The Exchanges

Q So in the private equity strategy, and we're going to talk about CHI Doors What's the ethos of the strategy that this deal fits into?

A The ethos of our strategy in US private equity is around transformations. We're looking for good companies that we can inflect in a meaningful way and transform maybe operationally, maybe through acquisition or growth, maybe strategic repositioning, top grading talent. But the question at investment committee is always, why is it gonna be different in our hands? Not just, okay, it was growing last five years, eight percent top line. It's going to be eight percent top line next five years. That's not our deal. Even if it's a great business, we're looking for something that we say we see an opportunity to really inflect the growth or take the margins up massively. So CHI Overhead Doors fits into that transformation program. We saw something that was good, but could be so much more.

AI assessment note: “The ethos of our strategy in US private equity is around transformations.”

Q What was the diligence process like to get you the conviction that you wanted to preempt this deal?

A So there was some limited information in the data room at that point, so you could do some financial analysis, and there was things on the financial side of piecing together opportunity. We could look at how has steel moved over a period of time, and how have their steel purchases moved? Were they capturing all of the deflation that had been happening in the steel market? The answer was no. You're combining things like that with, well, who runs procurement? Well, we don't really have one. There's really not really a head of procurement. Tell us about your last three Salesforce effectiveness initiatives. We don't really do that. And then you look at the org structure of sales, and there's one sales leader with literally every salesperson reporting into that person. There's no structure. When you think about time and territory management and how salespeople are spending their time and dealers not having a growth plan tied to CHI, it's a little bit stitching together pieces of information that tell you, okay, we know it's a good business. We know we could do so much more. The world's a competitive place. People are going to figure this out. Just go. And even if we have to pay a little more than we otherwise would want to, these are the assets we want to make sure we get.

AI assessment note: “stitching together pieces of information that tell you, okay, we know it's a good business.”

Q What are some of the important but subtle aspects of the ownership that from the outside you might not appreciate are important in sharing this ownership with the employees?

A There's a few different success factors we've noticed for when does this go well. Number one, the leadership team has to be super passionate. If the leadership team is like, I'll do it just because you're telling me I got to do it, Pete, I'll do it. Don't bother. It's not going to work. You're not going to change the culture. This is a second job for them to drive engagement and do all of this work. That's one commitment of the leadership team. Two, you've really got to look at how do you make this a meaningful wealth creation opportunity for people? Sometimes you'll hear folks say, we gave 500 dollars a stock. I wouldn't bother. I would give a cash bonus. For this to work, people need to see a path to at least six months of their income with upside, hopefully a year of income on average. And then the third thing, I do think you need some degree of stability in the workforce. It's hard if you've got a retailer that is churning their employee base a hundred percent a year, and you show up, start talking about five-year plans. That's a difficult dynamic. So we had an unbelievably committed leadership team, so passionate about this. When they were rolling out the programs, I'll never forget this, the sales leader talking to All of the salespeople, including the most junior sales folks who would never have ownership, I'm getting emotional talking about it because you could see what…

AI assessment note: “There's a few different success factors we've noticed for when does this go well.”

Q So how did it find its way to you?

A It was an auction process. We had heard good things about the business. I think Barclays sold it back in 2015. We were on a big list. They were going to call the world on it, and we jumped on it, got an early shot to go study it, meet the people, walk the facility, had already done a fair bit of work on the market, decided early on this was something we really wanted to do, and so we preempted the process. At first round bids, we had a final round type offer. Our price was certain. We submitted a term sheet on a contract and we said, we'll sign this in 72 hours. The seller literally didn't believe it. There's just no way you're going to do this. You guys have done so little work. So the founder of the seller actually spoke to George Roberts and was like, are you guys really going to do this? And George said, yeah, talk to Pete. We're ready to go. And then we signed it in 72 hours.

AI assessment note: “It was an auction process. We had heard good things about the business.”

Q Let's talk about the exit. You've had great success with this business. You've done 80% of what you want to do. How do you think about who the next owner should be?

A We had a lot of inbounds from strategics, from financial sponsors, from family offices, you name it. We got a lot of inbound interest on the business. Obviously we're fiduciaries, so we have to seek out the best outcome for our investors. Having said that, given the culture that was built, it's not hard to believe That the people who value this culture are the ones who are going to pay the high price. So somebody who's maybe more of a slash and burn corporate buyer, I'm going to make this up. We didn't have one of those in the field, but they're not going to pay the winning price anyway. So when a new core comes along and you look at how new core operates, how they treat their people, their safety record is legendary. Their profit sharing program. If you look at their financials, I think their manufacturing plant employees made last year on top of their wages, like 35,000 dollars in profit sharing, a lot of money. Now that was an epic year for steel. I concede, but still that's a philosophy that you don't see everywhere. So when new core came calling at the same time, many others did, there was reason to believe this could be the best thing for our investors to engage with them on an exclusive basis. And we think they could pay a market clearing price and it'd be the right thing for the employees.

AI assessment note: “the people who value this culture are the ones who are going to pay the high price”

Q Let's turn to what happened once you own the business. There are a couple levers you mentioned. Why don't you walk through what your game plan was at the time?

A We didn't use a lot of leverage. The percent equity in the deal would have been 40% or something. Top grading of the leadership team did happen. We brought in a talented guy I had known, Dave Bangert from Danaher. I had hired separately to run Ingersoll Rand, Dave's old boss, Vicente Raynell, so knew a lot of people who knew Dave, and Dave knew us, so that was an easy hire. And Dave lived in Indianapolis, so it was a drive to Arthur, Illinois, which is by Urbana-Champaign, University of Illinois, so a little bit remote, can be a difficult place to recruit people into. So there was an opportunity to bring in some really operationally oriented folks. We did bring in some new environmental health and safety help, The injury recordable incident rate, which is OSHA's key metric of safety, was 14 at the time, so what that means is for every hundred people in the plant, how many people per year were getting hurt? It was 14 out of a hundred per year. So you add that up over five years, that's a lot of people. She brought in new help there. There was, relatedly, a big opportunity in scrap and rework, and they made quality products, but inconsistently. And it's interesting how much you will find parallels between safety issues and quality problems, because they both speak to the process in your plants. So we brought in some operational help. We brought in some marketing talent. There was…

AI assessment note: “Top grading of the leadership team did happen. We brought in a talented guy”

Q How did you figure out what price to put on the table to effectively preempt the rest of the competition?

A We tried to triangulate around where high quality building products businesses had traded over time. These were low double digit type multiple businesses. I think the fact that it was a garage door company also held it back a bit. It wasn't something sexy in building products. It was like, ah, garage doors, like a Masonite type business where people would say, Good business, but not that exciting. There's not some market penetration story. There was a market share gain story, but it's not like garage doors in totality had some big growth story behind it. So we felt like that low double digit zone was where it was going to trade, which is where we bid. Then we just kept going up trying to preempt. But the whole process of preemption is a fascinating psychological game of how do you make the other side feel like it's worth not going through a process because speed and certainty are only worth so much. Particularly when you have a good asset. So convincing someone to take it off the table early with your price, it's a lot of psychology.

AI assessment note: “triangulate around where high quality building products businesses had traded over time.”

Q Now you own it. You see all these operational improvements. You bring in some leaders. How do you decide what to do first and in what order?

A There's a leadership tool that we borrowed also from Toyota. Ocean Connery is the official name, but it's now known more broadly as strategy deployment or policy deployment. People call it different things. That is a way of cascading priorities into an organization. How you prioritize, and then if the priority, let's just say one of them is scrap production, How does that cascade down to individual plants, leaders, shifts, so that it all adds up to what you think you can get? There's a leadership tool we use to do that, and it is as you would expect. You go after the biggest opportunities. It's constantly Pareto-ing, like, how can we get 80% of the results without drowning the organization in priorities? Because if you have 12 priorities, you're going to achieve none of them. It's got to be, what are the critical few that you're going to get this year?

AI assessment note: “It's constantly Pareto-ing, like, how can we get 80% of the results”

Q Do most of the identification of those opportunities in data analytics come before you've made the acquisition?

A Not really, because you have to move so quickly to win in this world. So you have clues. But you don't have the access to data and the time if you're going to be effective in winning these assets to be like, well, I got to get to the one decimal place. How much money is there in scrap? How much could we lower inventory? How much faster could we accelerate growth and market share gain? And some of which is unknowable. The market share gains we drove in part were lead time reductions and knowing how much you could shrink lead times down relative to the competition. You could analyze that forever and you just need to get into it.

AI assessment note: “Not really, because you have to move so quickly to win in this world.”

Q And what's been the impact from that formation to today?

A So we've got about 20 private equity firms signed up, and by signed up, I mean they're committed to doing this at least a few times in their portfolio, following our standards, and then sharing some data back to the nonprofit so we can track where's the money going, who's being impacted, what's happening to turnover and engagement. We've worked with some public companies on this, continue to work with some public companies on this, some family-owned businesses, some restaurant chains. The most heartening thing is you've actually got people talking who largely have just been throwing grenades at each other. So we've actually got labor talking to capital with employees at the center of the discussion of, yes, how do we move business performance, but how do we help workers who have no access to ownership of any sort? And without access to ownership of any sort, it's hard to get anywhere. As Darren Walker of Ford Foundation says, it's become normal in the U.S. to work 50 hours a week And beyond federal assistance. Somehow that's happened. A lot of these folks don't have savings to invest to get ahead. So how are they going to get ownership? And this is one of the ways to put ownership in their hands and do it in a way that it could actually pay for itself through productivity and better performance.

AI assessment note: “So we've got about 20 private equity firms signed up”

Q I know this business had been owned previously by other private equity firms, and would love to hear the dynamic of when you decided to buy it. What's different when you're the fourth private equity owner in this case?

A When we were looking to buy it, what we saw was that dynamic of good business, but we thought could be so much more. Grow faster, be more profitable, be less capital intensive and networking capital intensive. We really felt like you could transform the economics of the company to a different stratosphere. And part of the way we were planning on getting there was by engaging the workforce in a different kind of way. There were some signs turnover was higher than you would expect in a manufacturer like this. Engagement was not measured. That's always a dead giveaway when you ask what the engagement scores are like, and they're just not even measured. So there was no input coming from the workforce. And even walking through a manufacturing plant when people don't make eye contact, subtle clues that people are not engaged. And then the financial clues are too much inventory, When you talk to the sales force, smart people, but there's not much of a growth plan. It's just, we got a better model. People are going to come to us. So it wasn't as proactive as it could have been. There wasn't that much innovation. They weren't driving as much productivity on the shop floor as they could. So you saw the combination of some financial, Hey, this could be better. Some financial indications of that. And then just interpersonal and Q and a, you can ask some questions and get a sense that there…

AI assessment note: “part of the way we were planning on getting there was by engaging the workforce”

Q about the resources that you bring to bear into these companies in the sense that you've got a business that's been running, you're bringing in new management, now you're talking about outside advisors, different consultants. How do you think about where you and your team are spending time in these businesses compared to going off and looking for your next deal and just letting the management team run with it?

A Well, in terms of how we get engaged, we do a lot of work to try and identify the opportunities. So we will say we see X dollars or X percent opportunity in scrap. And the approach with the leadership team is often you can't tell people what to do because you can't hold them accountable. So what we try and say is here's the opportunity we see. All we care about is getting the opportunity, and we want to get it in the right way. We don't want to do a slash and burn thing or something that's not going to stick, so we want the capability to be embedded in the organization, but we do want the results, and if you want to do it yourself, or if you want to go hire McKinsey, or if you want to use Capstone, we have people internally, we're flexible. We just want to get the outcomes, and that way you get ownership while having people feel like they're accountable to an outcome. Then in terms of how directly involved we get, it's hard if it's all non-deal team resources. The deal team runs the board meetings. Everyone knows the investors are ultimately accountable, and therefore the leadership team's accountable to the investors. So I do think it's helpful if you have involvement from the people who have made the investment, who chair the board, who sit on the board, to also be in the business. By the way, it makes the board meetings way more productive when people are like, I know exactl…

AI assessment note: “in terms of return on time, it depends on the magnitude of the opportunity.”

Q And what percentage do you think you ultimately win versus the ones you have to walk away from?

A I'm not sure about the second one. The reason I said, hi, we know what we want. When we find that situation of good business, we could do more. We want to own it. We're not going to do something foolish. We're not going to just bid all the return away. But back to the return on time perspective, once we know this is what we want, we want to take our best shot. And if it's not going to work out, it's not going to work out. We'll go on to the next one. We try and preempt frequently. I couldn't give you a percentage. I just don't know. And then in terms of how frequently that works, I would say it depends on the market. If it's a super hot market, sellers are like, why would I do this? Who knows what's going to come out of the woodwork? If it's a little shakier and people see real value in speed and certainty, it's more likely to work out. I wish I had percentages on all this, but that's qualitatively how I think it works.

AI assessment note: “I couldn't give you a percentage. I just don't know.”