M&A Roundtable: Portfolio Management Practices and Challenges

Intro (00:00):
You are listening to the Alliant M&A Roundtable, providing insights and expertise on the unique risk management needs of private equity firms.

Jon Gilbert (00:11):
Thank you everyone for joining another series of the M&A podcast. We're here with Matt Cole from SBJ Capital, he's going to tell us a little bit about SBJ and what the private equity world looks like today. Also with me is Tim Conlon, a senior member of the M&A team based out of San Francisco. With that why don't we turn to Matt, and Matt, if you could tell us a little bit about SBJ Capital, who's really one of the pioneers in the private equity industry.

Matt Cole (00:37):
Yeah, thanks, Jonathan, thanks for having me on. I'm excited to be here with you. It's my first M&A podcast, so that's certainly a big milestone for me. Yeah, happy to talk a little bit about SBJ and our history. SBJ is a relatively new firm, but the team has been around doing this, investing in the same types of deals, same segments of the market since, call it the mid to late '90s. So, I guess we have been at this for a little while, always investing in family and founder-owned businesses, primarily in the consumer and services industries. We're currently investing from our second institutional fund as SBJ capital, targeting control and non-control transactions and companies with 3 to 15 million of EBITDA. And in general, what we're seeking to do is partner with these family and founder-owned businesses to help make operational improvements and accelerate growth.

Jon Gilbert (01:25):
That's great. Thanks for that, and it certainly sounds like exciting place. You know, turning to yourself, it looks like you've had a pretty interesting background, maybe not the traditional route for most of the M&A deal guys or private equity deal guys that we see, whether it's starting, certainly investment banking may be more normal, but also some operational roles. Tell us a little bit about your background, how you got to SBJ and what you like about SBJ Capital.

Matt Cole (01:49):
Yeah, no, for sure, and you're absolutely right. It wasn't exactly the cookie-cutter background but ultimately got to a place that I'm really excited about. After undergrad, started in investment banking with Deutsche Banking and had three great years of experience there. And then I was keen to get some operating experience working Corp Dev FP&A strategy, post-merger integration, to be totally honest, was relatively happy doing it. I had worked with my current colleague now, Gus Spanos, who has a mix of both PE and operational experience on his resume. And the opportunity came up to join SBJ, as part of the founding team. And for me, it really was sort of the perfect opportunity, sort of a way to combine my transactional and operational expertise to work with smaller companies and in the segment of the market that we play in the low-mid market. I think coming with that combination, coming with, you know, sometimes a non-traditional background helps me, helps us, resonates with family and founder-owned businesses, and helps us differentiate a bit, which is great.

Jon Gilbert (02:53):
That's great. No, that's very interesting and definitely sounds like a unique place. You know, you mentioned sort of founder-owned businesses and I know that's the target for you guys. What are some of the challenges that you see when a founder, who is a first-time institutional capital - are they always receptive to change? Do they ever push back?

Matt Cole (03:10):
Yeah, no, it's a good question and, you know, frankly, I think if someone's coming to market looking for a capital partner, they probably know there's an opportunity to make changes in the business, opportunity to continue to grow, opportunity for a capital partner to sort of be that catalyst for some type of change. Now that said, you're absolutely right. I mean, we're dealing with often 10, 20, 30 or multi-generational family-owned businesses where there is a lot of entrenched process and people and ways of doing things. And it comes back to a little bit of the culture of the team here. We have a saying that we try to influence their ideas rather than directives. And we may be a control investor, but ultimately the teams that we're working with the people at the companies, they have to execute. And so, if we're going to be an effective change agent, we need to influence them. You know, we invest across a pretty diverse set of sectors, but fundamentally it's recognizing and looking for those types of opportunities to be a change agent and help these companies grow and get them bought off on those strategies. You know, that's what we're looking for and I think it's key to being successful, is to be able to work with teams and drive those types of changes.

Jon Gilbert (04:23):
Yeah, that's great. Thank for that. You know, certainly understand the focus on consumer and services, it does seem like you touch a lot of different industries across the portfolio, whether it's obviously consumer, but healthcare and education. Just I guess generally, are there kind of common themes or challenges that are faced, you know, throughout the portfolio? You know, really in the last, 6 to 12 months?

Matt Cole (04:44):
Yeah, I mean, no matter what segment you're in, almost, it seems like there's no avoiding some of the common themes, certainly in the last six months, twelve months, you know, pick a number with issues that came either as a result of supply chain, inflation or more recently some of the macro headwinds and the circumstances are always different and the mids can be different, but every company has sort of had to deal with those types of challenges and our companies were no exception.

Jon Gilbert (05:14):
That's great, and I imagine, you know, like other industries, the portfolio companies were probably facing some headwinds relative to workforce and labor, and it certainly seems like a challenge in the last couple of years. Given every portfolio company is really dependent on having great talent and a reliable workforce. How have your portfolio companies adjusted over the past couple years?

Matt Cole (05:37):
Oh, for sure, and you know, you're right, it's been a big issue for everyone and certainly being a big issue for us. It's something that we've been talking about at the fund level, at the board level of all the different companies while we're seeing, you know, some abatement in that, certainly more recently it's been a couple years where labor has been a key topic of discussion and key pain point at different times. And for us, I wish I could say we have the magic formula, but it's just a lot of hard work and it's on sort of both recruiting and retention and trying to make human capital a priority in every one of our businesses.

Jon Gilbert (06:13):
Yep, that makes a lot of sense. And just kind of on that theme. How important is kind of the buy-and-build strategy at SBJ Capital? Certainly, you've seen a ton of add-on activity in the last, you know, five years and certainly a lot in the last couple years.

Matt Cole (06:26):
It's deal by deal. It's no secret within private equity that it can be a compelling way to create value. I think in recent years you've seen more of it within the competition for deals and as valuations are seemingly continuing to rise. If you're going to pay a full price, you know, for an attractive new platform deal, we're able to build more conviction if you thought or you believed or potentially even had a pipeline of add-ons that you could do, ideally at lower valuations to try to average down that multiple, create some value in the process.

Jon Gilbert (07:03):
That's great. And, again, going back to being operators, it seems like you guys know what to do and how to do it, always looks attractive on paper. It's not always that easy in practice, I imagine.

Matt Cole (07:12):
For sure. And a lot of it is just, you know, absolutely relentless project management, bringing resources to bear. Smaller companies tend to be understaffed and we add acquisition integration to their daily to-do list. Easier said than done. So, making sure the teams are supported, we're engaged, it's critical for us.

Jon Gilbert (07:33):
That's great. Well, you know, shifting gears again, even further, kind of taking a step back and looking at the private equity market overall, you know, from a fundraising standpoint, given that we're close to wrapping up 2022 faster and faster every day now, you know, what do you see in store for, you know, 2023 on the fundraising side of the house?

Matt Cole (07:52):
Yeah, you know, it'd be curious to see how this plays out. It's been, and it’s sort of been well publicized. That was a really active fundraising market over the last couple of years, sort of after a relatively brief pause, there was a lot of capital raised across strategies, you know, buyout credit, et cetera. And there's certainly a lot of dry powder out there given the speed with which funds were coming back to market, raising bigger funds, adding additional strategies, et cetera. I think in recent experience, there was a lot of capital raised, but a lot of it tended to be concentrated in fewer names, most prolific fundraisers, you know, saw a lot of success and, you know, we're exiting deals and raising capital quickly. But's a crowded market and it had been, and so there was certainly a lot of competition at times just for retention, but ultimately normalizing hopefully into a little bit more of a regular way fundraising market goes into 2023 because, you know, ultimately, you know, change is constant and there will be private equity funds seeking to raise capital for those strategies.

Jon Gilbert (08:55):
Yep. Makes a lot of sense. I mean, I always say in some ways private equity is very micro-focused and, you know, they're not necessarily impacted, and portfolio companies are impacted by macro events, but there's always a way to have a winning strategy, so to speak. But that's great. Matt, as you're aware, you know, Alliant has invested heavily in the cybersecurity technology space with leaders now available to provide, you know, really comprehensive pre-close work as well as unique portfolio monitoring and remediation services. You know, as a leader at SBJ, how do you think about cybersecurity across your portfolio company and, you know, what steps have you guys taken as a firm to kind of safeguard the company's networks and systems and all that good stuff?

Matt Cole (09:40):
Yeah, no, it's such an important topic for us and it's interesting. It feels like it's become more important every year. You know, to your point about pre-acquisition diligence, we're doing a cyber review on every deal, but we're getting a cyber policy now on every deal that that wasn't the case, you know, call it five, six years ago. But it certainly is now. We're taking steps both at the fund level as well as the portfolio company level doing cyber training. We have both regular sessions as well as third-party service providers that help us with ongoing training to be aware of the different types of cyber-attacks that are out there and doing periodic reviews. We do semi-annual insurance review as it is and adding a robust cyber review to that process is something that we've started to do more and more of.

Jon Gilbert (10:30):
Well, great to hear that you guys are taking such a proactive focus. I would say that's not the case yet with every firm we work with, but certainly it seems to be a growing trend across the industry. Tim, anything you want to add or questions?

Tim Conlon (10:42):
Yeah, Matt, in a typical year, how many new, new deals are you at SBJ typically doing and then looking at 2023 with some potential uncertainties in market and everything else? Is that changing or is that going to kind of stay status quo?

Matt Cole (10:59):
You know, it would be great for our core buyout fund if we could close three new platforms a year. And you spend a lot of time looking at a lot of different deals, ultimately get to those, those three, and that's before add-ons. And we talked a little bit already about, you know, add-ons being an appropriate strategy for some companies more than others, but we tend to do at least as many, if not more add-ons in any given year across our portfolio of, you know, 12 companies call it, you know, compared to the number of platforms that we close. I don't think that's unusual. I think a lot of funds will close more add-ons in a given year than they will new platforms. And you know, for us it certainly remains relatively steady. What I'm hearing from bankers is that pipelines are still relatively full, maybe not as active as 2021, but still active heading into 2023, so hoping to continue to have the same level of activity and closed deals, you know, going into next year. But we'll see. I guess you never know.

Tim Conlon (11:58):
There is the unknown for sure. No, appreciate that. And then a lot of our private equity clients across the country work with founder-owned companies, and we've heard some interesting stories about valuations and how that that is looking, I'm sure you've run into that as well, but looking into 2023, are founder owners maybe getting a little more realistic on valuations and what companies are worth, or is it still a little skewed?

Matt Cole (12:20):
Yeah, it's a great point. We've been experiencing this real-time, I think because valuations have been going up so steadily for so long, and expectations have been set relatively high, you know, by bankers for family and founder-owned businesses. It doesn't reset overnight, right? And, you know, market conditions, broader macro conditions as well as debt capital, market conditions and interest rates and all those things that ultimately, you know, from where, you know, private equity investors sit, are reasons to be more cautious from evaluation perspective, that takes time to work through the psychology of sellers as well as their advisors. So, I think we're going through that process right now, and there's probably more of a disconnect in Q4 than there has been in quite a while.

Tim Conlon (13:09):
Yeah, for sure. No, that's consistent with what we're hearing. I appreciate that feedback.

Jon Gilbert (13:15):
All right. Well, special thanks to Matt Cole for joining us on another series of the M&A podcast. Look forward to talking to him in the near future and others. Thank you all for joining as well. I hope you found it helpful and insightful on what's to come for next year.