"Evolving Industry" Takeover: Operationalizing Brand: The PE Strategy for Rollups

Speaker A: Today we learned why not all private equity firms are the evil Borg sucking the souls out of companies, why generalist funds are basically an endangered species, and how rolling up 17 proud independent businesses requires equal parts diplomacy, strategy, and, um, beer. We talk about operating partners becoming the real engines of value, how brand strategy can make or break the success of a portfolio company. And yes, we recorded this one over drinks. My guest today is Scott Markman. You thank founder and president of Monogram Group, a brand consultancy that's been shaping private equity stories since the days when no one even knew what private equity was. Scott created the Ontaris Capital brand from day one, and he has over 30 years experience working with private equity. Scott also hosts a podcast called Beer Stories for Private Equity, hence the venue for our episode. Please welcome Scott Markman. Welcome to Evolving Industry, a no BS podcast about business leaders who are successfully weaving technology into their company's DNA to forge a better path forward. If you're looking to actually move the ball forward rather than spinning around in a tornado of buzzwords, you're in the right place. I'm, um, your host, George Jagosinski. Foreign Scott, this is very exciting being here with you tonight.

Speaker B: Thank you, George. Having me on your podcast. Well, I'm gonna be on my own podcast, being a guest on my own podcast, which is alternate reality, but that's where we are.

Speaker A: It's the inception of podcast that's going on right now. So, so.

Speaker B: And which of us is Christopher Nolan? I don't know. On beer stories for podcasts, I can't speak to yours, but I always have a beer, so cheers.

Speaker A: Cheers.

Speaker B: And for those of you listening and watching and who have seen me recently a few times, this is, uh, Sapporo, which was the name of my first dog. And so I'm over. I over index from a loyalty to Sapporo.

Speaker A: That's great. And I have a Mezcan Negroni because it's my delicious favorite drink in the world. So one thing that we have in common is we're both doing a lot of work in private equity, and that was kind of the theme of some of this conversation. You've been doing it a lot longer than I have.

Speaker B: This is the parlor trick that I lead with every conversation. Private equity going back to 1996. I was six years into owning the agency and trying to build a company practice. And my next door neighbor, we washed the cars one day on Saturday afternoon. She says, you know, the guys that I work with are going to be leaving my company and maybe they can be a client Here or something like, great, so I'll introduce you. Great. So she introduced me to these guys and I pitched the business and I won. And the company is called Antares Capital. And then I'm going to assume for a fair amount to my listeners and yours that that is like saying you build like Microsoft.

Speaker A: Mhm.

Speaker B: Because in private equity and Terrace Capital is a very household name. A loosely invented private credit as we know today. And they are a colossal institution. They manage, I'm going to guess 70 billion. I don't even know. Today they're owned by the Canadian government and they may have five or six hundred employees. And they are one of the, if not the largest player in middle market private credit. They're one of the top two. And so to say, well, you know, I kind of invented that brand from scratch 30 years ago. Instinct, credibility.

Speaker A: It's awesome.

Speaker B: And you know, it's like I'm not a name dropper, but it kind of works.

Speaker A: Yeah, so.

Speaker B: So I do it pretty often and I level set that we know what the hell we're doing and then say, you know, fast forward to today and our client count in the sector of private Equity is about 100 clients.

Speaker A: That's impressive. Well, this is really just a facade for me to suck as much knowledge out of your brain as possible. I figured a great place to start is since you've been in this space for a while and NPE has been growing more and more. How is it different today from what

Speaker B: it was when I started? It was not a sector. It was individual firms doing these strategies, mostly on the, on the, on the equity side and then growing the credit side and the investment banks and whatever. But it was individual firms, uh, I don't know, may have been a few hundred doing this stuff. Fast forward to today. What are their 4 or 5,000, depending who you listen to, in every stripe, in every subsector, every scale, every stage and tenure going on. And so I mean there, what are there at least 30,000 private equity owned, um, portfolio companies. Maybe 40 or 50,000 people working in the category. That's a, you know, a colossal order of magnitude greater and more complex and nuanced and siloed, you know, like niche nichified than that in 1996. And bear in mind, I'm not a finance guy. I don't have an mba. I mean, you know, I took a year marketing in college, but I didn't understand this stuff. And I, uh, don't know anybody else in marketing did either. So it took me a couple of years to Sit through meetings to fake my way through. Oh, I know what they're talking about, because I really didn't. And then once, like, the switch flipped, then it just became a lot easier. And today I walk and walk in a private equity meeting and talk shop and five minutes later they know kind of, that I can navigate my way through this stuff, but that's hard. Um, another way that I would say is, um, the specialization with scale comes, you know, kind of creation of subsets of this in terms of business model sector. They invest in the sheer scale of things. You know, they all define by assets under management or, you know, the range of ebitda, uh, the company's looking to buy, or they look at, you know, we do industrial services or we do healthcare or, you know, whatever. And. And so everybody's got their swim lane. And back then it was mostly generalist firms because that's all there was and that's all they could be. You know, today, if you're a generalist, you're a little bit ripe for the picking. That's. It's not a good thing. Thing often to be.

Speaker A: Yeah, I wouldn't put my money in that. I want a really tight investment thesis, right?

Speaker B: The way that they are shown the kind of deals they want is to opt into a narrower swim lane and they may have one or two, and we have plenty of clients who do that. But, uh. And there are generalist firms, but most opt away from that because it's. It's challenging and is sourcing of deals and the sourcing of capital because again, the LPs, when they're family offices, their institutional investors want definition and predictability. You know, I can. I can put my 6 million into any one of 400 firms knocking on my door. And why you? Well, part of that it is I know exactly what I'm going to be investing in and I'm going to put my faith in that, that this firm understands investing in industrial, you know, middle of the supply chain, blah, blah, blah. And that's like a more concrete, tangible thing to say yes to, as opposed to, we're just good investors and we'll kind of COVID the landscape. And we think that's a tough sell.

Speaker A: How have you seen the operating expertise grow? I mean, for me, operating partners that. I've just seen them get more and more, roll your sleeves up, get some shit done. And those are people that speak right to my soul, you know, because they're essentially consultants within their port cos and just getting real change done. But I feel like in the Past, uh, you know, people I talked to, they're like, there's really no one like that in the firm.

Speaker B: Okay. So I would say prior to 10 years ago, having people on staff who are operating partners or operating executives essentially did not exist. What they would do is most firms would have a coterie of people they knew in business or from other PE firms that were a little bit older, they kind of retired and they were just on, you know, side hustles. We brought it, uh, you know, be on the board. We brought onto the advisory team of Portco 12 because they had knowledge in the category or they had scaled a company before or where they solve the tech problem and they were brought in as paid advisors to address that need or opportunity or problem. Great. Now I mean the firms that don't have operating people on full time and are pretty senior and came out of McKinsey or came out of successful other companies and they're on staff now regardless of the stripe of investment profile. Very few firms that have an army of, you know, some individuals are army of people departments. They're just ops people. I met with some folks the last couple of days here in Boston and, and that's mostly who we're trying to target because they're the folks that will um, bring us into these companies and recommend us and play a role in the work that we would do. Um, that did not used to be. And so in that trend it's become easier for us to sell our expertise and our value at delivery builderables into these companies because there's somebody on the other end who prioritizes it and understands it.

Speaker A: Yeah. I wonder if it also helps like the, the public, you know, view of what private equity is. Also when I think about very broadly, I think people think it's like the evil Borg that's just swallowing up companies and tearing the souls out of it. Right. But, but, but from, from my, especially within growth funds, when you've got a strong operating partner, you are just, you are unlocking the, you know, the potential energy that's in that that organization and turning into kinetic energy.

Speaker B: Could not agree more. So there are certain publications in which the leading one is the New York Times, who have played this trope out for a long time, which is um, the big boys, the Carlisle's, The Blackstones, the TPGs of the world are, you know, these Hoover, you know, suck the life out of companies, load them up with debt, put the money in their pocket, sell them m the carcasses, all that stuff. And there's that Stuff definitely goes on, don't get me wrong. But because we play in the world of the lower middle market and sometimes the middle market, what goes on in those levels of private equity is wildly different. So a vast majority of the companies we work with, the intentions are more, I'll um, call it honest. They're not about financial. Even today they're not really about financial engineering. And what they do to these companies and the value they create, the benefit that they impart on these companies of which we're a part of is wildly more positive and common than what the New York Times will talk about while they squeeze Party City dry. Yeah, well they did, but that's 1 out of 10,000 data points.

Speaker A: Mhm.

Speaker B: So you know, it's, it's an easy angle to write about on a long term basis and it's with companies that are in the public eye anyway. The companies that you served and I've served are like this big and they're in like rural Texas and they're doing, you know, machine driven parts that go into airplanes or something. And it's not sexy, it's complex, it's abstract, it's hard to understand. But telling a story about Party City and whatever, whoever ruined them and sucked them dry is an easier story to tell than they suggest. Oh, that's all private equity. Uh, it's not lazy, it's very simplistic.

Speaker A: Yeah. And the lifeblood of uh, the economy and our country are these companies you've never even heard of. Right.

Speaker B: That are actually, it is the backbone of America, your company and our company, the PE firms that we serve are making those companies. Now there is consolidation. Absolutely. We work on a lot of what are called roll ups, consolidation, fractured markets. But the benefit that is imparted on these companies is 5x downside, the negative.

Speaker A: Completely agree. And where you help is in, you know, they need to do something different. Right. From a, from a brand strategy perspective, from a innovation with a capital I. They've, they've been successful to a certain point and now they need to do different. And so something we had talked about before is how the heck do you, you're both balancing herding cats as far as like this new organization and then getting them to do something very different that they, they've not done before in

Speaker B: the world of brand and name over the door and potential change of that and consolidation of that and then presentation of a story, a value proposition. What are you going to do? For me, all that stuff has really the foundation of brand. 90% of the people that we serve in private equity, have never been through that. Both at the PE firm level maybe, but at the portfolio company level, no way. We often run it. You know, our clients are entrepreneur, founder created companies in these kind of business to business niches. They make widgets that go into widgets or services are going to services. And they built wildly successful companies, but not because of what I could have done for them. They, they were great salespeople, they were great engineers, they were, you know, great at managing teams and, and maintaining relationships. All these really essential parts of running a business. But branded marketing as a knowledge and a competency as to why they were successful to the point that private equity bought them very uncommon. Well then you know, as private equity is, let's say in a roll up doing this consolidation and they they're going to buy. We've our biggest is 17 and once. And you have to herd the cats around that stuff and get well here are your options and here's you know, option A, B, C and D about a brand's, you know, architecture, you know, is it a one brand, is it a bunch of brands? Whatever it is. And then you have to get consensus on that and then have to go build the stuff and then take it to market across all these local markets and whatever. That's hard. And these people are a little bit freaked out at times. You mean my name's not going to be open the door anymore? No, it's not. And that's, I understand the, the concern of that because I've built this agency over 36 years while my name is not overdue. It's Monogram Group, not Markman. I get it. It's been my life's work. Right, I get it. But at the end of the day if certainly want to stuff $5 million more in my pocket because what I'm going to do for them. What are you going to say? No, I don't think so. Yeah, you're going to say yes. I want that. Okay then with all due respect, we're going to be respectful, we're going to be thoughtful, we're going to be detail oriented, but we're going to make it go away. Because I want to get you $5 million more in your pocket by rolling other equity.

Speaker A: Yeah. The interesting thing I find in those situations is um, I think sometimes it can be viewed that these people are resistant to change. But I don't know that it's always the case because I think it's just that they don't know what change looks like. They've Been doing the same thing and possibly a multi generational organization and they've had success from that. So like they just don't even know what change even necessarily looks like.

Speaker B: Change is hard. Oh yeah, it's human nature. We're all wired the same way. Change is hard establishing and you know, going on a diet, uh, getting you got trained for a marathon and you, you know, you have to start that regimen of training for eight months in advance. It's hard. And to stick with it and believe in the end outcome, the benefit and the, and enjoying the journey and all these things. It's too abstract for most of our clients.

Speaker A: Yeah, yeah, it's very difficult. Um, and so you know, I always love to hear some stories from the trenches if you can, you know, protect the names of the innocent and all that. But you know, if we could help make this a little bit concret, uh, maybe an example where you've been able to help someone do something different that they hadn't done before.

Speaker B: As I can name names because the company was sold two years ago to another private equity firm and the RP firm client harvested value and all that stuff.

Speaker A: Okay.

Speaker B: There's a company that is known today as Surface Prep. Mhm. It's pretty well known in the lower middle market private equity universe because of this, its history and its recent sale careers. They were created by a firm in uh, Chicago called Frontenac maybe 10 years ago, started a process to roll up a uh, company's local yolk companies in this classic fractured market which is the distribution of industrial abrasives. Like what, what.

Speaker A: Mhm.

Speaker B: Is that so what? Industrial abrasives are about 500 SKUs that are made out of very specified minerals that are as fine as sand up to rocks and they are used to impart a surface on a metal part. So think about a titanium rod in your knee in order to be, you know, kind of biologically ready to go under your knee. On that rod it has to be a surface that is very uh, polished, pristine and you know, sterile and all of these things. Well, the way they get the surface on that titanium rod is by sandblasting out of a nozzle a certain you know, um, spec, um industrial abrasive. There's massive applications for these. But it's a local yokel very, you know the distribution is, it's by very nature kind of locally Oakland kind of uh, category. So front neck hoovers up maybe 10 of these uh, in every corner of the country and they package it and they sell that company to center Partners in Dallas, who was our client. Well, center of thesis was completely different. They want to create a national brand because they wanted to go into companies like SpaceX and sell at the enterprise level, corporate to corporate.

Speaker A: It's very different.

Speaker B: So in order to do that, they had to create a master brand and create all the marketing and, uh, selling infrastructure in order to be, you know, kind of have a foundation built to be legit to do that and then to train up their local branches to then go use this material to then take the company, you know, on some level in general into that world. So we did all of this work. Now what happened was there were about 15 or 16 entities. So we did all the research and did all the planning. What happened was there were four of the entities. One was up here in New England, I think, in Boston, that has such local brand equity of their original company that to kind, uh, of get rid of it in the near term was going to be damaging. So there were four brands out of the 15 where we created a version of the house brand logo, kept the name, and then endorsed it as a surface prep company for appearance. Then we built out the master brand for all this other stuff. There was one entity that was kept private label up. We built all that stuff out and then they hired a marketing team. They had none. They created a marketing team and then we trained them up. Then they went at it. The deal, uh, went really well. They went into Canada. They're now to Europe. I think when they sold two years ago, they might have had 25 entities from originally, wow. It was like 16 or 17 or whatever it was. And then, you know, so we kind of built the foundation and the assets and the structure to kind of all of a sudden one day stand up a big national company because they were the market leader when Service Prep went live. So fast forward to a little bit less than two years ago. It was sold from Center Road to Nautic up in Providence. It's a very big private equity firm for a ton of money. And while I don't know all the particulars, I promise you that the value of the brand or the balance sheet was a 10,000 fold orphan. Two greater than what we got paid.

Speaker A: Uh, yes.

Speaker B: So the value created in that was through the roof. Now, when this whole idea was sold, I had to sell into like 17 general managers who had to say yes. Now, again, four of them said yes, but. And so we built out a interim transitional solution to address the local needs without killing the house. And so we split the, you know, split the Needle, whatever the metaphors on that. And everybody was happy. But like, you know, I walked into that room with like 17 GMs. I had to get them all to say yes. And again, none of them had been through this before.

Speaker A: Oof. Uh, so if I'm hearing right, it was, it was a little bit doing the yes. And to get them on board rather than.

Speaker B: Yeah.

Speaker A: Forcing it down their thrones.

Speaker B: And I had to be prepared to pivot and adjust and, and deal with my clients. Center oak, my clients, the C suite of surface prep. But I had these 17 other clients that had to kind of play along.

Speaker A: Like that was hard, I bet. And, um, people might be sick of me talking about it, but I'm a huge common language guy. I would imagine in those conversations, creating common language for them to know, hey, I'm still going to be this local thing, but I'm powered by the larger brand and just those types of frameworks.

Speaker B: Racializing brand is critical and valuable, but it's hard and a little bit unknown, um, to the practitioners on the front lines. And so the habit forming and the training and the coaching to start to play on one team is a big deal in these kind of big roll ups happening all across America right now in a variety of industries.

Speaker A: So you've been at this a little longer than me. You seem very excited about it. What gets you excited keeps you excited.

Speaker B: Number one, I love the craft that we pursue. The idea of research and diligence and strat work and foundational work and creative work and execution work and launch work and training work I just find to be, uh, fascinating. And I have felt that way for a long time. A B to your earlier point, I happen to love doing the kinds of companies we do because I know we make such big impact. So we're able to do world class work. Our agency is that good. We are at the top of the heath. I'll put us against anybody in America. But doing it for the companies we do it for is freaking gratifying. M. It just is. And you know, I love our private equity clients. You know, doing it for the founders and the leaders of these companies and frontline people is even more gratifying because they don't know what they don't know. And then what happens is they see our work and it's like, oh my God, I just got the keys to a Maserati.

Speaker A: Yeah.

Speaker B: Yes, sir, you did.

Speaker A: And I could be proud about my new company and I can have unlocked

Speaker B: potential 100% of the time from this side of the fence. That is so gratifying.

Speaker A: Yeah.

Speaker B: Now, you know, the journey, the creatively, you know, the strat journey that we go through even on our side of the fence is just phenomenal. We work in a very collaborative agency. We enjoy working with each other, we enjoy the process together. And I've never lost that. I mean I'm a designer of education and I have um, a BFA from Washington, St. Louis. I, I just, I love, it's what got me excited when I was in college. I love the process.

Speaker A: I love the process. Well, I'm curious if you ever have this experience which is when you're dealing with these abstract challenges. A lot of times I found us getting to this point where you're just, you've consumed so much information, you've looked at so many different options and like you just start to feel lost in the woods and you're like, how are we ever going to get the hell out of here? Are we ever going to be successful? But then like somehow every time you do get on the other side of that in that moment.

Speaker B: But you and I have this thing in common, which is complex problem solving. Mhm. And then selling the solution. M. We have the same thing. I, you know, we say all the time. I'm sure it's your firm. We live in the world of Greg.

Speaker A: Yes.

Speaker B: No right answers. Now there are uh, I'll call it preferred answers, but there are no right answers. It's not black and white. It's not a spreadsheet calculation. And so to invent that or invent options and then go sell what you believe in and even have a backup plan, like that's in part.

Speaker A: Yeah. It could be exhausting. It's exciting and exhausting at the same time too. Right. There's some self doubt that happens throughout the journey. But uh. Yeah.

Speaker B: Isn't the selling of the work like, you know, I don't know, I'm thinking of um, like um, it's a little bit like being a pitcher on the mound. It's just you and you're either gonna win or lose. All our eyes on you. But you're so confident and excited about the opportunity and your abilities and it's like, you know, bring it on, let's go.

Speaker A: Yeah. Yeah. And then, and then you get enough wins under your belt and you're, you're the pitcher that every team wants to have. Right. And that's a really good feeling and I, I like to be that like the operating partner's best kept secret that they just want. Well, not best kept. Uh, let's take the secret part out because ideally they're just telling all their other operating partner friends about us, right? But yeah, like, I love that value. So we could talk all night. I know that you've got to get somewhere and I. I probably do as well. Something that I always like to finish on is in life, in your career, what's the best advice you've ever received?

Speaker B: Treat people really well, enjoy the journey, and don't take shit.

Speaker A: Simple but profound. I love it. Hey, since we're in person, we can finish this podcast podcast episode on the Cheers. Thanks for listening to Evolving Industry. For more, subscribe and follow us on your favorite podcast platform. And pretty please drop us a review. We'd really appreciate it. If you're watching or listening on YouTube, hit that subscribe button and smash the bell button for notifications. If you know someone who's pushing the limits to evolve their business, reach out to the show@evolving industry.com or reach out to me, George Jagosinski on LinkedIn. I love speaking with people, getting the hard work done. The business environment's always changing and you're either keeping up or going extinct. We'll catch you next time. And until then, keep evolving.