[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
[email protected].
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: Welcome everybody. This is Peter Lehrman. I'm thrilled to be back on master's in small business M and a. I think this is our 25th episode. I am really excited to have gotten onto Glenn Oakin's calendar. He is somebody I've known for the better part of the last decade as a client of Axial, and I'm really happy to have him on the show to talk about his career and talk about all the things that he and his folks have learned at Mangrove over the last multiple decades of investing in the lower middle market. So it's a great opportunity with a great guest. So, Glenn, thanks for being part of the show and thanks for giving me time on your Tuesday.
[00:01:56] Speaker C: Thanks for having me, Peter.
[00:01:57] Speaker B: As I said before we push record, I think it's be great to start sort of at the beginning of the beginning with you and just hear the origin story of mangrove, as well as your own path into the lower middle market. I know it in many ways began in the 1980s and 1990s. Let's start there, and then we're going to get into all the things that you feel have changed and all the things that you feel have stayed the same since then.
[00:02:23] Speaker C: Great. So to answer the question about origins in private equity, for me personally, I started in private equity in 1989 and was fortunate to join a couple of fellows that were leaving chemical venture partners chemical bank at the time. Lucky to join them in a de novo fund called Florida Capital Partners, which was quite small, but we were in our, it was probably appropriate that we be entrusted to a relatively small dollop of capital, but luckily it worked out well and launched from there. So Florida Capital Partners was a lower middle market fund focused on more entrepreneurial, smaller companies, typically making between two and ten of EBITDA, with majority of the activity being on the lower half of that, much like mangrove today. And we had a succession of six funds that were successful and very stubbornly at Mangrove. We continue with that same lower middle market focus, but with some strategic differences.
[00:03:23] Speaker B: If we went back one step further. Glenn, how did you get yourself into that position with Florida Capital? I mean, what's your own personal story? Obviously, you and I share an alma mater proudly at Virginia, but just how do you think you got to the starting line of Florida Capital Partners if you were to just go back one to two steps earlier in your career?
[00:03:43] Speaker C: Sure. Yeah. It's probably not typical, but back in the nation's days of private equity, that was probably a little easier to have happen. It started my career just working in a bank training program. Worked at the bank for a bit and then went to an investment bank for a couple of years. And then I just discovered what private equity was. And I had a friend up at chemical venture partners who serendipitously was eager to continue in the lower middle market and not uncommon. His organization was wanting to go upmarket, so he decided to go out and start something new in the lower middle market, and I was lucky to join with him and another individual. We started Florida Capital Partners in 89.
[00:04:30] Speaker B: I'm curious to just talk a little bit about investing in lower middle market businesses in 1989. This is pre Internet. This is pre email. Take us back to. I was born in 1979. I remember the days before email and the days before the Internet. So I remember those days, but I wasn't in business at the time.
When I got into business in the late ninety s, I graduated late ninety s. And so email was kind of there. It was like one of the first pieces of Internet infrastructure that I kind of remember being part of my day one business career. What was it like to do?
Do you remember transactions from the early ninety s and how you found them and how they got started and just sort of the way in which transaction sourcing and execution took place? It'd just be great to hear a little bit about just what it was like to do deals in the very late eighty s and the early ninety.
[00:05:22] Speaker C: S. Yeah, well, thank goodness by 89 excel was being used or else I'm not sure how I dump things, but I do look back with some embarrassment at some manual processes, even manual logging on paper of a deal. Pretty quickly we realized that it was a big task to keep track of things and that we did need a CRM, so we fixed that. But it was extraordinarily different, really. Private equity wasn't much of an industry. There were some heralded, laudable, typically middle market or large funds that we all looked up to and emulated. But the lower middle market was certainly underpopulated relative to today. And overall, there just weren't that many practitioners, regardless of the size of the funds, which was wonderful. Certainly from a competitive standpoint, those were wonderful days. Multiples were obviously a heck of a lot lower way back then, a small company, the handle for a multiple might be four times or five times, commonly, as you lifted up. The way in which we saw deals was definitely different. They were much quieter. When I talk to limited partners today, sometimes they ask about proprietary deal flow and bless my competitors who truly have individually sourced deals that they did not see from an intermediary. But it's not really part of our recent experience. Virtually everything that we invest in, everything that we contemplate, with just a few exceptions, will be represented by someone back in the late eighty s. And the ninety s, smaller deals were largely a domain of business brokers. Buy side business brokers who certainly cared an awful lot about certainty of clothes, I presume, because many of them probably were concerned that somebody else might compete with them and get a sell side mandate. So having close relationships, having people that you knew, knew what they were doing, that you could trust that would pay them, was important, and they certainly were important and are important to us. They're our lifeblood. So the preponderance of small deals, as you know, were the domain of smaller buy side business brokers. And gradually, over the subsequent 30 plus years, an awful lot of market share in the lower middle market has been taken by sell side organizations, some of them decent sized investment banks. So that certainly changed.
[00:07:52] Speaker B: The buy side brokers that existed back then were brokers who did not have a commercial agreement with the owner. They had a commercial agreement with you at Florida Capital Partners back then, or mangrove today, is that correct? Like they were out in the market hunting for opportunities, but you were their client, and the transaction would compensate them only if you closed the transaction. Right. They weren't working for the seller independent of who the buyer ended up being.
[00:08:21] Speaker C: Yeah, I think the typical dialogue between the buy side business broker and the company owner was that the payment of a fee was not the responsibility of the company owner. In the event of a sale or a recap of transaction, the buyers are going to handle that fee. And it's not to say that that intermediary necessarily or categorically would only show it to one party, but they would tend to show it to a handful as opposed to 300.
[00:08:49] Speaker B: Why do you think that it's changed so significantly, and why sell side representation of these business? I mean, I have so many questions, but why do you think? You've already mentioned that's one of the big things that's changed, is many more of these businesses are professionally represented in some capacity on the sell side today, as opposed to back then. Do you have a sense for why that has happened?
[00:09:10] Speaker C: I think that just as there's been a proliferation of private equity funds and private equity fund practitioners, there's been a proliferation of agents of investment banks. Younger people would carve out from a larger investment bank and start their own. And when you have a larger population of investment banks, some of them would be smaller operations and they would be willing to come down market. And since they were coming down market, I imagine that would encroach upon the territory, the traditional territory of a buy side business broker. I think that company owners also may have shifted in terms of what they prefer and what they insist on. They might love the idea of a more robust process where a 150 page sim is written and it's distributed to hundreds of people. So perhaps there's some subset of owners and operators and sellers that are also seeking that.
[00:10:10] Speaker B: A lot of people who are buying businesses today, I mean, there are plenty of businesses that get bought today without a broker representing the sell side. I agree with you that it's far more infrequent today. Do you think it happens? And one of the things that you have to take on as the buyer in most of those cases is you have to do a lot of work to get confident in just all the diligence associated with the business. What was that process like in the. These were businesses prior to the Internet, no quickbooks, no net suite, and they weren't represented by a broker or an investment banker. They were just being shown to you and a handful of other buyers by a buy side broker. I mean, what was the general state of transaction readiness of the businesses that you were buying in the. How much work did you have to do before you could feel comfortable writing a check and closing?
[00:11:08] Speaker C: Sure. I think that in the lower middle market, we have to be willing and we have to be facile with doing the fact finding ourselves back in the day with a more common buy side business brokerage representation, there were still varying degrees of preparation and of information available. We frankly kind of loved it when a friend of ours that knew us and entrusted us was kind enough to think of us as a really good fit for the owner and would entrust us as one of the handful of people looking at the business. And from our perspective, we were totally fine. And we still are to this day, totally fine. With an introduction, with a conversation with the intermediary along the lines of please tell us what the company does and tell us what they want to accomplish, what they want to do. Can we please get three to five years of historical financials with some adjustments? Please share anything about any concentrations, customer concentrations, supplier concentrations. And with that, we were delighted to get on the phone. Perhaps you might ask about value expectations. The next step is just to get on the phone with the intermediary. I'm sorry, with intermediary and the owner.
[00:12:20] Speaker B: Yeah. So excel was already in place. When you think about big shifts and big changes, do you feel like what in your mind represents some of the bigger shifts or the big fault lines in the evolution of private equity investing? Small business, private equity investing? When you think about excel pre Internet to today, how in your mind do you think about just big things that have changed or things that have evolved and now you find them in a very different place than when you got started?
[00:12:53] Speaker C: Sure. Certainly one of the main changes is the impact of greater competition. We can fully expect to have a few, at least if not several people or dozens of people that we're in competition with. So that certainly has changed access to the owner. Very early access to the owner is not always insured in a regular sell side process. In fact, it's probably the exception. So that's a significant change. It just so happens that for various reasons we're told, and I believe that we play pretty well when we do have the opportunity to get in front of an owner, particularly if they care about their people and they want to know, like and trust the people that they're going to entrust their baby with, maybe they're going to keep a piece of the business and continue. It's an advantage to us when we can have access and early access, but these days it's more rare that happens later on in the process. Another obvious impact of significantly increased competition is just the escalation of purchase price multiples over the 30 some OD years that I've been doing this, for some practitioners, doubling or tripling of multiples. If I go all the way back to late eighty s, yeah.
[00:14:08] Speaker B: One of the things that you read about is buying lower middle market businesses and achieving some form of multiple arbitrage as the businesses get bigger. Was that part of the play back then? So, for example, if today you would buy a lower middle market business for six or seven times ebit, and back then maybe that exact same business you would have bought for four to five times has the multiple arbitrage basically just sort of moved up. In other words, back then you bought it for four and you sold it for seven, and today you buy it for seven and sell it for ten. Has that stayed the same?
[00:14:44] Speaker C: It largely has. I think the exception to that, where that is not the case is when you start talking about either larger companies or companies in particularly sexy industries that are very much in demand, where the starting multiple is quite lofty. You entered a period like the recent period where the cost of debt increased materially. I think that multiple arbitrage for larger deals and people paying double digit multiples might be less assured. But for the lower middle market, that opportunity, if you do the right things with a business to help professionalize, to grow, to reduce risk, to eliminate concentrations, to bring a more replete team to the company, then that multiple expansion is still very much available and in about the same measure as in the past.
[00:15:36] Speaker B: One of the things that we talked about just in our prep that I really wanted to cover with you especially, was operating partners, because that became a really big part of your playbook as an organization way long ago. It wasn't like, oh, it's really competitive here in 2018. What are we going to do? We got to find something new to do. Let's start using operating partners.
It's been part of the way you and your teams and partners have thought about winning deals and driving really good outcomes for a really long time. And it seems like it was part of your playbook, maybe even before you needed it, in order to drive good financial returns. Could you just sort of take us through how you found your way into that model? Like, any memories of what precipitated the focus on it and why you decided to dive into it and now stick with it for so long?
[00:16:31] Speaker C: Yeah, absolutely. And you're right. It is in our dna, and it's been a seminal part of our work for three decades. If you go back to 1989, there really weren't many lower middle market internal operating partners, certainly, or concerted efforts, I don't think, to build meaningful internal operating teams. And it just made sense to us.
We try to do the right thing, we try to do things right. And when we looked at our friendly competitors in 1980, 919, 90, 91, we were learning intimately that entrepreneurial companies, while they may be fantastic at what they do, and the entrepreneurs may be excellent, they may be niche dominant in what they do. Their margins may be excellent if they're entrepreneurially owned. Usually one found that there was some room for functional area optimization. An entrepreneur can't do everything themselves. Very few people are excellent at everything. And part of the entrepreneurial DNA often is a desire to do too much themselves, to keep too much close to the best, perhaps. And it just leaves certain functional areas suboptimized, which is probably why they reach an inflection point where they need help to really take that next step and grow. So given that that is essentially a part of the companies that we invest in and invested in back then, we didn't see our competitors with the capability of having the right people, with the right capacity to be dedicated to helping these entrepreneurial companies professionalize and improve and grow. And there's some classic functional areas in the entrepreneurial world that tend to be ignored or underdeveloped. 1 may seem rather mundane, but it's just having the right information from which to make decisions from which to manage. We certainly heard, especially long ago, a lot of grumblings from entrepreneurial owner operators who would complain about the cost of a truly qualified controller or a CFO, even heard grumblings like, I'm not going to pay that for a bean counter, that sort of thing. But very gently, truly very gently, we would try to evidence and to impress upon them that wouldn't it be great if you, the captain of the ship, had this kind of information from which to make your decisions? And then we would try to demonstrate it and show them what that can be like. There's so many different functional areas in the industrial world in particular, you often see underdeveloped commercial efforts and teams. So sales and marketing organizations and teams, you certainly rarely saw a really experienced leader of a sales organization. You might have in an industrial setting, people that are engineers, and they don't particularly believe in the importance of sales and marketing. So all these are quite fun. You find a diamond in the rough, a company that's doing very well, so much respect for the owners and the operators and for the business, but you see what they can do to break through that inflection point and really builds a lot of enduring value when you can do those things. So all that to say, the right person to help reengineer a plant, the right person to do so much of what our internal operating team does, operators themselves, who are also very good coaches. The backgrounds of our internal operating partners here, for example, they're not people that had a cup of coffee in some private business. Rather, they're folks that typically do have maybe engineering degrees on top of a business degree. They have been heads of manufacturing, of organizations and became ceos of organizations. And then once they were in private equity, they took their very sophisticated operating tool and all their reps in industry. And then they became something more. They became unbelievable coaches and they became very facile at taking a very sophisticated tool set and customizing their approach, lifting up the vital few things that we know is really going to move the needle, that we know is going to build the most value in the shortest period of time. But you can have internal operating partners that are that dedicated support system for portfolio companies. And guys can have the most sophisticated tools, but the most important tool is a human one. If they don't understand that, they have to allay people's fears of change. If they don't understand that, they have to gain and earn. The owners, the operators, the entire organization, the entire employee base is trust. Over time and friendship, then the most sophisticated tools in the world are for not, because you have to get enthusiastic buy in. And that takes patience. It takes understanding that you have to sometimes realize small victories and take the approach that you really do want to make a worker's life better. One of the classic questions that one of our terrific internal operating partners asks is, hey man, what's a hassle in your day? Which sounds terribly mundane, but what he's learning when he's listening to people is he's picking up an awful lot about two things. One, he may be finding inefficiencies, shortcomings. Same time he's building trust with people. When he can relieve those people of that small hassle, maybe it reveals something.
[00:22:15] Speaker B: Big with the operating partners that are part of the Mangrove investment organization.
Is it a fixed group of operating partners, or is there more dynamism based upon portfolio companies and funds that you're raising?
[00:22:28] Speaker C: Just tell us.
[00:22:29] Speaker B: I've seen different approaches. Where have you guys decided to play in terms of working with operating partners? Is it sort of a specific set that work with you over the course of a fund? Or does it tend to occur after you've transacted and you're trying to line up somebody that's specific to a company that you've recently bought.
[00:22:49] Speaker C: Yeah, it's chiefly the former. We believe that if you want to ensure quality, then making something replicable is important. Right. And getting rid of variability. And our approach to operating talent or internal operating partners is to make them just that. They're internal. They're full time employees of mangrove. They are partners. They're part of the fabric of our organization. They are on the investment committee. They help our organization run better. They are full time, and they are available to the entire portfolio. Now, you raised something important, and that is that certain internal operating partners here, they have strengths that the other may not have. So 1 may be particularly strong in sales and marketing organizations, building sales and marketing organizations. Another may be particularly strong in completely reengineering a plant and workflows and happens to be a deming disciple extraordinaire from way back. They can do it all, but we do tend to match the hatch in terms of the specific needs of the company and the personality of the owner, operators and the team. You're making me think about the alternative, and I suppose there's no right answer. But for us, this has worked extraordinarily well. And I think the portfolio partners really appreciate knowing in advance who is going to be working with their baby and with them. And they get to vet those individuals, and they get to determine whether they like and trust and respect that individual and want them to come alongside. And if you had people in a corral or if you would then go out and find someone, I don't know that that same predictability and consistency would be there. We talked about sort of a broad timeline of the industry. As some funds did incorporate meaningful internal operating capabilities. The limited partner community took note, and they started really wanting to see that in response, some funds, rather than investing heavily, as we did in those individuals or in that function, they kind of waved a hanky at it, and they would have a couple of people on the corral, they'd try to get off the golf course for a project, or they would bring someone in house that really didn't have, I think, very rare combination of experience and talents to be a really good internal operating partner.
[00:25:24] Speaker B: Has there been a particular path that the operating partners at Mangrove have traveled prior to coming and being part of the partnership at Mangrove? I know they've all been operators, and maybe some have been operators in finance functions, some in sales and marketing, some in engineering and product. But beyond their operating experience and having had a chapter that was compelling to Mangrove, in other words, did you find them at portfolio companies. And then I'm just curious how you found the people that you ultimately recruited into your organization. How did you come into contact with them? Was it through discovering them as part of acquisitions that you made, or was it dedicated recruiting, sort of professional recruiting processes? I'm just curious whether there's any process by which they tended to travel before joining the organization full time.
[00:26:16] Speaker C: I think all of those routes are viable for us. It just so happens that I personally knew one of our co founders at Mangrove, actually, to give you some sense of how important these individuals are. But Matt Young is his name, and I knew Matt and his path. He had an undergraduate in aerospace engineering. He had a master's in industrial engineering. He had an MBA. He spent some time in the Pentagon as a consultant to head to state and military generals. Then he became the COO or the general manager of a manufacturing business, and then became the head of manufacturing for a very large multinational manufacturing business. And then he became the CEO of a friend's company. So I was following his career and just a tremendously talented individual, and the right cultural fit and the right personality. So we were very fortunate to have him join us back in the Florida capital days. He brought with him a gentleman named Roger Bates, who also had an engineering background by education.
And he was the head of manufacturing for what became the world's largest maker of auto OEM airbags, which was extraordinarily quality critical. He had also had manufacturing experience in the military sector, also very quality critical. And he's a gentleman who truly is a deep deming disciple. Tremendous tool set, particularly in manufacturing, but also in systems and processes for service businesses. Matt hired Roger as a consultant when Matt was the head of manufacturing in North America for Melita, just the world's largest maker of coffee filters. Those guys together more than doubled the throughput of those very sophisticated plants in about a year. So they really did have a very strong core operations background. But Roger also importantly, had been a consultant. That's how Matt ended up hiring him. And becoming a great coach and a great teacher is very important, in addition to having the ability to do it oneself. That's not what we're trying to do. We're trying to partner with owners and operators and their teams and identify together the core strategy, the vital few things that will really help the company reduce risk and build value. And then you're coming alongside the people at the company that are going to be executing on these initiatives, and they can step in and help as well when asked. But you can see the importance of being a good coach in addition to being a doer, where would you say.
[00:29:08] Speaker B: That the operating partner model is most at risk of doing more damage than where does it go wrong? Does it go wrong around how the change and the buying gets created? Or is there somewhere else where you've either seen it go wrong or heard about it going wrong? How does it not go right?
[00:29:26] Speaker C: That's a great question.
Can you imagine if you had been very successful? Well, you are a very successful entrepreneur, but you're a very successful entrepreneur of a private company. You've done extraordinarily well, and along comes someone that is going to be your partner and they perceive there to be some room for improvement. If someone was going to be an overbearing jerk or not, be highly, highly sensitive to the necessity to have a few victories to demonstrate your worth and your intentions, that would be a disaster. It can also be challenging if you have an owner who really is not self aware at all.
That's extremely rare. But we have encountered it and we've walked away from an opportunity because it became clear over time, not too much time, that despite what may have been initially indicated, there was absolutely no willingness to change anything and no understanding that there was room for improvement. Now, if a company or an owner doesn't need any assistance, that's wonderful. It means more capacity for our operating guys, and we have seen instances and we've had partnerships where that was nearly the case. But generally there's at least something that can be improved upon.
[00:30:52] Speaker B: I want to talk a little bit about add ons. So one of the things you said, while we certainly invest in companies that do not have add on acquisition potential, there is no more linear way to generate growth and returns than investing in a company with good add on potential. Can you just unpack that and that statement? Those are your own words just in your notes?
I'd love to talk about this a bit.
[00:31:14] Speaker C: Yeah. And it certainly was something that was easier decades ago than it is now just because of competition. But when you have the ability, rather than organically push the rock and grow, and we do grow organically quite a bit, we build capacity and we sell that capacity and we do grow businesses. But it's rare that an initiative would double and triple and quadruple EBITDA, an organic initiative, sometimes within the span of a couple of years. In the past, we had the great fortune of typically growing EBITDA about tenfold with the consolidations that we were fortunate to get involved with. I say that it was easier back then because nowadays, if you get rocking and rolling with a consolidation, particularly if it's in a sizable industry, it won't be quiet for long and an awful lot of money will start chasing that. I mean, look at the multiples in HVAC, for example, or in janitorial services or landscaping. The multiples have gotten pretty lofty and the competition for a particular deal can be lofty as well. Nonetheless, it's still a great thing when you can buy even two, three, four or a lot more companies for a portfolio company. We happen to believe in integration, doing a meaningful job of integrating those entities so that the entire organization is well run. But you spoke earlier of the multiple expansion. As you grow fairly obvious that you take up a company from 3 million of EBITDA to north of ten, you build some splashy value.
[00:33:00] Speaker B: When you do that through consolidation at Mangrove, you just mentioned you tend to prioritize integration. What does that mean to you? What is the definition of integration and a relatively high level of integration at Mangrove? Is that a single p l? Is that a single brand?
What are the attributes of high integration in a mangrove consolidation?
[00:33:25] Speaker C: Well, any of the functional areas where it just makes sense to not have redundancy is what we would want to help to integrate. You mentioned the brand. It's not uncommon to pursue a strategy of having dual branding such that the platform has a brand. And when you invest in a smaller entity in that same industry, as a tuck in, you might keep the old brand of the add on company and then you might put a fill in the blanks company. So you might dual brand for a while and then after a time, if it seems to make sense, you might just go to the platform's brand and you're doing this obviously in the case of the dual branding, to make sure that you still are recognizable by your local audience, by your customer base, a lot of goodwill and community. So you don't want to lose that, but you're preparing a common name for your ultimate exit partner.
[00:34:28] Speaker B: Are there any places where you proactively do not seek to create integration when.
[00:34:33] Speaker C: You'Re consolidating it's so case specific. Wherever it just didn't make sense, where it does make sense and things like accounting function probably make sense, insurance makes sense and it's very case specific. But we're just going to try to do what makes good sense and we'll explore that together in a collaborative way with the portfolio company and with the add on and figure out what is the best path and pursue that.
[00:34:59] Speaker B: You said one of the things like you've been talking about a lot of things that used to be easy and that today are harder. Right? So you said consolidations maybe used to be easier. Buying businesses at lower multiples used to be easier and has gotten harder. What has gotten easier over the last ten years, 20 years, 30 years, as opposed to harder?
Is there anything in the easier column?
[00:35:24] Speaker C: There is. Great question. I think that the things that have gotten easier are easier not because the market has gotten easier, with maybe one exception, that it is easier to find intermediaries and find deal sources that's easier to identify. Then you just have to compete like Hector with all your new competition. So that's easier. But I think the things that have gotten easier haven't gotten easier because the market has gotten easier. I think they've gotten easier because we've had to get better. That's the beautiful thing about competition. You think about sports and you think about the capabilities of. We watched a little NFL football the last night. Think about the capabilities of the NFL players. Some that I met in the 1970. Today they couldn't even get on the field and they may not even get on the college field. So competition obviously forces you to get better. And we definitely have gotten better in almost every functional area. We've gotten better in our own use of data, in our use of a really robust CRM, and our sales and marketing efforts have gotten better. We've gotten better in terms of our diligence, in terms of competing for opportunities. And the other thing that's gotten easier is when you've been in over 60 industries and you've partnered with over 160 companies, there's just so much to draw on. We've learned so much from those experiences and we could bring that to portfolio companies and bring that to competitive processes. I wouldn't think that company owners want to see that you know something about their industry and that you have been able to be value add in a certain functional area in a certain situation.
[00:37:04] Speaker B: Yeah, I was just going to say there's not a lot of companies in the lower middle market, at least investment firms, that have the duration and the history and the volume of transactions. That mangrove and the partnership, the Mangrove partnership, which obviously predates Mangrove with Florida has. And I'm be curious just how significant of an advantage you feel like that reputation and that record mean. Do you find yourself leaning into that track record and that reputation in the competitive transactions that you want to win more than anything else? Is that what gives you confidence that you can win competitive transactions? I'm just curious how you guys size up your reputation and your track record as a way to win competitive deals versus, I guess, other techniques or other methods by which you try and compete to win a transaction that you're really excited about.
[00:38:04] Speaker C: Yeah, I would not want to be starting anew today without the advantages that you're describing. The reputation and the experience is tremendously helpful with intermediaries. They're looking for certainty of clothes. They're looking for someone, they won't embarrass them and they get in front of the owner. Tremendous help there. Then when we get in front of the owner, it's probably even more helpful. Now in a very competitive environment with lofty multiples, it's possible that we may not even get to that point where we get to evidence, to the owner and to their team that we care very much about our portfolio partners and we are tremendously value add. We try to make it fun. All those things will become evident and we have a lot of experience in their industry or in similar industries and have the core competencies to help them move the needle. All that only gets to be brought to bear when you get in front of somebody, and we may get priced out of something before you can get there.
[00:39:01] Speaker B: Maybe we should just spend a little bit of time on sourcing. That's a place that you and I have spent a lot of time talking. When we get to see one another in person, can you talk a little bit about just the sourcing and the evolution and the changes in sourcing over the course of your career, as well as just any other things that you think are interesting from a sourcing perspective? I just would love to hear you've been so successful there. I'm sure I would get a lot of offline emails from people saying, you didn't ask Glenn about sourcing. How did you miss that one? So I want to make sure we cover that, and then I want to finish with just some conversation on culture, because that was one of the things that you spent a lot of time writing up some great notes on as well. We'll hit sourcing first.
[00:39:41] Speaker C: Sure. Believe it or not, those things probably will dovetail pretty well. They'll segue well. So we've been at it for a while. We used a dedicated sourcing model from the very beginning, since 1989, which means that we divide and conquered, which was really critical. I mean, if you think about the way most people used to do it, they did not have dedicated sourcing efforts. And the expectation was that partners would source, execute. And then, and I think the word choice that was used commonly way back when is telling monitor the portal company not a lot of value add if you're monitoring, right? So we were dedicated to it, which means that you have people that are thinking about how do I find the next great deal source? What do we need to communicate about what we're willing to do and what we can do and what we have done that not everybody else can, will or have done? We have to differentiate ourselves, particularly in a competitive market. So the sourcing job is to figure out who do you communicate to? What do you communicate to them that's meaningful, right? It's really different. And then be extraordinarily responsive. You have to be, I think, very much on top of using information and using data and using systems and processes to make sure that we're really good to our customers, our deal sources, our lifeblood, whether it's a business broker or whether it's a big investment bank. And that has to do with having people engage with them that know what they're talking about, that have agency who know what questions to ask, efficiently garner the information that we need to make an accurate decision and then stand by those decisions. We do get the entire team involved in the process at a certain point to make sure that we are securing all the information we need to make an accurate assessment and to stand by the indications that we make. There are people that don't mind a bait and switch, that there's an ethema to us. So we want to be very accurate in our feedback and we want to be timely morphing over to culture.
[00:41:57] Speaker B: One more question on sourcing, because I'm just curious, you mentioned earlier we just provided some comments on proprietary deals from owners versus working with intermediaries. Seems like that would be one of the biggest areas of change over the decades is substantial amount of remediation from sell side professionals as opposed to from buy side professionals. And it seems like your general orientation is just not to in any way bet the sourcing function of the firm on proprietary opportunities and proprietary dialogue. Is there a reason why you have made that decision? Or just was there a point in time when you developed, when you changed your mind or you changed your opinion, or you began to change your orientation on the issue? Just given that the history of sourcing was maybe more proprietary in nature than it is today, I'm just curious if there's been any shift in thinking over the decades or just even in the last 510 years on intermediated versus spending time connecting with a lot of business owners directly.
[00:43:01] Speaker C: Yeah, we always relied on intermediaries. Again way back, it was chiefly by side business brokers. And now we still are still extraordinarily important to us. And you mentioned that we've been happy customers of axial forever, and that is a very important audience to us. And we spend a lot of time and effort, and we prefer that, frankly. Right. It's not that we've changed our practices, nor have we changed or made a decision to move away from that. It's just that that's what the market is comprised of. More and I would have tremendous respect and Zemendi for any of my friendly competitors, truly are excellent and very successful and very active at coming up with an industry thesis, and then proactively and without the assistance of an investment bank or a business broker servicing an opportunity, that'd be a superpower. That'd be pretty great. The majority of people that I celebrated, friends that I'd see perhaps doing that once we talked about it, as often as not, would be that that was for add ons, for an existing portfolio. And that's a totally different thing. I think that is very doable to find add ons, but to find that platform that's proactively and independent of intermediaries, that's pretty stout.
[00:44:22] Speaker B: Okay, back to culture.
[00:44:23] Speaker C: Yeah. So whether you're talking about working with company owners and their teams or intermediaries, culture, and internally, obviously internally in our shop, culture is of utmost importance. I mean, it sounds stupid, it's David Gerd's obvious, but when it's who you are, meaning when your culture is a healthy one, and when your default mode is to do the right thing to earn your keep, to be helpful, to hopefully be adequately humble, to have fun, good things can happen. And a lot of people will give lip service to culture. But I think if you spent time with the entire organization, you could see how important culture is to them, how much they've invested in that healthy culture. But I think it's absolutely invaluable. Some sellers may not care that much. They want a particularly lofty multiple, and that may be their focus, and that's their prerogative. But happily, we've certainly seen so many people, so many company owners that genuinely care about their company, and they genuinely care about their people. And we've been very fortunate that an awful lot of people have felt that our culture is one that ensures that we will continue their legacy of doing the right thing. And our codified values, our core values, we live them, do the right thing, is the table stakes, of course, but earning our keep, call it, move the needle is another important value to us. Have fun is another one. Intellectual curiosity is one. And it makes our work a whole lot more fun working with each other and working with the outside world. And I think for intermediaries, I think they absolutely, especially the business brokers, they should absolutely know that they should keep coming back to people that are going to do the honorable thing and communicate honestly and communicate early and just try to be helpful with a deal or with anything else. We have a lot of close relationships because of that. There's one random point that I did not make before about the power of having internal operating partners that I should lift up. And it's the fact that that's given us the ability to work with complexity in a hyper competitive time. I mentioned some things that other people wouldn't do or couldn't do. We've done extremely well with a number of opportunities where there was headline risk, but if you did the work, you would find that it was just that, that it was mostly a headline. And with further understanding, you'd come to find out that the risks are very appropriate, especially relative to the opportunities. And when you have internal operating guys, they have the ability to look at complexity or imperfections as opportunity.
That's a huge benefit of having that team.
[00:47:26] Speaker B: It seems to me that complexity is one of these areas where there's some real alpha generation left in this world. And what are the examples of complexity that you guys characterize as complex? And is it as simple as just like, customer concentration, risk, or high cyclicality? Or what are the things that to you begin to signal, okay, there's complexity here, let's dive in, as opposed to there's complexity here, let's move on to something, because there's a great investor who says, like, I don't invest in anything that I don't understand. Right. His name is Warren Buffett. Right.
And so I'm just sort of curious how you guys parse complexity and how you guys think about defining it. What makes you want to pursue something more deeply because of complexity versus want to makes you move on even faster? Is there any way you could put words to that? I'm sure it's a complicated question with maybe a challenging answer, but I'd love to hear any thoughts you had on that.
[00:48:30] Speaker C: Yeah, absolutely. That's funny, because the two forms of complexity that you lifted up are probably the ones which come as close to categorically no goes for us, extreme customer concentration certainly would be a difficult thing to get around. And for us, cyclicality, extreme cyclicality, those are things that are difficult to see as anything but a very real and profound risk where all the operating talents that one might have is not going to save the day. I'll give you some exceptions, though. We did invest in a business which had extreme customer concentration just once. And it was a business that is the sole source manufacturer of rubber and urethane and composite tiles to maintain a stealthy signature for submarines. Absolutely mission critical, quality critical. And no one else had figured out how to make these products in commercial quantities with that perfect quality which was required. People's lives were at stake and very expensive assets were at stake. So the headline risk was a very serious one. It's, oh, forget it, look at the customer concentration. But I did mention that one of my partners had done some work at the Pentagon, and we were able to divine that nobody else could make quantity of tiles. It was a black art. And so we invested in that business and it worked quite well. But that is a great example of an extreme piece of complexity that is prohibitive in almost all cases. We had an extremely successful partnership with a business that had outsized supplier concentration. What we were able to do together was to build the largest value added reseller of 3d product development software. And that supplier was quite concentrated. We studied it and we came to come into relationship with that supplier. And what we learned was that they needed larger, more sophisticated value added resellers. They were not going to go to the cloud.
They needed us to grow, and they were willing to facilitate our growth. So that's a pretty good example of an extreme complexity. Typical complexities have more to do with things for us, like an owner operator CEO that wants to leave day one and does not have a successor, or just a less than replete team that will send an awful lot of funds running to the sidelines. But it's something we're quite accustomed to. Not surprisingly, operators are pretty good folks at recruiting operators, so we're quite comfortable doing that. Given that we're lower middle market guys, we're not shy of digging into numbers and try to make sense out of numbers that are not very professionally prepared and don't make a lot of sense. Roll up the sleeves and do some work there. Let's see.
We're doing extraordinarily well with a portfolio company right now that's in the enthusiast auto aftermarket. And this might surprise, but some people will wave the flag of electric vehicles in the face of our company, whose focus is producing products as the dominant manufacturer of components for restoring classic cars. Those two worlds don't really overlap I don't think people are going to give up their 58 Corvette stingray because they also own a Tesla. I mean, those are two different desires and two different appetites. So we were happy to work with that business, which was a great opportunity for operational improvement and more than doubled the EBITDA. But you don't see that opportunity when a business is devoid of complexity or suboptimized functional areas that will send some other people running.
[00:52:36] Speaker B: It actually really makes me connect sourcing and sourcing expertise to this topic, because I think one of the things that has happened for sure in the world of sourcing is there's been a lot of investment in developing dedicated business development capabilities in private equity firms. Certainly over the last 1015 years, one of the places where people have recruited meaningful amounts of business development sourcing capacity has been from much more junior career paths, where the business development professional has not done deals before or is just early in their career. It's not that they're bad people or that they're not great teammates and great professionals, but they have either no investment background or they have no transaction background when they sort of get into business development. So a person who's responsible for sourcing, who doesn't have some of the, I guess the patterns and the data points to appreciate classic cars and evs can coexist in a very, very successful way in the future. It seems like a lot of firms where the tip of the spear in business development just has less experience sizing up these things is the kind of investment firm that's more likely to make an incorrect, premature conclusion and walk away from something like that. Whereas if business development and deal sourcing is looked at as more of like an investment judgment function at the top of the funnel, you probably would get to a very different set of conclusions. I would think that there's a relationship between those two things in terms of just who's sizing up the opportunities at the tippy top of the funnel.
[00:54:22] Speaker C: I've certainly heard the lamentations on the part of our business broker and investment banker friends about their interactions with people that didn't have an awful lot of experience or don't have much decision making authority. And I think it's a whole lot more fun too, for our teammates in sourcing that have the goods, they have the experience, and they do have the authority to make decisions with the understanding that it can always bring something forward that they still have questions about. And then the team can make that determination as to whether we see something. As long as there are certain characteristics present, then why not err on the side of inclusion, at least in terms of advancing it to the next level?
[00:55:04] Speaker B: Yeah, Glenn, maybe one final question for me. You said like 15 minutes ago you certainly wouldn't want to be starting out in private equity these days.
And obviously you and your team have spent a lot of time and worked very hard in order to have the reputation that you have today.
If 22 year old version of Glen Oak and knocks on your door and asks you for advice, or a 30 year old who is thinking about leaving and starting their own investment business knocks on your door, I mean, what advice do you have for those two kinds of young investment professional personas? Someone who's interested in the investment business coming out of college and then to your point earlier about not wanting to get started in this business. Now, if you're halfway through a private equity career, done a really nice job, you're vp somewhere or something like that, and you're thinking about setting out on your own. What questions would you have for a person like that? What advice would you have for a person like that? Just curious how you think about that based upon what you said a few minutes ago.
[00:56:05] Speaker C: I made that comment because of the proliferation of noise, of competitors, of dry powder and all that. And the advantages of differentiators, be they terminal operating experience or industry experience. You learn an awful lot when you've been in the industry seven times. But for somebody that is thinking about getting into something anew, what differentiators might they be able to gravitate towards? So maybe it is specializing in a sector and really getting to know all of the deal sources focused on a sector, building a vocabulary, building experience, building understanding and knowledge about a sector. I think that all could be pretty interesting. I love to see young people who want to eventually get into sort of finance getting some operating experience too, if only to maybe have a little more credibility or a little more empathy for operators if they're going to have Facetime with the owner operators. But yeah, I wish I had sage advice for someone. I guess another big thing is obvious, and it's just making sure that you are getting into bed with people that you've really vetted and not be blind to the importance of culture and of integrity. And certainly things go much better then. But try to find some niche, whatever it may be.
[00:57:39] Speaker B: Maybe we should pause it there. Glenn. It's been great to catch up. It's been a wide ranging conversation. We've covered 30 years in 70 minutes, and obviously so many of these topics, we could have spent the whole 70 minutes on, so look forward to chapter two of this conversation at some point in the future. Thank you so much for the time today. It's been great.
[00:57:59] Speaker C: Thank you, Peter. Always a pleasure, my friend.
[00:58:08] 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
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