Private Equity Value Creation with Mary Rachide and Bob Hund

Hey, best but never final listeners. This is Sean with value creation at all time highs in private equity. We thought this would be a good time to bring to our listeners a special on core episode where we talk about the role of operating executives in private equity. This is one of our most popular episodes to date where Lloyd Doug and I get together with senior operating executives from ICV and a Rydian, which is formerly known as HCI, and talk about the multifaceted operating exact role. Some of the things we talk about are the pathways into PE operations, how up execs are integrated into due diligence and value creation, what's rewarding about the role, how to interact with different stakeholders, and some of the challenges of being an operating executive. This is a really good one if you're interested in value creation and PE. Enjoy! Get ready to peer behind the curtain of the private equity universe with each episode of Best but Never Final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together, we'll navigate the corridors of private equity revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward. Let's go! It is great to be back with another episode with Lloyd and Doug. Jim, on how you doing? How's everybody today? Pretty good. Glad not to be in an airport today. It's that time of year where we're all busy, which means every time of year. Today we have a really special episode. You already? Let's do it. I'm excited about this one. Yeah, me too. All right. The little primer here for our listeners is that today we're going to talk about one of the major major topics and certainly the biggest trend in private equity over time. It's value creation. In particular, value creation, it's talking with the people who are today extremely directly involved in turning the art of the possible into a reality. We've got some special guests here today that are very familiar with Lloyd and Doug. Lloyd, would you like to introduce the special guest that you know most well? Absolutely. I would love to introduce my operating partner at ICB, my partner in crime, my thought partner, Mary Rashid. She'll give you the details on her background herself, really excited to have her on our show today. Mary? Thank you very much. It's great to be here with all of you today. So I joined ICB going on four years ago and Lloyd and I've been working together closely since day one for me at ICB. It's been quite a journey. I started my career as a controller at a publicly traded apparel company. I went to business school and then spent five years at McKinsey, consulting, strategy, retail consumer goods and did a good bit of private equity work there. So that was my introduction to what private equity is, mostly supporting due diligence and some other value creation activities. And from there, I spent the next good chunk of my career and executive roles at a variety of companies and a variety of industries. So I bring to this operating partner role a pretty diverse background that helps me be a real counselor to our senior executive teams and a counselor to our deal teams as well as we vet deals and looked optimized the execution of our value creation strategies. That's great. Well, Mary, welcome. We're looking forward to talking about some really kind of interesting topics in terms of how you interplay with the whole machine of private equity and creating value. Doug, how about yourself? I think you brought a friend along as well. Who do you have? I did also in my partnering cry. So I'm going to let Bob Hunt introduce himself as well in terms of background, but similar to Lloyd, Bob is my right hand man and also really compliments the entire firm in terms of how we think about trying to build better, more valuable businesses. And I think that's not only indicative of how HCI thinks about the world, but I think the way the whole industry is moving. Who great to introduce Bob. Bob, take it. Yeah, thank you Doug. A little background on myself. I started my career as an engineer. Central Illinois during times when the term Rust Belt became popular and I'll kind of explain why I mentioned that I was like, ambitiously wanted to reform US heavy manufacturing to better compete against companies in Japan and Germany or more advanced and process technologies were talking late 80s early 90s. I was a manufacturing and systems engineer at a big company called Caterpillar for about a $2 billion modernization program they had back then. And I really grew in affinity for processes back then. Companies to me were comprised of great products, smart conscientious people, good data, world class processes, relationships and of course well capitalized. Then I went on and I focused on a bunch of different roles throughout my career. I was in marketing, I was in sales, design, aftermarket support purchasing, new product commercialization worked 10 years overseas, led 6 sigma for a big unit of the company for a while and then after that I decided I wanted to put all that to good use in the RAN company for a bit into that and then at the end I thought well the capstone of my career is going to be an operating partner with HCI where I can put everything my experience for the last 30 years to good use and I absolutely love what I do. If I could just comment on that I think one of the things that's an interesting part of this conversation is this concept of range, Bob's nickname internally is McGiver. And he actually had his kids in the office here last week and I told them that which I think is going to stick at home. It's the breadth of experiences that people like Mary and Bob bring that I think is so valuable. But do you think about being entrepreneurial and innovative in these small market companies? Yeah I think that's right, 100% Doug and to me that breadth of experience and varied experience, cross time, across different environments also helps bring better pattern recognition to the table. And I got to believe Mary and Bob have that in spades. 100% it's indicative of, in reflective of probably one of the best trends in private equity. So you know Lloyd and Doug you all are much older than I am but and so it's so great. I mean it. When I started which is probably a lot later than when you all started private I was like 1999 when I started and I think you guys started like I don't like in the 80s or something I probably wow. On today. It was you know it was more of like a deal team centric approach and now it's this symphony of collaboration trying to build a greater whole in kind of a short period of time. It's you know transformation that's evolved from maybe the earlier days of optimization. So we're going to dig into a lot of that. Anyways let's jump into the meat of the conversation. So maybe just just establish the baseline here. Why don't we talk a little bit about just how the operating partners play roles within your respective firms. And so maybe what we'll do is we'll start in the same order we started. So Mary do you want to talk a little bit about the role that operating partners play with an ICB? Sure. At a high level we play three main functions and maybe a fourth that's an internal ICB facing function but diligence strategy and then what I'll call execution support. So diligence is that upfront we've been introduced to a company that we want to get to know more to figure out if they be a good fit in our portfolio and that we believe we can drive a value creation strategy that's going to return to our shareholders. They're expected results. We can involve deeply in diligence and I like to look at myself as vetting the assumptions behind the underwriting model. Do we believe that the resources and talent are in place are their investments that need to be made to enable the growth story, etc. And then value creation planning for us has actually moved up almost into the diligence phase. We're simultaneously building our value creation plan with management as we go through that diligence process. And we formalize that once we've closed to make sure that we're all really deeply aligned and know what everyone needs to go do to execute. And then we move very quickly in execution support and being a mentor, a coach, a supportive resource for all of our executive teams to make sure that they have all the elements in place that they need to be successful in executing those value creation plans. And then we also play a role internally with the firm supporting our best practices, capturing and codifying what we're learning that works well with our portfolio companies and making sure that we create the systems and processes to be able to repeat those behaviors over and over again to support the overall success of the firm across all of our portfolio companies. Hey, Mary, if I could, there's an interesting friend here that I see. First of all, I totally agree with this concept of collective underwriting. So you get the deal team underwriting versus the opposite of underwriting. And what's interesting to me, and I think a positive but challenging, is this pulling forward the value creation strategy. And so just like you talk a little bit more about that with two aspects in mind. One, how do you get access to management teams to do that in a meaningful way along a very accelerated process? And then two, do you guys as a firm use that to compete? I.e. with clarity of strategy, I'm willing to pay more, I have more conviction when I need to win. Yeah, so I think first of all, I participate with the deal team from first management meeting. So there's a trade off of resources and time and energy. [BLANK_AUDIO] We've actually found that introducing our operating partners earlier in the process actually helps us be more successful in our deal processes because we're not just coming to the table with bankers and finance guys, but we're also bringing guys and gals who've sat in the operating chair and can empathize with management and understand the challenges and can ask them operational questions about their business that show our relevance to them. So we think it actually helps us early in the deal process to be involved there. And we get positive feedback from the companies that we're interfacing with about the structure of our team and how we show up differently than some of our competitors. And then as we move into the value creation, oriented elements of things, we actually have it in a live process that we're working right now. We had an explicit value creation meeting as part of our diligence where we actually started by asking the founders of this business, what are your aspirations? What are your big, hairy audacious goals? How big, how grand could this business become if you took away the constraints of time and resource? And we started there and then baked into a, well, what's realistic? Where do we want to go? How far on this path can we get during a reasonable hold period? And then what are all of the things that you feel like you need to go execute? And we've been having this conversation gradually, but actually used a conversation with management during the diligence process to make sure we're aligned on what we see as the opportunities for the business, with what they see as the opportunities. And that upfront alignment actually sets you up to have a much more successful partnership when you're going to execute later down the line. - Yeah, and Sean and I've talked about this, but in my mind, this is like the natural evolution of the industry as it matures, you've got to create more value. And so what you're doing is super healthy. And I would only comment one thing, which is I think most people appreciate that resource. I think some teams opt out, but that's important to know too, right? Because it says it's not a partnership that's consistent with at least ACI strategy. - Totally. - And Mary, like digging a little bit more on what you share that I've, as Doug said, and this Lloyd appreciates intimately as well, like bringing ops teams into the diligence phase can be incredibly impactful in terms of giving edge and alpha to your bid. The other tension of that is sometimes there's an amount of realism that kind of can stifle the dare to be great. So, and to be fair, there's many occasions where I would give this like deck to our operators within our P firm and they're like, what is this? This is not rooted in reality whatsoever. And I got a couple of them like literally stuck in different places in China for many years. And I was like extremely apologetic for that, by the way. But you know, how do you balance that dichotomy of like we need to dare to be great, but we have to be realism in getting that balance right because in order to win a deal in this market, you kind of have to like be bold to a certain extent. - Totally. And I think it's some of the art and science of this role, especially in the early part of a deal process. I mean, on one hand, if we're working with founders and most of the companies we invest in are founder and family owned and operated. And it's often the very first time they've smelled institutional capital. So there's some good and bad in that. The good news sometimes is they don't know what to expect. So we have the opportunity to help frame for them the way our partnership is going to work. That can actually be really productive. And it's interesting because I think some of it is what we as operating partners have to bring to the table. We have to help. And that's part of the magic of our jobs is helping founders translate this big vision for what's possible into how do you break it down in the solvable parts and on what timeline. I actually think that's a critical part of what this role should be when well executed. It's not curtailing the vision and the art of the possible. It's how do you activate it and actually get there? Exactly. And how do you think about it on a timeline that's relevant, right? And so, OK, great. That's a wonderful, amazing 20 year aspiration. And we want to see how far we can get you on that path during a whole period that's relevant for us and our investors. So you're still letting the VPs at your firm really juice the last year in the model that fit here. And then you get to make the numbers work. OK. No, Sean. Actually, we're trying to figure out how to get out of the blocks in year one and two faster. Aren't we all don't take my tricks away. That was how I got to have to do through the old margin expansion, year five margin expansion. This episode is brought to you today by HCI Equity Partners, a lower middle market private equity firm focused on partnering with family and founder owned manufacturing, service, and distribution companies. ICV Partners, an innovative private equity firm, supporting management teams of leading companies at the lower end of the middle market. And Blue Wave, the business builders network connecting the most proactive business builders in the world with the best of the best service providers for critical variable on point and on time due diligence and value creation needs. Now back to the episode. We have real conversations about those practical realities of business too. And we don't believe in hockey sticks. We have to have real reasons to believe the underlying assumptions and why we think the plan put forth by management is relevant and how it's going to get traction and progress towards that bigger aspiration. We do have to be very grounded in facts and reality and what it takes to execute and operationalize big ideas. But that art of translation and that active translation, there can be a ton of value created there. That makes a ton of sense. So Bob, how about you? Yeah, listening to Mary, I would just like to say, did over. A very similar MOHCI, a little bit different. We have an operating team. I'm the operating partner. We have a team of a mix of specialists and generalists that do virtually the same thing. We have our due diligence checklist. We go through, we get heavily involved in the very first management presentation. We identify and quantify a value creation plan as early as we possibly can. You know, very often in these companies, you really don't know exactly what you got till you would work as coming off the walls later on in the ownership period. You have to refine it, refine it, refine it. But you got to get something on paper up front. And that helps. As Mary said too, very often these entrepreneurs who create these companies, they have those, like those three basic elements of leadership. Otherwise, they wouldn't have gotten where they're gotten. They have a very strong vision. They can execute and they leave a legacy with people. And that's why their company is successful and that's why we've acquired it. That vision sometimes goes long into our ownership period. And we want to make sure we harness that and couple with the vision that we have for that company as well too. It especially is true with their net on acquisition. Because they need to adopt the strategy and the vision of the platform, but also they have a vision going with it as a value. And we need to make sure we have that value. Some of the things that we do at HCI specifically is the way I look at it from my role is there's three things. One is we seek and assess opportunities for value creation. Like Mary said, within our portfolio companies, another one too that we do, we seek opportunities to mitigate risk. And risks can pop up in all different kinds of ways that we don't think about beyond eliminating value. But the risk that value could be distracted is something that we need to make sure we stand top of. And the third one, of course, is we inform our boards. We engage our management teams at the port coast on the resulting initiatives. And there's like three ways we do it. One is coaching and governing a company leader through the initiative. Another one is sourcing and contracting a consultant to help lead the initiative. Or one of it is literally lead the initiative ourselves. If it's a basic company, and we don't feel they can do it on their own, and we can step in and do it, we can do it. We don't really like that last one, because when we go to sell the company, we're selling the capabilities to do stuff on their own. So having them, the coaching and the mentoring thing upfront is really the preferred way. But once in a while, we have to step in and do a forming model and do that to push things through. Yeah, Bob, if I could just comment, so far the conversation has been mostly in the context of how do we engage with a portfolio company? And I think one of the things that you have helped us do that has been most impactful is to think about consistency of application across a certain set of engagement priorities. And I think to me, that becomes scalable, it becomes efficient, it becomes repeatable, it becomes underwriteable. I think you're under selling yourself a little bit, because I think you've done a great job of creating back to your comment about process, process around, I think eight key functional areas that we consistently engage with across the portfolio. One of the things we've done recently, this really helps on engagement very often, especially some particular company, CEOs, it's like, well, why do you need to come in and help? Why do you need to lean in on this company? There's a problem here or not. I personally found that if you focus on processes and not on personalities, you can go a much longer way. We've developed a, we call it a rapid assessment toolkit, where this is beyond due diligence, this is long into the whole period, where we can go into a company, we have six different modules on finance and accounting or operations in freight or it's on sales and marketing, different areas that we have 86 different processes that we focus on and we sit with the man has been team, we go through all 86 functional leaders and say, "Hey, how do we rate on this?" On a scale of 1 to 5, one is, "Needs a lot of attention. 5 is walk on water. 3 is, "It's okay. It works well." And then if we can get a mutual agreement on those processes, only focusing on processes, then all of a sudden you get to a really good realization with the leadership team on where weaknesses are and where they spike, which is also the needs of macolades in there. And that really helps on the value creation planning because you get consensus very quickly. Of course, you do that up front when you do your initial due diligence and your initial value creation, but to do this refresher every couple of years, it's kind of like going to the doctor for your annual physical. They're going to run you through a battery of tests. It's similar. It takes us a couple of days to go through it with my team. We make that assessment, discuss it with the CEO, reach consensus, and then all of a sudden value creation projects and opportunities start to flourish. I think that's great. We've started doing what we'll call sort of a midterm retreat process where we go and do a reset on value creation. We do a lot of that, but I think we can actually benefit from being even more explicit in the approach, the way that you've described it. So I'll look forward to connecting after this call, Bob, to compare notes on our key functional areas and all the processes that we look at versus what you look at. Perhaps we can learn something and help each other there. Hey, Bob, you're speaking my language as an industrial engineer, undergrad major, so process and systems that's music to me. So this is good stuff. I do have a question, maybe for you, Bob, and Doug, can you talk a bit about how you arrived at the size of your portfolio operations group and the composition? I think Bob, you mentioned there's some specialists and some generalists. How did you all arrive at that setup? Hey, Bob, I'll take the beginning of that and then you can talk about how we've optimized it. So our journey is a bit of an evolution where 15, 20 years ago, we acknowledged the need for operating partners in the business. And we had assembled a couple operating partners who were very senior, very accomplished and great counselors and advisors. And that worked well as an improvement from where we were, but as we thought about kind of like 2.0, how can we do this better? What we found is we needed younger, more engaged, more being able to be doers on a full-time basis as opposed to almost really active board members. And I think that may be unique to the lower middle market because a lot of what we do, it's not just advising, it's building in concert with the team. So we migrated to somebody with Bob's profile, a very broad set of experiences that we thought were directly apro to the business. And then from there, I think it was Bob's vision to build the team and Bob, you could take it from there. Everyone has their different strengths, right, and different perspectives, especially when you get some folks that are maybe newer in their career, very focused on data. Some people on the team that will go in there and they say, "Hey, I want as much data as I can out of the company and they're putting it into a data warehouse, they're analyzing it and Tableau. They're doing a few things here and there." So that they could guide the Chief Commercial Officer of EP of sales, what they should be doing or what they could, what's the art of the possible. And until you get your hands on that data, you've got to get in the weeds a little bit to know what some of those things are. People at that level are pretty good at that and they need to be a little bit specialized. I mean, because they've been there done that. Maybe they've done pricing studies in the past or maybe they've done network optimization studies or build SIOP processes in the past or something like that. This is the older traditional retired person operating partner who maybe will lead things early on in their career, but it hasn't been that recent. The recency of some things is helpful, especially nowadays when you're looking at, I've mentioned mitigating risks. Someone who really knows some better aspects of cybersecurity. The risks that really impact our companies, we have to be in tune in that and you have to be up to date on the latest technology and the latest trends. I offer, as I've watched Bob build his team, I've developed a couple of opinions on this model. The first is, I think our team's best highest in use is when they have enough knowledge to know the need and can effectively pick a partner to help us execute the need. So I'm always pushing the team, be a broker of resources and an enabler, don't be a doer because I need you across 15 businesses, not two. I think that ability to see the opportunity to find it and come up with a solution that employs external resources is a really critical part. I also will say in the lower market where we are, I think there's a balance between being a journalist and a specialist because one of the key elements of being successful here is you've got to have credibility in the ear of the CEO and I find if you're too much of a specialist, it's hard to advise that CEO partner holistically. So I think as people are thinking about this career trajectory, you've got to have some areas you spike, but I think you've got to be a pretty good man. I agree with that and appreciate your story and your evolution. I think about how you've set up our team at ICV and it very much is rooted in that last part that you were talking about, Doug, to connect with and have credibility with that leader of the organization, family, member, founder or what have you, having that breadth of experience matters a lot because their most pressing challenges may not necessarily have to do specifically with IT or production or people issues or whatever it is, it may have to do with a set of issues that having that experience relevant to your company based on my experience with five other portfolio companies are founder, led businesses or family, led businesses is what matters most. That's what we believe and so that's how we've organized our portfolio operations team. My view is like all of these operational initiatives, it's kind of like an IT project, they take longer and the results are harder to get at than you hope. There's still real value there but if you don't have the credibility to walk that CEO partner through, hey, this is going to be hard, it's going to be painful, we're going to have some slips along the way, I think you lose momentum. Yep, agreed. So Bob and Maryam, curious here about this evolution how it's played out in many ways and one, it's like how do you manage the interplay between the different stakeholders involved? And saying the stage we talked about earlier, it's now kind of this symphony of motion. In the earlier days of PE, it was kind of the deal team and the portfolio teams. Now it was kind of it, it was like a one or two string band. Then it turned into a quartet. Now you got this whole symphony of you've got the deal teams, you've got the board, you've got the third party advisors and service providers and you have the C suite executives that are all as harmoniously as possible moving together to play some beautiful music. How do you as operating partners from your lens kind of manage and work through this whole interplay of needing everyone to hit the notes kind of in sequence and cadence with each other? So I have a very sexy analogy of how I think about this and I share this often with the CEOs that I'm working with. I look at myself as being the glue, the grease and the grit in this process. So the glue is like bringing all these different resources together and making sure there's the matically consistent approaches to what we're doing, that the path that the deal team is on is consistent with the path that management is on and we've consistently shared that with the board of directors to make sure that we're engaging them in the right topics at the right time. And so it's really facilitating that connection and when seeing that there's points of disconnection bringing them back together again to make sure that we're really aligned and moving in the same direction. So that's the glue piece. The grease piece is identifying where things are becoming roadblocks and where things are getting stuck, where one element of the equation is not moving fast enough or there's just something that's preventing progress and really shining a spotlight on it to make sure that we're all aware of it and focusing resources on removing whatever those roadblocks are that are preventing progress. The grit piece is just having the stamina to keep at it when things get hard. And it's hard to make a decision when it's hard to find the right resource, when the first two attempts at the pricing strategy didn't go as planned, having that resilience to just keep going at it again, especially the things that are really critical to the value creation plan and the ultimate success of the company and the executive team. I think those are the pieces. And then one of my CEO said that I really needed to add a fourth G that he felt like I brought to the table, which was a glitter. We also have to have fun and be a little light-hearted about some of these things and take the work seriously but not take ourselves too seriously. And being able to do that while you're still managing all the other things, I think is part of what can make us more effective. So I have gladly added glitter to my 4G framework in terms of how we collaborate and work across all of the different stakeholders that are involved. Mary, I always thought Lloyd was kind of a glitter. No. Lloyd is definitely the glitter. No doubt. I love that metaphorically analogy and don't tell your business school about that because some professor will knock it off. And trademark your 4G's right now. Maybe I should just go ahead and write the article on LinkedIn. Yeah, copy right it. Copy right it. Copy right it. Alright Bob, how about you? I guess from my perspective, I think how do you manage interplay because you have so many different constituents and they all have different backgrounds. They have different objectives, they have different motives. Everyone sees the world through a different lens based on their experiences. And although there may be more than one right answer to an issue or a problem or an opportunity, there's likely a single best answer. One of my favorite things that people in my team always hear me say is that reasonable people equally informed almost always agree with an emphasis on the equally informed part, communicate, communicate, communicate between the different constituents to seek that right answer, with a very deep respect for poor co-leadership and use emails as a last resort. So it's so one way. Now tell you what, one of the best things that came out of COVID, if anything, was the acceptance of teams and Zoom that you can actually have face-to-face meetings, several in a day with several different poor co-s and it works almost as well as being there in person. That communication with independent board directors, with C-suite leaders, with deal team members, to try to say, okay, we've got an opportunity here. What's the best way to go about it? You're probably going to get five different answers. But eventually you're going to come up best answer. And I feel that's the role of myself is to try to drive towards what's that right answer, that glue-greased grit glitter part that Mary was talking about. It's really important that they be able to get there in being involved. Sometimes occasionally you'll have a CEO that will say something like, well, if I'm doing everything right and meeting my AOP, then there's really no reason for you to be involved. And it's like, hold on a second. We have a perspective. I mean, we see things, value creation opportunities, ways to mitigate risk, that maybe you don't see. We have backgrounds in these areas. So being a fly on the wall, keeping constant communication to be able to come up with things, because we have all different ideas and perspectives when you get through it is the right way to go. Sometimes company may be meeting its annual operating plan, but there's something that's not quite right. Maybe that it's going the wrong way on vision, or maybe the execution is kind of going off the rails a bit. And if the operating people aren't in the business and seeing that, you might fall off the track. I love what you're saying and think about your analogy earlier about getting an annual checkup. It's like saying, I can run and I can do all the push-ups and sit-ups. Why do I need to go to the doctor? Everything's fine until it's not. And then usually it's too late, or it's pretty far gone when it's not. Okay. So you're trying to get ahead of it. I think it makes all the sense in the world. I think there's another corollary to this conversation that's kind of interesting. Sean, you described this as this elegant symphony of all this coordination. And I live in it. It feels much more like a scrum. And I say that like constructively because like to me, one of the big values that we have in HCI is the power of debate. And so we don't shelter lines of communication between the ops team, the management team, and the deal team. And we often disagree. So there's a lot of like tag and interim conversations that we kind of work our way through that I think that like it's kind of be a hard part of the process, but it's healthy. But I think like for Mary and Bob, there's this dynamic of like you got to be empowered to make decisions. And so I'm sure you guys have encountered situations where there's a little bit of a dual authority. And sometimes you got to make sure you're aligned on okay, how hard are we going to push? Is it a stick? Is it a carrot? Is it a leadership element that can be a challenging part of this change management I think? Yeah, absolutely. And what I've learned sometimes the hard way is if as an operating partner, you get out in front of where your deal team is and they don't understand where you're going and why, then they can't show up in a way that's supportive or they may have a different perspective. So getting that alignment so that we show up as one firm with our management teams where we've got aligned perspective on where we're going is absolutely critical for us to be successful and really help drive our portfolio companies in the way that's most successful and productive for them. There is one particular element that sometimes can get in the way and I didn't even think about this till Doug introduced me to some of his operating partner friends when I first started HCI and that is should operating partners be on the boards, the companies are not. Board is a governance role. It's a governance governance role. If you're working on the board, you're in a board meeting and you're working alongside management, I don't necessarily have that kind of like that ability to have unfettered access to independent directors and also a close relationship with the CEO. I know some others say no, I'd rather not be on the board because it's too much of a conflict. I'm curious with Mary, are you on any of your boards? No, it's interesting. I sit on boards outside of my ICV life and experience, but at ICV, I'm intentionally not on any of the boards. What that does for us is I still have the unfettered access to any of our independent board members. If I call, they're going to pick up the phone and answer and have a really frank conversation about what's happening, but by not being on the board, it means when I'm meeting with management, both at the sea level and especially one or two levels down, that there's not that pressure that it's a judgmental or it has to be a performative conversation. They can be honest and straightforward and direct about what they're experiencing and often come to me for help of, "How do I frame this for a conversation with my board? How do I frame this for a conversation with my sponsor or lead deal partner?" Which in my case is often loyed. I can anticipate the questions, the challenges, the things that they need to be prepared to address. So, instead of having a conversation with me as a board member, they can have a conversation with me as a partner to help be really well prepared for those discussions and dialogues. I do think that it helps from a trust perspective in many cases because they don't feel like I'm judging or I'm not determining their performance review at the end of the year. That's kind of the board's purview. And I do attend all the board meetings. I'm part of that process. So I see everything that's happening. I see the dynamic. And many of my CEOs actually ask me for feedback after the meeting. How did it go? What could I have done differently? What are people saying when we're not in the room? How do I adjust my approach and take a different course to be more effective in those interactions? I do find that it can be really helpful when you use the right way. As I'm listening, for some reason or another, it made me think about one of the books that was recommended when I started Blue Wave. Because I'd never been an entrepreneur. I was always on the deal side of PE. And so I was asking, what should I read? How do I get up to speed? And like, oh, you've got to read this book called Traction by Gina Wickman. And it was a great book for me in terms of just how to get started. And one of the key roles that Gina says every company needs to have is what he called the integrator. And this is the person that is in between kind of like the C suite or the CEO and the execution. And it's the person who's the champion of the strategy and the orchestrator of the tactics to make sure the trains are moving and the plan is going for it on time. The way I'm kind of processing this conversation, you are playing that integrator role between like the deal leads, the portfolio companies, and you've got to translate for both. And you've got to be a champion at times for both in terms of making things happening and keeping everyone working together. Does that kind of resonate? That's the glue, right? Yeah, no, I love it. You know you're successful too when the CEO calls you every other day asking for your advice on something. Hey, what do you think of this? Just to bounce stuff off of you? Then you know, okay, I've got that relationship going. We've talked about collaboration and communication. Sometimes you have to prescribe. How do you handle that when you're like, we've talked, it's been three board meetings, still hasn't happened. Like, this is what you got to do. I'm sure I do everything I can to avoid that, but sometimes you have to. How do you know when and how do you do that? Silence. So we're going there. I guess we're going to go there. Paul jump in. For me, it's what I was mentioning earlier, focusing on the process and not the personality. If you can identify a broken process in the company, like I said, reasonable people even in the form of always always agree. So you show the process, look at this is broken. You start with the CEO on downward and say we've got a problem here because something is not working right. Regardless of who's managing it, let's dive in and see what we can do. Then you go through that discovery together. To me, then it's not prescriptive. They're finding it on their own. Yeah, I totally agree. The process is broken. We're going to do something about it. Let's go. If you can go that way, then you're not prescriptive at all. They've just numbered it on their own. I don't disagree with anything that you've said. I think the tricky part is, what if you see an opportunity to take one of those processes that came out as fine, a three, and you see an opportunity to get it to a one? What do you do then? Yeah, I mean, if it's in the value creation plan, then we're going to quickly calculate, here's what it's worth. That's one way. You could prescribes a, hey, we're going to do this or you can say this is how much it's worth to do. There's got to be a reason for it. If we can take it to a five, we're not going to take it to a five just because we want to. We're going to be going to be money in it or something or risk mitigation in it. Therefore, we have to show and prove that's where it's coming from. I agree with Bob's approach, but I think Bob's approach assumes that actually people can be objective in really personal situations. I think that happens more than half the time maybe, but there's a meaningful percentage of time when it doesn't. I'll just show you. share my own experience with this. First of all, like, HCI's a firm takes the concept of partnership really seriously. We're way better equipped to be collaborative versus directives, just given the model and given our personalities and given our approach. But at some point in certain situations, you conclude, as a fiduciary, I'm supposed to make decisions that maximize value. And at some point, you just go, like, this is so clear, we're gonna do this, right? And I think there can be fallout with that. So, like, we don't do that haphazardly, but everyone wants in a while, like, the size of the prize is so big, and the risk of not doing it is so big that, like, you're forced to be directive. I would say, when a lot of times when that happens, it's a bigger issue than being directive on a specific project, 'cause it's a reflection that you and the team aren't aligned from a vision or where you're going perspective. And so, sometimes that goes hand in hand with changing the team. Once again, it's kind of like the similar parallels probably with an even how your CEO's upright. I've gotten this experience since Billing Blue Wave is there's gonna be a lot of debate on strategic and tactical initiatives. We're gonna punch it and mold it and play with it, but eventually someone's gonna make a call and then everyone's gotta get behind it, and then breed to success. And I'm sure that happens not only between the board and the C-suite, but also every day within the C-suite of your companies themselves in terms of, like, at some point you make a call and everyone grabs the or and starts rolling together. That's a helpful insight, 'cause I've always wondered kind of how you all approach that. Moving the page here, I'm curious for Mary and Bob, what are some of the aspects of the roles that you play that you really enjoy the most about? - I think the thing I get the most satisfaction from in my job is seeing the folks I'm working with be more successful. You have to take great pleasure in the success of other people if you're someone who needs a ton of recognition and feel like you have a ton of authority every day. You're probably not gonna be terribly happy in one of these roles, but if you can take your joy and satisfaction from helping other people get better and helping them find their success, you can find this to be a very, very fulfilling role. So I think that's a big part of it. And for me, the other part is the variety. Every day is a working on different challenges, working with a set of different portfolio companies to assess and understand and meet their needs. So there's a lot of intellectual stimulation in this role. And if you're someone who needs to have a lot of structure and zero ambiguity and what you show up for, you're probably not gonna be terribly happy in one of these roles, but if you like the variety and being able to plug in on a lot of different issues, topics, industries, then again, that's one of the big things that I really enjoy about what I do. - I think that says it all. That's amazing. How about you, Bob? - Yeah, I guess I have two. For me, working with like real grassroots entrepreneurs. I mean, the founders of the companies that we acquire, 'cause we mostly acquire family, funder-owned businesses. These people, these individuals are experienced. They're successful risk takers from early on in their career. They generally have never been cogs in the proverbial corporate wheel. By far, that's the number one aspect of my job. And in fact, having worked in big public health companies until I came to HCI, that's almost like a high for me to get to work side by side with people who grew their companies up from nothing and put all their family assets on the risk. And they did all this and they get rewarded and we come in and they get this. And then we can take that vision that they had for maybe the last 10, 15, 20 years and grow it to a whole new level where they can get a second bite of the apple. That is so cool. For me, that's the number one. The second thing is working the lower middle market. The time horizon on many of our initiatives are relatively short. So you can see tangible results fairly quickly. One of my favorite quotes is Teddy Roosevelt. He said, far and away, one of the best prize a life has to offer is a chance to work hard, to work worth doing. You can see that the work you're doing, the value creation we put in and then you get it out and all of a sudden you see it and then our LPs get rewarded, the management team and then the entrepreneur that started it gets his second bite of the apple or her second bite of the apple, and he go to the divest. It's an amazing experience that you just don't get unless you're working in the environment that we work in on this call. - I think that puts a great fine point on everything that I said Bob and really that resonates and I completely agree. - I mean, between the quotes then the blue glitter grease grit. I mean, you guys, Lloyd, we gotta up our game here. - Yeah, definitely. - Definitely. - I've been secretly interviewing some new players for this, so we're gonna, no, no, this is, this is great. But I think what you described is one of the reasons why so many A-player business builders are attracted to and flooding to these value creation and operating partner roles within private equity firms because of the things that you just said and the satisfaction that comes from the types of achievements that you're able to see every day. And we'd be remiss if we didn't kind of look at the other side, right? There's every job, every role, it's a continuum, a range of things, right? And clearly the balance of satisfaction but also great things is almost always, in some ways, a little bit of counterbalance on some of the challenges. And so I'm curious, what are some of the challenges of the role that you experience that go with the flip side of that coin? - I'd say one of the challenges is you can do this job 24/7. There is an unlimited number of opportunities to help our portfolio companies drive better value. Each of us is working at ICV at least with three to four to five portfolio companies at any given time plus also supporting our other operating partner colleagues in their work and being a sounding board and resource to them. Plus we're trying to help build capability for the firm so that we're codifying those best practices and taking them from one portfolio company across the portfolio. You can work an unlimited amount of hours, expend an unlimited amount of effort. And I think it goes back to something that Bob said earlier about prioritizing and understanding what really drives value. And what are the right places where we can actually have the most impact on an individual company and on the portfolio as a whole? So that prioritization and being very intentional and choiceful about where we dedicate our time and energy is one of the challenges, but also one of the great magic sauce things about this role. That can be one of the big challenges and then I think the second one is playing that glue role, that integrator role can be difficult when folks, as Bob was saying earlier, have very different perspectives. And so getting the right set of influence tools in place and I like to talk about how history is multi-calusational change over time. And it's unlikely in a fraught situation that I alone am going to be the hero who brings all the pieces together and magically solves the problem and gets everyone aligned. So the question for me is, what are all of the situational elements that I need to help get in place to drive that different future? And so there's a lot of thought that goes into who are the right influencers? What is the right information and data? What are the emotional drivers behind people's needs or reluctance or fears that are holding them back from accomplishing something? So there's a lot of time and energy that goes into figuring all of those pieces out so that we can arrange the playing field, arrange the game board in a way that we're likely to get to the outcomes that we're trying to achieve. I'd say those are probably the two biggest things that take a lot of my time and energy and they're overcomeable and in solving them well, there's great opportunity. - That makes a ton of sense. How about you, Bob? - Yeah, I would agree 100%. Especially at the beginning one is making the choices and where you spend your time. I mean, very often on my day, I'm double triple booked for meetings. And I have to delegate or say, hey, look, can we shorten this from two hours to one hour 'cause I want to get something else in and a lot of people in our firm are that way and the deal side is well too. And we change industries. I'm sure Mary's the same way. At four, five, six times a day, you get into another industry and get into the management team. And I think you have to have maybe a little bit of ADHD to have this type of role because you're constantly changing and changing industries. You get a high over that. I mean, it's kind of like, wow, this is cool. What did I do today? Let me go back and look. I did all these different things. But it is a bit of a challenge 'cause just keeping your notes straight and keeping everything together and going the right way is straight. I would say the other challenge too is just, it's hard not to fall in love with some of these companies. The deal team will come in and say, hey, look, we got this great industry, read up on the sim, we read it all, we're gonna take you to the management. You get through the day and you're like, I love this company and you've got all this value creation stuff going through your head. We're gonna do this, we're gonna do this, we're gonna do this, we're gonna do this. And then the deal team comes back and says, (laughing) What, what do you mean? We're gonna, we got a great opportunity here. We got, come on, Doug, do something, you know? And then he's like, no, no, no, no, no, no, no, it doesn't make a natural sense. And the good thing is, I get really smart people on the finance side, they tell me right wrong. But I think that is the other one too, is you have your attachment there to make sure you can drive, which you can drive, but you also have to listen to the deal team and when they say, hey, we need a course correct here for reasons that are more financially driven in that, you gotta make sure you listen to what they're saying. Did Bob just beat me up in a very nice way? I'm pretty sure you did. (laughing) I'm sure you did. That was very elegant, Bob, well done. Bob, you gotta remember, as investors, we can't fall in love, right? No, you. (laughing) We have to make the investment, and then we have to exit the investment. But from a deal perspective, that's very much true. And interestingly, there are companies I get very. excited about them, but I think there's equally as many times where I'm picking up the phone and calling Lloyd and saying, "Hey, here's the three or four really big strategic and operational challenges I see here." Like, are we really sure that this is where we want to go? So I would say that as many times as I'm in love with the deal and really want to do it, there's also a lot of times where I'm one of the skeptics and some of that has to do with being more operationally involved and deeper on that part of the business and really being able to vet through some of management's assumptions and plans. So there's sometimes where I'm the big cheerleader and there's other times where I'm the big skeptic in the room. I'm glad you brought that up, Mary, because at least when I said earlier, thought partner, and this is before even submitting a bid or indication of interest for a business, I think that interplay is important because I might be meh about a deal and Mary's like, "But look at ABC and D. What if, what if, what if, what if?" And I'm like, "Maybe." And then you factor that into your judgment as to whether you want to go do some initial work to see if there's possibilities in ABC and D. And that might actually get you to lean in, right? Same way with her being a skeptic, I'm super excited, jumping up and down. Well, did you think about D-E-N-F? Now, or yes, right? If I did, then I can go and have a conversation with her. If I didn't, I was like, "Oh, good point, Mary. Let me go look at D-E-N-F." And I come back and say, "Hey, Mary, you're right. D-E-N-F are issues, but what if we can solve D, what if we can solve E? That only leaves us F. What do you say?" So it's a more constructive and healthy discussion that ultimately shapes our diligence as we go toward deciding whether we want to spend time on this and pursue this business or not. Because again, in my view, if you're not super excited and have conviction and clarity, then you shouldn't bother. And so this kind of interplay, like Mary's raising, actually helps sharpen that. I love the things you were saying earlier, Doug, about debate. I grew up in a world where we had a value of the obligation to dissent. So if you see something, you're obligated to say something about it. And it's been interesting in the ICB context to figure out how and when to say it and make sure that it's perceived in the right ways as being constructive and focused on the issue and focus on the process versus being personal or taken person, having the risk of it being taken personally. I'm a believer that all of us at the table, as we're looking at opportunities, have that obligation to say what we see and make sure that our concerns are out there and part of what we diligence. Especially on the complexity of the change management. We could see, oh yeah, we can get over that. We'll hold on a second. That change may be a lot harder than we're thinking. As I hear the conversation, I think the way we end up kind of making decisions, I think the deal teams end up being the keeper of the financial outcome, if you will. But I think the ops teams are very instrumental in assumption input and testing. And the answer is only as good as the assumptions. And so I think it's just interesting how like Bob and Mary, you guys are testing the assumptions that are reflected in the model to help us get to the answer that ultimately drives conviction or not. I'd be curious, like you talk about what's challenging. I'm interested in asking that question a slightly different way. What functional initiative do you find most challenging? We organize ourselves around a couple different areas of competence, operational expertise, supply chain, M&A, human capital, the technology, marketing sales accounting. Let's say those are functional areas of expertise. Mary, do you have a view on like what's the hardest of those to get right or to influence? Well, I'll tell you the most important one is the people, the human resources. And if you have the right people and the right strategy, all of the other things are imminently solvable. And I think the people is the hardest part to get right. You're making assumptions about how people are going to perform in a new environment. You're trying to continually help people evolve and grow their skill sets. And because it's so artful versus just like straightforward matter of fact, we're not machines. Lloyd and I joke all the time, when the day comes that we can digitally print perfect people, this business will be so much easier. The hard part is often the people and getting the people's story right and getting the collaboration and communication between the people. And all the rest of it, I think, is Bob saying, you know, reasonable people that have aligned incentives and objectives I would add. With the same information and data can come to the right decisions and all the rest of the pieces are imminently solvable. There's a lot of different value creation strategies and I agree with you on the people side. You could create strategic roadmaps. We can do integration projects. We can do make versus buy decisions. We can do branding. We can do pricing analytics. We can do SIOP processes. We can put all those in. They're tried and true and you can put them in and get those processes put in. But then there's that one element and that is candle leaders in this company truly execute on their own or not. And execution is everything. They have to be able to execute. Given an opportunity, can you take it, can you put together a plan and can you put the puck in the net? And it's amazing how sometimes it requires bringing in somebody or hey, let's go get a project manager to come in and help you go through the execution phase because everyone agrees on what the strategy should be and everyone agrees. Yeah, we really need this. How effectively can they execute to it is really important because it is everything. So it's interesting to me basically what we've just said is if you agree with my eight different functional areas and maybe there's nine or 10. But the hardest one is also the one that is the most art. And so you can make this whole thing as much of a science and a process analysis that Bob likes to use that framework and at the end of the day it comes down to assessing people and getting the right team in the field which I think is the biggest art form of the business. Yeah, that's right. And as part of that, one of the things I've personally invested in and Lloyd's been a great supporter and encouraging me to do this is leaning in on the human capital side. So at ICB we're operating partners. We have four or five specific companies that we work with on a day-to-day basis for generalists. We're roughly industry group aligned, but our industry groups are pretty wide. So we still end up in very different businesses on a daily basis, but each of us is also started to take on a functional area as well. And the one that I've taken on is this human capital piece. So I've recently become Hogan Assessment Certified in the effort of both understanding how to be a better coach to our teams on the field, but also to get better at vetting and selecting talent that's going to be additive to our teams and help them get where they need to be and make sure we've got really good alignment of the personalities and people that we're bringing in with the job functions and roles that we need them to play. So that's become a bigger focus of what I've been doing over time. So maybe to bring this conversation to kind of full circle here, one of the things I think that we all agree on, everyone on this conversation here sees the world through this continuum of you're on a journey, not a destination, you're getting better all the time. You're giving your best, but nothing's final, right? The name of the show here. And so one of those things is like all of us, I'm sure, view the world through the lens of like, I wish we could do this one thing. Is you have Lloyd and Doug here? What are one of the things that you wish? Maybe the operating partners knew that you wish you could do to like have even more impact? I'll throw that up potato to Bob here first. Not a whole lot. I mean, our firm is small enough where we're staying constant communication day in and day out. I guess I would say one thing would be just to continue to remind management teams and the deal side of our house that our ops team is generally process oriented, but we shouldn't be brought in just to work a project. We really do need to be on the wall or at the table at every board meeting because our antennas are up. Our antennas are up and they're tuned and they're listening for value creation opportunities or listening for risk mitigation opportunities that might not be picked up by others in the room. We have those different experiences in the different backgrounds. So keep us involved all the time. If we can make it, we can make it, but we at least want to make sure we have a seat at the table. Well said. How about you, Mary? I think that's a conversation Lloyd and I probably had about what two and a half years ago, Lloyd. Interestingly, I don't think there's anything that I could say here that I haven't already directly said to Lloyd in person. I'm pretty direct and straightforward. And the thing that we talk about a lot is making decisions more quickly. And what is it that we need to do as a firm to make sure that we're making tough decisions in a more timely way so that we're advancing the ball more quickly? So that timeliness is the thing and it's kind of funny because as I understand more about our personality differences, I have a much higher sense of urgency than Lloyd does, but Lloyd also has a really high sense of anxiety. So as long as I'm pushing and driving, Lloyd's got more comfort to sit back and like watch how things unfold and evolve. But really, I think that timeliness and sense of urgency and not just in the way Lloyd and I interact because I actually think we're getting to a pretty good rhythm, but how we interact as a firm. That makes a ton of sense and I think that's common not only in private equity, but also your portfolio companies and probably even our own individual families and households. So I think this has been an incredibly insightful conversation that I know personally I've learned a ton from. And so I really appreciate Mary and Bob joining us today and kind of having this kind of pull the curtain back conversation on the day and the life of an operating partner in private equity. It's been a pleasure. Thanks for the opportunity. Thank you Bob. Thanks Mary. Awesome conversation. A special thanks to HCI equity partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and found their own manufacturing services and distribution companies. Learn more at hciequity.com. ICV partners and innovative lower middle market private equity firm supporting management teams of leading companies at the lower end of the middle market. Learn more about ICV at ICV partners.com. And finally, Blue Wave, the business builders network connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point and on time due diligence and value creation needs. Learn more about blue wave at blue wave dot bet for further information on HCI, ICV and blue wave and relevant topics discuss here in the episode. Please see the episode notes for links. 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