Episode 74: John Stewart of MiddleGround Capital on Optimizing Operations in Industrial Manufacturing Portcos

Episode Transcript  

 Shiv: All right, John, welcome to the show. How's it going? 

John: Good. How are you?

Shiv: Good, good. Excited to have you on. So why don't we start with your background in MiddleGround Capital and then let's go from there.

John: All right, sounds good. So I'm John Stewart. The founder and managing partner of MiddleGround. I started my career working for Toyota Motor Corporation as an hourly worker on the shop floor. And over an 18 year career was promoted throughout the organization. I got my undergraduate degree and ended my career running their manufacturing operations in the UK with responsibilities for some of the other manufacturing across Europe. And in 2007, I was recruited into private equity and joined a firm called Monomoy Capital. It's based in New York. I joined them in 2007 as an operating partner. And then we raised three funds there. And alongside the fund raises, I was promoted to head up the operations team, became managing director, started leading deals and transactions, and became a partner in the firm there. Decided to leave in 2017 with my partner Scott Duncan to start MiddleGround. Scott also worked at Toyota and so we worked 12 years together there and nine years together at the prior firm and we started MiddleGround in 2018 and we've now managed about $4 billion of assets and have offices in Lexington, Kentucky, New York and Amsterdam and we invest in industrial B2B and specialty distribution companies in the lower mid-market.

Shiv: Yeah, and that's really interesting. And for what it's worth, we have a ton of guests on this podcast that focus on investing in technology or tech enabled services or business services types of companies. And you're investing in more of these traditional markets that are, make up a huge portion of our economy. So, and I think a lot of that comes from your background and how you kind of got into this space. Talk about just the types of companies that you're encountering. What is the, what does the quality of deal flow look like? How do you see competition in terms of other private equity firms competing for deals and how do you end up winning deals as a firm in that part of the market?

John: Yeah, so it's interesting because, you know, we, there's a lot of different firms. It's a very fragmented space. That's what I like about the lower middle market. A lot of firms start out in the lower mid market and then don't tend to concentrate there. And so we're trying to develop a strategy that allows us to concentrate on the lower end of the mid market and continue to go back, you know, to these companies where we see a lot of opportunity. And we differentiate ourselves in deals really through our operational approach. So myself and Scott, both have held every position that you can inside of a factory. I've actually authored a book on how to make your plant run more efficient. And we use that as one of the toolkits. And now we've been doing private equity for 18 years, specifically in lower mid-market industries. And so there's a lot of repetitive things that we see in these companies and we're able to drive a lot of value in these businesses. We buy healthy companies, you know, and try to make them more profitable. And because we've been doing this for so long, you know, we've developed a pretty good toolkit. So about 40% of the people in our firm are people like myself that know how to operate these factories and know how to operate the operations of a company. And so that's our real differentiating edge. You know, we're looking for companies where our skill set partners alongside of a good management team and can drive incremental value. So it's a kind of a real sweat equity model because we're underwriting the things we can do in the transaction and we look for them to generate 25% or more of the return in our underwriting. And so we're less dependent on debt than everybody else. We put a lot less debt on our companies, which gives us more stability from my standpoint. You may take a little bit of more risk at entry. But we think we're taking less risk overall because most of the companies we acquire have been around for five to seven decades. And so they have long established relationships with their customers and their vendors and are making like core products for the industrial base. It's very fragmented, we run up upon different players from time to time. We don't really see anybody consistently in the deals where we're looking at these transactions. We like to see all the deals from the investment banks and we do really well in those areas. But where we really excel is when it's a limited process and where there's some opportunity to be the first institutional capital. So if it's a family business that is second or third generation, and they're looking to monetize because the family has most of their assets tied up in that one asset and they're looking to diversify or whether it's an owner operator who's built a business and looking for someone to help them to scale the business. And so all of these different opportunities. So about 60% of the time that we're doing transactions, we're the first institutional capital. So we're dealing a lot with founders, family businesses, corporate carve-outs and investitures, things like that that are going in, you know, non-traditional auction processes, so more limited process.

Shiv: Yeah, and I'm looking through your fact sheet here and the types of companies you've invested in and there's everything from engines and metal processing to garage door components and all these other different types of companies. So what is the uniform thread that runs across even though it's in manufacturing? I understand that. But I think when we're talking about technology, there's a lot of overlap and it feels like a lot of these businesses would have different nuances. So how do you manage that and how are you building a team that can actually build value, underwrite deals, and actually scale these kinds of companies that look different?

John: Yeah, so the common thread is regional based manufacturing. So we're buying companies that are sourcing their raw materials, manufacturing the product and selling it in the same region. So we're not buying products overseas and in low cost countries and importing them. It's a strategy based on the investment in North American manufacturing primarily. We do do a little bit in Europe right now. And we're building that part of our business out over time and we'll have a dedicated business in Europe eventually. But, you know, it's kind of nuanced from that approach. And then, you know, we have areas where we have a lot of expertise, like, you know, I have a background, me and Scott in the automotive industry, we've owned a lot of companies. And we have a strategy to make investments in mobility and the future of the auto industry. And so even though in automotive, the content of the vehicles is changing dramatically, even though the number of vehicles isn't increasing. And as you get electrification, which is still a huge trend, people think electrification is done or it's dead. It’s not. It's come into fruition more with hybrid technology than full electric, just because the infrastructure is not there for the full electric right now. And the battery technology is continuing to evolve. But we still like that space electrification, vehicle light weighting. So whether it's an electric vehicle or internal combustion engine, you know, get more efficiency out of the car by taking weight out of it. And then autonomous and connected cars. And so those, you know, we like that space and, know, but we don't like to invest more than 20% of the fund in anyone in-market. So we can't do too many of those investments. We do have another strategy that we are investing alongside infrastructure spending in North America. So, you know, there's a massive infrastructure bill passed, you know, in the last administration to upgrade a lot of the aged infrastructure. It takes years for that money to be spent. It was over a trillion dollars. And so, you know, less than 20% of it's been deployed to date. And so, you know, we're investing in industrial manufacturing companies that fuel infrastructure programs. So think bridge construction, roadway construction, wastewater construction, the power grid, strengthening the power grid. So those are areas that have done some investments and have done really well. And then we have industry 4.0 or advanced manufacturing. So there's a lot of new technology like 3D printing and additive manufacturing that is emerging. These are smaller businesses, a little bit more nuanced. And so, you know, we think this is a good opportunity for these types of companies, especially as you look for people wanting to adapt their supply chains quicker to the end environment. So we've seen the supply chain over the last 15 years shrink considerably. There was a big push in the 90s and early 2000s to, you know, extend the supply chains and tap, you know, low cost wage markets all over the world. And so that was done. And then, you know, really as a series of events, but the main driver being that these emerging economies started to grow. And the low cost countries needed their own labor force just to build up products for their own country. And so it became not so low cost anymore. And so that people started to tighten their supply chains that was concentrated and happened a lot faster because of COVID. And then there's supply chain disruption, which happened after COVID because of the loss of the workforce that we had as we went through COVID and had a lot of people retire out of the workforce in manufacturing. So that's another trend that we're looking at. But we also are just general industrial investors. You know, it doesn't have to line up with one of those themes for us to be interested. We like to partner with really good management teams. We like to say that we have a lot of expertise, but we're not the experts. So we like to partner with management teams that understand the markets. That's when our programs really work the best. And they're putting in commercial relationships and building out the commercial pipeline. And then we're helping them to execute on the growth that we're seeing because of these kind of macro trends of shrinking the supply chain and re-exploring a lot of this production.

Shiv: Yeah, one of the interesting things, you as I'm hearing you talk about all of this is we meet a lot of PE firms and I find that over time, you know, some of them start to blend together because they all are saying the same thing or say similar things. And it feels like there's no unique differentiator about the firm. And I think here, you know, it's very clear that there's a secret sauce or a proprietary or a framework or a thesis behind how you're investing. It's been earned over a number of years and that allows you to kind of really distinguish yourself as a firm in the marketplace to win deals and actually create value. 

John: Yeah, absolutely.

Shiv: Yeah, and talk about that underwriting piece because as you're meeting these companies, you touched on that earlier and I wanted to dive deeper. Like how do you underwrite a deal? Because these kinds of investments can be tricky. There's a ton of capex and depreciation and things like that that make the businesses way more complicated. How do you think about underwriting the deal and how do you build a value creation plan?

John: Yeah, so we want to start with a good company. So we don't want a business where their products only compete based on the lowest cost. So if it's a commoditized product and there's no intellectual property, there's no proprietary process, material, geographic proximity, there's no real advantage to the company. We're not really interested in those types of companies. So we try to look for companies that are differentiated and have alignment with some of the trends that we have. But we typically look for companies that are growing better than their core markets in their historical period. We're not doing turnaround. So we're buying positive EBITDA, positive cash flow companies. And cash flow is very important to us. So we try to stay away from companies that are high EBITDA but heavy capex. So when you look at their cash flow adjusted for capex, there's not a lot of cash flow. And we're very good at managing these companies. Our team gets involved and it's built up from operating professionals and transaction professionals at the time that we attend the management presentation. And when we go into these MPs, we'll have a larger team that's involved. We have people that are walking the factories that understand factories and how they should be managed and are gonna be working with the business post close. They're also investing in the companies as a part of the GP commitment with us. And so they're not advisors that don't have any skin in the game. They have real skin in the game here. And so they start to build a value creation plan that touches every line item of the P&L balance sheet of the company. And although there some common things that we see, you know, with all the businesses, every, every VCP, we call it value creation plan is, is very unique to the individual company. And some common things that we see is working capital management. A lot of these companies just don't maximize working capital management. They don't, they don't competitively bid out their supply base and they don't understand their value in the supply chain. And so they're not able to extract the most value, whether it's pricing or terms from their suppliers. 

Shiv: Can you expand on that? Just to bring it to life a little bit for the audience.

John: Yeah, so when you look on a global basis, there's only 30 mills that you can buy steel from all over the world. Not that many. And of course, they have many different sites, but the companies are not so many. Most of them are global. There are a few regional firms. But we go in and look at a company, and they're buying $100 million worth of steel. And it's a family business, they've grown. They think they're buying a lot of steel. Well, we buy $1.6 billion worth of metal across our portfolio. We own over 220 factories around the world today. So, you we know for all 30 of those vendors, like what the terms are that you can negotiate with them, what the pricing is on the metal, what the terms are, you know, for the pricing, whether it's, you know, indexed or, you know, just how all of that's managed. We know the customers as well because we do a lot of B2B. So we're buying from a lot of the vendors. We're selling to a lot of the same customers. And so we get to know who are the easy people to work with, who are the difficult people. When we go in and look at a company like that and they're buying metal for X and we're buying it for X minus 10. And when they have terms of Y and we have Y plus 35 days, there's no risk in executing it. We know we can execute it. We've executed it all across our portfolio. We have really good strategic relationships with these companies. And we're able to do it in a way that it creates value for the supplier as well. So you go in, and out of these 30 vendors, maybe they're using 10 of them. But maybe they should be using three. And so you can go to the three and offer them more purchasing. We’ll buy more metal from you, but we need these terms that we have across the portfolio. And so we're able to get those better terms and we're able to give them more business and extract value for that because it generates free cash flow for the company.

Shiv: Yeah, and that's, and that's like meaningful because every, every percentage point there translates to working capital gross margins onto the bottom line very quickly at the volumes that you're talking about here.

John: Yeah, it's almost exponential because when you look at smaller businesses, the biggest barrier to growing a small business is working capital. The amount of working capital you have to invest in. And so when you can change that dynamic, it's often not the case that owner, entrepreneur, his business is limited based on customers. It's based on his ability to invest in inventory and work in process and new equipment and machinery to scale the business. They just have to prioritize those dollars. And especially if it's been a family business, they're very conservative. They tend to not use a lot of debt in the companies. And so you have to be cautious about putting debt on these businesses. A lot of private equity firms will build their LBO model and they try to put as little equity as they can in the deal. When markets were good, they would try to put 30%, 35%, 40% in the deals. We put 50%, 50%, 60% in every deal, and we've done five platforms still underwriting to a 3X return with 100% equity in the deals because of the value creation drivers that we bring to the table, which is differentiated. And so when you look at a traditional firm that's going to try to maximize leverage, well, you're buying these companies based on pro forma adjusted EBITDA. These companies are almost all cyclical in nature. There's some cycle to them, whether it's based on their raw material pricing or whether it's based on their customer base or the market that they're in. And so you've got to understand where the company is in its cycle. Is it expanding or contracting? So you have to understand that. You have to understand the company's real ability to generate free cash flow. Proforma adjusted EBITDA generates no cash flow, right? So raw EBITDA generates cash flow. Proforma adjustments generate nothing. So in the world that we operate in, you have to buy based on pro forma adjusted numbers. know, everybody has a quality of earnings and bidding off these numbers. But the ability to convert that pro forma adjusted to real EBITDA and not just keep anniversary pro forma adjustments is really important because you got to generate real cash flow. So a lot of times, we'll even if it's a company that we'd like, and historically, there's a lot of adjustments in the company, we may still buy it, but we'll put little or no debt on the business until we execute our value creation plan and have the company generating the free cash flow on a consistent basis. And then we'll size the credit facility based on the cash flow of the company. So it's just a nuanced approach at how we kind of think about it. It's a little bit more conservative. In our underwriting, we're liberally trying to underwrite so that we don't have any zeros on our balance sheet, which is different than most firms.

Shiv: Yeah, I think in these kinds of companies, especially, exposure to debt, the risk is not just the debt carrying cost, but also that you're putting the core business at risk because the assets on the balance sheet are the things that are generating the revenue that can easily be taken back by the debt provider if you don't meet your covenants.

John: Yeah, exactly. And so that's why we're typically a turn to a turn and half less than the market. And it can vary wildly depending on the situation that we're in. And because we look at it that way, it's given us the ability to consistently deploy capital. So we've consistently put about $800 million of capital to work per year. And even through COVID and even through some of these periods that we've seen recently, we've also returned a lot of capital. We've returned over almost $800 million of capital so far. And we're still early in our period of investing. But that's because of our value creation approach and our operational approach to these businesses.

Shiv: Right. Yeah, one of the interesting things, you said two really interesting things. The first is just the X factor or like the throttle or the bottleneck in growing almost every company is working capital because how much can you deploy to actually lend more revenue impacts how fast you can grow it, right? And managing that is super important. And the second thing that I found that was interesting is when we get PE investors that invest in technology companies that don't have physical assets and supply chains, when we talk about cross-pollination across the portfolio, it's often about best practices and what can one company, for example, learn from another on pricing or sales best practices or marketing and digital efforts and things like that. In this case, the interesting thing is because the supply chain is there, you can negotiate for all of these companies together and actually create enterprise value in a way that a technology PE firm couldn't necessarily find because there's overlap in all the businesses because they're kind of dealing with the same suppliers.

John: And we can actually sell products to ourselves. So for example, we have companies that need stamped products. We own a stamping business. And so just like if we have those, introduce those organizations together so that the stamping business can start quoting business internally, where you have a lot more control over the outcome. So look, it's a different approach and how we kind of think about it. It's working so far. We raised our fund in August 2019 and then COVID hits. And then we go through the supply chain disruption. We go through interest rates increasing. We go through UAW strikes. We go through wars. We go through tariffs. We go through administration changes. And I tell everybody that everybody's all upset about tariffs today. And I don't think people really understand the impact of tariffs. I think it's funny, the press, like the day after the president announces these tariffs, these reciprocal tariffs that aren't even in effect everywhere, that there's an article that says tariffs are reshaping how American consumers are buying products. Really? In a day? Like it's reshaping? Not at all. The impact's not that quick. It's not that real. You know, there may be isolated instances where that's the case, but by and large, you know, when you look at the, know, the GDP of the United States, you know, compared to other countries, even though we're trying to spur manufacturing or the administration is with our policies, we still manufacture a lot of the products that we consume and especially a lot of the high dollar products that, people consume like automobiles and houses and you know, the kind of big spend items, you know, it's not like there's a mass influx of some of these products that are, you know, flowing into some of these core businesses. And then, you know, the part of that that a lot of people don't understand as well is that when you look at tariffs on foreign governments, you also have to consider the exchange rate of the currencies. So when the first Trump administration was in and he put the 25% tariff on China, the Biden administration never reversed that 25% tariff. So it was a bipartisan tariff on China, the original kind of 25% that was put in place. Well, what did China do? What was their response? Well, China devalued the yuan 20% immediately. The impact was almost nothing because they devalued their currency. And so there was no impact. You could still buy products from China just as efficient because your dollar went further into those economies. When you look at Canada just this year, the exchange rate from Canada has been more volatility in exchange rate between Canada and US dollars than the tariffs will ever cause between the two countries.

Shiv: And so how are you factoring that into your investments and as you're looking at these companies or does it not matter because a lot of these firms are these regional manufacturers and suppliers?

John: Look, it always matters because any time there's uncertainty in the market, that creates volatility. And so whether it's on the credit side, whether it's on the equity side, whether it's on the market side, as far as M&A markets, it all has an impact. So from that standpoint, I'm just saying that the actual net effect of the tariffs is not widely good. I mean I own 220 factories all over the world. I’ve got 157 of those factories in North America. I've got another 40 factories or 35 factories in Europe and then the rest all over the world. And we just did the analysis and we looked at, we're purchasing over two and a half billion dollars of raw material from everywhere. Again, we have companies everywhere. The estimated impact of the tariffs is less than 3% on purchasing, on sales, on exports. We don't export so many products, but exported products that we're exporting out of the area where they're manufactured. It's 0.4% impact if all of the reciprocal tariffs went into effect. So to me, it further reiterates the importance of investing in regional manufacturers. That model. And I wish I could take credit for that model. I learned that model at Toyota. So when Toyota was a public company only in Japan, before they were a public company in the United States, currency fluctuation was something that was a big risk for us in the company. And I worked on corporate strategy there as well. And so we would always internally kind of look at the company, irregardless of what the actual yen to dollar ratio was on 120 yen to the dollar ratio. That's how we just kind of always kind of looked at how we manage the business. Now, of course, the company would take, you know, huge, have a huge volatility because of the change in exchange rate going up to 300 yen to the dollar and down to 90 yen to the dollar. And so Toyota started as they're expanding globally, you know, over the last 30 years, they started focusing on building their vehicles in the region where they're being sold. And so before, when it was just a Japanese based business, they only could manufacture the amount of cars that their manufacturing capacity in Japan had, which takes up a lot of capacity just to fill Japan. And so they would export those vehicles all over the world and components and products. And they knew in order to be able to grow the way they wanted to is they needed to manufacture the products in the region closer to the customer. They needed that to expand the production capacity of vehicles just to make more cars. But then they started out, they were supplying a lot of the products from Japan. About 75, 80% of the content of the car was coming from Japan being assembled in these foreign locations. Well, they started to have this currency fluctuation issues. We're really exposing them with all the raw materials and major components like engines come in from Japan. And so they started this regional manufacturing model where they started sourcing and building out supply bases in these regions so that they could buy zero from Japan.

Shiv: End to end in a regional facility without having that risk. So I guess my question coming back to the value creation side would be how much as you're looking at these companies, how much of the value creation plan is optimizing for these kinds of costs and risks on the risks on the cost side, where there's maybe like a standard cost base, but then there's like flex of based on exchange rates or supply chain costs, there's a ton of value creation opportunity and how much of your focus is on acquisition and optimizing for growth and things like that?

John: So we don't underwrite acquisitions as part of our underwriting. So we're looking at the base business. And then the VCP drives anywhere from 25 to 75% of our return in the investment. The more it drives of the return, the more I want to buy the company, almost indifferent of price at some point, because there's so much that we can do, which protects the downside in these companies. So if they are going through a contraction, the stuff that we can implement can actually cushion that contraction for the company. In some cases, we shrink the top line of the business. We bought a company from Sun Capital Partners, a really good private equity firm, and they made more than three times on it. A company called Aerotrueline that makes products for garage door installations. So everything you need to install a garage door except for the motor and the door itself. So all the brackets, the track, the rollers, all of those fasteners, everything. We put it together. We kit it. We sell it to the guy that's installing the garage door. And we actually shrunk the business and doubled EBITDA by helping the company focus on price elasticity of demand, looking at their customers in our markets and where they had more pricing power and where there was more opportunity, looking at the supply chain and managing the supply chain better so that you had higher free cash flow yield. And then, of course, making the factory more efficient when we do that all the time. So there's like a difference, again, there's different nuances in all of these areas, but there's always at least 25% of the return. I would say on average is probably 40%, 45% of our underwriting. Now there is growth because we're buying companies that have grown. Cash flows generating return. And we are using leverage. So we have all those traditional models, but we have the extra one, which is the value creation plan. 

Shiv: Yeah, explain that to me. If let's say 100, whatever the value created is 100%, you're saying 25 to 75%. So let's say on average 50% is from the cost base side or optimizing existing operations on the base. 

John: You have cost and cash.

Shiv: Cost and cash. And is that the other 50%? Like what is the rest of the...

John: It's growth, right? These companies are growing and they're growing better than they're, you know, they're growing better than the industry, you know, averages, you know, over their life cycle. We are also the cashflow generation from operations, you know, that generates a return to leverage, you know, we're still, you know, 40% debt, you know, on these are, you know, 40, 45% debt. So we're using debt as a tool, but we're not beholden to it. So in a lot of private equity firms, when they couldn't get 65% leverage in the deal and it blew up their model, we have this other operating lever. And so we really rely on it. It's real sweat equity if you think about it, because we're underwriting things that we are going to execute. 

Shiv: Yeah. I think, yeah, what's really interesting is again, drawing a parallel with technology investors and those types of businesses. There's only so much you can do on the cost side because the cost of an additional license of software is basically zero. So at that point, the optimization really needs to happen on how much is going into engineering, how much you're putting into product and marketing and sales. And often the growth effort happens to be on net new clients or expanding existing accounts but it's still about landing more revenue from those accounts. And in this case, there's just so much opportunity that sits inside the existing business that it makes so much sense for you to focus there. And I guess that's the reason why I wanted to touch on this is you have a larger ops team than most marketing, most private equity firms, because most PE firms will have like a couple of ops partners or a handful of folks that are optimizing their portfolio companies, but it feels like you're bringing in a team with every investment that's actually going in and operationalizing this stuff.

John: Well, in me and Scott, the founding partners, we're both operators, right? We don't have financial degrees, right? We crossed over to the, I crossed over to the transaction team side as an operator. And so it's just a different approach to it. A lot of our investors kind of, I think they feel like they're skipping the middle man investing with us because of what our differentiator is. And we look at these investments differently. We look at them based on operating the business. We look at how are going to make money operating this business? Now we've got to sell it, of course, but we want to be able to make a return. But in our first fund, which we closed in 2019, in 2022, before we had any exits, we returned 40% of the capital with no exits, just from free cash flow. And so, know, so free cashflow is just, you know, the saying is cash is king is true. And so many people just, you know, I see, especially in private equity, you know, the deal team will fall in love with the model. Right. And I tell everybody, every model that we do is wrong. Like we know that it's just what degrees that wrong, every investment banking presentation, you go in to see a new company, no matter how it's performed in the past, it's going to grow the next five years. Right? you know, and if, you know, people are underwriting based on what, you know, has never happened and what the, you know, is, they're saying it's going to happen. Whereas we look historically at the performance and we look how, how the company's actually performed, what the actual cashflow has been. Now we still have to buy off pro forma adjusted, but, but if 70% of the EBITDA is pro forma adjusted when we're buying it, you know, or, and, you know, the company's generating 25, 30% or less free cash flow to EBITDA yield. You got to be really cautious in those circumstances because if you put any leverage on the business, then there's nothing left in that situation. And that's where we come to the table because we do do a really good job on the working capital side and we can improve the working capital management. There’s been cases where we've actually flipped the working capital cycle, made it where it was like cashflow negative. So we actually generated working capital as we grew the business. We had better terms with our vendors than our customers had with us, which is not typically the case in a lot of companies. so, you know, and, you know, we bought a company called Banner Metal that was about a hundred million of revenue, nine million of EBITDA. We bought it in December 2019. We flipped the working capital cycle because they supply specialty metals to medical, dental, and aerospace manufacturers. So these people are buying real, precise, exotic metals. And they don't buy them in mill quantities. So even the big users, like someone that's making hip replacement joints, they don't buy enough titanium to buy it directly from the mill. And they don't want to buy it directly from the mill because the mill wants to sell it in tons. And they're not buying it in tons. They actually want to buy it in the shape of a hip replacement and where they can just do their final tooling on it to sell to the customer. So we buy the big sheets of titanium. We cut it to the shape. And then we sell it to these medical manufacturers. And so we do this for all kinds of precision businesses. But the company basically operated like a distribution company. So they had terms with their vendors, but their customers had better terms with them than they have with their vendors. So it consumed a lot of working capital to grow the business. So when we bought the business, we put a very light capital structure on it. We put an ABL, which is real efficient and cheap. And then we had one of our existing investors invest it and they do mezz investing. So mezz is typically expensive, but when you pair it up with an ABL, your blended cost of capital is low. And because it was a friendly investor, they had no covenants. They just followed the ABL. So we only have a fixed charge coverage ratio covenant of like 1.05 over the life of the loan for this business. So that gives us a flexible capital structure. Then we successfully negotiate it with our vendors. In some cases, we got consigned inventory with 90-day terms. And we generate a boatload of cash. You flash forward that investment to September of 2022, it's doing $350 million of revenue and $65 million of EBITDA.

Shiv: Yeah, I mean that's that's insane and that's a great story to share and I think it actually really brings home a lot of the things that you touched on today's is this operationalizing and optimizing on the the operations of these companies is where the value is and I think the fact that you guys have so much expertise is how you're able to do it and I wish we had more time to talk about this because we're coming up on time. But before we close off John what's the best way if people are listening and they have a company that could be a potential fit for you guys or do want to connect? What's the best way to reach you?

John: You can reach out on LinkedIn. I have a pretty good social media presence there. We do a lot of activity, can reach out to me or MiddleGround. You can also come to our website, middleground.com. Our contact information is there. You can reach out to me or any one of my partners, anybody on our team, if you have something that's of interest. We also share a lot of our playbook with people. We don't really view it as proprietary, you know, so we share a lot of the things that we do with others. So if there's something I talked about that's interesting and you'd like to get more information. And we also have our own podcast called Executive Sessions that we do where we talk about just industrial manufacturing. It's not really about private equity, but it's just about, you know, what it's like to operate in industrial manufacturing.

Shiv: Awesome, we will be sure to share all of that in the show notes and the links and John with that said, thanks for coming on and sharing your expertise. It was quite refreshing to hear from a true expert that's found a way to generate alpha in their space. So appreciate you coming on and sharing your wisdom.

John: Absolutely. Thanks for having me.