[00:00:04] Speaker A: Hello and welcome everyone. I'm Peter Lehrman and this is Masters in Small Business M A. This show is an ongoing exploration into the vast and undercovered world of small business m a where we interview both the proven and the emerging owners, operators, investors and advisors whose strategies and methods for transaction success have been put to the test. The show aims to us the nuanced intricacies, the key ingredients, and the important factors that can improve your decision making in your own journey in the world of Small Business M A this podcast is produced by Axial, an online platform that makes it easier for business owners and their M A advisors to find, research, and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast show notes, edited transcripts, and many other related resources, all for
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Peter Laraman is the CEO of Axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
[00:01:21] Speaker B: Ken, it's great to have you on. Thanks for making time this morning.
[00:01:24] Speaker C: Appreciate the opportunity.
[00:01:25] Speaker B: Peter yeah, so I thought a lot about where to begin. And instead of beginning with private equity and control buyouts, I want to begin with tech and Internet investing, which is worlds away from where you've been for the last decade. It all started, it sounds like, with a tech banking job right out of school, and now you find yourselves in a completely different world. I'd love to just hear sort of how things got started for you in the world of finance and banking and.
[00:01:49] Speaker C: M and A. Yeah, for sure. So if I flash back to what seems like an eternity, go. I graduated from business school in 1999, which was the heart and peak of the sort of the technology bubble and what was going on in the economy at the time. And a lot of my classmates from NYU were fleeing to the west coast to work tech banking and work for startups and other technology firms out west. And I joined Morgan at the time because they were really building their technology banking group but doing it in the New York as the center for them. So it was an opportunity for me to stay close to home, but still work on what seemed to be a pretty exciting slice of the economy and enjoyed the several years that I spent there. I did leave in 2002 to try to migrate more to the buy side, and I joined an early stage venture firm, also in New York City, and worked there for about five years and while it was rewarding in a sense, where it was less transactional, obviously investment banking is very transactional in nature, where you work on one project, but then as soon as the investment's made or the deal's done, you're kind of moving on to the next one. So I liked the notion of sort of living with our investment decisions and working with those companies, although I came to realize that early stage investing is really a very difficult environment, particularly given my background. I mean, I do have an engineering degree, but I'm not overly technical in my experience or ability to evaluate winners and losers in that realm. And so after five years doing early stage venture, I saw an opportunity at kid and company, which was really to work for a family office direct investment group, but do so with an eye toward more established businesses. And that, to me, has been the most rewarding place in my career, where I've certainly been the longest, then I'm sure we'll talk more about that. But it was kind of a virtuous path, and the steps along the way made a lot of sense at the time. And no looking back, it's been a great run.
[00:03:57] Speaker B: Yeah, I'm looking forward to talking about what you all have been building at kid and company. And before we get there, when did your point of view begin to evolve or mature on early stage investing as not the home for Ken long term, in 1999, the Internet was everything. I mean, I was in college still, but even I remember the Internet was everything. Everything else was not interesting. And so going into tech banking makes a lot of sense. Sounds like you went to go work in early stage venture capital after the Nasdaq crashed. So, yeah, just what was the arc in your experience that sort of led you sort of more and more away from early stage tech and more and more towards profitable growth businesses, bootstrapped, cash, flowers. Do you remember that part? And remember your mind starting to change? Just how did that take place?
[00:04:48] Speaker C: Yeah, it's interesting because if I look back now, I think about how I was spending most of my time while working in venture, and we were basically an angel kind of seed investment group. And so we would be the first tranche of capital going into these business plans, these entrepreneurs, and we were making a lot of small bets, for lack of a better word, across a wide portfolio of potential opportunities. And in doing so, you come to the realization that most of those opportunities, for one reason or another, are never going to make it. They're too early, they're too late. They're really not well thought out. It ends up costing a lot more and taking longer to meet and achieve certain business milestones. And so, day in and day out, I was spending all of my time working on these companies or working with these business owners that were running out of capital. They were struggling to make payroll. They hadn't quite yet achieved marketability or commercialization of their product or service. And so I just felt like almost like a triage doctor kind of moving from wounded patient to wounded patient, and wondering at what point were we going to kind of shoot this one and preserve the focus on the ones that we thought had a fighting chance of surviving. And it was a slog. It really ended up not being that enjoyable. And again, no knock on that business world. If you live there and you were able to take advantage of it, there's a lot of money to be made. But it really just didn't set up well for what I thought I could add the most value and what I enjoyed doing in terms of working with businesses.
[00:06:24] Speaker B: How did you hear about the kid and company opportunity? Do you remember how that came onto your radar?
[00:06:29] Speaker C: Yeah. So two of my colleagues at Spencer Trask had joined Kid one several years before I did in 2008. And then when one of my colleagues was joining or leaving Spencer Trask to join Bill Kidd in 2008, he kind of tapped me on the shoulder and let me know what he was doing and asking if I wanted to consider going with him. So to me, that was the entree, and it was a very different time at that firm. When I joined Kid and company in 2008, we were doing some early stage venture. We had multiple offices. We were a team of 20 or 25 investment professionals. You think about what was going on. This is early 2008. It was still a pretty frothy investment environment. We had people on the ground in Latin America. We were doing deals outside the US. In many ways, it took the recession of eight and nine to really bring some discipline to what we were doing as a firm. And I'm not sure the company would have survived, certainly without that focus and really having to kind of batten down the hatches in eight and nine.
[00:07:32] Speaker B: Well, it seems like you have a knack for kicking off your investment careers either right after or right before some of the most epic bubbles of the last 25 years.
[00:07:41] Speaker C: There's a lot to learn during good times and bad times, and so you can't predict. And just perseverance, I think, is the name of the game.
[00:07:48] Speaker B: I want to spend some time talking a little bit about family offices. As a buyer of small businesses and cash generating businesses, there's been a bit of a fashionable preference for family offices, at least over the last, I'd say, I don't know, five plus years in lower middle market investing, a little bit of scorn directed at sort of private equity, which buys and then sells family offices, sort of have had a little bit of a white knight narrative around them as, like, providers of capital, very durable, permanent capital holding and owning businesses forever type of spiel, and I wanted to just unpack a little bit of that. In the context of kid and company, it seems like kidding company is actually, in some ways, very much on that page and on that wavelength as a family office with family based capital as the core sort of capital base for the business. But it doesn't seem like kid and company has any problem exiting businesses. You guys have had a couple great exits over the last few years. So how do you guys think about the family office value proposition to business owners at Kitten company? It's clearly not 100% tied to we hold businesses forever. Seems more flexible than that. I'd love to just talk a little bit about that and just sort of get into some of the conventional wisdom and sort of pull it apart a little bit and create a little more nuance there. How does kid and company talk about those things with business owners? And how do you guys think about holding to own versus holding and then improving and then selling?
[00:09:20] Speaker C: Sure. No. We've been investing directly into privately owned companies for more than 45 years. My partner, Bill Kidd, started his career in the mid 1970s, made his first investment into a privately owned company, and really has not looked back in terms of just the idea that that can be a very lucrative way to approach private equity, as distinct from going out and raising a fund or other business models that we can talk a little bit about. So even when I joined Kitten company in 2008, I wouldn't say we were out there positioning ourselves as a family office. But as you highlighted, Peter, it's become somewhat fashionable and trendy to be a family office. And so I think it certainly positions us or people understand what that means. We're not a private equity fund. We're not investing in other private equity funds, but we're a direct investor of our own capital, into privately held businesses, as you cite. And because we have capital as distinct from maybe an independent sponsor. We like the notion of what a family office means, particularly to business owners, because I think for people that own their company in the lower middle market, and there are hundreds of thousands of businesses, and we like that fertile hunting ground for opportunities, the notion of selling your business, they're going to go through that one time in their life, likely. And private equity as a whole can have a bit of a negative connotation or stereotype. And so to the extent we can delineate ourselves from traditional big bad Wall street or private equity in the eyes of a business owner and say we're a family office, we're a kinder, gentler version, what an outside investor might look like and the way that we approach collaborating with you as the business owner and keeping you involved and preserving all the good attributes and not coming in and just completely disrupting or changing or coming up with a really aggressive style, I think benefits us in any sort of competitive environment. But it really, I think, just speaks to the type of investors that we are. From the beginning, we've always been let's come in at a time when we think we see value and opportunity in a company, but that's going to be an opportunity that we're going to be able to play a role and add value for a period of time. And inevitably, if we do a good job and keep our heads down, somebody's going to come along and take notice of what we've done and make us an offer that we can't refuse. And so at the end of the day, we're economically motivated. We're not looking to buy and hold forever. There are family offices that certainly take that approach. But our idea is we can play a role at the lower end or the evolution of a business in a fragmented market, look to scale it to a certain point, but a business is going to outgrow our ability to add value the same way it may outgrow its ability to be a standalone, independent company. And so I think we got comfortable with our role in the stage of evolution of business growth and effectively know when it's time to exit and let somebody else have some fun.
[00:12:24] Speaker B: Yeah. What is your point of view on non family office private equity? Do you think that it's unfair, the big bad wolf sort of narrative, or do you think that the conventional narratives around what a private equity fund does and doesn't do, do you feel like those are naive and sort of poorly nuanced? Or do you think that there is a fundamental difference between how the business model of a family office and the business model of a private equity fund drive differences in behavior?
[00:12:52] Speaker C: Yeah, I would say we really operate and function more like a lower middle market private equity fund in terms of our collective experience, the way we evaluate multiple deals, the way we think about really looking at kind of a five year forecast in terms of what we think we can do with the business, thinking ahead to what those exit opportunities are going to look like if we're successful in our initial investment and ensuring that there are multiple ways to monetize that down the road. And so I think to your point, it's a little bit of an unfair categorization of all private equity, thinking back to the corporate raiders and the guys that are going to come in and just fire employees and cut costs and look to cut their way to prosperity and over lever businesses, there are a lot of extremely successful lower middle market private equity companies and funds that their sales pitch or their moniker of what they do looks very similar to my talk track in terms of thinking about how we're the first outside investors coming in to partner with business owners and help them achieve the next level of success in their company. And so there's just so much capital in the lower middle market today, and it's still very competitive, and we're not always successful at distinguishing ourselves in that kind of buying environment. But there's a little bit of a blurring and certainly a lot of very successful lower middle market private equity funds that I consider colleagues and friends and collaborators in deals that we look at or share ideas around.
[00:14:22] Speaker B: How do you guys think about. I mean, is part of the reason why you guys pursue exits as opposed to holding to free up capital for new investments? Is that a constraint that you guys manage, or is the exit opportunity really just a function of returns and IRR and sort of returns based thinking?
[00:14:43] Speaker C: Yeah, it's interesting because there are reasons why larger private equity firms do what they do sort of at sort of a level or size company above us, both in terms of the amount of capital that they can deploy into any one opportunity, as well as what they believe their skill set aligns with and the influence they can have over creating value? So we like to get in and partner with business owners at a point in time when they've had a history of success. The company's been around for ten or 20 or 30 years. They're sought after for a particular product or service. Customers return, they've got loyal employees and yet left to their own devices. In many ways, they've reached the end of their tether in terms of being able to grow because they really haven't properly staffed the company with all the appropriate business functions, a CFO ahead of sales and marketing ahead of it all the investments in people and facilities that you need to make to unlock that next level of growth and so we believe we're well positioned to identify businesses that are ripe for that sort of opportunity. Enhance the management team, enhance the facilities, just professionalize all the aspects of the business, from getting the financials audited to using systems and infrastructure as a tool to unlock that next level of growth. And there's very compelling arbitrage in terms of where you can invest in those businesses and where those businesses are valued. And just achieving all of those business milestones are so value enhancing in terms of not only creating a larger company along the way, but the multiples that those businesses attract in terms of an exit valuation, that we believe we're playing in the most opportunistic segment of the market to really capture that arbitrage, that we would rather go and sort of recycle that capital into another similar opportunity in another business, as opposed to continuing to own it. We might be successful, it might take five, six, seven years to get there. But then what that business can do over the next three to five years might be very different than the opportunities we might be able to see if we go and find another earlier stage opportunity.
[00:17:00] Speaker B: Do you think that that's largely a function of just a lower return requirement for private equity that is upmarket from the lower middle market or a lower return threshold for strategic buyers? Is that what creates the majority of that arbitrage opportunity? Is that for them, it's better to put capital to work and underwrite a lower return opportunity in a business that's already been professionalized, they can write a bigger check. They don't have to do all of the work. You guys have gone and done all the work. And because they have an LP capital base that's comfortable tolerating a lower returns threshold, better for them to just find relatively well built, well professionalized businesses and deploy capital again and again and again than it is to do some of the real blue collar professionalization of small businesses that's being done at the lower end of the middle market. Or is there something else that's driving the compelling arbitrage? Or is that, do you think, the primary driver of it?
[00:17:58] Speaker C: No, you've hit on some of it. And in many ways, larger private equity firms are victims of their own success because the allure, or once you've become successful in a smaller private equity fund, the notion is to go out and raise larger pools of capital. And one of the knocks on sort of the institutional investing market is many of the larger private equity funds are becoming enriched off of management fees and are drawn to raise larger pools of capital and there's no doubt the return expectations are lower. I mean, the bar that they're comparing themselves to is really the public market returns or some sort of blended portfolio. And they view themselves as an alternative diversification strategy that with a little bit more risk and leverage, you can generate higher returns compared to public market indices or other comparables. We don't view that as our barometer. We're admittedly putting fewer dollars to work, but we're generating eight to ten times returns. It's venture like returns without taking venture like risk. If I could categorize it that way, just in terms of what we do. And you can't do that with a 500 million or a billion dollar fund, because I don't think you can find enough good opportunities to deploy that much capital and be as involved as we are with our businesses by managing 20 or 30 or 50 different businesses at the same time. So it becomes unwieldy. So to your point, they're able to put more dollars to work in each and every company, but the return expectations are inevitably going to be lower.
[00:19:37] Speaker B: And I would think the same is true for a strategic buyer as well. If they're trying to compound shareholder value in excess of market returns, they don't need to generate a 25% return, annualized return. They just need to be somewhere north of 10%, probably.
[00:19:55] Speaker C: And the size businesses that we acquire are not going to move the needle for a strategic buyer. So strategic buyers are frequently our exit, just inevitably. We've done the aggregation of many smaller companies into something that now is worth their time and attention and will be much more strategic in terms of what they can buy. A turnkey, one stroke of the check from what we've done for the past five years, which is assembling a much larger, more valuable business for them.
[00:20:23] Speaker B: Let's get into some specifics. Eight to ten x returns without venture risk sounds pretty good. Let's talk about how you guys are pulling that off. I was saying, before we push record, let's talk about the family rv group business. That sounds like a fun one. Certainly very understandable for an audience of any kind as well to just get their heads around an rv business as opposed to some of the more arcane businesses in the lower middle market. Tell us about that one. Tell us how you found the business. If you remember, it was mid 2010s that you bought that business, if I'm not mistaken, right?
[00:20:57] Speaker C: Yes. So it was a great sort of just story of success all the way around in that we got an inbound call from a business owner, a family owned and operated RV dealership in Cincinnati, Ohio. And the reason they knew of us, or even thought to call us, is we had had success with another unrelated business in Cincinnati five years earlier. And the families knew each other, and they got to talking about what they were thinking about doing with their business. Lucky for us, the earlier investment, which was a lubricant distribution business, completely unrelated. But they said, hey, we had good success in working with the guys at Kitten Company. Why don't you give them a call and just hear them out and see if there's an opportunity to work together? And so that one sort of came to us in the truest sense of a proprietary type of transaction, where we went out and met with the business owners. The company was being run by the second generation. It had been founded 50 years earlier by a husband and wife team in Cincinnati, running in one location for 40 years. And when the two sons got involved, they started to see opportunities, or they were presented with opportunities, oftentimes from the manufacturers, to go in and take over underperforming dealerships in adjacent markets. And so when we met them in 2015, they had already done this in the Dayton, Columbus, and Indianapolis markets. And so we met them at a point where they had grown from one location to four, successfully navigated the recession of 2008, 2009, and used that industry weakness to their advantage, where they were able to buy inventory at pennies on the dollar and really be well positioned when the industry recovered. And it's a very cyclical industry historically. And so it's not always ideal for traditional private equity. But we really got behind the notion that these guys had proven not only resilience through the recession, but an ability to acquire and integrate other similar locations. And in what was a very fragmented industry, really got behind sort of their industry expertise, what they had done, but they were also raising their hand and saying, this is starting to feel a little big and unwieldy for us to continue growing. We see the opportunity, but we're just less comfortable managing that on our own. And so we're really raising our hand, looking for help. So it had just a lot of the attributes that we look for, looking to preserve the operational expertise, the industry knowledge. I mean, at the end of the day, we're generalists, so we're looking at different industries every day and just trying to figure out where we can add value and where we should even be spending our time. And so it was a new space for us. But we got, again, very comfortable with the macroeconomic trends, what these guys had achieved to that point in time and where we could get on and be helpful. It took more than a year of discussion with them to get them comfortable with not only selling the company, but the role that we could play. And so we closed that investment in 2016. We actually did it simultaneously with the acquisition of another dealership, which happened to be the largest in the state of Kentucky, which was only about an hour from where they were located in Cincinnati. And so we came together with, initially, a business that had five locations, and then over the next several years, just did what we do. We added to the management team, we put in place a CEO, a CFO, head of HR, as we started to really scale the number of employees, and we grew that over the next several years from five locations to twelve across five states. And we're really seeing what was evolving in the opportunity at the time. Sorry, in the industry, rather. At the time, camping world was a publicly traded business that was aggregating or acquiring a lot of dealerships around the country. And there was another family office backed strategic buyer called RV retailer that was backed by the. They were backing the team from autonation that had done a similar buy and build strategy in auto dealerships, and just saw a little bit more of an untapped opportunity in the RV space to replicate their success there. And so they were coming in with a vengeance and a lot of capital backing them and really establishing a pretty well thought out and aggressive playbook. And so you fast forward to the pandemic of 2020. And like everybody else, in March of 2020, the world kind of came to a grinding halt. Our businesses were certainly, we weren't shuttered because we were deemed to be an essential business, certainly for the repair side of things. But by the summer of 2020, when things started to loosen up and people were just, due to the pandemic, not willing to get on airplanes or stay in hotels, rvs became a really attractive alternative to the ways that people were recreating and vacationing. And so the market just went gangbusters between 2000 and 22,021. And at that point in time, we had developed a dialogue with rv retailer again. They were pretty aggressively looking to scale something much quicker and with more capital than we certainly could do. And we got into a situation where it just became an obvious partner or exit for us. And I think at the time, they had gone from zero locations in 2019 to, I think they were at 38 locations around the country. And so by acquiring us, we took them from 38 to 50 locations. We were in a geography where they had no presence. And fast forward today, they're now well over 100 dealership locations really filling in the entire us and showing no signs of letting up. And so it really just speaks to, I think, us knowing sort of what we had stumbled onto maybe a little earlier than what others were looking at or focusing on. I remember talking to a lot of lenders and other investors back in 2015, 2016, and they said, what are you crazy? We had exposure to rvs back in 2007 and 2008, and we got our shirts handed to us just because that industry is extremely cyclical. And we saw through that and said, well, we might have to continue to own this business through another cycle. But that's another benefit of really being a family office, is we're not beholden to the time periods or requirements of a fun life cycle. And so if we end up owning a business for a few more years because we have to weather a recession or a pandemic or some other exogenous event, we can do that without any worry. And so we're certainly patient from a timing perspective. But in this case, we ended up owning that business just coincidentally, for a five year period, and it was a very successful exit for us in 2021.
[00:27:52] Speaker B: So just because you guys have the ability to hold on to stuff for longer doesn't mean that you necessarily want to sit there and hold the bag on a business which is falling apart. So you obviously have that flexibility, but you still want to be very careful about what you ultimately decide to buy and invest in. Could we spend a little time just talking about how you guys priced and underwrote the deal? Just get into whatever memory you have of just the transaction and how you thought about structuring the transaction. Obviously, there was a second generation of children involved in it. I'd love to just hear any details that you're capable of sharing about that.
[00:28:28] Speaker C: Yes. One of the reasons that it took so long for us to have a meeting in the minds around valuation and getting a deal closed was just not only our patience, but our kind of sticking to sort of valuation metrics and what we felt comfortable paying for the business. And they may have had expectations that were a little higher than where we were willing to price it or value it, but from our perspective, we do very few deals. And so we don't have this gun to our head where we have to deploy capital, we have to rationalize overpaying or competing for assets. And so we put forward an offer or evaluation that we thought made sense for us and gave us a level of comfort. Just taking into consideration the size and lack of professionalism and systems and financials that they had in place the cyclicality of the industry. And another sort of meaningful aspect to our transactions is the sellers are always rolling a significant minority percentage of equity along with us, and we've got some unique ways of structuring that. But it really gives them an opportunity to achieve not only liquidity on day one, but for those members of the management team and the ownership that are going to remain involved in helping us operate and grow the business, that second bite at the apple can be extremely lucrative down the road for folks that are going to stay involved. And so I think at the end of the day, that's what really won it for us. And again, we sort of parted ways friends for a while, and then the call came back in six to nine months later, and they said, we really want to revisit this. We think you'd be the best partner for us. And so I think it's just a testament to sort of sticking to our conviction on what we're willing to do and what we're not willing to do. And I think just sitting back in.
[00:30:21] Speaker B: That six month period, Ken, do you think they went off and tested the market, or how do you think it ultimately came back around to you?
[00:30:28] Speaker C: So we were talking exclusively to them, and then kind of in those discussions, they hired an investment banker. And that's where things kind of went a little sideways in our discussions. And so the banker got involved and tried to put their stamp on it. And look, they might have been able to competitively auction the business or bring in other interest, and maybe they did, maybe they didn't. I don't know for sure. I know they were approached by strategic buyers at the time and didn't like what that might lead to in terms of their livelihood and their involvement with the company. And so we've seen that in the past as well, where strategics might be willing to value a business higher. But the notion of what's going to happen to employees and what's going to be my day to day responsibility as a business owner as a part of a larger bureaucratic strategic buyer is not always as interesting or attractive to me. And so we try to be candid about what life's going to look like with us. And I think there's a little bit of unknown and just trepidation as business owners in any sort of transaction. And so they really need to evaluate not only who's going to pay me that last dollar, but what are the other elements, professionally and personally, that I'm going to be spending my time doing. And I think that's where we can really present a compelling case on what that holistic picture looks like, even if we're not the market clearing buyer at the end of the day. And so we've seen that number of times where transactions that we've been told we're not going to be the prevailing bidder have come back to us for one reason or another. And so I think this is just one example of that.
[00:32:04] Speaker B: I think it's a really good reminder for everybody who's pursuing businesses and getting frustrated with valuation that very often, like it's on take two or take three, even, that things can come back to you. And so just having the patience and being in a position to have that patience can really matter. I want to spend a little bit of time just talking a little bit about the generalist nature of kid and you guys, there's been so much, again, it's been fashionable, and I think in many ways quite credible, to become more specialized in private capital markets. Right? You see it happening in venture crypto funds and life sciences funds and marketplaces, focused investors, or SaaS investors. And you've seen it also happen in middle market, lower middle market private equity people picking very specific industry verticals at some level of the sort of NAICS code tree. You guys have gone against the grain there and continue to be capable of doing. Generalist to. I think part of your advantage is clearly the flexibility that you guys can bring to the businesses that you partner with. Just, you have flexibility in a variety of ways. But if you want to be a great generalist in 2022 in private equity, what must you be great at if you want to maintain the generalist posture and still win? How do you think about what it takes to be successful as a generalist this deep into the maturity of private equity?
[00:33:36] Speaker C: Yeah, it's interesting because our thinking on that has certainly evolved over the years. But when you think about it in the current environment, what I would say is one of the things we like about being a generalist is just the number of opportunities that could avail themselves to our focus. I think there are, I've seen studies, there are hundreds of thousands of small companies in the US that fit the size criteria and stage criteria that could be opportunities for us to pursue. And so in some ways, that's overwhelming in terms of where we should be spending our time and thinking about the attributes of what makes a good business for us versus better for somebody else, or not a good candidate at all. And certainly, I think, knowing our shortcomings we try to be upfront. People are not coming to us for our depth of aerospace manufacturing knowledge or our relationships around medical device oems that our medical device manufacturing business could, that we could open doors for them. But where we're playing a role is just general business builders knowing the playbook to come in and preserve what is good. And the industry knowledge oftentimes resides within the companies. But then knowing where we need to supplement just the CFO function, the general sales and marketing function, that Playbook has a lot of similarities, whether it's a manufacturing business, a distribution business, aerospace or healthcare or rvs. To us that's less relevant, but where we've really had success of late. And if I look at the last three businesses that we've new investment platforms that we've made over the past year, the common theme there is that each of those have started with a conversation with an executive or experienced professional who came out of those industries. And so we're spending a lot more time really trying to leverage our network and relationships and get introduced to people that have had a successful career in an industry, albeit maybe with larger companies or larger private equity backed businesses. And they see an opportunity to get back in at the lower end of the middle market and want to do so with a partner that gets how to talk to these business owners, that gets the playbook for professionalizing and scaling and integrating what is likely a very fragmented market. And so partnering with that industry expertise almost in what I call it like an outsourced operating partner model, is proving to be pretty successful and a good use of our time, as opposed to just sitting back and waiting for the next investment banker to show us their auction process and competing with a couple of hundred other people that are looking at a business. So we spend time meeting with executives that again have experience and ideas around an industry, and then together with them, we'll go out and find companies to buy, or they come to us with an idea around a company that they think they would like to run and have a relationship with those business owners. And that's been a much higher hit rate for us as well as gives us that industry insight. And if I look at the three businesses over the last year that we've invested in, we're in landscape services, we're in a civil contracting excavation business and an IT services company, all extremely different industries. But every one of those investments for us started with a conversation with an executive who was not involved with the companies that we ended up buying.
[00:37:10] Speaker B: How are you guys meeting those executives and how are you deciding which executives to meet? Have you partnered with a search firm? Are you hardcore LinkedIn power users? What is the tip of the spear in terms of who you meet in the executive ranks to power some of this approach to deal sourcing and to winning deals?
[00:37:30] Speaker C: Yeah, it's really all the above. One of my partners has a background in executive recruiting, and so he's extremely well networked and does a lot of our internal search work. When we're looking to fill a position at any one of our portfolio companies or add industry expertise at a board level, those searches really start internally for us. But then the extension of that is we get introduced to or can uncover a lot of seasoned executives, and then you complement that with, we do have buyside search relationships that source for us not only companies, but executives. And then just being in the business and being out on the circuit, the networking, the conferences, the introductions from lawyers and accountants, and being out there talking about what we do and who we want to meet is the best way to just keep that network alive. And I think when I look back at sort of what was happening in 2021, where we weren't flying around the country and able to meet with people in person as frequently, those executive relationships and cultivating those over Zoom and initially getting those insights into industries proved to be a great and productive way to spend that time when we weren't able to do those meetings in person. And so that was just, I think, a real catalyst that now we're just kind of propagating.
[00:38:47] Speaker B: Now it seems like maybe the right next person to interview from kidding company is the talent partner in the organization. I feel like it's interesting. There's a super well known venture capital firm called Andreessen Horowitz, which got started, I don't know, maybe seven or eight or nine years ago when the two co founding partners got together after incredible careers in tech, and they really built out the business. It's obviously oversimplification, but I think in many ways, their inspiration for building Andreessen Horowitz the way that they did was CAA creative artist agency, which is the talent agency, which controls probably more than 50% of the major Hollywood media hit productions and has really developed, like a real control hammer lock on talent in Hollywood. I wonder whether or not a more significant amount of infrastructure around permanent talent and talent expertise inside of private equity is part of the next ten years. I know that operating partners have been around for a while now, but it seems to me that maybe we could see really dedicated focus inside of private equity firms. With dedicated budget to just talent and expertise on talent for both deal sourcing, but also faster time to value post transaction. Do you think that's already underway or do you think that that's early?
[00:40:06] Speaker C: No, I certainly think it's underway. And the analogy to venture is a good one because I remember, and a lot of those firms, I think, subscribe to the notion of betting the jockey, not the horse. And so Andreessen, Horowitz or other venture firms, they'll back an entrepreneur that has been serially successful regardless of what they're going to do next, because they know that this guy is just a proven winner. And I think there's something to that. And why, when we look at opportunities, figuring the personalities and the people within, and it's the hardest thing to get right. But when you get it right, you really can appreciate that at the end of the day, this is still a people business. And so there's a reason maybe more industry focused private equity funds have a bench of operating partners or expertise. That's what really gives them that deep insight into healthcare or manufacturing or business services, whatever their area of expertise is. But again, being a generalist, where we sit, what we found, and we've had operating partners as part of our team in the past, is that it's tough to be a real generalist operating partner. And so I think the notion of what I call this outsourced operating partner model that I sort of liken to, the way that we're doing things is we're going out and finding that industry expertise and aligning with it around opportunities, whether it's manufacturing or business services or software or distribution or consumer products. And I think that that's going to be a recipe for success. And whether we're cutting edge at doing that, I doubt it. I mean, certainly the operating partner model is well proven, but how you do that in a generalist environment, I think maybe has to change. But again, I think bringing in and professionalizing family owned and operated companies has always been what we've been about, and supplementing the talent, preserving what is good about small companies and allowing them to continue doing what they do well and enjoy, and then supplementing the administrative or burdensome aspects to running their company is still a very refreshing concept to these business owners and one I think that I really try to exploit when I sit down with business owners say, tell me what it is that you enjoy doing and really like about your business. And what's a drag. I mean, you don't like dealing with your employees. I get it. You don't like the finance function that you're probably doing part time and suboptimally we can solve for that. There are people that we can bring in and supplement and make your life easier, give you a lot more free time and allow you to spend more time doing the aspects of your job that are most impactful and going to have the most value enhancing aspects going forward. And that really resonates with business owners and where I think most people would find kind of somewhat refreshing message.
[00:42:53] Speaker B: Ken, I promise you I would let you go at the halfway point of the hour, so we're going to have to leave it there. It's been great to catch up. I've known you for many, many years and it's great to have you on the masters in small business m and a podcast. Great to learn a little bit about you and your journey and also what you guys are figuring out and achieving at kid and company. Thanks so much for the time. Look forward to having you back on at some point in the future and good luck with all the new investments you guys have made in the last twelve months here.
[00:43:20] Speaker C: Well, thanks Peter. We've enjoyed our long relationship with Axial and knowing you and are thankful for the opportunity, so always appreciated.
[00:43:33] Speaker A: If you enjoyed this episode, check out Axial.com. There you'll find every episode of this podcast as well as our recorded Axial member roundtables, some downloadable tools for dealmakers, Axial's quarterly league table, rankings of top small business acquirers and investment banks, and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sellside M A advisor, you can get started for
[email protected] as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me directly at
[email protected] I promise I will respond. Thanks for listening.
