The Exchanges

Q When you buy a company and you're teamed up with the operating partner, how do you create that game plan for one of your portfolio companies?

A Yeah, we just kind of wing it. We have a repository of what must now be thousands of pages of value creation plans. These are typically 60 to hundred page PowerPoint documents that focus on the four or five levers that we've identified during due diligence that are going to move the needle during our investment period. And then we track those meticulously with KPIs, monthly, quarterly, in some cases weekly. The operating partner and the investing partners work together to define What success is going to look like. We may have different areas of expertise along the way in terms of who drives which of those components. But pretty quickly, even pre-closing, it transitions to the operating partner and the management team co-authoring. How do you get from good to great? Starts with a hundred day plan, which is how do we get out of the blocks extremely well, extremely successfully, but it's really about the next four or five years. And I mentioned operating partners. That's one element of what we do. We have also operating principles. So we have a team now of six going on seven. And in addition, we enlist former executives from our portfolio companies who are now looking for value-added board positions, and so we do try to group hug the value creation process, structure it, document it, measure it.

AI assessment note: “transitions to the operating partner and the management team co-authoring. How do you get”

Q So circle back now, just from that perspective of doing something that previously to that point in time had been very popular. As you said, it was kind of unpopular when tech was going wild. You could probably say the same thing of, say, two years ago, if not today. What did you learn from having done that?

A Well, you become deeply skeptical of trends that are suddenly these watershed moments where The future is not going to be anything like the past, and so leave all that behind. And what I can say left a great impression on me was the FT ran an ad, it must have been 2000, maybe late 2000, and it was the following, thanks old economy, we'll take it from here. And it was an ad for something like Roberts and Stevens, or Hamburg request, or some high-flying shop. A year later, that looked really stupid. And the more of those kinds of humbling lessons That you can learn early in your career where markets change brutally, and it becomes about surviving and not chasing what's hot at that moment, but taking a longer term perspective, to me that was Goldman Sachs. I could have gone to some startup and done who knows what, and priced my options that eventually would have been worth a hamburger. But going to Goldman to me felt safe, and it felt like a long term career move. And a place that could weather storms. So I adapted a pretty early risk antenna that said that could kind of sniff out maybe bullshit a little bit and stick with things that have been around for a while.

AI assessment note: “you become deeply skeptical of trends that are suddenly these watershed moments”

Q I'd love to talk through the pluses and minuses of a business like this within a large organization like Morgan Stanley. Why don't we start with the positive benefits you feel you derive from being here compared to being independent?

A It is in middle market private equity when you're focusing on fairly tightly held Businesses located around the United States, not in New York, not in LA, San Francisco, generally. It is very difficult for a business owner to differentiate and distinguish between all of the varieties of rocks and trees and lakes and rivers and mountains and hills that are the middle market private equity diaspora. I'm not taking potshots because they're really good investors and they're very smart. However, it's dizzying. Who's good? Who's a good partner? They all look and dress the same. So here's a positive. They kind of know Morgan Stanley. They know it to be a very respected institution, particularly in recent years with some of what James Gorman has done post-financial crisis. The firm is in a great position. We have a very good reputation. We actually lead with that, and it gives us a conversation. It's a conversation starter. You may not love it, but you're going to talk to us and allow us a chance to explain what we do and what Morgan Stanley brings to the table. It's different, number one. Number two, This is a firm, and I can say this now having worked at Goldman, Apollo, and other places. The culture's fantastic here. It's collaborative. It's collegial. It's low ego. People from other divisions, whether it's equity research, macroeconomics, fixed income research, our debt funds, our …

AI assessment note: “So here's a positive. They kind of know Morgan Stanley.”

Q Let's turn to the investment process and maybe start with, you mentioned middle market, you mentioned founder-owned businesses. What are your core investment principles that you look at when you're targeting investments?

A We focus on a few very sacrosanct things. Number one, we focus almost exclusively on services industries. It's a very large portion, 70% or so of GDP. From a top line perspective, organic growth, many multiples of GDP. We try to take the cycle out of our investing and look for things that are growing, taking market share in industries that are winning. That could look like B to B services where you're taking pain points out of SMEs. It can be human capital management. It can be multi-site consumer services. In the past, we've been very successful in recently residential services, professionalizing traditionally analog business models with modern, sophisticated, scaled operations, sales and marketing, lead gen, leveraging digital technology to make these businesses better. That's important. We do that in the business services, consumer services, healthcare services, and industrial services space.

AI assessment note: “We focus on a few very sacrosanct things. Number one, we focus almost exclusively”

Q What type of investment do you gravitate to like a moth to the flame?

A I mentioned just the excitement and energy and positivity that comes through alignment with mission-driven organizations. For example, we just acquired a business called Emler Swim Schools. My partner David Thompson did. Its mission, founded by a woman named Jan Emler, was to stop so many kids from dying in backyard swimming pools and at YMCA. It's because no one was teaching kids how to swim at a very early age. This is a business whose mission is to teach children through professionalized multi-site curriculum how to survive if they fall in the water, how to swim better. Those are just better places to be in life. Doesn't make them great businesses and doesn't guarantee success, but you certainly feel an energy there like you're doing something that's worthwhile.

AI assessment note: “energy and positivity that comes through alignment with mission-driven organizations”

Q How did that thread clearly get you in the door, allows you to have some value early on that's different from the other people around you play out through those early stages of your career?

A I stood out probably as not having had quite a cookie cutter educational background. One of the things you learn in a liberal arts education, I tell my kids this today, is at its core is critical thinking. While it may not be the most Analytical practice if you can learn to think critically, process different kinds of information, assess what's true, what's not true, form an argument, support it. I did all that in a finance context, which was different, and I think I impressed upon people a level of maybe maturity, academic maturity, professional maturity, because this was new for me. I wasn't made to do this, and so I approached everything with almost a childlike Intellectual curiosity and zeal, and that becomes kind of infectious even today when I work with younger professionals who have a spark where they want to keep pushing something and do better and learn more. It becomes a little bit exhilarating, and I think I probably left a pretty positive impression, which then got me roped into some more interesting assignments. I was also fluent in French, and we had this great aspiration of opening an office in London To conquer the European tech scene, and I got tapped early, and I went. So I went to London and helped set up an office, and I just kept raising my hand and moving up.

AI assessment note: “I stood out probably as not having had quite a cookie cutter educational background.”

Q How do you assess the quality of the management team, both their own capability and this lens that you said of, are they willing to work with you to make change?

A I think if you're in the industry long enough, you develop pattern recognition. And I go back to some of my first principles in terms of what allowed me to survive early in banking when I was clearly out of place. I think the power perception, the ability to read a room, the ability to understand how people interact with others, What vibes are they giving off? There's a lot of in-person learning that you're really trying to pick up on when you're talking to executives early and often. What motivates them? What do they really like? I also lean heavily on operating partners who themselves were C-suite executives, whether CEOs, presidents, divisional vice presidents. They have an uncanny ability to connect with management teams and really assess them, and we've gotten programmatic and scientific about it, where we'll have behavioral assessments as part of our due diligence. So it's all got to check out.

AI assessment note: “we'll have behavioral assessments as part of our due diligence”

Q If you look at this recent deal, this Minnesota roofer, what are the deal dynamics in the market today?

A Fascinating. Very small group of people invited to meet the owners owned by a regional, smaller private equity fund. Talented investment banker who covers the space, knew the seven to 10 private equity funds that have been around this sector. By the way, that is a minuscule number of people. Think about that. We're in an environment where bankers, who are our partners, are trying to be efficient with managing team's time, not waste a lot of time, and basically select from highly pre-qualified people for efficiency, speed, certainty. And pricing. One of seven been there. We know Resi services. We have a good reputation. Our team here is great. They down selected to two parties with substantial work yet to be done. Such was their level of confidence that of the remaining two parties, one of them would get there in a very real way. And that's exactly what happened. That is a very different process dynamic. The bar is very high to be included in a small handful of people. Contrast that with three or four years ago, the wider net you cast, the more people who are desperate to put money out the door, the better chance you had a silly outsized buyer who may or may not have been qualified to acquire the business, getting you that outperformance and an exit. So it's a very different, more discerning market, but it's one we actually are very comfortable operating in.

AI assessment note: “select from highly pre-qualified people for efficiency, speed, certainty”

Q What did you most take to in those early days?

A I was never going to lead the pack in terms of scintillating financial analysis. There were just much better qualified people with engineering degrees from Stanford and Cal Berkeley and wherever, but I could process a lot of disparate knowledge and make it cohesive and write about it, and so I became a go-to for taking a bunch of abstract technology, lingo, financial analysis, And effectively generating content for institutional investors or for other intermediaries and do it in a really probably well-written way. What you'll learn is a lot of people really don't write very well. Today, it's worse than ever. Maybe chat bots will bail us out of that, but people can't write. So if you can write early in your career, you can actually make a niche for yourself in distilling a lot of complex information into readable content.

AI assessment note: “I could process a lot of disparate knowledge and make it cohesive and write about it”

Q How does your diligence process work on a deal? Maybe walk through an example. Think of a recent deal and the type of due diligence you did on it.

A Here's what's critical to your second question. The most recent investment we approved at investment committee and has just, has signed, and so we'll close within the next few weeks, is in the residential services industry. It is a roofing contractor in, of all places, Minnesota, North Dakota, Denver. The diligence there was we were truly differentiated with an angle because we own already in our current portfolio two distributed residential services businesses, That have very similar models. So what happens when you focus on a sector is you develop an expertise, you have pattern recognition, you draw on past experiences, you compare, contrast, you use your historical diligence built up over five, six, seven years of focusing on a subsector that flows very naturally into a new diligence assignment. So the team and our investment committee knew what to do, knew what to look for, knew what good looked like, knew what great looked like, Knew where this company stood, was able to uncover their deficiencies, their strengths, et cetera, using a well-worn path. The diligence bar is much higher on something where you're kind of prospecting, and it's a new sub-vertical, for example. The first time we did a veterinary deal was for a business named Pathway Veterinary Alliance, and it was in 2015, and while we had been around the vet space trying to find something actionable, the diligence…

AI assessment note: “The most recent investment we approved... is in the residential services industry.”

Q What was your path from there forward into where you had today in private equity?

A There was a moment in which I asked myself, am I really going to be an effective technology advisor, investment banker? I don't have a background that suggests that I should. I was learning a ton. To this day, I can recite the Geography of early semiconductors using field programmable gate arrays and early risk language that enabled things like ARM, and it was fascinating, but that was not going to be my niche. I also didn't know a lot. I was making it up as I went. Therefore, there came a time where I could either recommit to becoming a full-time member of Cowan's technology investment banking group, which by the way, would have been going right into the tech recession of 99, oh, oh, oh, one. Or take a pause and actually go to business school and teach myself all the stuff that I never learned. So I threw myself into the hottest cauldron I could find for a non-numerate thinker and went to Wharton and majored in finance and minored in accounting, and I kind of did my penance, and I loved it. From there, I had tons of optionality, and that really was very much a door-opening, career-enhancing step back for me.

AI assessment note: “went to Wharton and majored in finance and minored in accounting”

Q What do you think that implies for your expectations of returns going forward?

A That's a great question. The problem here is private equity professionals fall in love with their own portfolio companies and are convinced Yeah. I'm sure other people will probably have to take their marks down a little bit. It's a tough economy. Not us. We do need a resumption of a more constructive credit market to unlock a little bit, a lot bit of transaction flow. So you start to have more efficiency in processes. I think that's a little ways, ways yet. So what it means is people are going to have to have the courage of their convictions to over-equitize investments. And generate their returns through something other than financial engineering, which by the way, has never really been a private equity calling card, to be really honest. But here's what I would like to say. We've been waiting for this moment for a long time because we work exhaustively on value creation planning, and we've incorporated operating partners who are full members of our investment committee and in our carry pool and joined at the hip with us. Because we think real value creation comes from that kind of expertise, and we're willing to share the upside. I feel like we've worked really hard to have the same returns as a lot of other good private equity managers who haven't taken that quite as seriously. Personally, I think the rising tide has lifted all boats, and that's all fair. But I think the nex…

AI assessment note: “I think the next couple of years, you're going to see a dispersion of returns.”

Q So how'd you get from Goldman to Morgan Stanley?

A Trade it up. I, uh, ever eager to, I think, keep learning and advancing. I asked if I could do a rotation in Goldman's merchant banking division. They're very talented group of private equity investors. PIA, it was called, and what you learn at Goldman is when you raise your hand and leave the people who are your sponsors, you're breaking snow on your own now, and that was an interesting lesson, and I did get into PIA, which gave me entree to private equity, which really has always been a lot of talented bankers have always really yearned for the buy side. It's always had this halo, and sure, there I was following the sheep, and I was brave enough to ask for that, and I got it, and I performed okay. But I learned, and I was surrounded by some really excellent talent, many of them now who've gone on to tremendous success. Doug Lindahl, who went to New Mountain Capital, mentor Jerry Cardinal, who's someone I watched with awe in terms of commercial hustle and chutzpah and just work ethic, and now he's gone to phenomenal things at Redbird Capital. I was surrounded by a lot of talent. I saw what great and good really looks like, and I was last in. And a group of five very talented peers in a class. I'm the guy who asked to come in. I read Tea Leaves pretty well, and I thought my career might best advance somewhere else.

AI assessment note: “I read Tea Leaves pretty well, and I thought my career might best advance somewhere else.”