Episode 63: Brad Armstrong of Lovell Minnick Partners
on Supporting Portcos With an Advisor Bench

Episode Transcript  

 Shiv: Alright Brad, welcome to the show, how's it going?

Brad: Going great, great, happy to be here.

Shiv: Yeah, excited to have you on. So why don't we start with your background and LMP and let's go from there.

Brad: Well, sure, sure. A little bit about me. So 20 plus year career in, really a combination of the operator hat, the investment banking hat, and then the principal investing hat. So I started my career in the industry, spent some time doing M&A and capital raising work in some of the same industries that we invest in within LMP. And then I've been part of the LMP organization now for over 15, approaching 16 years. So a little bit about our firm. So Lovell Minnick Partners just celebrated our 25th anniversary last year. So over the course of our history and since inception, we've raised some over 5 billion of committed capital across our partnerships. We're investing out of our sixth fund. And our investments generally fall in three areas, financial services, financial technology, and then related areas within business services. And you can think of us as a middle market investor, squarely middle market, kind of a growth and buyout kind of flavor to our investment strategy.

Shiv: And there are a lot of PE firms that play in that space, right? So how do you guys distinguish yourselves? Like we've met a ton of middle market companies or firms that are investing in certain industries like FinTech and the types of sectors that you're investing in. So how do you separate yourself from the pack?

Brad: Yeah, yeah, for us, the secret sauce has always been really around kind of two defining characteristics. And one of those is sector expertise. And so that kind of multi-sector approach where we're by design, not an index fund for the middle market. We want to be the forum for really the best ideas, direct market access, and working very closely with what we view as really the best companies in end markets. And so that specialization is really critical. And it really shapes how we research areas to invest in. We're very thematic in nature and we have the liberty of doing that because of the fact that we're only mining in really three areas. It also really affects our sourcing. We do a lot of direct sourcing. We're at conferences you've never heard of. We're cultivating our own executive network, really trying to get in front of companies, before bankers, before other private equity firms. And we're relevant because we're bilingual. We speak kind of the native tongue within their industry. And that really resonates. It comes across when you're talking to a founder and CEO and you know their major suppliers, you know their competitors, you know folks that maybe are on their board or their advisory board. It gives them a level of trust and familiarity and it convinces them that we can be something more than just capital. But the other major component of our strategy beyond specialization is really having something that's purpose-built to work with those companies. And so part of our sourcing strategy is demonstrating to those potential investments where we can be, as I said earlier, more than just capital. And so we have a deep operating partner bench within LMP, as well as a number of third party relationships that we've kind of worked into to find playbooks. And so the process that we've used is one of, I'll call it sort of mass customization, meaning every company has its own unique journey and its own unique needs, and therefore needs its own separate value creation plan and strategy. And yet it needs to be something that's repeatable and scalable. And so we've put a lot of process, a lot of technology and have a number of people that are dedicated to those functions. So kind of back to, how do we win? What's our right to win? It's really around those two things, specialization and value add.

Shiv: And can you expand on that a little bit? Like what are the areas where you're focusing? You mentioned three areas and give some more details on how you've built this mass customization or value add for these companies in a way that let's say a more generalist firm would not be able to do.

Brad: Sure, sure. So one way to think about it is just using a recent example. And so if we look at one of the companies from our fifth fund, a company called Pathstone, which is a wealth management firm, when we invested in Pathstone about five years ago at 30 million in revenue, today it's 10 times that size. And they're very much what we look for in that they had a very unique go-to-market and business model, the way they work with their clients, which are high net worth investors. They had a really solid product and services offering and the early stages of a national growth strategy. And they had a vision for what they wanted to do, but they had a lot of external support needs and desires. They were the proverbial sort of kid that checked out every book from the library. So they made great use of our operating partner bench. They would tell you the story. The first time that we met with them, which was about six years ago, we brought one of our advisory partners, an individual named Ron Cordes, was a founder and CEO of a large public company that just got taken private called Asset Mark. And Ron is like an industry celebrity. So Ron joined us for that meeting and it added, I think, real credibility because they could very much not just hear from me and hear how we work, but they hear directly from Ron who had had the benefit of being the executive of a Lovell Minnick portfolio company and relating his experience working with us. And then having the opportunity over time to have Ron join his board, have a chance to work not just with Ron, but a number of other areas and individuals from within our advisory council, which is really our operating partner bench. But those individuals are hand selected because they, like Ron, they come out of the industry that our executives work in. So we're not, we're not asking the, an individual who was the CFO of a manufacturing company to work with a SaaS, SaaS organization. We're not adding, asking someone who was a chief marketing officer for, for, for a technology company to work with services company. It's very much paired and matched with companies that are cut from the same industry because that adds more relevance and it makes it much more relatable.

Shiv: Expand on this operating partner bench that you mentioned there because every PE firm has experts or even operating partners on their team and from what it sounds you guys are leveraging this bench a lot differently than other PE firms would so help us understand that a bit better.

Brad: Yeah, the right way to think about our bench, I'll put them in two groups. We have one group that is really very much industry focused and we have one group that is functionally focused. So think of it as sort of insight partners for the folks that are industry aligned. And that's typically a 30 year industry veteran, was a CEO or president or someone of that sort could be a fantastic board member or industry river guide, or drop in executive candidate. But the other group, the functional experts, are really your impact partners. And the right way to think about the mental model of that group is, picture your typical C-suite. We want to have one or more resources for every executive inside of that C-suite. So we want to have someone for the CFO to call upon, someone for the CTO to call upon, someone for the chief marketing officer to call upon. We want to have someone when there isn't yet a chief marketing officer, someone that they can call upon as a resource. And so we have one or more individuals decked against each of those functions. And so that's built out. It took a lot of time to do this, of course. You can't do the field of dreams, build it and they will come. You have to kind of build it as needs emerge and you find the right individuals. And we will continue to build it. But that's really the vision. So I'll give a recent example of one of those additions. One of the emerging areas of focus from a risk standpoint is cybersecurity. And so it affects not just firms like ours, which have heavy technology footprints, but a good number of other firms sponsor-backed and otherwise. We brought in an individual who's an experienced CISO, really a subject matter expert for cybersecurity who in effect is working full time across our portfolio, really helping to build that function up. And in some companies, that's a very heavy lift. In some companies, it's a lighter, more surveillance-like function. But it's just one of the recent examples of something that we rolled out there.

Shiv: Yeah, I was catching up with one of our bigger private equity partners recently, and they had invested heavily into full-time operating partners for different subject matter areas a couple of years ago. And then they realized that the overhead expense of that was just too much. And so they kind of wound that back. And instead of having a deep bench of internal folks that can then get involved with all the portfolio companies, almost like an extension of those portcos, they decided to have operating partners, but then have a Rolodex of people that they can kind of call on. And we're, as an example, like we provide that on the marketing side to a lot of these PE firms that have one or two or three kind of operating partners that are core, but then they need subject matter expertise in marketing or fractional CMO or marketing due diligence. And we're kind of providing that. So that makes sense, but help me understand the model there though, because I would assume just using that's the story that I just shared as an example, like these people are not full time on your payroll or are they? Is that kind of how the model works?

Brad: Yeah, so it really truly varies by individual. And we have some of those executives want full-time work, full-time engagement. Some of them have other interests in life that could be professional or otherwise. Many of them, with our encouragement, serve on other boards, could be a public company board, could be an industry association. They typically only work with us and don't work with other private equity firms. And so there is a level of exclusivity that exists in most of those relationships, but we do try to tailor it to the individual in terms of the mode of engagement that they're looking for. And an important part of what we're also trying to solve for is that we've not gone to the extreme of saying, this is a push strategy. We're going to, we're going to take everybody through the same cookie cutter checklist model and approach. And we're going to have an intensive process and full-time group that's sort of prosecuting that effort. We've, we've very much said, this is going to be a pull model. We're going to try to lead and, and, you know, convince our companies to do this where, where it makes sense, where it makes good business sense and rely upon our, our leadership teams within each of the portfolio companies to suss out and make sure that the individuals that they do get exposure to through the advisory council are relevant, are additive, and are accountable. And so there's a natural, I think, natural kind of checkpoint there to make sure that they're getting the most out of this. But it means those resources, kind of back to the heart of the question, it means those resources, we can solve, it's a little bit of choose your own experience. So for the folks that want full-time engagement, many of them will have five, six projects at a time.

Shiv: Mm-hmm. How do you and this is more of an operational question for the PE firms and investors that listen because they're always trying to figure out where to allocate their limited dollars, especially on the management fee side, right? So how do you, how do you handle the cost there or like spread it out and still have the operational capital to run the PE firm and then prioritize that against other priorities that you have going on?

Brad: Yeah, yeah. It's definitely a critical topic, especially because, these resources, they're highly skilled. These individuals are very talented, very much in demand and need to be compensated appropriately. And so, you know, we often look to compensate them in two, in two manners. Part of it is cash and part of it is having an equity opportunity in many cases, because their projects are specific to individual companies, we're trying to align it that way to the greatest extent that we can. And so, for example, an individual that may be on that industry side of the house steps onto one or more portfolio company boards, they'll earn the typical board compensation package that another outside director would earn. And that'll consist of both cash in the form of a retainer as well as the incentive equity participation. In the case of the operating partners that are more focused on sort of functional disciplines, it tends to be very much project-based work. And so again, we want that cash and that equity opportunity to reflect the impact and the value that they deliver. And so where we can, it's best rooted at the company level because they see the direct return on their efforts.

Shiv: Mm-hmm. Yeah, that model seems to work the best because then the pressure is not on you as the firm to fund that resource. And at the same time, the advisor is getting compensated the right way by the portfolio company.

Brad: The other key component, I agree, and the other key component to this that we've done is we will fund a value creation budget for our company with primary capital at closing. And so it's not the case that it's reducing our company's resources over time. We're actually bringing the resource of bringing that financial capital and reserving a budget at the time we're making an investment so that those initiatives, even when they haven't yet been fully defined, are pre-funded.

Shiv: Yeah, and I'm assuming all of those types of activities are put below the line as well for the company.

Brad: Well, when it's possible that it's an add-back, certainly will categorize it as such.

Shiv: Yeah, yeah, we see that, especially when we're brought in, like when it's below the line or an add-back, like we're the the portfolio company feels much better about making the investment because they feel like it's not actually affecting their financials and their efficiency.

Brad: Well, agreed. And you know, anytime, as we always say, anytime you can make a one-time investment for recurring benefit, that math can get very compelling. And so, you know whether it's an add-back or not, you know, those investments that have recurring benefit are usually very potent and very impactful.

Shiv: That's great. And what is your approach like when you're thinking about different areas because value, value creation plans inside companies, like if you were to make a prioritized list, like there's probably 10 to 15 core areas that apply to most companies. So how are you prioritizing between those and trying to figure out where to allocate your limited dollars and resources and advisors?

Brad: Yeah, the key really starts in due diligence and trying to really categorize those opportunities in the course of diligence. We pull our advisors into the diligence stage of our transactions. In some cases, that work can be thesis altering. In some cases, it's not necessarily thesis altering, but it's at least thesis fulfilling. Where it's thesis fulfilling, that work can, for example, occur post-signing, pre-closing. We have to be realists around what transaction timetables often look like. But we very much try to bring that work as far forward in the process as possible. We committed, now a couple of years ago, to having defined written value creation plans in place at the time that every new investment is made. And so there is already a blueprint, there's already a playbook, and a lot of times the work's already underway by the time we're closing on an investment because we want to have a running start when our capital goes into an investment. And that has really helped us get off the ground faster than we did in the past. But to the point of prioritization, it usually becomes fairly evident through the course of diligence where the biggest levers are. And we absolutely want to pull those early in the cycle of an investment where you get the benefit of compounding gains. So a lot of times in our companies, those take the form of executive hires and really adding to the executive team. do a lot of around coaching. We have some resources in our investment, excuse me, in our advisory council that support a lot of that coaching and human capital development. Part of our process being, we're oftentimes working with founders who want to help them through that evolution. And so helping to build out their team and even helping to develop them is really critical. One of the other key areas to invest in is technology. It's table stakes, and you see a very strong digitalization theme across our portfolio. A lot of our services companies are very much tech-enabled services. If they're not that way at the start, they're certainly that way at the end. There's a lot of convergence. As an industry specialist, a lot of our SaaS-driven companies also have services in the delivery model. It's very much trying to drive the technology barriers and frontiers for our companies, drive more technology enablement, more automation. Those tend to be the areas where we get the biggest return on our invested capital. And so those are a lot of the areas that we tend to prioritize.

Shiv: Yeah, totally. We're seeing this pattern as well where value creation used to be thought of as like a post-closed first 100 days activity and more and more PE firms are clueing into the idea that what you are likely going to do post-closed, you should start planning for during the LOI to close phase because it increases the speed at which you can move post-closed instead of just trying to figure things out once the transaction has actually become real.

Brad: Yeah, agreed, agreed. And one of the things that I think has helped us just in terms of idea development is, and I've heard this in some of your past podcasts, because I know some of our peers do this as well, is the importance of bringing our executive teams together. And so we started nearly a decade ago, we started our executive summit, bringing our CEOs and presidents together for a day or sometimes longer, for networking and enrichment. It's really funny to see how that's evolved over time because the first session that we did was very much, we got everyone in a room together and we brought in presenters, we brought outside speakers, and we did some presentations ourselves and we talked to them for a day. The feedback we got was, that was really interesting guys, but what we'd really like is we'd like to talk to our peers more. So the next year we added more networking. And the feedback was that was great, but we really want to talk to our peers even more. And so over time, it's come to include more and more in the way of peer networking, a lot of which we try to facilitate in a deliberate way. But we still try to leave the informal piece of it as well. It can be a lonely job to be the CEO of a company as often reported back to us. And part of our job is to make it feel less lonely. Let them network with their peers. They have a lot in common. 

Shiv: Totally.

Brad: No one competes. It's sort of a safe room, kind of an experience, and we're in the process now of trying to do that across other functional disciplines. So how do we get our human resources officers together across the portfolio? That session is actually in April of this year. How do we get our CTOs together? We've done some virtual events in the past. We're actually in the process of doing some in-person events for some of those other functional executives.

Shiv: Yeah, all of that sounds great. When you're in a deal cycle, are you talking about all of these benefits to a prospective portfolio company or CEO saying, hey, here's everything that post-close you will get access to. It's not just the capital, it's not just the expertise, but it's also this community.

Brad: Absolutely. And I use the term, we do want to weaponize our value creation team because it's a key part of the pitch. And we've probably undersold it in years in the past. Our firm's heritage, if you go back, we were born out of founders who were operators. And so we've kind of always had this operating heavy, you know, kind of mindset as, as investors and the willingness to really work collaboratively with our teams, roll up our sleeves. We were doing a lot of value creation work and we probably didn't sort of tag it as such. And we've done a better job in recent years of better articulating what it is we're actually capable of doing, showing the impact and, to your point, making that part of the pitch that this is part of the experience in working with us and these are the individuals that you'll have access to.

Shiv: What are some things in coming back to the diligence side and pulling some of these work streams forward? What are some areas that you feel like there's more that can be done like you guys are doing a decent amount but you can invest more into and I'll give you an example of something that we noticed given that we're brought into on the marketing side and go to market diligence and often times we find that PE firms are really good at legal, technical, they'll do customer diligence, market diligence, they'll build a TAM and voice of customer and that type of stuff. But we see commercial due diligence as an area that's kind of more done as, like a financial or mathematical exercise than an actual value creation exercise of understanding all the levers. Is it upsell? Is it cross sell? Is it net new customers? How much greenfield is there? What channel should we invest into? How efficient is the current go-to market? What's inefficient? What should we scale up, scale down? You know, those types of activities and questions that can drive a ton of value. And we've very rarely seen PE firms that understand how to do that. And when we come in, we're able to do some of that work, but it still feels like it's quite under-leveraged.

Brad: Agreed, agreed. Actually, business development and marketing, so sales and marketing, is actually the first area that came to mind as you asked the question. So I think you're I think you're really onto something. And part of this is the size and shape, just the profile of companies that we're investing in. Our typical company is five to 25 million of EBITDA and so very squarely middle market. And again, because the majority of our investments are, are, are really kind of management driven companies, founder backed or, or next generation of management, or typically first time institutional capital. Many of them are bootstrapped. And one of the areas that we see often is sort of critically under invested and sort of under managed is, is around sales. A lot of times it's the CEO or one or two others, he or she are the ones really driving a lot of the know, the sales and, and, and frankly, marketing as a function is, is typically fairly unsophisticated. And so we have some resources in-house within that advisory council. We also have some resources outside of LMP that we want to have on speed dial that are experts, for example, in things like sales operations, digital marketing, branding. You know, repricing. And so we have some specialists that will have worked alongside us and alongside some of the operating partners around just a kind of a broader overhaul of go-to-market because it's one of those, it's very under invested, it pays real dividends. There's nothing to drive enterprise value growth like driving top line.

Shiv: Totally, yeah, I think that's one of those things that it sounds great in theory, especially as you're making an investment, like people talk about levers or cross-sell opportunities and things like that, but really there needs to be a sequence and plan around it on how to actually capture that value. Connecting to your point about the advisors and this council that you have, like how are you pulling folks like that in to help on the go-to-market and commercial side to make some of those assumptions inside of an investment thesis a reality?

Brad: Well, one question is, how do we find them and then the other is, how do we engage them? And we often find them just through our network. And it's the benefit of having been doing this for 25 plus years. You just develop a very deep bench of individuals. Some of them are former portfolio company executives. Some of them are referrals from other advisory council members. And so it's tremendously helpful to have a proven quantity because I can say with conviction to one of our CEOs that I really think you should work with this individual because we've seen them be effective in these other instances. And by the way, if you want to talk to the CEOs of those companies, your peers, you can absolutely pick up the phone and call them. So they arrive with a lot of credibility, but you're getting them, getting them involved. The most critical thing is just getting them in early, you know, as we said earlier, these tend to be the levers you can pull that have really compounding gains, particularly as you think about a lot of our organizations are developing from being maybe kind of a single product, single service centric firm to a multi solution selling kind of firm. And that's a whole organizational overhaul in terms of how you think about business development. A head of sales no longer works. It needs to be a chief revenue officer. You need real marketing. You have to really think about your value proposition, how you pitch. need, you need a much more mature account management function, which oftentimes doesn't really exist. And so there is a lot of that organizational development that needs to work in it. And it does truly take quarters, if not years, to play it through. So it's so critical to get it started early.

Shiv: And in that type of a transition, are you also like going from, like a single product, single solution type of business to multi solutions where there's account management and mining existing customers and things like that? I'm assuming you're also assuming that there will be M&A layered on top of your core acquisition there.

Brad: That's correct. Yeah, that's correct. And so we'll do a lot of work with our companies around, know, is it sort of the buy versus build, you know, versus rent, you know, sort of decision making. see this a lot with our very technology centric firms, you know, given the nature of their ecosystems. And we're very much aligned against specific value chains. It's one of the benefits of being a sector specialist. I can think very nimbly between data and software and downstream things like monetization through payments, for example. And so for us, it's really critical to think about that broader monetization opportunity. And it's one of the, an outgrowth of that is that we'll look very nimbly at, will an acquisition help accelerate some of that roadmap? Do we have a software company that can make acquisitions to internalize the payments component to the strategy, or can they partner for it? And can we help them triage in that decision making? So very much with our investments, trying to think about that value chain and three-dimensional aspect to the growth opportunity.

Shiv: How much does your outlook on the market and the industry and some of the key sectors where you're investing influence your M&A roadmap? And you mentioned like, you know, there's very quickly you can tell where in the value chain the opportunity is. And so I'm just curious, like going forward, where do you see those opportunities and how are you trying to figure that out when you look at M&A?

Brad: Yeah, well, we come to the table with ideas right at the outset. If we're learning an industry for the first time, while we're reading a CIM, something went wildly wrong. And our research process is years ahead of that. And in fact, if you look at every new investment, you can trace back to the research work – we call them campaigns – but the research work that preceded that as oftentimes quarters or years in advance of it. And so we're showing up with, really day one, with a view towards the vision and strategy that we envisioned for the company and that we've already discussed and aligned with the CEO and the leadership team around what we all want to accomplish together. And so M&A means something different for each one of our companies. Again, we're trying not to have a cookie cutter approach because industries are different, teams are different. Some of our companies have been pure organic growth stories and they deliver phenomenal growth just with organic growth. Some of them are highly acquisitive and they'll make one or more acquisitions per month. So there's not one way to win, but we do want to come in with a plan. It certainly won't be accidental.

Shiv: Mm hmm. Mm hmm. And we're coming up on time here. So just before we wrap up, there's tons of PE firms that are listening that maybe have one operating partner or like a couple of operating folks that don't have this type of robust framework to support their portfolio companies. And so what advice would you have for them as they're trying to get their program up and running in order to get it to a point where there are a ton of advisors and ton of resources available for their portfolio companies?

Brad: Well, it is hard. There's certainly a chicken and the egg dynamic that I think we all sort of need to work through in the process of building it out. At least for us, our experience was that it was really needs driven. And so it built itself up rather organically because there were needs that occurred individually and pretty soon collectively. For us, keeping the ear to the ground and really seeing where a pressing need maybe wasn't just in one instance, but it was actually something that was shared across the portfolio. A lot of it came through. You know, that kind of listening tour and actually I go back to the event I discussed earlier, the Executive Summit oftentimes has been a great feedback collection mechanism. Of course, we're talking to our CEOs oftentimes every week, sometimes much more frequently than that. But those opportunities where you really sit back and you see the bigger picture. That's really invaluable. I think for those firms, kind of listening to their CEOs and their other C-suite executives and letting these sort of drive the direction of the build out is probably the right approach.

Shiv: That's great advice. And for founders or other people listening, what's the best way for them to find you if they want to connect with you?

Brad: We're online and in the office.

Shiv: Yeah, so we'll be sure to include your LinkedIn and your website and all the other resources that we have. And with that said, Brad, thanks for coming on and sharing your expertise. I think there's a ton that a lot of PE firms can learn from, especially as they're thinking about how to support their portfolio companies better. So appreciate you sharing your wisdom.

Brad: Well, Shiv, it was a real pleasure. Thanks for the time today.