and we're going to get top dollar for them and they're going to be best platform people can buy. That's where we're going to now. I think a long term, the pendulum will move back over time once a lot of the guys have exit. I do see it one day picking some ideas and running hard at them for decades. Dreaming big, making real good in the universe. Obviously, who your investors are, you've got to take that into consideration and whether liquidity timelines are, but I think Thomas has a really good point of people oftentimes ask is how have you all been able to build a big team and a lot of it is based around how generous we try to be with the economics that an independent sponsor does have. Being an independent sponsor is very, very difficult. In our opinion, there's no guaranteed salaries and so you got these guys start in firms and that's very difficult to do for most people. As our businesses have gotten older and more mature, they compound. We probably spend less time on those investments and they're growing and achieving our objectives faster and faster. It can be very difficult to let go of them because you're thinking, hey, look, if we just hold this another six or twelve months, we can see a runway where it could be even a better outcome. But we're trying to build a firm here as well and so there's nothing wrong at least in our opinion with taking some chips off the table from time to time, putting some liquidity in the team's pockets to keep the engine going and to build the firm for the long term is how we're sort of thinking about it. Certainly that can be difficult in the moment to let something go that you think that there's a little bit more runway with. We're still trying to figure this out ourselves. We're only, I guess, a little over five years into being in our first investment. We're just now getting into the window where we might start seeing more exits and so maybe ask us a year or two from now, we might have a better thought on that because we certainly don't know it all at this point, trying to figure it out as we get here. There's certain deals. There's one right now where the management team want to keep on going and I would say there's some hesitation of us leaving the equation and our VP partner, that deal and they want to keep on going. We have a lot of momentum. We have 8 million to be put under a low wire. We're thinking about maybe doing a CV there, got to exit and be great outcome. Seems like everyone around the table wants to keep on going. It's not that party, it's keep on going. That's, it's going to be a very large company one day. I think investors really prefer liquidity in this market. Every conference I go to, that's a common panel topic. That's their preference. Till the seasons change, there was a lot of capital deployed at pretty high multiples. A lot of that hasn't got returned. I do think that probably is a prevailing narrative right now. You guys seem like you've been navigating able a lot of pragmatism both for them and for you and building out your team. I could see how you would start out very starry eyed about long term permanent capital over the intervening first one to two decades of your investment organizations life. You would realize there's a much more pragmatic place that you need to arrive at where you're distributing capital to your partners, you're distributing capital to LPs and then if you're able to make it to the other side than your 15, 20, 25 years in and everybody has got enough capital to more or less live the life that they want to live. Then you start to potentially return to that original approach and take a few really big long term swings. You're building the machine as you go. Given some cases went out to go raise $100 million and we get $30 million on our thesis and you have a structure where it's not hard to add additional equity as you go. You can build a company there and compound long term but Brad Jacobs, I mean he raised billions for QXO right now and he did that off of track record providing exits and he wants to build a $50 billion company there. It didn't happen overnight. It happens over time. The best year we've ever done is 19 years. When you look at firms like Alpine, Shore, Europe and the hundreds for year, we want to be there one day. We want to be doing something like that. We want to be able to have track record of success and returns and investors lined up. Nothing happens overnight. You can say you want to do this but it's nice to build a track record and a retirement. People always rest and make what they can do in a year to get under us, they would do in a decade. I think you just keep going at it and you'll eventually build something of value. Maybe that's a great place to end it. It's been great to meet you guys. It's been great to have a chance to learn more about the story. We've covered a lot. Learned a lot more about the organization and about you guys. I think it's really interesting to get into your return on capital points of view. I think it's really interesting and really helpful to the category to think about the way you guys are partnered with private equity GPs. I think we've covered some really interesting material that doesn't have a lot of prior visibility. I think a lot of people will enjoy the lessons. Thanks for carving out the time and giving it to me and giving it to the listeners. Look forward to following you guys on your path to pulling toe to toe with someone like Brad Jacobs over the next couple of decades. That sounds like a good goal, Thomas. Appreciate it. You have an assumption. Yeah, thank you. One of the things that always strikes me a lot is that there always sort of is this narrative around the private equity guys and they're the investors and then there's the operators and the more that I spend time with people in an interview context like this or the more that I spend time with our customers that have done really great work, whether they're investment banking professionals and they started their own investment bank or their guys like you that have started your own investment firm. I'm not sure there's as big of a difference between the kind of operator and the investor. Anybody who's been building anything, it all kind of reduces down to a different type of operating. It seems like the best operators building investment firms have a lot of similar characteristics to people that are running the quintessential operating company. I think there's a lot fewer differences and a lot more similarities between people starting one type of firm versus another and that always is something that comes out when I interview someone like you who's seven years in and you guys have bootstrapped your way to where you are. You guys sound a lot more like operators in many ways than you do sound like Rizzled Grey Bearded Investment Types. So it's great to spend the time with you. Look forward to watching you guys continue to succeed and grow. Thanks for the opportunity and we'll pause there for now. Thank you Peter. If you enjoyed this episode, check out Axial.com. There you'll find every episode of this podcast as well as our recorded Axial member roundtables. Some downloadable tools for deal makers, Axial's quarterly league table rankings of top small business acquires and investment banks and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner, considering an exit or as a cell site M&A advisor, you can get started for free at Axial.com as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me directly at
[email protected]. I promise I will respond. Thanks for listening. [Music] Peter Laramann is the CEO of Axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of Axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
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