The Exchanges

Q I want to ask you about capital allocation. You're buying businesses, there's a financing component. What do you see as the most important levers of capital allocation in the success of one of these businesses?

A It's two things. One is, what is the pipeline and opportunity set for inorganic growth? We are actively avoiding categories where the bolt-ons are trading outside of our price range. There are categories today that people are having success rolling up, whether they be Resi HVAC or pest control, or in a prior cycle, perhaps VET, where the platforms trade at big prices, but the bolt-ons also trade at big prices. You have relatively small bolt-ons trading at maybe eight to 11 times cash flow. For us, that is fundamentally less interesting than similar end markets where the platforms are trading at 12 to 15 times, but the bolt-ons, because of micro market risk or just lack of private equity heat, are trading at, let's call it, five to eight times. To us, those are more interesting opportunities. A lot of the time we spend in diligence on a category and on the initial purchase within that category is spent on building out the pipeline so we can think about within how much confidence interval range do we have that we can get the next 3040, fifty million to work at an unlevered low to mid teens return, and then with a dollop of leverage once the business is ready for it, now without even getting into organic growth, you're up into the high teens or low twenties. The second capital allocation decision that is critical to us is where are the pockets of technology implementation and inve…

AI assessment note: “It's two things. One is, what is the pipeline and opportunity set for inorganic growth?”

Q How do you decide when a business is ready to take on some leverage?

A It's a combination of two things. One is, what is the depth of the G&A line? Do we have a CFO, a controller, a head of treasury and cash management? Are all of the warning lights that we touched on earlier in place so that we're able to spot things in real time if something isn't coming to fruition in a way that we underwrote it? So that's the people side of it. And to a size and scale, we have found that the credit markets are far deeper Cheaper, more flexible, less covenant-laden, and friendlier to consolidations that are, let's say, 15 to twenty million of EBITDA in size and scope versus something that's five. What does that mean in terms of practical timing for us? That's usually 12 to 18 months after we invest in a business. We've typically deployed the preponderance of the equity we've allocated to that roll-up. The team is fully formed. We have all the warning lights in place. And it's at a size and a scale where we can then go to the market and get a number of term sheets and create real competitive tension around that financing.

AI assessment note: “It's a combination of two things. One is, what is the depth of the G&A line?”

Q Which two people have had the biggest impact on your professional lives?

A For me, I would say number one is my wife, Annabelle. She's allowed me to spend the time, effort, and energy traveling around the world with Alex the last 13 years doing the things we need to do to build the firm, and she's picked both of us up off the ground from the lows over the last 13 years. But equally as important, she actually suggested that Alex and I worked together while we were in business school, so GSP is Very much her brainchild. Her and Alex have actually known each other for longer than I've known either one of them. They went from preschool through college together. We both give her and Alex's wife, who's also named Alex, a ton of credit for helping us in the early days of figuring out our partnership. Two is Royce Yudkoff, who we mentioned earlier, who's our HBS professor for me, and I'm sure Alex agrees, has been our most impactful An important mentor and thought partner over the last 13 years. Even to this day, almost 15 years later, whenever we have a serious problem, our first phone call is to Royce, and just an unbelievably thoughtful, smart, humble individual who we owe a lot to.

AI assessment note: “number one is my wife, Annabelle... Two is Royce Yudkoff”

Q Where you guys started was operating these franchises. What did one Burger King franchise unit look like when you bought it, and what did you do to improve it?

A I'll take you back to 2014, which was the first Burger King investment we ever made. The unit economic at the time was about 1.1 million of sales per box, and about 11% straw of a margin. What we saw is that through technology and thoughtful capital allocation, There was a real opportunity to increase the overall equity value. What we were able to do pretty quickly was align up all of the 1.1 million dollar Burger King P&Ls in the country that had similar wage state profiles through benchmarking see that these particular restaurants were off by about three to 400 base points. Some of that was food costs. Some of that was on the labor line. This was our first iteration with investing in technology to grow the enterprise value of these businesses. Within that business, we put in food cost software, which allowed us to pretty quickly see where the variance in cost of goods sold was coming from. Was it waste? Was there a proportioning? Or was it theft? Then we were able to start managing to that. Eventually we moved the store level margins within that business from 11% to closer to 15 or 16%. If you think about a business that beneath that store level EBITDA line has GNA, so the 11% store of margin was maybe seven percent EBITDA margin, and we move that up to 12 or 13%, that's quite material. The examples today are similar to the examples back then, perhaps on a larger scale with f…

AI assessment note: “The unit economic at the time was about 1.1 million of sales per box”

Q When you're talking to a founder that you're trying to win the deal, how do you position that tension with wanting to be their partner forever and treat it that way? And the knowledge that In the structure that you're in, you're ultimately probably gonna sell it in a few years.

A We're very upfront about the point that we are a private equity firm. Our goal is to monetize the investments within a reasonable time horizon with our founders. It's self-selecting. If they have an issue with that, there's probably not gonna be a partnership, and if they don't, then let's turn over the next card and talk about it. That also comes to the discussion around incentives and incentive alignment. With us and the partner companies, one of the things that we've spent a lot of time, effort, and energy on over the last 13 years is coming up with incentive and governance structures in place to make sure that people are maximally aligned to a successful exit. And so what does that mean for us? That means the importance of rollover in a founder-owned transaction. Founders are typically rolling anywhere from 20 to 50% of a transaction with us. Also, incentive economics above and beyond that. General private equity hygiene is to allocate a 10% management incentive plan at the time of the deal, and we do that, and that's important. But what we found is going above and beyond that to create even more alignment in some of the, I'll call them upper tier outcome cases. When we do a deal with the founder, we present to him or her, as well as their whole team, what the management option program looks like. But we also explain That if they are willing to write a new check into our de…

AI assessment note: “We're very upfront about the point that we are a private equity firm.”

Q I'd love to take a step back and break down how you go about doing all of this. If you think of GSP, what is it that you're looking for in the type of company that you want to buy and build?

A The first thing we are looking for is we invest in founder-owned businesses. We feel like a lot of the alpha that we've been able to create over the last 13 years is partnering with founders Being the first institutional capital into their businesses and helping them scale those businesses, usually through M&A, ultimately to a scale, to a level of diversification, to a level of revenue mix through integration, technology, capital allocation, managerial talent and governance, create platforms that larger private equity firms want to buy. That's not something we've learned in business school. That's not something that we learned in investment banking. That's what we learned from getting our teeth kicked in as operators ourselves. We were the CEOs of our working business for the first few years and made mistake after mistake after mistake. Those mistakes have added up to a healthy appreciation for operations, for integration, and for what true partnership with the founder looks like. That's been the single biggest overall alpha generator.

AI assessment note: “The first thing we are looking for is we invest in founder-owned businesses.”