Episode 79: Lloyd Metz of ICV Partners on Transforming Legacy Businesses with Capital, Digital, and EQ

Episode Transcript   

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

Lloyd: Hey Shiv, glad to be here. Really excited. Good to meet you. Really excited for our conversation.

Shiv: Yeah, likewise. Same here. Excited to have you on. So why don't we start with your background and ICV and let's go from there.

Lloyd: Sure. ICV Partners is a lower middle market buyout firm. We’ve been around for a little over 20 years now. We are focused on investing in family and founder led businesses in three primary verticals, food and beverage, consumer services and business services. And we have some active subsector views and theses that are working inside those three verticals. But that's where we spend a lot of our time. I've been with the firm. You're making me count Shiv. Gosh, 23 years. Goodness. Time flies, right? I started at ICV after spending some time at Warburg Pincus, a pretty large private equity firm. Prior to that, I was in the high yield capital markets group at Morgan Stanley. Before that, I was at Harvard Business School, where I learned a few things, which was great, and started my career in finance at J.P. Morgan out of college.

Shiv: That's an impressive career. Why don't we jump into ICV in particular? I think one of things that you mentioned that separates you guys as a focus is the investments that you're making in business services and food and beverage and consumer services. Talk about just focusing on those verticals or industries in particular, because a lot of the investors that we talk to invest in more, I would say more trendy verticals in industries like tech or tech enabled services and SaaS. So this is a different space or at least we don't hear from as many investors on the show that are focused in some of these other areas. So talk about why the focus there and what really distinguishes you guys are able to kind of generate value in those, in those industries.

Lloyd: And this is part of why I'm super excited to be on your show, Shiv. I feel like I'm different from your typical guests. So these are areas that we have had success with over many years or the years that we've been involved in investing. Honestly, we find those sectors ripe for innovation. They're chock full of family and founder owned businesses that need to make a transition. And therefore there's just a lot of opportunity there. Even though we're not technology investors, like some of your other guests, these companies that we invest in are in the 21st century and they need to adopt and embrace technology. So whether that's for their internal processes. Whether it's for their customer interface, their customer experience, whether it's for their go-to-market and sales efforts, you have to use technology in some way, or form. For many of our companies, unfortunately, fortunately, we have to undertake a pretty meaningful upgrade to their technology system. So whether that's a full ERP implementation or whether that's just the finance and accounting billing collection systems, we are inevitably upgrading those systems at virtually all of our companies.

Shiv: Right. And I guess, I guess with that, because these are more legacy businesses, if you will, that need to adapt more technology and be transformed, you're basically taking on a major transformation off and as part of your investments, would that be fair to say?

Lloyd: It is. And again, we are looking to back the founder or the family member who's running that business. And that takes quite a bit of conversation, trust building, and really trying to understand what is important to that CEO who may be the son or daughter of the founding parent or grandparent. And oftentimes the conversation turns into legacy, right? That leader has something to prove to their family, something to prove to the founding member of the family, even if they're no longer with us, they still have it in their mind that they have something to prove. And we have to find a way to understand that. And I think that's part of what makes us different. I think based on our teams, upbringing and character and our career paths and just who we are as people, I think our EQ is pretty high. And so we have a real sensitivity to understanding what is that leader of that business care about what you mentioned the word legacy, how important is that legacy implicit or explicit. And, and we try to align the strategic initiatives, the goals that we're trying to accomplish over the two, three, four, five years along with that. So a lot of times, Shiv, the technology discussion comes about when we're, we don't use this term, but I'll use it to the shorthand here, how to future proof the business, how to secure the business's future and therefore secure the legacy of this family business, introducing a better, faster, more effective way to go to market, to interact with your consumers, to collect and build better and more efficiently, to understand your cost structure more accurately. Those are all elements that help make sure that this company endures and therefore supports your idea or your feelings around legacy. So I'll stop there.

Shiv: Are you in these cases then we started by saying that you're more of buyout firm, but then are you still having these founders or families stick around post transaction and they're with a meaningful equity stake?

Lloyd: Absolutely. That is our preference. That is our strong preference. We're not the type to make an investment in a business that's been built and led by a family member and then exit them. We're trying to make sure we understand their aspirations, their ambitions, what goals they're trying to achieve, and then figure out can we help them get there faster, more efficiently, more effectively. So we absolutely want them to roll over and participate meaningfully in the equity ownership and the equity upside. And we want them to continue to lead the business. We're trying to find situations where our capital and our involvement is liberating to that CEO, to that founder, to that family-owned business leader.

Shiv: Yeah, I guess that brings me to almost like it's agnostic of the fact that you're the industries you're investing in. Then you touched on this earlier, just building the relationship and the EQ side of this is really connecting with those founders and building a unified vision where maybe the gap is capital or you're bringing additional resources that enable that vision to kind of come true.

Lloyd: Yeah, that's right. And honestly, capital is important. Know how is also important. And part of that EQ is knowing sometimes when just the power of encouragement can make the difference. Because sometimes the initiatives, the steps, the ambitions that we're pursuing, the projects, you name it, all that execution stuff that you need to do to double or triple the size of a business. There are going to be moments for that CEO and that leadership team that are just outright scary or where their confidence is not as strong as they would hope it to be or like it to be. that's where you literally need to hold someone's hand and encourage them and make, you know, tell them it's going to be okay. Let's go do this. And if it doesn't work, we'll figure out how to pivot and get it right the next time, but let's go for it. And encouraging our leaders to take some risks, calculated risks, educated, informed risks, and holding their hand and cheering them on as they go do it. That's a big part of what we do.

Shiv: At what point are you bringing in that founding team into the idea of the types of transformations you'd like to happen inside these companies? Because up until you invest in the business, the founders have been running it or the families have been running it in a particular way. And now you're about to make the investment with, I'm assuming, some sort of a value creation plan where you look at different areas that need to be professionalized or transformed or just operationally changed how they've done business. So how are you bringing in the founders into that conversation and getting their buy-in so that that type of a transformation is successful?

Lloyd: Yeah, that's a really great question for us as we do our diligence, as we're getting to know the team, getting to know the company, getting to know the opportunity. And to the extent we hear the aspirations from the leader vetting those ambitions, we ultimately sit down on multiple occasions and share our learnings or our analysis or our points of view with that business leader and we start to craft the initiatives and the value creation plan together. And so it starts before we actually conclude or close our investment. It continues after we conclude and close our investment. And then we share it with the broader leadership team of the company, usually within 60 days of closing our investment. And we talk about, here's the rough outline of the value creation plan and now let's put the flesh and the meat and the substance and details around it. And that's what we use to guide our efforts over the, really the rest of the investment period. So we share the views of the value creation plan fairly early.

Shiv: Do you get pushback or what's the reaction at that stage? Because the investment hasn't been made. is like the family business. A lot of founders look at their businesses like they're like another baby of theirs, right? So do you get pushback at that stage where you're coming in with an alternative vision or at least a transformation that maybe they haven't had in mind themselves? And how are you getting people on board with that?

Lloyd: Right. And that's where you, I think you have to have some very decent and good EQ people skills. So the ambitions of the leader of the company, the CEO, is what's paramount. That's where we start. And if we agree with those ambitions, then we proceed to find a way to make the investment. If we disagree with those ambitions, we usually step aside and go look for something else. So if there's no alignment or agreement initially with what the CEO is trying to accomplish, then we go find another opportunity. So given that we're starting from that place, we then go figure out what can we bring to the table that can help the team achieve those ambitions faster in a more capital efficient way. And then we share those. So there's usually not much disagreement or pushback to, you know, offering, hey, if you do it this way, it doesn't cost as much or it'll be faster. So that that usually goes pretty well. I wouldn't call it pushback, but where things sometimes get a little, there's a little reluctance is when we bring to the table greater opportunity. So if the ambition is to double the size of the business and we come to the table with, if you make over these capabilities, your marketing, your sales, your go to market organization and introduce some technology. Lead generation, CRM, et cetera. We think you might be able to two and a half times your business. And then here are some opportunities to expand geographically through M&A or add a service line or a product line through M&A. You might be able to three X your business. That's where it's not so much pushback, but that's where people start to get nervous, maybe or a little uncomfortable because that's new. It sounds aggressive. It sounds scary. They've never done it before. And then that's where you have to take some time to educate and then take some time to walk people through it. And then ultimately, if need be, hold people's hands as you go through those, those efforts.

Shiv: Yeah. Do you think that the reluctance is more from building a business without the capital resources? Like where does the reluctance come from? I guess, I'm sure you encounter this all the time because in a reality with the financial backer behind you versus just kind of being founder led or bootstrap, you kind of have to operate differently.

Lloyd: Yeah, there's some of that. I think ultimately it comes down to what some folks might just call basic human nature and some of the wiring, right? Once you're used to operating, moving, living in a certain way, in a certain cadence, and you get comfortable, Homeostasis, right? Humans get used to their current conditions over time. And now you want to get out of that place, do something different, do something you know, challenging and different. That's where people get uncomfortable. And I think that's just a dynamic of human nature personally.

Shiv: Let's shift to the value creation side, especially on the food and beverage and the consumer goods side. Those industries almost have different value creation levers than let's say more tech or SaaS types of businesses. So talk about where you see the biggest levers as you're coming into these companies and what are some of the primary areas that you're looking to drive more enterprise value?

Lloyd: Yeah. So one of our companies that is certainly top of mind, you definitely need to introduce and embrace social media for one, right? That is part of how you raise awareness of your products, raise awareness of your services. And given the technology underlying social media, you can zero in and target consumers very accurately and in some cases with great precision so that you are more efficient with your customer and consumer acquisition costs. You're more efficient with your marketing, dollar spend, and you can have a more direct feedback loop between consumer and what you're communicating through your marketing and messaging, what purchases happen on shelf or, if it's a food service oriented business at the grocery deli counter or the restaurant table, you can connect all of those more tightly in a feedback loop than you were able to before. So that makes for a more effective marketing outreach and customer acquisition process. It also gives you, as the product innovation person inside the organization, some better feedback loops on what is working and what is not working with consumers. So there's that part.

Shiv: Yeah, this is something that we preach to a lot of our clients as well. And looking at the data and being able to figure out where are your marketing dollars or go to market dollars going, what's the return on investment and what should you scale up, what should you scale down? 

Lloyd: Yes. That's right. Absolutely.

Shiv: So I guess those principles hold. In the specific industries where you're investing, what does that look like in practice beyond just like the, I guess the high level framework on there? If you can give us some more specifics like, what are some areas that you're really dialing into, whether it's payment or point of sale areas, if, whether it's how much you're investing on the retail front, just help me bring that to life a little bit.

Lloyd: Yeah, that's a good approach and a good question. The example I'm thinking about now is one of our companies is basically painting a picture around lifestyle and celebrating a particular lifestyle and a particular culture. It's a South Asian yogurt manufacturer, dahi. And they have crafted a campaign around different holidays, different life events. It's graduation season for college and high school, so they have imagery around that, imagery around family. And then they have a through line with their products, product placement in a lot of their campaigns. And it's trying to bring awareness and it's trying to strike an emotional chord with the consumer. And then that ties, and this is on Instagram and the different social media outlets, and that is allowing them to track and see who's engaging, where those people are engaging, and it's informing their promotion strategies and their promotion approaches at the grocery shelf. Geographic specific promoting in this market versus that market based on the information they're getting from consumer engagement from the social media campaigns. I think that's a good example. It's a current example and one that's been pretty effective.

Shiv: Yeah. Yeah, that's great. And just out of curiosity, just from my own interest, what is that go to market split look like for companies like this? Like what percentage of it is going towards, you know, sales folks that are kind of going around store to store versus, you know, on shelf promotional spend versus digital versus social? Like what does that split look like for companies like this? Or what is the healthy range that you're aiming for as you're making an investment?

Lloyd: Right. Right. This particular company goes to market through distribution. So the promotion is you give the distributor dollars to promote either through price or some other sort of discounts as they go put the placement, put the products on the retail shelf. The retailer can get some dollar promotions allocated to them as well as the distributor. So that's what that looks like. And so we'll tell them, you know, this should be two for $5 or the, this particular SKU should be, you know, buy one, get one free or, whatever it is. And that promotion is shared by the distributor and the retailer. So that's what that looks like. When you introduce the social media campaigns, you now have some optionality to bring in consumer direct consumer promotion. So scan this QR code or use this promotion code or register your information here and we'll send you a coupon that you can then use at the grocery, at the checkout. So you can now start to do those sorts of campaigns with the consumers directly. But by and large, most of the efforts are going through distribution.

Shiv: In an environment like that, you know, with the types of products you're selling, there are players throughout the value chain, if you will. Right. I guess margin is such a critical piece of the value creation plan. Talk about the margin expansion piece and how you work on that as you invest in these companies, because I imagine when you're coming in, these companies are not completely optimized. Maybe they don't have preferential pricing. Maybe there's better promotional work that they can do. How are you driving margins up?

Lloyd: Right. In many cases, and I'll stick with our yogurt business, we underwrote building a new plant. So they had an existing plant. It was small, constrained, older process technology. And we went through a fair amount of work with a whole suite of consultants, but we needed to find a new plant that not only had internal processes and production processes that were efficient with state-of-the-art throughputs, production speeds, et cetera. But you also wanted to locate it where you were minimizing and reducing your outbound freight costs to deliver to your customers. And you wanted to minimize your inbound freight costs from your suppliers. And when you put all that into a large model, the output is an area on a map of the United States that says your plant should be located somewhere in this region. It's pretty cool. Pretty cool to see. And we ultimately found a location in Virginia, built a new plant. It is ramping up, hiring people, a lot of new jobs in this part of Virginia. And we think we have lowered the cost of our outbound freight, our inbound freight, we've renegotiated purchasing contracts to have more efficient. So it's not as much the absolute unit costs of the milk inputs, but because we have a new plant and we can handle different quantities per delivery, we have bulk delivery of inputs and that is more efficient for the suppliers. It's actually more efficient for us in production. So we expect with all of those changes our product costs or production costs or total costs to our customers to improve meaningfully. And so some of that, obviously, you share with your customers, some of that you keep. So that's how we're thinking about improving margin. It's your process improvements around production, but it's also paying attention to the other costs of inbound and outbound freight.

Shiv: How do you, in a situation like that, how do you model out the capex side of it, right? Because to gain on the margin side, you're basically having to build a new plant and take on the additional capital expenditures associated with that and maybe more machinery and other things that go along with that. And how do you factor that in? Because there's maybe added risk to that. Maybe you're taking on debt to fund some of that. So how do you balance those two priorities?

Lloyd: Yeah, we are fairly modest, conservative even with our debt when we finance our investments, when we make acquisitions. And so we had reasonable debt capacity for, in this particular case. And in general, we have reasonable debt capacity on our portfolio companies. And the view we took is that, not only will you improve your profitability in the near term and during the investment period, but you also have room for continued expansion in years six, seven, eight, nine, 10. So whoever the next owner of the business is, they have multiple years of runway to expand the business. And so we penciled out the, you know, the opportunity to, from where we stand, triple the size of the business and there's still room to grow afterwards. We also think it allows us to be more creative on expanding the product offering and brand portfolio of the business. And so we're actively looking at new brands, different brands, adjacent brands. And part of the value creation would be to take those brands and fold the production into our new plant. And then that also helps add efficiency to your procurement and your inbound freight, also add some efficiency to your outbound freight and distribution of product to the retail channel. So we think that'll help drive disproportionate growth in cash flows and profits as we add some of those brands through M&A.

Shiv: How does that affect like when you look at your IRRs as a fund on the investment? Because when you make an investment like that, like are you extending your expectation for a hold period to kind of generate the value you'd want from an investment like that?

Lloyd: Yeah, in this particular case, no. In general, and we've done this in other different businesses besides our yogurt business, we have a bread business now that we're pursuing a similar approach. If you're intentional about it and focused on it, as I said, before you even conclude the transaction and really keen on rolling up your sleeves right after the closing of the transaction, and you can get these sorts of capital intensive projects concluded within the first 18 months or two years ballpark. It doesn't hurt your IRR as much as you think. And again, the profile has to be such that when you put in these capital projects, you're going to be able to fill that capacity with profitable growth either organically or in a perfect world and inorganically you'll be able to do both and that doesn't that doesn't hurt your IRR in a way that that I think you might be thinking.

Shiv: Right. Well, I guess I have a few friends that own big manufacturing businesses. And one thought that comes to mind is just that macro fluctuations or systemic risk. Right. So like you make an investment, you move your manufacturing facility or you expand your capex and then demand for the business shrinks or you're not able to keep up to the level that you'd need to to invest in a plant like that. So how do you underwrite risk like that?

Lloyd: Yeah, and this is part of how we think about food and beverage and part of where we kind of locked in on that space. We're North America focused, largely US focused. And so we don't, how do I put this? We don't look for segments of the food and beverage space that could be fad or trend, or susceptible to fads and trends. And there are lots of private equity firms who have made tons of money investing in the cutting edge trend, brands, and categories. That's not our approach. We're trying to find those growing categories and where we can, if it's a branded product, they are the category leader. So it's a category and this is a category leader where we don't think they're susceptible for new entrants, new disruption. That's where we'll play. Yeah, so we don't, so to answer your question, we have to make sure our diligence is right and we vet our own assumptions going in. We are not expecting there to be material swings up and down with demand for the product.

Shiv: Yeah, I think that piece is an important part because there are certain areas where you could be riding the wave up and then kind of building for capacity and then demand shrinks and now you're in a tough spot. 

Lloyd: Yeah, and I think some people have found that out and are living that because post COVID in a lot of different sectors, food and beverage being one of them, several branded food companies and certain categories experienced a multi-year run up 21, 22, 23. And then in some cases, they start to lose airspeed and come back down last year, and 23 and continuing into this year.

Shiv: Yeah, yeah. Even as an example, like home and construction type of spaces with materials and stuff like that, there was a huge run up and slow down. So yeah, that's, that's good insight and betting on these markets where demand is more steady and, and less susceptible to shocks like that. What about on the direct to consumer side? You, opened this up earlier. How often do you see that as a value creation lever? Because I meet these companies that are more legacy businesses and they're completely under leveraged on the e-commerce and direct-to-consumer side. Are you looking at that as a value creation lever for your companies as well where they need to improve their e-commerce presence or how they're going to market beyond just retail and more traditional channels?

Lloyd: Yeah, historically, no. We haven't pursued direct to consumer strategies or techniques to go sell direct to consumer. Most of the food companies, as I think about them, that we own, like I said, are selling to distribution and other food purveyors, right? So food service, restaurant chains, QSR, fast casual, grocery store deli, grocery store bakery, those sorts of customers. But you have to have the consumer in mind. You still have to think about their customer because ultimately they're concerned about driving foot traffic to their restaurant or to their store. So you still need to understand the mindset of their consumer, our consumer, their consumer. So no direct to consumer commerce with the companies that we've invested in because that would be a conflict with our customers. We're toying with how to do better at understanding our customers, the consumers, and engaging with them. But we're not, not going as far as direct sales.

Shiv: Mm hmm. Yeah, because I've seen that be a major missed area when we meet these legacy businesses as potential clients and what very immediately it's it's it's visible that they haven't done the direct to consumer side. And there's a big chunk of any particular market that is buying online with things like, let's say yogurt, obviously, that's happening more at the retail level. So I would totally understand that.

Lloyd: Right. depends on the category that you're talking about where direct to consumer is a really, you know, the material unlock and allowing you to reach corners of markets and corners of the country or the marketplace that may be hard to get to or inefficient to get to through regular traditional distribution.

Shiv: Yeah. And the other thing that I, that's worth noting is that, you know, if you think about tech companies or software companies, if we were to pick a category like CRM software or data analytics software or accounting software, it's incredibly saturated. So, and incredibly competitive because all the big players focus on digital or e-commerce type of go to markets where it's more driven through the website and lead forms and stuff like that. But when you think about more traditional companies, it's the opposite where the commoditization and the competition exists on the retail and distribution side. But if we look at the digital side, there's almost no player that has really figured it out across a bunch of these different verticals. just in terms of just jamming out with you here, I see that as a major opportunity area, especially in areas like manufacturing, like consumer goods, like a bunch of these different more traditional industries.

Lloyd: Yeah, that's a great point, Shiv. And I'm glad you brought up the data point, because part of what we try to encourage and instill with our portfolio company teams is the importance of data. And I'm consistently surprised at how many large organizations don't have consistent and reliable data on their customer, their consumer. And so to the extent that our little yogurt company can tell a large retailer this store in this market, this district, in this state over indexes for consumption of our yogurt. And together with the data that we have brought in, that's available third party. Sometimes you have to pay, sometimes not. But to the extent you can start to amend your data set with other sources where you can say there's a growing South Asian population around this store of yours or these sets of stores, and it hasn't shown up in the census data or whatever data that that retailer may be using, but to the extent your proprietary data can tell them something they don't know, it gives you credibility. It helps you sell into their footprint of stores and it positions you to potentially become a category leader because you know things that they don't. And again, it comes from data and appreciating the power of data, both from social media, third party data sources, and how rich where you can cobble it together.

Shiv: Yeah, I completely agree with that. I think especially with products like that, shelf space makes such a huge difference in terms of how much you're selling through a particular store. So the more you can bring to the table to convince folks, especially if it's like yogurt is in the refrigerated section, there's even less shelf space there, right? On the flip side, there's, I think a huge, you mentioned social media earlier. I think purchasing decisions at retail can be driven by social. So if we look at promotional budgets and go to market budgets of these companies, they may be investing in coupons or particular shelf space to get in front of the customer. But the purchasing decision or the branding power of a particular product can be significantly influenced by what the same consumer sees on social because there's way more opportunities to interact with that customer there. 

Lloyd: That's right.

Shiv: And I don't see enough companies investing in that, where if you are on a retail shelf, there are seven other yogurt brands or 10 other milk products on the shelf, why should they choose you over something else? Like social and content can go such a long way to influencing that.

Lloyd: That's right. And, and in this particular case, our yogurt business has done a great job of opening up their, their, you know, like the year of saying yes, right. They opened up their mind to accepting inbound engagement from different people who long story short are influencers, but they actually just like the product and to kind of raise their hand and said, Hey, can we work with you? And so the influencers that they've wound up working with are genuine, legitimate fans and consumers. And it shows, and that authenticity is a big part of that consumer engagement. And it's not just the promotion and the price and all that good stuff, the P's that you learned in business school, but it's how does this brand, how does this product make me feel. 

Shiv: 100%.

Lloyd: So in this particular case, Shiv, they have testimonials that they've received from consumers where people are weeping because the product reminds them of their grandparents. It's powerful stuff. When you get it right, when you got the right product and you kind of tune into the right frequency, it's pretty powerful stuff.

Shiv: Yeah, it's funny. I'm actually a customer of that particular product myself. it's, yeah. 

Lloyd: Oh really? Okay.

Shiv: Just, and just connecting to this influencer piece, because especially for folks that are listening, you know, just to bring it to life more, there's a huge opportunity to build brand affinity and just people talk about brand recall and these kinds of old school legacy terms in the marketing space. But if an influencer that let's say has a cooking posts on Instagram for the South Asian community was to use this yogurt inside their recipes, that would make a huge difference to whether or not that product goes off the shelf, right? And so to be able to draw that line, like you won't get exact attribution, but you know that there's a connection between those different activities on the go-to-market side.

Lloyd: Absolutely, absolutely. And so bringing it back to what we're talking about with family and founder led businesses, we also do corporate carve outs. You know, sometimes having the conversation that we just had is hard for some family led businesses to fully grasp and understand. And sometimes the unlock is getting the senior leadership of the family business to listen to the more junior, younger members of the team who might intuitively or technically just get what we're talking about. And sometimes that's the magic unlock. The understanding and the knowledge is resonant in your company. You just kind of need to listen to them. And they'll show you the way. So that's pretty cool when we can get that to work.

Shiv: Totally, yeah, I completely agree with you. And I think more folks should be looking at more of the traditional value creation levers that you discussed at the beginning and then combine that with some of these more innovative or new age approaches. And I think there's a mix of both of those that makes it all possible. I know we're coming up on time here, but as people are listening, if they wanna get in touch with you or learn more about ICV, how can they get ahold of you?

Lloyd: I'm on LinkedIn, pretty easy to find. Email is the best way to reach me. Lmetz at icvpartners.com. That's the preferred way to get me.

Shiv: Excellent. We'll be sure to include that in the show notes. And with that said, Lloyd, thanks for coming on and sharing your wisdom. Definitely a different kind of episode, but I think the people listening, especially those that are investing in more of these non-traditional areas that PEs are actively investing in, I think we'll learn a lot from it. So appreciate you doing this.

Lloyd: I appreciate the opportunity, Shiv, this was great, really enjoyed it.