Episode 139: Ian Ross of Concentric Equity Partners on Investing Outside the Fund Cycle and Feeding Winners

Episode Transcript   

 

Shiv (00:12.566)

All right, Ian, welcome to the show. How's it going?

Ian Ross (00:13.841)

It's great. Thanks. Thanks for having me.

Shiv (00:17.964)

Yeah, excited to have you on. So why don't we start with your background and your role in Concentric and then let's go from there.

Ian Ross (00:24.369)

Sure. so I joined Concentric 20 years ago and I'm one of the partners and I'm the president of the holding company. but my background has really been all around the middle market. I started as a lender with GE Capital, I've been an investment banker, and this is my second private equity firm in my career.

Shiv (00:43.31)

Awesome. And then talk about like what you guys are focused on as an investment firm. Like what types of ideals are you looking for? How are you guys structured?

Ian Ross (00:51.921)

Sure. You know, our our focus is really around backing entrepreneurs that we think have the potential to really grow their business and grow and create equity value over time. how that looks is a a big focus on services, business, financial and consumer services, but also some niche manufacturing and areas where we think there's value that can be created.

Shiv (01:14.466)

Got it. And and one of the things that makes you guys unique is that you almost are like a hybrid between a family office and a private equity firm. Can you explain that for for the audience as well?

Ian Ross (01:25.197)

Sure. Yeah, it's it's a differentiator in today's market. you know, the the firm the family office was started 30 years ago by the patriarch who passed away a a number of years ago. but he and his daughter created it as their own family office and really they just wanted to do investments and back people. And so they really started backing private equity firms as they were being created through the 90s and 2000s.

and then around the mid-2000s, they they decided they really wanted to create their own team inside the family office to do deals on the family's account and you know collectively on all of our accounts. And so that's really when we put the strategy together to focus on doing those low lower middle market private equity deals. And it really grew up organically. and so as the the family's wealth grew, certainly as the investments did well and then added in family office services along the way.

to make sure to you know keep track of their records and books and liquidity and all of the things that that come along with a family office.

Shiv (02:27.981)

Can you expand on that? Like help us understand like let's say a regular private equity firm and how they do business where they're raising funds and they have to deploy and kinda exit the fund by a certain point in time. Is that how you guys work or b or does the family office component change how you guys look at investments or or how you deploy capital?

Ian Ross (02:45.817)

Yeah, it it it does change it in in a pretty important way. I mean, private equity firms are great business models and there's lots of very successful people that have built terrific private equity firms. But one of the challenges with that model is it's really all about the fund. So everything is kind of focused around what's the best thing for the LPs, how do you maximize your MOIC and deals in the fund? You know, there's a lot of pressure to get early wins in a fund so that you can post those wins.

which will give you the kind of the credibility you need to raise the next fund. and and what ends up happening is that you send tend to sell your best companies early when you can get to, you know, two, three, four times your investors' money. And you tend to hold on to the maybe the less than best companies longer because you're you're trying to work with them and make them better, you know, to get to an exit.

And so the the dynamic is that you you kind of shortchange a little bit of your upside based on the fund timeline cycle. And so how that looks for us is we wanted to create a model that could basically do the opposite of that and wanted it to be entrepreneurial, wanted it to be focused around backing and creating businesses. so you know our model.

is different. Each deal is a little bit of its own entity in terms of the the legal structure. But more importantly, it allows us to invest capital into a business. And then as the business is doing well, we we have a feed the winner strategy. So we can keep you know putting in another series, another series, double triple down on that money so that we're able to be with the business much longer and we're able to be a part of that growth story.

Shiv (04:33.483)

Yeah, that is definitely different in in the sense that like this doubling down on winners that sometimes because LPs are asking for their capital to be returned and you kind of need to return the fund, a lot of firms aren't able to do. But then how does that what does that look like for you guys returning your own capital? Like are you aiming for certain horizons on which you want to see a return on your invested capital? Like what's the what's the strategy there?

Ian Ross (04:39.875)

I know I'm coming.

Ian Ross (04:50.801)

Excuse me by the way.

Ian Ross (04:58.981)

Yeah, you know, we like to say that we are long-term oriented and value creation oriented, but we're not patient. so as it as it relates to us, you know, we want to be a part of really building those companies. and so we we take a fairly active role on the board. we take an active role in, you know, the the different sort of strategies that could help to really develop and grow the business. We certainly aren't running the business.

but it allows us to take a kind of a longer runway, if you will, on what can happen. you know, we also, I mean, all of the non-family members that that really run the investment firm, we invest our own capital alongside it. And so, you know, many of our investment team think about it as like their own family office because they've made an investment into that business and they really want to see it grow. And so what it does is just allows for longevity.

In some situations, but I would tell you there's other situations where we've sold a company, you know, two, three, four years after we invested in it just because it was the right thing to do, it was what the management team wanted to do. So it it turns the decision from how long to hold a business into, you know, how what's the best kind of upside for ourselves and for the management team where we expect to be co-investors and have great alignment in the company rather than what do we need to do for our fund cycle.

And so that's really the differentiator is we're not selling on a timeline from something else. We're really selling from when we think we get the best return on the company.

Shiv (06:32.843)

Are you guys deploying capital entirely from your family office or are you taking on debt? Like are there are there actually LPs involved here as well?

Ian Ross (06:43.269)

So, you know, our family office, it it actually started with three family lines at the first generation. And so we're now on to the second, third, and fourth generations. So there's quite a few people that are the clients of the family office, which kind of look like limited partners. we don't raise third-party capital. and so you know, we're not a registered investment advisor, and so we're not soliciting or trying to attract third-party capital. and so we're able to kind of do

you know, do it how we think it should be done in terms of the investment strategy. but it it it looks similar to that.

Shiv (07:20.063)

God how much does that influence decision making? Because I g I'm assuming a lot of these people are like co investing in these vehicles or pooling capital together to deploy into these types of assets. So like do you not feel pressure in those situations similar to let's say a private equity firm would to return the fund or is it different?

Ian Ross (07:39.674)

Well, you know, so our private equity firm is is fully integrated with our family office operations. So within the family office, we've got a team of financial advisors who are working with each of those family members on an advisory capacity and meeting with them, you know, two, three, four times a year officially, but then in contact with them regularly about how things are going. and so what what we've really built is a

We think about the investment business as being a little bit like the family business. And so many of the family members they love hearing about the deals, what's happening with this company or that company. we hold an annual meeting every year where we'll invite some of our portfolio company CEOs to come talk to and present to you know the our family member investors. and so we we treat them, we treat it like a professional investment firm in the sense that.

you know, people are LPs, but they're not active in the business. So they they kind of view it a little bit as their own family business.

Shiv (08:43.703)

How do you look at and I the reason I asked that is I'm curious about like how you're structuring deals because you have these investors, but and then at the same time, it's family office is the one that's really backing these businesses. And then what about debt on these companies? And how do you look at financial engineering or just a deal structure to make the economics work for you to generate the type of return that you'd want?

Ian Ross (09:05.873)

Sure. Yeah, I mean, we're, you know, we're out in the marketplace trying to build companies, just like many private equity firms and and others are. so we look at it from the perspective of starting small. So many of the deals that we do will be on on the smaller end of what a lower middle market private equity firm might invest in. 10, 20, you know, 30 million of revenue, you know, somewhere between zero and a couple million of EBITDA.

And we're really looking to kind of develop a strategy to build those companies. So in the beginning, we tend to have very little debt because debt, I mean, certainly magnifies your return on the upside, but it also magnifies your return on the downside. And smaller companies that are really working to grow and develop can't really withstand a lot of debt. And so from a kind of capital perspective, we're generally big equity investors in the beginning. But then as those companies grow and develop,

You know, we do implement and use debt to help them finance their growth. And so if we have very good alignment with the management team that owns, you know, a significant piece of the company, we'll say, hey, it probably makes sense to use some debt to go fund, you know, acquisitions and other things that we're looking to do from a growth perspective. and and that works out well. So, you know, we have a company today that's north of a hundred million of EBITDA that started with zero and

Know today a hundred million dollar EBITDA company can support a debt profile that's significantly higher than a three million dollar company. So, you know, we tend to play across the whole spectrum of growth. And we try to use financing in a smart and strategic way without getting too far in front of ourselves. I I think if you you know get too much leverage on a company too early, it tends to backfire because they just can't, they're not big enough or they don't have enough capacity to support that. So

It becomes a a game of of using the right amount at the right time and then probably and scaling that up over time.

Shiv (11:07.477)

Yeah, that that that makes a ton of sense. I guess given that you're coming into these companies when they're a little bit on the lower end on the revenue side, are you getting involved with the actual value creation planning and helping them figure out where to scale or invest their capital?

Ian Ross (11:23.702)

Absolutely. So from a you know, from a value creation perspective, we think about it in in really three different ways. So the first and most most important is growth. And growth can be either organic growth, which is by far the best, or acquisition growth, which is kind of a close second. And so we spend a lot of time around the growth. You know, we also think about value creation from the perspective of multiple arbitrage, which you know, everyone likes to think about that.

and financial leverage. And so, really, those are the three groupings of opportunity. I think on the growth side, you know, we we spend a lot of time working with our management teams around your organic growth strategy, you know, whether it's sales and marketing or pricing or you know, looking for new ways to surprise and support your customers. that that's really where the the heart of lower middle market investing is, is is in and around.

the that type of strategy. But we're also quite active on acquisitions. Many of our companies are active acquirers, you know, looking to expand their offerings or their geography through through M&A. So we're we're kind of all over all over those categories.

Shiv (12:35.499)

And and is your approach in those cases to like just back the management teams or are you getting involved and helping them figure out, okay, on the and A side here are potential targets that you can go after or organically here are the levers that you should be pulling. I'm just curious like the level of operational involvement here.

Ian Ross (12:54.351)

Yeah, I mean I I think a great investor is the answer to that is yes and. a great investor shows up, is supportive, tries to ask the one or two or three really helpful, important questions, but also doesn't ask the fiftieth question that the management team, you know, would need to answer in order to go execute on something.

And so we really pride ourselves on being operationally oriented, which I think most private equity firms today would say that they are. But really for us, it's about like what's the what's the thing, what's the couple of things that will really move the needle on growth? how do we encourage our management teams? maybe they already know it and we're just helping them refine around the edges or maybe bringing in resources of different people we know or companies or ideas.

to the table that may help them kind of refine that strategy. You know, sometimes things are new. I mean, you know, one of the big things today is that, you know, the the marketing function of many companies is just is changing very rapidly with AI and all the new technology. Things that used to work two or three years ago, you know, have completely flipped. So we we we kind of just try to recognize that and think about like what's the smart way for us to help that management team to really capitalize on their opportunities.

Shiv (14:15.541)

Yeah, completely agree on the go to market side. I mean, that's what we see with our private equity partners and the engagements that we get pulled into. I'm curious, like, how do you help your portfolio companies or how are you helping them navigate those challenges? And like, is it more of a people problem? Is it an approach problem? I'm curious what what areas are you digging deeper into there.

Ian Ross (14:35.577)

Yeah, I mean, I think in so many ways, leadership in a rapidly changing market can be challenging for some. So, you know, learning to you know, maybe try the thing that didn't work six months ago, but it might really work now if you do it a little bit differently. Like that's a nudge and and being able to nudge someone to try something new or different or maybe the same in a new way requires trust.

And so the first thing for us is really building a level of trust with our management teams and our you know operating leaders. So they get to know us, they get to understand us, and you know, they they're willing to accept feedback or ideas into how to change their business. That's probably the most important thing. I think how that shows up is, you know, maybe there's a a party at another one of our companies, maybe it was a part of the management team.

Maybe it's a third-party provider, you know, marketing firm or service firm that we saw really just crush it on executing a specific strategy. We'll say, hey, this worked great over here. Let's have them come and present to this other company. So we're we're not trying to mandate anything and we don't want to drive, you know, good investment firms do not drive their company strategy from an ivory tower. It really needs to be distributed out into the field. And those leadership teams need to really own.

those decisions and and how the how the go forward looks. And so we we recognize there's a delicate line there and we work hard to kind of stay on the right side.

Shiv (16:10.116)

Yeah, that's great. I I guess the in that in that through that vein, I guess the question would be, are you bringing talent from your investment team or do you have an operating team that's getting involved at that level with these investments? Or are you trying to pull in external partners and advisors to to support certain initiatives where you see an opportunity area?

Ian Ross (16:23.345)

That's right.

Ian Ross (16:31.183)

Yeah, I mean we're we're a pretty small team. So one of the things about lower middle market investing is, you know, it it's hard to build a 40 person team with the the you know fund size and everything that happens in the lower middle market. So we've got a few people that are highly value added that have certain levels of expertise as operating partners or you know a number of our investing partners are former CEOs who bring a level of

you know, perspective that that maybe is is differentiated. And so, you know, we look to find people internally that can help it. But oftentimes those people, they also know what that third party service provider or angle might be that could be really helpful. So I think it's it's a combination of both. you know we a lot of private equity firms these days are building huge teams of operating partners. And we think that's that's great and that could be the right answer.

Ian Ross (17:29.332)

but we're a little bit of a hybrid. So we've got a few and we're, you know, working to build networks of external people that can come in at the right time.

Shiv (17:36.843)

Yeah, yeah, totally. We've seen it happen where certain private equity firms have built large operating teams and then having to scale down those operating teams because they didn't find them to be as valuable. So it's it's a little tricky. Not everybody can do what Vista has done. And even that it's it's quite expensive to sustain. I I'm curious, like, do you feel like your approach as a this family office and the PE from kind of this hybrid, does that give you guys an advantage on deals where especially on the lower middle market where

Ian Ross (17:55.289)

Okay.

Shiv (18:06.902)

People like they're entrepreneurs that are running these businesses and they really wanna work with certain types of folks that really wanna back their vision. Does that give you a bit of an advantage when you're competing with other PE firms?

Ian Ross (18:18.201)

Yeah, I mean, you know, this is a highly competitive business and there's there's plenty of high energy, very smart investors out there at funds, but also at other structures. You know, how we think we differentiate is certainly it's the it gets down to the human and the human relationship and how we interact with people and like how they if they like the vibe that we have in terms of being, you know, entrepreneurial growth oriented, certainly that's important. you know, I think on the family side, there is a

There's a there's a subset of of leaders out there who really want to be associated with people that they're proud to like be associated with. And so you know, with with the family that that we're a part of and have been a part of for many years, they've got an unbelievable philanthropy, you know, multiple foundations. you know, we all invite our CEOs and we just had a CEO summit a month ago or so in Chicago.

We brought in our financial advisory team to present to them on different strategies so they can think about their own wealth creation, you know, when once this business that they're running sells or others sell. and so we we try to use what we have to really help our partners who are those CEOs, help them kind of develop you know, both their career and their business, but we also try to help them look out for their own personal situation.

And you know, to help them think through, well, gee, what would they want in a family office at some point if they're successful in growing their business and selling it? And so that really resonates with some people. It doesn't with others, and that's okay. but but we really we try to use you know the the things that we have to to become a consolidated profile that some will find differentiated.

Shiv (20:04.456)

Mm-hmm. Mm-hmm. Yeah, I think I think family offices kind of have this unique position where they can actually work more closely with founders and I think that can end up being more founder friendly. In in general, are you partnering with companies where the founder then wants to stay on and see the next phase of growth of the business through?

Ian Ross (20:23.739)

We we are. And and I would say just to your earlier point, you know, you really find out what kind of partner you have when things go wrong. you know, when when everything is going right and the company is growing up into the right, it's kind of easy for everyone to be happy and excited about, you know, where the company is going. But the reality of lower middle market companies is, you know, there's often you you know, you often need to take two steps forward and one step back before you can take three steps forward. And so

Part of part of our dynamic and part of the focus we have is around supporting people, being creative, but also being like a strong partner when you really need us. People joke that banks love to lend you money when you don't need it. But when you really do need it, they they say no. We think the same thing can happen with equity partners. And so we we really try to be relationship oriented from that perspective.

Shiv (21:15.946)

Yeah. How how do you navigate that through transformational periods? Like, especially now, for example, with AI, like companies are facing transformational opportunities and challenges on go to market, on on the product side in terms of increased competition, paid media has gotten more expensive. Like all of these things that these companies are navigating. I'm curious, like, how are you helping these companies navigate some of these challenges now?

Ian Ross (21:41.34)

We we are. And you know, many times founders have run a business, they've gotten to a certain point, and the challenges become new and different. So what you're describing around, you know, AI, technology, marketing, all of it is evolving in new ways. And we oftentimes run into a founder who says, Hey, this is a you know, great. I built it from where it was from nothing to where it is today. I really want a partner to help me.

not only help the business get to the next stage, but also to help me personally get to the next stage. And so we talk a lot up front. Sometimes people say, hey, I want to be CEO here for, you know, two, three, five years, something like that. They might have a timeline or they might have a goal of what they want to achieve. And we'll say, hey, that's terrific. Let us work with you to go and we can re together recruit, you know, new members of the management team that might have some skills or experience in those areas that you don't.

and so part of navigating new technologies and new trends is bringing in fresh perspectives and people with experience and the ability to help navigate through those areas. And so we're very open about that. And people find it generally very refreshing to know that you know being a a founder CEO can be kind of lonely. if you're the one person making decisions, if you own all the equity.

you don't have a partner, you know, you have to make those tough decisions by yourself or maybe with a, you know, an advisor or two. Having a, you know, a firm like us being your partner, like those decisions are are more out in the open and are talked about. And it allows you to kind of build relationship, get perspective, but ultimately the CEO has to make the decisions around what's really going to happen with that business. And so we think about navigating a changing world as making sure we have great alignment with the people that we're with.

And you know, making sure we've got the right people in the right seats to to really refocus the business and drive it forward.

Shiv (23:40.119)

What with with some of these types of changes and transformations, like there's almost like this front loaded investment required, right? And something we touched on earlier, which is like you you're not bound by returning capital to LPs. Like, does that help in these situations? Because sometimes a company might need to take a step back profitably in the short term to raise EBITDA in the future. I'm curious like how you guys look at those types of trade offs, because a lot of those currently exist at the in current market conditions.

Ian Ross (24:09.199)

Yeah, I would say most companies need to make that trade-off. many times a founder, you know, they build a business, they get it up and running, it's growing, it gets up to B, you know, whatever it is. and you know, they they start to make decisions around, well, gee, I don't want to go spend a lot of money on a new ERP system implementation, or I don't want to go spend money experimenting on marketing or sales or

You know, I just kind of like what it is, right? The cash starts flowing and they feel very good about it. the the the change comes when you say, Hey, it's great you've made it to whatever, two, three, five million dollars of EBITDA. We're probably gonna cut that EBITDA in half or maybe to zero. because we think there's like a two-year investment period here where we're gonna go, we're gonna expand your team, we're gonna go recruit, the company's gonna spend money on.

Some of the things that'll really drive that organic growth. And that's an important, really important thing to talk about and be very open with because people get protective of their earnings. And certainly in the private equity game, a lot of companies are really valued off of multiple of EBITDA or profits. And it's important to just recognize sometimes you need to take a step or two back before you can start really marching forward.

Shiv (25:32.394)

Yeah. How do you reconcile that with like this I I think earlier you were saying that you know, w you're you guys are patient, but at the same time you wanna be opportunistic with these investments if there are opportunities. So how do you balance those two priorities?

Ian Ross (25:46.48)

Yeah, that's that's a real challenge, you know. I mean, that's that's ultimately gets to the personalities and the the magic of a great investment firm. is how do you describe and articulate the path that you believe that company needs to go down to get to you know the the the outcome that you're really shooting for? So, you know, just as an example, we we've got a business today that's a terrific bottling company. They they bottle beverages and can beverages.

a lot of beverage companies are moving from plastic to aluminum. So there's, you know, big, big growth in the demand for aluminum. You know, we've got a business, we're building a greenfield plant. And so this is, you know, we had a plant, it was running well, you know, doing profit and everything like that. But now we're gonna build a plant that's four times as large as the original plant. It costs four times as much, and you know, it's a massive kind of growth trajectory for that business. Like profits are dropping.

This is we're adding expenses and people in the original business. But we think, you know, a year, two, three down the road, there's gonna be gigantic value creation through that kind of expansion. So, you know, that's just an example of you know, more of a capital play in terms of growth. But we see the same thing in services businesses, we see the same thing, you know, many other types of businesses. You just, you know.

Ian Ross (27:08.239)

We all need to just take a deep breath and say to ourselves, like, wow, this business would be a lot better with you know, some of the base level technology that other companies have. And we've seen it enough times to know and and have the perspective of, hey, that makes sense. You know, great, we've got a year or two to really make those changes. And the catch up for us is not just, you know, the return of, you know, what our EBITDA is right away. It's much more about are we creating value and do we think that these things are going to pay off in the long run?

Shiv (27:38.805)

Yeah, I think I think that is a is a very healthy perspective. I guess, you know, you need you need the right team and the right leadership to be able to navigate some of the some of those areas. when you're when you're looking on inside these companies and especially given that you're investing in services, are there certain patterns that you're seeing across the board? You mentioned that, you know, base level technology requirements or on the data side or on the go to market side. Like what are you seeing seeing, especially in the services sector?

Where there are opportunities in front of these companies that they kind of need to navigate or or things that they need to transform inside their businesses to generate more enterprise value.

Ian Ross (28:16.133)

Yeah, I mean, we, you know, we use some of those old SaaS metrics for services companies. So, you know, what's your customer acquisition cost and what's the lifetime value of that customer? And it it sounds pretty straightforward, but you know, when you go apply that to a small business, it's just not doesn't come naturally to many, you know, small business owners or founders. and so, you know, we do the work to kind of take the data and say, you know, look, this is what you're spending to get a new customer.

This is how much that customer is worth to you. Like, you know, maybe you could spend two or three times what you are right now because your customers are highly valuable. They tend to have longevity, they stick around, you know, high margin, you know, et cetera, et cetera, et cetera. Or, you know, when you look at a business and the opposite is true, which is wow, you're spending a lot of money to get a customer, but you know, your lifetime value is pretty low because you keep losing them. you know, for whatever reason.

Ian Ross (29:11.247)

Then the fix becomes different, right? It's it's much more about well, what do we need to change in our operations or in our service delivery to really make those things hum? So it it it comes by a case by case type of scenario. but it's it's trying to come up with a customized view of what should happen for each company.

Shiv (29:30.252)

Yeah, that's that's fantastic advice. We're we're coming up on time here, Ian, but before we close things off, if people are listening, they want to get in touch, what's the best way to get a hold of you or your firm?

Ian Ross (29:40.485)

Yeah, look, you can look us up online. It's Concentric Equity Partners or I'm on LinkedIn. My name's Ian Ross and happy to hear from people if they'd like to reach out.

Shiv (29:49.706)

Yeah, we'll be sure to include all of that and the links in the show notes. And with that said, Ian, thanks for coming on and sharing your wisdom. I think it was quite fast paced, but there's a lot of great learnings, especially for private equity firms that are more the traditional private equity version. There's a lot that can be taken away from your model as having the family office and how closely you're working with these entrepreneurs. So appreciate you sharing all.

Ian Ross (30:09.178)

Great. Thanks so much. I appreciate it.