Transcript for:
February Panel 3: Understanding How/What It's Like To Work With PE - Part 1

The President's investment strategy. Thank you, appreciate the invite here. My name's Mike Shaw. I've probably got a slightly different background than most of the people here today.

And hopefully will bring a different perspective because I'm not an investor per se, but a lawyer who works with many of the type of people that are in the room today. So I'm a partner at the law firm Mutt Shellist in town. We're a 100-person law firm that is based in Chicago with a small office. office in Orange County, California. My role at the firm is I'm the chair of the firm's corporate department as well as running our private equity practice.

So I spent early part of my career at Kirkland and Ellison Town doing large private equity deals. At my firm I built a private equity practice where we represent lower middle market, middle market private equity funds as well as some large PE funds that are maybe doing some small... smaller deals and we work on platform acquisitions, add-on acquisitions, day-to-day corporate work, outside general counsel work for portfolio companies.

I'm on both sides of the table, buy side and sell side. I also represent a lot of entrepreneurial sellers who might be selling to a private equity firm, so I understand the mindset of an entrepreneurial seller. what their goals and fears are often in doing a transaction.

Thank you very much. Michael Voss, Cranbrook Partners. We're a, really, I'm kind of one of the smaller guys in the room here.

Our companies are 5 million to 20 million in sales. One's break-even, the other's, you know, 1 to 3 million of M&M. So, but our philosophy is, it's myself and my other partner, who's at, you know.

We've known each other since we were five years old. We went off into investment banking. I was an engineering consultant. So we've kind of come together a little bit later in life. We've been working closely together for about ten years now.

So we have the five companies, a combination of services and products. What we look for is our investment philosophy is to be opportunistic. We don't have any outside finance, so we don't have to meet certain requirements for investing money in returns and things like that.

So we look for companies that have, you know, it sounds trite, right? Growth potential on the top line, ability to improve. Frankly, we look for things that are interesting to us.

So something, you know, at the risk of sounding kind of airy-fairy, we like working with companies that are fun, that have management teams that we like. So that's our investment philosophy. We don't really, people say, well, what are your exit strategies for your businesses?

We don't really think that much about it. We've sold pieces of some of them. But, yeah, I mean, in the longer term, we want to make a return on the investments. But we're sort of in the mindset, if you can grow them and improve them, the money will come after, as opposed to going in and saying, hey, we want to make a certain, flip this for, and I don't even understand some of these terms, cash flow. cash or whatever.

So that's our, it's not just optimizing our return on assets. I'm not looking down on anyone here, you're probably looking down on me saying we're not rational investors, but that's the way we, that's our philosophy. Thank you.

Thank you, Michael. I'm Rodrigo Braga, I'm with Braga Investment and Advisory. We're a New York based family office, private equity firm.

So we tend to be very Very opportunistic, like Michael will look at deals not only in the traditional private equity law, middle market space, but outside of that. We tend to be and differentiate ourselves by being much more flexible than your traditional private equity firm. We don't have a rigid mandate that we have to make that distribution and give back capital. It's all our own capital or other family offices that we partner with.

Yes. So we don't have that five to seven year deadline in which we find ourselves in a tight situation and we have to sell the company to give back capital to our investors. And we tend to be very focused on long term value creation, working with the business owners, understanding how they got to that position.

The companies that we invest in tend to have been around for a long time. owner operated and founded and have come to a differentiated market position in some aspect or another and so we seek to understand that fully what differentiates them and then look for avenues and opportunities in which we can improve and bring our operational expertise and help them grow in other areas. Very good, thank you very much. So this session I think of it as the...

Be careful what you ask for, because you might get a recession. And here's what I mean, a little tongue-in-cheek. You're executives, you're looking for a sponsor, you're looking to get into a deal where you can put some money to work, and you've got a vision, a thesis, that you can now make a reality.

Bring some companies together, grow the value, serve the families that are part of that family, of that part of that company, and see it happen. Now, though, it's going to actually happen. And so what we're going to talk about is what's it actually like to work with a PE sponsor post-close. Okay? So the first question out of the bank, and we'll ask each panel member to walk through their view or their approach, is to describe a little bit what's it like, a typical, you know, month, month in, month out, how is it to work with your CEO?

How often do you meet? How formal are the board meetings? Are the communications ad hoc, structured?

What's the tone, the atmosphere? What's important to you about how that works? And Rodrigo, if you don't mind, we'll start with you.

No, absolutely. That's kind of tricky because it varies widely. How we manage and how we are involved with the company varies drastically and is incredibly dependent on how involved the organization is. and how the company works and operates. And so we tend to be very flexible in that case. One of the things that we like to do, and this is actually post-close, is we're approaching the deadline.

We sit down with the seller, and we have a very clear, in plain English, discussion of how things are going to operate post-close. What our defined strategy is going to be. How involved do we want to be?

How involved do they want us to be? What areas are going to be inside our scope to be involved with? And what areas are in their purview to operate and the decisions that they can make without consulting us?

And then we can define the strategy. How often are we going to touch base with that? Do they want us to fly in and meet there? Do they want to just have monthly calls on the phone and then a quarterly physical board meeting?

And so it's very dependent and we work together with the business. business owner and people that are staying on in senior management to define how that interaction is going to pan out. Thank you very much.

Yolanda? So what I find is that there are really very different styles of engagement. Just working with different executives, with different private equity sponsors.

There are those who are very hands off and don't engage in it. There are those who are keeping company. I think you say you're like hands sitting on the edge, right?

So I think it's one of those quick questions also that we touched upon in the beginning. I think it's good to know up front what kind of engagement. Private equity, I think, investor, in my experience, has a style.

And even though they might say we do it differently in different situations, there is still a difference. the whole style and and style which could really range broadly from being with a company every day to only quarterly you know board meetings so it's it's just a matter of style and learning about it up front will give you a pretty good idea how this will work out i mean that's my contribution to this question thank you very much so uh it it really varies as you said so one of our companies the biggest one Vexor is a it's a recycling to fuel company that was acquired about a year ago and that one has it there's been some shuffling in the management team but that one was more around putting in basic metrics and reviews with the management team so it's a weekly report there's a weekly a short weekly phone call and then a monthly board meeting but that does get into the operation when aspects of the business there's another When I work as an IT... Services firm for mid-sized companies.

That one was actually one of the Cranbrook partners, another good friend of mine, who was the lead on that deal. He really didn't have an interest in working on it. He had some health problems and didn't want to work on any deals. So he basically runs that company and that's hands-off. We would come in and he's got another partner in that company that we acquired.

It was the guy that ran it before it was acquired. They run it and we would do the monthly board meetings. You know, some tempers flared one meeting and, you know, Paul, my former partner, said, we don't need meetings with the Pope, you know, once a month. So you guys take your management, keep your ownership and get lost. And we said, hey, you know, if that's the way it's going to be, that's the way it's going to be.

So, and then the last one, spot imaging, we're in the action. Ceo, three children and a founder. And I came in to be a part-time CEO because they're very capable people.

They've always worked at the company. They don't have any best practice. This is things from elsewhere, so we put in you know Proforma sales and they were had that basic keynote from just just fundamental metrics and the problem there was you know Three children of the founder and it's you know who put gum and whose hair in sixth grade But very good, you know overall good people so that's almost more of a coaching and mentoring and Intermediating type of thing and it's actually good that I'm on Two weeks on and two weeks off because we've done so much.

We outsourced almost all the engineering, got rid of five electrical engineers. We're outsourcing all the IT. The systems we make have a big IT element to them and software. Rather than us trying to configure all these systems, we're outsourcing it. The basic process is almost overwhelming in terms of the amount of change we're trying to implement.

So it's kind of good that I'm there a couple weeks and then I'm gone a couple weeks. But there's phone calls. And I think in that case...

Again, not that I'm a brilliant guy or my partner is a brilliant guy, but just basic fundamental ways that you operate a business that they need help with and they catch on pretty quick. So they'll call us and we'll have a deal that we're doing a big Department of Defense deal for 40 hospitals and so how do we structure that and write the contracts and that type of thing. So it really varies. Again, I'm kind of the small guy in the room, so that's the way that we do it. I imagine it's probably not a lot different for bigger firms.

So I think to really think about the relationship between the executive and the private equity fund, try to put yourself in the mindset for a moment of your typical private equity fund partner. They are, on a typical day, dealing with their limited partners, they're trying to raise a new fund, looking for new investments, executing either a platform or an add-on investment, dealing with day-to-day issues. issues at whatever portfolio company has issues that day and usually about three four or five portfolio companies at a time no private equity person will ever say I wish I got to spend more time on an investment they're torn very thin in terms of what they're doing on a day-to-day basis so what does that mean they're going to be involved in major decisions buying the company major contract something with your credit facility and they're going to be involved when things are going badly.

When performance is going well at the portfolio company you'll usually have a lot more leniency and less contact with the private equity firm. When things start going south that's when they step in and there's more handholding at that point. Every company is different every executive is different it's important if you're doing diligence. It's not a private equity firm to ask those questions.

How do they work with their executives? How involved are they day-to-day? You're always going to have your reporting and your monthly or quarterly meetings and your board meetings and all the periodic items.

But day-to-day, it's a really important question to ask of each other, what's the relationship going to look like? Very good. That was good for me too, Mike, is that the two things.

One is performance, and private equity people do not like to spend more time if they don't have to. The other one is, the single biggest one I hear is if there's bad news, there's a big difference if it was told ahead of time or after. We all have bad news at times. No surprises.

So, thank you. Those were great discussions. And then if you think about the first step then, it's... It's going to be we can close the deal. We're going to go through onboarding.

So how do you think about onboarding a new portfolio company? And, you know, some of the typical things we might think of is dashboards, reporting, the 100-day plan, the first six months. What's important to you? And kind of how does that work? Melaina, if you don't mind, would you like to?

Yes, I think. I would say from our perspective that happens pretty ever wide. So when we put a deal together, call it action, we have a value creation plan. Obviously at that time it's at a high level because we don't have a lot of information, but we have to have a clear path to value creation and that's part of our model. We partner with experienced executives if we identify opportunity in the market, have investment pieces in the kind of company, we must have A value creation plan.

And as you progress in the deal, you collect more information, that plan gets developed. But then further, the idea is that before close, you have a 100-day plan. And it's quite detailed. So when you, and, I'm sorry?

I want to add something to what you're talking about. You know, as you and I talk about with the executives, a lot of times we're talking to you, the executives, about your 100-day plan, and you're very vague about what the levers are. Can you address that?

Yes. Can we go back to what I said? Joe, I think it's a very good comment because oftentimes what you see is just generic statements that would pertain to, it's like some language that I can take to any business and it would pertain.

It's not what we're looking for. We're looking for a clear, well, we're not looking for a book. In fact, the shorter the better.

But clarity collation would... Opportunities exist in the industry. What risks exist in the industry?

What kind of company would fit your investment thesis? And then once you get this company, if you have a company, then what are specific, again, not just build sales force, not just put systems in place, I mean, those things, everyone knows those things, you don't have to say, but what are specific things, what are specific levers you would pull that is aligned with this industry dynamics that we're all after. And another thing is, it's a question that I always ask, what have you done before that is similar? Private equity doesn't like taking risks they don't need to.

So if you can demonstrate that I've done this before. So in effect, then you have well articulated opportunity. You have a plan and you have a person or a team that can execute the plan. So that's what really what we're after. And again, doesn't have to be detailed and doesn't have to be very specific at the beginning, but it can be generic.

Just to add to this. I mean, you learn a lot during the due diligence process, right? So upfront, you might have generic, but as you go along, because I've got a support in place, and suddenly you have a much more detailed and personalized plan, right? Yeah, it's a process, obviously, because when you started at a high level and getting closer to closing the deal, you have more and more information. What I don't like to see is generic statements that I would take to any business at Fort Portain.

Those apply, but what is it so specific to your thesis and specific to this particular business that will make it a success? So let me add something. In every industry, there's patterns and dynamics going on right now. Bill used the term, the industry, where the puck's going.

So where's the puck going? What are the risks in closing the gap so you can get there beforehand? We want to know that you're able to discuss what those levels are.

of what you've presented. And then when you have a company, as you are looking at the specific company, you're applying which ones are more heavily you're going to pull than the other loans. And then what priority? Yeah, that's right. And then when you think about investment, this sort of plan, there's always something core.

There's a core to it. It could be, you know, the industry is cyclical, and we're a good time. of this cycle where there are some opportunities to buy more companies and create, maybe there's new technology you could apply. And yet they're specific or it could be industry is very fragmented, it's a consolidation.

There has to be some sort of core to your thesis that is very clearly, can be very clearly articulated. And like I said, it's really not about detail, but it's about clarity of your vision and