Episode 35: Private Equity and Family Capital

In this episode of The Sound of Automation podcast, we talk to Emma Gergen of Carlson Private Capital Partners. Bryan and Emma discuss the different types of private equity and how it differs from family capital. Listen in to learn how your business can benefit from an outside advisor.

Guest Emma Gergen
https://www.linkedin.com/in/emmagergen/

Host Bryan Powrozek
https://www.linkedin.com/in/bryanpowrozek/

For more information on Wipfli, please visit our website at:
https://www.wipfli.com/manufacturing. You can also contact us here.

Transcript

Emma Gergen:

What are your goals for your business and the ownership of your business over the next three to five to ten years? And then backing into the action steps you need to take to meet those objectives. Because there are so many different options for a business liquidity and exit, it takes time to understand on the front end not only what's out there, but what's most important to you and how your business can succeed ultimately without your involvement, how it can benefit from the capital and expertise of an outside investor.

Speaker 2:

Welcome to The Sound of Automation, brought to you by Clayton & McKervey, CPAs for growth-driven businesses.

Bryan Powrozek:

Hello, and welcome to The Sound of Automation. I'm Bryan Powrozek with Clayton & McKervey, and joining me today is Emma Gergen of Carlson Capital. Emma, how are you doing today?

Emma Gergen:

I'm good, Bryan. Thanks for having me.

Bryan Powrozek:

Excellent. Well, so we're going to be covering a topic we've touched on in the past, but just maybe from a little bit different angle in terms of some of the private equity that's out there available to help business owners grow their business, and coming from the family office side of things, which is maybe a topic that some of the business owners haven't heard of yet. So before we jump into that though, I guess, can you just give me a quick introduction to yourself and Carlson Capital?

Emma Gergen:

Yeah, for sure. Happy to do so, and feel free to stop me along the way here if I need to explain any of the acronyms or otherwise.

Bryan Powrozek:

Sure.

Emma Gergen:

I certainly have done the same with businesses that we're looking to invest in multiple times over.

So I have a traditional accounting and finance background. I started my career in the audit practice at Deloitte, and then it went into investment banking and then at a traditional middle-market private equity firm. I also have a family business background, and I'm the member of a fourth-generation electrical distribution company that my great-grandfather started in 1919. And so it's that family business ownership that has really helped me develop a sensitivity towards stewardship and continuing the legacy of a business, starting from a founder.

And then the approach that we have at Carlson Private Capital is a combination of the strengths of my private equity investing background along with the flexibility and long-term perspectives and the legacy sensitivities enabled by a single-family investor in the Carlson family. So we really take a view that business is a force for good. We're mindful of growing businesses to generate returns, but also very focused on serving our customers, serving our employees, and serving our communities.

The Carlson Private Capital platform started about five years ago now, and it's myself and a team of nine dedicated investment professionals that represent the direct investing arm of the Carlson family office. And we were approached by the Carlson family with the desire to help the family get back to their roots of investing in growing middle-market companies and provide a solution to family- and founder-owned businesses, really in the form of professional family capital that isn't readily available in the market today.

So from a blocking and tackling perspective, we're looking for businesses that typically have $5 million in EBITDA for a platform investment. And then we combine the professional skill sets of a private equity lens with the long-term orientation and flexibility of the single-family capital base with the Carlson family, and really focused on supporting management teams who are looking to facilitate the transition of a founder or accelerate growth and oftentimes embark on an M&A strategy for the first time.

Bryan Powrozek:

Excellent. So yeah, and I think that, at least in my conversations with business owners, there's a bit of a stigma about outside money, that I think everybody's got the visions of the 1980s and private equity coming in and buying things up and breaking them off. And that's not necessarily the case today, but I guess to maybe set the stage for some of the folks who might not be as familiar with it, can you just discuss the private equity and how that all works and the different types that are out there and how that might come into play for a business owner?

Emma Gergen:

Yes, for sure, because it could be an overwhelming market, just like any new market, and there's a lot of nuances to it. Generally speaking, there's a wide spectrum of investors in private businesses. So there are angel, individual angel investors or small groups who do seed stage, early stage investing through the startup phase into growth, equity, capital, and then traditional large buyout funds. So the shapes and sizes and personalities are different across all of those spectrums. There's a handful of categories that I think through when evaluating, from a perspective of a business owner, what different type of investor I may be looking for. One is the stage of the investment. So a fund that's focused on a business stage is typically characterized by the level of profits in the business. So private equity usually implies some level of profitability, anywhere from a couple million dollars in EBITDA all the way up to $50 million, $100 million, $200 million-plus in EBITDA. The earlier the stage, those are typically referred to as lower-middle-market investors, to the larger stage, which typically get characterized at least in the private equity space as your traditional leveraged buyout or LBO model.

That's the stage. That's important to consider. Then there's the sector focus. So some firms are generalists like ours from an industry perspective. They will invest across industries. Some focus on a specific industry. And depending on what you're looking for, you may hear more or less about that focus. The other element is size. So different fund sizes, the size of the actual fund, will dictate the amount of capital that they're going to allocate to each individual deal. So some might focus on a check size that's smaller on minority investments, and some may want only control majority investments. Some may be interested in supporting growth capital for a particular initiative, and some want a liquidity event for the ownership at 100% or less than 100%. So the size of the fund and the strategy of the fund from that perspective is a point of difference between funds.

And then the last one that I would highlight, and probably one of the most important, is, I've characterized it as engagement level, but firms vary in their level of operational engagement with companies post-investment, everything from very involved weekly conversations, daily conversations, maybe will even step in a management role at some point, all the way to very hands-off, maybe quarterly board conversations that are a couple of hours, or even less than that potentially. So there's a really wide spectrum of different strategies and different segmentations out there in the private equity world.

Bryan Powrozek:

Yeah, and I think when I talk to clients about this, it's similar to most things in business, right? Private equity, wherever you fall on that spectrum, is a tool. And depending on the situation and the facts and circumstances to each individual business owners, maybe it's the right tool, maybe it's not, but it's something that business owners at least need to think about and consider as they're seeing challenges in their business. "Hey, I've got this great opportunity to take advantage of. I just don't have the capital to do it. And if I could get the capital, I could exponentially grow my business." Or similarly, we see some business owners who perhaps they've grown the business to a point where they've... They've grown it to the point where they could retire, but they still have 10 years to go, and so maybe it's an option for them to take some chips off the table and bring somebody else in. And so now it's kind of securing some of that growth that you've made over the years, and now you're shifting some of the risk off to a third party.

So there's a lot of different ways to look at it. And so I like how you laid all that out, because I think it's important for business owners to know that not all private equity is the same and they have different objectives and different goals. And so when you get approached to think about that, it's not a bad thing.

Emma Gergen:

Right, yeah. No one size fits all, which is actually a really good thing, because then it [inaudible 00:08:52] it may take a little bit of time, but you can find perhaps exactly what you're looking for.

Bryan Powrozek:

Yeah. And so given that, let's dive down into the family capital side, because to me it's a very interesting option especially given the business owners I work with, small to mid-size manufacturers, engineers who've grown this business from day one to wherever it is. So they take a lot of pride in these businesses. They want to make sure that their employee's taken care of, their legacy is taken care of. So I understand where some apprehension comes in to bringing somebody in to help with the growth. But I think that's where family capital almost matches up with that legacy, that desire to retain legacy. So how best do you see family capital fitting in with business owners?

Emma Gergen:

Yeah, and thanks for teeing it up like that, because I got so excited when I heard what the Carlson family wanted to do with our platform, because for me, it married my professional investing experience as a traditional PE investor with the family business sensitivity that I've had from growing up with my great-grandfather, my grandfather starting this company, that I just feel an intense sense of stewardship and legacy association with. And to be able to have a platform to bring that to other business owners has just been really personally exciting.

But I would say, as you think about the family capital landscape, if you meet one family office, you've met one family office, and family offices are as different as the families that they represent. And so just that's another nuance of the whole model, and we're seeing more and more family offices that have direct investing business similar to ours, which is a great option.

You know, thinking about where the capital comes from is helpful, because the biggest difference between family capital and private equity funds is that the capital in a private equity fund comes from limited partners, and we call those LPs. They're typically pension funds, high net worth individuals. They are all signing up to a fund's investment strategy, beholden to a legal agreement with the LP that they use to form the fund and enables them to deploy capital within a certain period of time, sell those businesses within a certain time, and realize liquidity for those limited partners at the highest possible return, period. That's their goal, and they do a really great job of that and there are some really great sponsors.

Our mandate as a family capital provider for the Carlson family is also to generate returns, but one of the huge benefits of being part of the Carlson family office is that our investing doesn't have to be only about the dollars and cents. We're very much focused on the employees and the communities. The Carlson family has a longstanding tradition of civic engagement in the Midwest, and the fiduciary responsibility we have to the family is to generate returns but also to give back to the communities, to find ways to help the employees, and offer all the benefits of a traditional private equity firm in terms of the ability to add value and help the businesses to grow, but provide a lot of attributes that the traditional private equity firm cannot, one of which is the length of the hold period, and then a lot of these legacy and stewardship-related conversations that we can have with [inaudible 00:12:32] pieces that's different.

Bryan Powrozek:

Yeah, and I don't think that, like you mentioned, even on the private equity side, it depends on the fund and the objectives of it and the investors in it. And so, yes, you could find a very growth-focused fund, and that's going to be the priority. And those are the questions that the business owner wants to ask and understand if they're considering any sort of outside investment, is to really understand who they're trying to partner with. But as you kind of mention there, that longer investment horizon for the family capital, and it's a smaller group. You don't have as many investors, you're trying to meet their expectations. So some of those decisions can maybe be a little bit easier. Again, it's hard to compare to two conceptual private equity groups, but there's the tendency there that you could see a little bit of that.

No, and I feel like it's a great option for a lot of the clients that we work with, because they're very family-invested anyway, similar to your family business, that it's husband and wife who start up the business and they grow it to what it is, and they want to make sure their people are taken care of and they've got somebody that's got similar values and similar objectives. So that's great.

So I guess in your experience, because you've worked on a lot of different sides of this industry, the private equity industry, do you have any advice for business owners who are considering partnering with a financial sponsor?

Emma Gergen:

Yeah. I think what you described around a business owner's ability to find a solution for their needs is a good framework to think about from the onset. What are your goals for your business and the ownership of your business over the next three to five to ten years? And then backing into the action steps you need to take to meet those objectives. Because there are so many different options for a business liquidity and exit, it takes time to understand on the front end not only what's out there, but what's most important to you and how your business can succeed ultimately without your involvement, how it can benefit from the capital and expertise of an outside investor, before you start a process and before you need it, and starting building that network of trusted advisors and individuals early just to be able to collect as much information as possible and perspectives to guide that decision-making, I think, is a really good tool to think about using.

Bryan Powrozek:

Yeah, and we've had a lot of conversations recently with clients to the effect, even... It's funny, because if you're walking into a conversation and the business owner says, "Yeah, I'd like to sell next year," well, it's already too late. There's a lot of work that could be done upfront. And so we've had some conversations with clients who are nowhere near that transaction and saying, "Look, we know you're not ready for sale. You've still got 15 years of running the business [inaudible 00:16:05], but let's start having those conversations now so that if we do find, okay, the right next step for you is an internal transition to your key employees, okay, well, then we got to start upskilling those employees." In the case of our automation clients, they're probably engineers who don't really have much formal business training, so maybe they're going to need to go back to school. Maybe you're going to have to put them through some other trainings.

And the same thing comes out if it finds that, yeah, you're going to be looking for an outside investor. Well, let's start discussing who those potential investors could be, what the pros and cons are of each side, and so then as you're planning for that, you can make sure you're addressing the things that they're going to find important in their financials and your operations and all those kinds of things. So I'm glad you answered it that way, because that's in line with a lot of things we've been talking with clients about as well.

Emma Gergen:

It can make for a really exciting and more smooth transition when you do decide. I was just in a meeting this morning with one of our portfolio companies who made an investment in another founder-owned business to join the family of companies. They're six weeks in and it went extremely well, because they felt like they'd already been working together for a year, even though the transaction closed six weeks ago. And everybody feels really excited about it, so it really works.

Bryan Powrozek:

And this wasn't on our original outline, but just because you mentioned it and I've got your website up here and looking at the team, that's another benefit, really, that I see to some of the financial sponsors, is that knowledge that you're bringing to the table to maybe help. And I had a call with Corey Peterson from your office a few weeks back, and the fact that a lot of these small to mid-size business owners are struggling with business problems, and unless they've got a friend who's an entrepreneur or they belong to a Vistage group or something like that, they don't have a lot of peers to work with. So that's something else that a family office or private equity brings to the table too, is the ability to come in and say, "You're struggling in this area with your bookkeeping or your accounting. We can help you with that. We can help standardize some of that." And then it's the dual benefit of the investor gets a more valuable company, and the business owner gets someone to help them-

Emma Gergen:

Oh, yeah. For sure.

Bryan Powrozek:

... address those problems they've had.

Emma Gergen:

That's what we... Everybody talks about it as thought partnership, but when it really works... And we use what we call a pull model instead of a push model, so we don't come in and say, "First hundred days, here are all the things." We say, "Here's what we've helped people with in the past. If you guys think we can help, call us." And inevitably, we're talking all the time and [inaudible 00:19:03] friends and you can really have a great partnership and add a lot of value that way on both sides.

Bryan Powrozek:

No, that's great. So you mentioned early on some of the specifics you look for, revenue sizes, things like that. What are some of those intangibles? When you're out talking to a prospective company, some of those things, what are the things you're looking for in that arena?

Emma Gergen:

Yeah, really good question, because of course there's the financial parameters and business models that we evaluate, but for us, it's a lot more critical to have strong alignment with the founder and management team around the philosophies for how they intend to, or we intend to, collectively grow the business and support the business and the strategic aspirations that we collectively have for the future. I mean, in a lot of respects, it's like a marriage. You want to date and then you want to align through a transaction and can work really closely together to become a resource and sounding board, and you want to be able to find that great partner. We feel the same way, and it's really about... It's a lot about the people.

We recently made an investment in a really great business for predominantly that same reason, the cultural and philosophical alignment around growth strategy, thermal systems. It's a control systems integrator, an automation solution provider focused on district energy, life sciences, and mission-critical end markets. They've got an immense opportunity to grow organically as well as inorganically, leveraging our experience and support to invest in smaller businesses that can help grow a family capital platform in the automation space. And it's those types of opportunities and the alignment that we create on the front end that allows us to do something that feels pretty special. So that's how I describe what we're looking for beyond just the blocking and tackling of the financials.

Bryan Powrozek:

No, that's fantastic. That's great. So, Emma, I guess last question here, and I ask this of all the guests that come on, but if someone's listening to this and this kind of piques their interest and they want to learn more, what's the best way to get a hold of you and the team over at Carlson?

Emma Gergen:

So I think we put our emails and our phone numbers on our website, so I would probably direct you there. It's carlsonprivatecapital.com, C-A-R-L-S-O-N privatecapital.com. And my name is Emma Gergen. I'd welcome a conversation, an email, or a phone call anytime.

Bryan Powrozek:

Awesome. Well, Emma, thank you so much for the time today, and we will speak again soon.

Emma Gergen:

Super. Thanks for having me. Have a great afternoon.

Speaker 2:

Thank you for tuning in. Don't forget to like us, subscribe, and share on social. To learn more about Clayton & McKervey, visit us at claytonmckervey.com. That's C-L-A-Y-T-O-N-M-C-K-E-R-V-E-Y.com. We thrive on finding the solutions for you.