A different approach to Private Equity with Michael Arrieta

00:00 oh Welcome back to the Real Selection Private Equity podcast. Joining us today is Michael Arietta, CEO and founder of Garden City Equity, a holding company acquiring founder-owned companies for the long-term whole period. Let's dive in. Michael, if you can share with us a brief insight into you, Yes, I am happily married for over a decade, four kids, and live here in Charlotte, North Carolina.

00:30 I'm running my holding company called Garden City Equity. We're a people first holding company that buy this family owned, founder owned companies and we want to hold them for the long haul. 00:40 What's one mistake that you see private equity firms or portfolio companies making and what would you suggest to correct them? Yeah, I would say a big mistake that I constantly come by is that we make short-term investments and we don't think about the long-term consequences.

And so it's kind of this whole notion Alex of IRR versus MoEC. And so for us being a long-term investor, we look at things of, we could actually go ahead and 01:09 invest dollars into ERP or CRM or AI implementation today, that we may not see the benefits for a year and a half to two years from now, but we will see the benefits from that two and a half years for the next 10 years. And so if you have a short-term horizon, you're only going to look really at cost efficiencies or cost savings or cost reduction efforts or very quick ROI efforts instead of the potentially the biggest investments that will transform the company for decades to come.

01:37 What have you guys seen that from, you know, is it every strategy has its positives and its negatives. You've obviously discussed why that works for you guys and why you chose it. Um, in fact, you sort of chose why that works for you. Firstly, why did you choose that model over, you know, your typical flip in three to what likely becomes seven years?

And secondly, what does this bring any challenges for you with those long, long hold periods or is that just, yeah, we love, that's the way we like to operate. Yes. Um, so when we created the garden city and we created it as a. 02:07 as a long-term holding company that has the ability to acquire companies and hold them for the long haul, right?

Our fun life is 30 years. And so it's a pretty long time. um And that's a great benefit because if you have a good asset, why would you want to force yourself to go sell that good asset to then pay taxes, to then go ahead and have to find new assets to deploy that capital into if it's already in a good asset, right? And so if you own Amazon and you're bullish on Amazon, 02:36 Why would you be forced to sell Amazon just because you're forced to?

It doesn't make sense. Versus if you say this has really good economics and really good mo and a good management team and they're growing, you want to hold that asset. So we thought about that when we started the company and said, we want to be long-term, just like Brickshear Hathaway. The difficulty is with it is that things change, right?

And so you could be in an industry that's really good one year and five years down the road, a big competitor comes in a market or 03:05 A big technology changes it or there's a big consolidation that has more purchasing power and it's hard to compete. And so at the end of the day, we always have to be good stewards and always have to analyze the options. And we have sold some assets, but it's our intention and it's our preference to hold these assets as long as we can. Makes sense.

you reference also the guys operate as a holding company rather than a typical fund model. What was that? Because the longer hold period, although I know firms that have fund. 03:34 fund cycles without the longer hold periods, with the longer hold periods, sorry.

So what did you, what made you guys go down that route and go down the holding company route? Yeah. One of the reasons was what I shared previously of the ability to just hold these assets for a longer period of time. But also we see it as a mechanism to bring shareholders in either in the early years or in the later years, and they're all going to own the identical assets.

And why that's so important to me. 04:02 is let's just say that someone that came into our second offering that we just did of 255 million, right? Let's just say that was you, Alex, that you came into that offering. And now you're looking at the five portfolio companies that we acquired on the first offering, right?

In 2020, 2021, two, three, 2024, right? All those offerings. And Alex, you could definitely help me out of growing these companies. Maybe you're a marketer, maybe you're a legal guy, maybe you're an entrepreneur, maybe you're great at operations.

And as an investor, 04:31 that came into our second offering. I want you to care about the first offering, but you're not going to if you are not an investor in that first offering. Why would you? You have no stake in the game.

So for us, we said we want this to be one company, one company that has different capital raises, right? And in those different capital raises, people will get diluted over time, right? But the investors have a piece of everything before, now, and in the future. And it goes in the opposite.

So let's say Alex, that you invested in our first offering in 2020. 04:59 but for some reason you did not invest in our last offering in 2025. Well, if you did not, you still are going to have a piece of everything we buy from here till kingdom come, right? And you obviously have a smaller piece because you were diluted because you didn't reinvest, but you still are now more diversified, right?

And you still have a piece of all those great assets that we buy. So that was something that for me coming from Silicon Valley, I just thought of, of our series A investors care about our IPO round, our IPO round, care about what happened in the past, right? 05:29 And so that was another reason we love the fact that from a hold co-perspective, all of our team could be focused on all companies and we don't have to worry about how much of our times we now like it. It's the first offering versus the second offering.

Or if we want to take capital from the second offering and we want to actually go ahead and invest in building companies from the first offering, we could do it. It gets pretty messy. As you know, if you have two separate funds and this first fund bottom air conditioning company. 05:55 and now you raise the money from a second fund and you want to invest further in that, it gets messy.

And so those are a lot of different reasons why we said the Holtscom model works really well with us. So something there I think would fill a lot of private equity firms to dread and that's where you kind of reference that your LPs are maybe not as limited as uh others with regards to their position. What is it that you guys... 06:20 are doing differently from that front if you're having kind of your investors come in and offer support for your portfolio companies.

Cause that in my experience certainly is not atypical. Yes. um It's definitely not typical. And I remember I've had some calls with institutional investors, very smart, great.

They loved what we were doing, but something that just caught me by surprise is that they, they did not um get involved to add value where I would have hoped. Right. And so all of our investors, 06:50 They are former, if you look on our website of gardencityequity.com and you just click under network and investors, you'll see there's Fortune 100 CEOs, there's small business leaders, there's marketing people, there's AI experts, there's athletes, senators, governors, a whole lot of people.

And so we tell those folks, hey, if you want to invest with us and you want to go ahead and you want us to use your capital to go buy these small to mid-sized companies in America, call it more mid-size. 07:20 That's great, but you have to be willing to, when we buy them, you have to be willing to help us wherever we see fit. Right? And so that's the big thing is that we're very clear upfront of what the expectations are.

We want to make them good returns. We want to impact the lives of our workers in these companies, but we also need their help. How do you manage, my immediate thing would be, everyone's an expert and you know, the old conscious or unconscious incompetence and thinking that they know, 07:49 That company, yeah, simple marketing. Yeah, I've been a marketer for five minutes.

I can tell you all about how to grow that business. How do you manage the involvement of said LPs who are maybe a little bit more eager outside of their station who want to share their ideas, which may or may not be in the best interest of the business? Yes. So first and foremost is, again, we have over 200 LPs and we get to know our businesses, our portfolio companies very well to know exactly what's needed.

And so we will know. 08:18 in this business, have a sales opportunity. They could unlock a higher closing ratio. They could unlock more leads, right?

We could unlock better SEO or better um AI optimization, et cetera. Okay, now let us look at our network and see who specifically is a sales expert, go-to-market expert, pipeline expert, closing ratio expert, AI expert versus in a completely different company, we may have a supply chain issue. They may say, boy, we cannot get our hands on some 08:46 streamlining operations in our manufacturing or in our warehouse and et cetera. And so in that we're like, oh, we know these two executives, these two entrepreneurs, they came up through supply chain.

They came up through operation. Let's call them and see what they know about it. And so we're the one that match makes more so than just 200 people saying, put me in there coach and let me help you out. How do you, how do you get to know your LPs?

Cause I think that's an interesting one from a, here's my money off we go. Great. 09:15 You're going to have to get to know them better than most for obvious reasons. Yeah, all the shareholders are personal contacts of mine.

So we've never hired any placement agencies. We've never hired a search firm. They're not, again, they're not just random inquiries that come in our inbox. These are all people that I've known since I started working.

So it's been over 20 years now that I've known a lot of these people. And then those people will then say, hey, 09:45 You have to know this other gentleman and there's other lady that is very similar to our approach of caring for people intimately, wanting to see them thrive, prosper and flourish while still making a healthy profit. And so it's all word of mouth, to be honest with you. Okay.

And that means obviously a lot of your OPs you've mentioned don't sound very, it's don't sound very institutional. Um, obviously you've got a hell of a network, so why not leverage it, but what's, um, what stopped you or going down the route of not bend down the traditional institutional capital route? 10:14 We just haven't needed it, right? And so we had a hard cap of 250 million on this raise.

And we went to all of our initial shareholders first to ask them if they would be interested. And they were, they committed over a hundred million dollars. And then we went to all the other personal contacts that we had that I haven't spoken to you since my first raise, right? Five years ago.

So today it's been five years. I actually launched to Garden City and we actually bought some companies and they're actually doing pretty well. 10:42 And if you want to come in on the second raise, you can. And to my surprise, we raised $250 million.

And so I never really needed it. between our team thinking about it of if an institutional investor could give you $20 million, but you have four or five, six individuals that could give you $20 million. Well, these four to five to six individuals could give us really good deal flow. So that's where most of our deal flows from our shareholder base.

They could help us diligence the opportunities. 11:11 They could then help us close the opportunities by coming into the management meetings. They could then help us operate these businesses. They could help us introduce ourselves to management teams that could fit in those businesses.

So we call it a virtuous cycle, right? By having these shareholder bases, it's a virtuous cycle. We raise money from them. We get deal flow from them.

They help us out on the deal. They help us grow their company. And it keeps going around and around. On the institutional capital side, it's just different.

It's bigger check sizes. 11:37 They're going to be more so financially engineering and financially managing the performance as you are shareholders, but they're not going to be in the business world of passing us opportunities to acquire in their networks. They're not going to be inviting us to dinners or conferences or events, et cetera. Okay.

So just greasing those, those netbook networks going through the old kind of a Rolodex and building on the, on the back of that. Do you foresee, again, we're looking future. know you just obviously completed a capital raise, but 12:06 Do you foresee in the future that kind of Rolodex beginning to run out and where you will take then, would that be then search funds to try and help you with capital or placement agents, et cetera, depending on how you define them? 12:20 I don't know.

It's a good question. And something I realized a while back, Alex, is not trying to read into the future and just be right where I'm at, right? Because it's so unknown, right? I would have never thought that we'd be raising $255 million.

And so in the future, whenever we're deployed with this fund, ideally, we would go back to these investors and they would give us another $255 or $300 or $350. I don't know what the number will be. 12:48 We're definitely not opposed to going to institutional capital, but if you have strategic capital, why not go to it first? Yeah, make sense.

the, and in my understanding as well as amongst the whole list of things we just shared that you guys do differently, you take a little to no debt approach, which is pretty unique. Private equity is renowned for, um, for its debt cycles. What, what is the, obviously clear advantages for you on that basis, but also where does it become a little bit more? uh 13:17 could just use a little bit more debt would be, this big gets a bit frustrating with that strategy.

I mean, obviously the advantage of using debt is you get to use less capital, less equity. And if the business works out well, the advantages that you make a higher IRR, especially if you flip that, you make quite a bit of cash, right? The constraints of it is you're just not taking a conservative approach. Right.

And so you were going to have tovenance. You're not going to be able to pull out as much cash. 13:47 and we're buying a lot of cashflow businesses that we pay ourselves dividends per year, obviously we reinvest what we're needed in the business. But whatever is excess, we'll obviously go ahead and distribute it out as a distribution to our shareholders.

The other thing is that at the end of the day, we're buying businesses that sometimes are a little cyclical. And so you put too much leverage on that, now you're out of covenants and you're over levered. What your EBITDA is if you're catching yourself in a down cycle and then 14:16 Now you're putting a lot of constraint on the man and the team, the team members and everything else. We don't want to put ourselves in that position.

So we are willing to actually have a more conservative, long-term, healthy approach, be able to weather the storms when they come while having less debt in exchange for maybe we are changing now five points to IRR, but it's fine, right? Cause we'd rather have the more conservative approach. So it's just a philosophy of mine personally, you know? And I'm glad I'm, I've never heard anyone say, boy, I wish I put more debt on that.

14:47 Yeah, that's probably true. just thinking about that from a, does that give you a kind of an edge from a dealer origination perspective? Does that make you more attracted to the hits you buy from founder owners or acquire from founder owners? And do they go, okay, yeah, you're not going to kind of leverage us up here and make them maybe feel the business a bit more safe because typically founder owners, albeit not always, but typically avoid debt because they see it as a risk and everything.

You nailed it. family home and everything else. 15:15 You nailed it, right? One of the things that business owners say so quickly out of such, it's incredible, out of such pride, it's like, hey, I have no debt, I have no debt on my cards, I have no debt on my warehouses, on my buildings, on our business, no debt, you know?

And then if you want that owner to roll over equity and you're telling them like, we're pay you six times and three of those are gonna be, the three of that's gonna be debt, first thing any smart business owner would do, especially with 15:44 chat GBT now and everything is to say, well, why wouldn't I just go ahead and refinance and put some debt on my own business and do a debt recap, right? And not have to sell you out equity and I could just put debt on my own business. And then if they also are rolling over equity, the thing they need to keep in mind is that they're now gonna be behind that debt, obviously, and their entire team is now gonna be having to um apply by those covenants of that.

16:12 And so it's just a different ball game. It's a different ball game. And a lot of times, those business owners don't want to play a different ball game. 16:21 What do you watch, read, listen to that you recommend that other people check out, Michael?

I always try to read three things professionally, personally, and spiritually. And so I always try to holistically grow. Personally, I love, love anything around. I'm a big fan of the United States of America and our history and our military and our armed forces.

And so I just love reading about it. 16:50 history of our country. So I highly recommend um anyone reading books around history. I think we learned it from history because it tends to repeat itself.

Professionally, I'm a big nerd on anything of John Maxwell. He's incredible at leadership. I love anything around hospitality as well. There's a great book called Unreasonable Hospitality, another one called Excellence Wins.

And so that's what I read professionally. And then spiritually, 17:18 Um, my favorite book of all time and where I get my professional and my personal, uh, insights from is definitely the Bible. And so, um, I'm a big fan of the Bible, always have my nose in the Bible and it's, uh, or without it, boy, would I be lost. I'm a big fan of, um, unreasonable hospitality.

I think it's a great book and just thinking about that from a service perspective and how you go above and beyond. we've, uh, we've done a bit of, quite a bit of work on that and implementing that through into the business of the, uh, when they went out and got the hot dog. 17:48 from the hot dog stand because they overheard the conversation and uh just being unreasonable with it. Which obviously the title of the book, but I did.

We loved it so much that we, that it actually became one of our corporate values. We've done quite a few things. We've got David Goggins' book, his first one, You Can't Hurt Me. And that's our mindset value on the wall.

So we've done quite a few things like that ourselves. And yeah, I think it's just better than the person with the pickaxe at the top of the... 18:16 Hill with a kind of motivation at the bottom, which is a few companies I've worked for had that image. Not overly inspiring to say the least.

If anybody wishes to reach out to you, Michael, post this podcast, how best to get in touch, Yeah, they could just send me an email at mike at gardencityequity.com. so pretty easy or just shoot me a note on LinkedIn. thank you very much for coming on to the 18:43 Private Equity Podcast, Michael, and giving us your insights into a different way of completing private equity.

you, Alex. Appreciate the time. And thank you very much for all our listeners for tuning in yet again to the Private Equity Podcast. Until the next time, keep smashing it.