Dave Feierstein, Ronin Equity Partners | Transforming Business with a Hybrid Investor-Operator Approach

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I'm very excited to have my friend and recent panelist together at a big private equity conference. Dave Fierstein Dave, great to have you here.

What brought you into this industry? how did you kind of get drawn to the PE world?

She was in advertising then. My mom raised me and my sister, and ultimately was a teacher at the public school district that we attended for over a decade. Before she retired, my dad also was an entrepreneur, he had his own business in construction, He's now retired as well.

So I ended up learning business at a very early age because of my parents. When I was actually in elementary school, I had a candy business. I recruited other students to help sell products for me, they'd earn commission. By high school, I actually was taking business courses in the high school, in accounting and in marketing.

I actually was volunteering at the public library to actually help elderly people complete their tax returns. And I also learned competition, which I'd say is an important part of private equity and investing at a very early age as well. By high school, I was nationally ranked in speech and debate, I was also nationally ranked in one of the biggest business organizations that exists today. And in both, you're kind of competing with tens of thousands of students in all the high schools across the country.

And at first, as I mentioned, I'd never heard of private equity, I hadn't even heard of investment banking. In high school, I thought being a stockbroker or a wealth manager was like the coolest job. My ultimate job at that point was like, Hey, go run the Fidelity Contra fund, that was like my dream job.

So actually, in middle school, I actually collected mutual fund prospectuses and annual reports and geeked out there. Then I went to a business college, I went to Bentley College up in Boston and studied finance and accounting. I actually tested out of all my liberal arts courses when I started, I actually immediately started studying just business and graduated a year early, second in my class.

I think where things changed, where I first even realized that private equity existed, was my first summer. Interned both at a small, boutique investment bank in New York. In addition, I also interned at three of the Big four accounting firms, each of the Big Four accounting firms. They do, like week internships for sophomores, each one was a week.

So I interned at PWC and E&Y and KPMG in that same summer as well. After that summer. I knew I definitely did not want to be an accountant, which actually is generally what almost every person at Bentley is. My wife, who I met at college, is an accountant at the Big Four. I actually loved the investment banking internship that summer so much. I actually came back to Boston, and I ended up interning at two additional investment banks while I actually went to school. So I actually rejiggered my whole schedule, worked in the mornings, had classes in the evenings, and then, by my junior year, was accepted to join J.P.

Morgan, in their M&A group within their investment bank and post-graduation, joined J.

P. Morgan I was at J..P. Morgan for about six years and did about a dozen different M&A sell-side deals while I was there, a lot of large deals as well.

But by, I'd say year four of those six years, I'd effectively automated my job. I had basically built a bunch of buttons that did everything that an analyst and associate effectively needed to do so. When I was an associate, I actually got kind of bored and ended up just setting up meetings with clients at that point as an associate, which is quite rare. I actually started bringing in business to the bank and generating fees, which ultimately the senior folks did not like since it made them look bad.

So I left and joined Goldman Sachs in their private equity group, which at the time was called PIA, or the principal Investment arm. Some people used to call it Goldman Sachs Capital Partners. Today, it's part of asset management. That was my first foray into private equity, and the reason I joined there is.

I thought private equity offered a really great mix of investing, high corporate finance and operating experience. You'd actually learn more about companies. Two years into Goldman, I had done half a dozen acquisitions for new platforms, and I realized I got a little bored there, too. I thought the only way I thought I could actually get operating experience was to actually go into a company directly. So I actually linked up with the folks at 3G Capital, the Brazilian shop. And ended up deciding to join the senior leadership team at Heinz. And then ultimately, Kraft Heinz, the ketchup business, and in the process, moved to both Pittsburgh and Chicago.

Did that for about three years, recruited what is now the Ronin team during the process at Heinz. Then, after that, did the same thing at a company called NCR, the old National Cash Register Business for Blackstone for about two years. And then did the same exact thing again for Bain Capital as part of the investment in a company called Diversity, used to be called Johnson Diversity for another two years. Then made a bunch of money for not only them, but a bunch of even investors we brought into those deals.

Then, about two, three years ago, just started doing our own control buyout transactions, backed by a bunch of the investors that had invested with us during those deals as well. So that's a little about how I ended up in private equity and where I am today.

And then so, my brother would always call me Alex P. Keaton, which probably dates me to a time long ago and had all these little side hustles. And then two went to college and my friends were going to investment banking. What's that? I don't know what that is.

And I guess I'll go do that. And then similarly, found my way into PE. But you had a much better version of me as a childhood.

And so, yeah, it's an interesting similarity.

Lift me into the dumpster with a sledgehammer, and I spent the afternoon making room in the dumpster. Oh, wow.

And we have certainly some perspectives on where we are on that. But I think one of the things would be great to get your sense, and maybe your thoughts on, is some of your experience with this now famous tool called zero-based budgeting, and how it can be used to add value. So I'd really be interested to have your sense, like, what is this tool? And why should companies be thinking about this type of methodology as they think about their own business?

We did change it dramatically to have it become what it is now today, and the way a lot of people think about it is. We've taught hundreds and hundreds of people, thousands of people at conferences, how to do this the right way today. But I'd say, if you go back actually to the 1970s, that's where zero-based budgeting was invented. It was actually invented by an engineer at Texas Instruments, and it was just a different way of budgeting.

You know, you had activity-based costing, you had traditional budgeting, and then you had zero-based budgeting. And effectively, all it was is instead of looking at prior year data or any historical data and just kind of growing from there. You'd start with a zero-base and you'd have to justify everything you'd need for every year. Effectively, from scratch. And particularly as to the need and importance and criticality to the overall business. That was effectively what it was invented to be. And actually, in the early 80s, it got adopted by the U.S government as like the official budgeting technique of the federal government and the Government Accounting Office, or the GAO.

And it was used under Carter and under Reagan, and then they dropped it and then you can see where the debt went, maybe they should have kept it going. And I've actually talked to a bunch of people in the government and the White House actually about these programs before in the past as well. They've not brought it back yet, though, to the government.

Now, kind of fast forward. Today, what we're really well known for is we're the team that really built and created. I'd say the modern day version of zero-based budgeting. Because if you think about the 70s and 80s, I mean, you barely had email, let alone any sort of system or software. And so what you could do with it back then is very different than what actually can be done with it today. Budgeting is kind of boring. If it was just doing a budget at a company, that's what a couple months in the year you're kind of done.

Not the most exciting, interesting topic to really talk about, probably the most boring topic you'd want to hear about. So what the modern day version of zero-based budgeting is today is actually a way of thinking. And using that same methodology of like, let's break everything down to nothing from scratch and really build a super defined, very data-driven process in every single function in the back office. So it's using that same approach to not just budgeting, but to the entire way. You manage your entire finance department, all your HR department, your whole IT department, your legal department, all your communications, internal and externally, the way you manage procurement, or even your sales operations teams. So those are functions that are actually can be very standardized from company to company, they're all your back office functions.

So it's actually a way to use that. Now you've got another question, which is how does it get used at big companies? and how does it use it? Small companies? So big companies are big, and as over time as they've gotten bigger, they become inefficient. They end up having too many people, doing too many things, fixing too many things with way too many processes. And so in a larger company, it's a way to rationalize and take things out of the business to make it really efficient.

And that's kind of the way we did it at Heinz or Kraft, Heinz or NCR or Diversee. These are big companies, multi-billion dollar businesses. So over time, they became inefficient. And so let's take the inefficiency out and take what we've just saved and redeploy it as best we can into working areas of the business sales, marketing, R&D, engineering, et cetera. That's the way a big big business generally can use it, and the way we've applied it there.

Now, in a small business, very different, still the same methodology. But it's actually a methodology on how you manage and build the processes and the systems and the infrastructure that you need to actually scale and scale quickly. Because in a small business, you may not even have any processes, you may not even have any systems. You may be actually starting from a blank slate, so it's like, now that you're there, what do I need to build to actually exist?

And without a lot of that infrastructure, you can't scale, you know, it actually will impede you from scaling and scaling quickly. That's kind of the way you can use it there. Yeah, I love that.

So I think it's a really interesting concept in the way you describe it. I've never really connected that.

So I think it'd be helpful. Dave, do you have a couple examples that you can share, like how you've deployed this kind of business transformation playbook?

It had been dead for, like, decades, since the 80s. Then, after Heinz had been written about so much in that kind of success, then Kraft being written about further, it actually expanded by the time we were in 2016. About 25 of the Fortune 1000 were talking about it on earnings calls, talking about it publicly implementing programs. And we were actually talking to lots of those companies to make sure they were doing it the right way, just help them and guide them down the right path. Today, it's even bigger today if you look at even the big consulting firms McKinsey, Bain Co. They all have practices that did this and do this today.

10 years ago, 15 zero, they didn't have practices, actually, many of those biggest practices. We trained their teams because we knew we could never handle the volume of companies ourselves in what was going to happen there, and we wanted to make sure it was done right. Here were the things you should and should not do today. If you look at companies like Verizon, companies like Walmart, they're also doing these programs.

This is only kind of recent exercises at a big company. Let's take Kraft. Heinz, Heinz is an example. It was all about cost takeout. If you think about Heinz. I was asked when I came in, my goal was I got to take a billion dollars in cost out of Heinz in two years, which I did.

We then bought Kraft. I was asked not only to integrate Kraft into Heinz, but I also dave. Want you to take another billion dollars in cost out, but do it in half the time, do it in one year. These are pretty ridiculous goals, but again, that's 3G Capital's way. We were able to achieve all of those things, so it was not easy. It was actually the toughest job I've ever been in, and I've been in some insane jobs, including the job I'm in today.

It was by far the toughest job I've ever had, the longest hours I've ever had, but was one of the most rewarding jobs. To learn what to do and what never to do again now, in that example, while it was great at taking tons of cost out. And actually, what most people don't know is about 70 of those costs had nothing to do with people, they were actually all non-people related cost items. 30 was extreme amounts of people reduction. Now the problem, and also the reason we left the business is none of the costs we were really taking out were getting reinvested back into the business. Which we did not think would sustain itself long-term. And for people who've now read the news, now, realize that is the case.

We left about seven years ago, actually for that reason, because we actually wanted to use this approach very differently. We actually wanted to take our whole operational approach, which we built there and which is really rooted in building the back office infrastructure and making it really efficient. In a business, we actually want to use that to help grow businesses instead. So we left obviously went to two other big companies to really test it, pilot it, really tweak it to a level of efficiency.

And then we got to a point where we said, we've got it. And then we started applying it to smaller companies. So a good example of how it's applied to a smaller business would be to take a company. Like a business we bought back in May of 2021. It's called Hardison Foods. It's a specialty food business, makes specialty cheese that you'd find in grocery stores all across the country, all branded product.

And we bought the business, when we bought it, we actually put three separate companies together, all in the same day, to immediately create that business. You know, we also do a lot of deals like that at Ronan, but it's perfect for this whole approach because it creates an extremely complicated integration. And all three of these companies were family-founded businesses, and they had almost no infrastructure.

There was no ERP system, they were using Excel, they were using quickbooks, they didn't even have most of the back office functions, they had no demand planning.

They were running payroll with checks, a lot of it was done in paper. They didn't have procurement teams that were like actually running procurement teams. They didn't really have HR teams and IT teams because there was really no systems.

There was really no finance teams either, so effectively you had a blank slate of a really mediocre, very small kind of back office. But that's very common in a lot of the companies I look at we acquire, and so by putting this in, we built them an entire infrastructure.

And in doing so, added costs into the business. We added people, we built an ERP system, we built multiple other systems, including demand planning, and in two years doubled the EBITDA of the business.

And there would have been no way that they could have even gotten there in that short of time. If we had not built all the processes and the systems and the infrastructure. For them, that was hard. So actually, our model, which I'm sure we'll talk more about, is we actually go into the business and do it for them, and we do it for free because we think it's the right thing to do if we're going to be a true partner of a business as well, so that's kind of the way you can do it in a smaller company.

And I think what you're also articulating is you're building it the right way the first time. And being really thoughtful about how to do it right. Versus kind of this meandering path to figuring stuff out.

And that's okay. And that's the way that two years, three years, four years from now, you come out the other end saying, I'm doubling my company every year. Now I'm growing 30, 20, 30, 40 a year, and that's what's been happening in our businesses.

You can't do it without infrastructure, yeah.

Historically, we did that, so there's a big change management element of it. And one of the big freeing things that I felt by starting something from scratch was. We have a mantra here where it's like, if you could do the thing that you're managing the way that you always wished it could have always been done, do it that way. It's like going back to a couple minutes ago, everything is sunk. Just do it the right way and then worry about it later. So how do you see that in these kinds of businesses?

And so to go in and say, you know, we're going to do it totally different, you know? Change all the processes, all the systems, everything. It's like, whoa, hold on, I've been doing it this way for 10 years, it works, let's not change.

And it's actually the change management in big companies way more difficult. Small business is like the opposite. They don't even have processes. So when you come in, you're like, Hey, I want to go add people, I want to go add systems.

I want to make your job easier and more efficient, and you're like, Please, it's so inefficient. I'm excited. please come and help me. I can't wait for more people, more resources, more systems, more processes.

It just makes my life easier. So they're very welcoming. In a small business, you don't have to deal with that cultural backlash. It's been very interesting to kind of see that.

And it's kind of unique, yeah.

But the race boats are fun to drive and change course.

What is the Ronin approach to value creation? What resources are you bringing to support your portfolio company so they can be as successful as possible?

First one is every single person on the Ronin team has a hybrid investor operator background. Meaning they've spent half their career, in the case of myself, about a decade in traditional investment banking or private equity. Then they spent the other half their career. Or about a decade as well. For me in as senior executives at companies, and what that allows us to do is a bunch of different things, you understand, a different way of diligencing assets.

You understand a business better, you can relate to an owner better, you can talk their language. So there's a lot of interesting things that kind of come out of that. So everyone on our team has to have that hybrid background.

Almost no one that comes in today has it. It's very difficult to find someone who just naturally will have that background, so when someone does come in, they have to learn both. So there's actually a large amount of training involved in what we do for Ronin talent that comes into the business. That's also the reason our turnover at Ronin has been 0 in a decade.

And all the partners have been together for a decade as well in all these situations, I just mentioned so, we're a very tight-knit group and every person on the team will spend half their time embedded in a company, half their time underwriting a deal, half their time embedded in that company, they underwrote, half their time back underwriting another deal, so the deal team itself is the operating team.

There is no separate deal team and no separate operating team. And we feel like that is a way better model where you get continuity with the owner consistently. And the whole message of what you underwrote in the deal is consistent with when you have to operate and execute it too, so your underwriting becomes more efficient as well. So that's kind of one big difference.

Second big difference is our operating model itself is where we actually embed our own deal team into every company. We invest in as interim senior executives for at least 6, 8, 12 months per individual platform or portfolio company investment. We will actually do it on a full-time basis and we move to the company in the process to really work alongside the existing management team. If there is one every day and you know, a lot of people say, like, how does that scale? I mean, like, it sounds like a really intensive model.

Like, how do you make that work? Obviously it took you two, three years at these big companies. How do you make it work in a scaled model today and have a firm and a franchise? It took us a long time to figure that out, right to take what historically took us two, three years at Kraft and Heinz and NCR and Diversi. And whittle it down. To be able to do it in 6 8 months per platform. And not change anything we do or change the quality of our work, which is very important to us.

And what it actually required us to do was to pre-build all the IT systems. We might use at any company offline at Ronin, so we can lift and shift all that code and configuration in any company. We buy on like an as-needed basis. And what that allowed us to do was it automated a lot of what we might have historically been doing manually. But it also allowed a system to run a process versus a person. So it allowed us to transition out in a more seamless way of the business as well. Now. It wasn't easy to do.

It took us about three, four years to build all the IP around this, it's about 16 different systems. Today. Now that we have it, we can do some interesting and unique things. So actually, we separate the Ronin team into today, actually three separate groups.

So, three to four Ronin team members go into one company full-time, three to four go to another company full-time, three to four go to another company full-time. Because we have 12 people. And if you time all your deals perfectly, you can actually do a lot. So that's actually why, in the last two years, we've done a total of 22 acquisitions across five. New platform investments have another platform under LOI right now, and generally do about somewhere between two and three new platforms a year in this insanely intensive, unique model.

So that's kind of, you know, you asked, Hey, how do I create value? and what resources do I give to these companies? That's kind of what we do, and when we do it, we don't charge the company for it, there's no consulting fees.

There's no salaries, there's no bonuses, there's no healthcare programs. Our view is, if we're going to take a monitoring fee or a management fee out of a business, we should work for it. We shouldn't just show up at the board once a quarter and just start earning money.

And so the owners that we work with really appreciate that concept as well. And I'd say almost every deal we do is a family founder-owned company, probably by 80 of our volume. And you know, a lot of times when we talk with an owner, they will tell us. They're really good at certain things. They're usually, though, very self-aware on the things they're not so good at, and they'll usually tell us all the time.

They're good at sales and marketing and R&D and engineering, because if they're not at least somewhat good there, they wouldn't even have a business to begin with. And they'll also separately tell us, though, they kind of don't know what they're doing. In finance, HR, IT, legal, communications, procurement, sales operations. Actually, oftentimes, half or more of those functions, they don't even exist in the first place, even to begin with. And so when we are talking with the owners, actually we're really backed by a bunch of large families. So we really look and act more like a family office than we do a private equity fund.

So we actually can be more relatable for them. But we situationally like to look for businesses where we can give them more than capital, more than advice. We're actually looking to invest ourselves into their business for 6, 8, 12 months, full-time move there. And when we do that, it's actually to build them, an entire back office infrastructure entirely for them. That oftentimes isn't there fully. And that level of sweat equity we end up putting into the business. A lot of these owners find it to actually be quite a significant, really personal time investment on our part.

I still actually don't know of any other investment firm really doing this model with their own deal team like this. But we've found it to be more important to do in smaller deals with these types of owners. Because a lot of times, they won't double or triple the size of their business quickly. If they don't, at least at a minimum, get that back office operating like kind of a robotic machine, and it's worked out very well. Actually, every business we bought in the last two years has pretty much been a family or founder-owned business. And the reason many of them wanted to work with us, and actually, in many cases, the owners actually only wanted to work with us. They actually didn't even want to talk to anyone else is. The owners told us they hated the back office and they found it extremely distracting to them.

They just like selling and making kind of cool things all day, so it really let them do their thing. They can focus there on what they love to do. And our team at Ronin will handle all the back office kind of administrative minutia entirely for them. I don't know if that was helpful, Sean, to give you a little perspective.

What we do, where we focus, how we do it, a little different.

I'd say, well, I work in the salt mines, or I said, I was a cobbler because my cobbler's kids have no shoes. And so I was always like, you know, like? We were really good, I think, at instructing and working with our portfolio company teams, and I thought we had a quite interesting approach as well. But what you're talking about is this very integrated approach to private equity.

We're going to be working with and for you in this kind of integrated circle, and we're going to be in the front lines with you. And the easiest thing to say is I was even thinking about your model in earlier days is like, how do you do that? And you think about it. The easiest thing in the world is to say, nope, you can't do it. And where I give you a lot of credit is you thought through the problem and said, Well, how do we get it to? Yes, this will work.

Because what you put out is the easiest ones. Oh, this thing will scale, and then you said, Well, okay, well, how do we make it scale?

And you have to find a very unique skill set of people to be willing to do that. And so it's a difficult model to replicate. I'd say, without having a lot of, without being operators and investors and figuring out how to optimize it entirely. Particularly given I'm investing in industrial and consumer companies, it's even more complicated because you're dealing with manufacturing and inventory and supply chain, and transport and logistics. You know, I sometimes say that tech companies are a little easier, or software they don't have any of those things.

So it's a little bit easier to manage, you have less functional areas to really deal with every day. But yeah, no, it's for us. It's like it's a real partnership, like, hey, if we're going to partner with you. And why? You should care? Well, you should care. Because I'm willing to be side by side with you in the trenches and like, give you what you're needing. I'm not here to like, give you a bunch of consultants and put a bunch of people in your company. And I'm here to like, give you free resources that are going to do the job with you.

And you know, for us, we're earning the role, they don't work for us, we work for them. And while we do a lot like, our goal is to earn their trust, not to tell them what to do and order them around. So that's very important in the beginning as well.

That's involved with these businesses, and then you've taken it a step further and that, you know. Not only are we going to align the ultimate end goal, but all the steps to get there. And so that's really unique and I appreciate that, and I can also kind of intimately probably also empathize and feel what it must have been like to create this, you know, over time. Because, like year one probably would have, it was almost like year one of Blue Wave. Where I had to change the whole delivery model and add this whole like symphony of motion and humanity and automate all these things.

You know, my hair was on fire for 18 months and so I'm sure I don't know if that was like you. When you first started getting going and trying to figure it out, but I imagine there were some late nights.

It was great because diversity had. It's a complicated carve out 250 TSAs, 150 countries. We had to manage all that, we ripped out every system and put them all in in six, eight months, so it was the perfect. Let's test the systemization of this whole thing. And then by then, like, the model was complete and we had it.

So you can kind of, like, find those moments of humanity in your life. So I'd be curious, Dave, if you have, like, any little life hacks that you've figured out that you think? Wow. This just made just a little bit difference in my life.

I hate shopping. I think it's a huge waste of time going to stores, even shopping on colors, sizes. Trying things on all these subscription services is like a massive time suck. I don't have time to do that. So, you know, I figured out what I like to wear.

Once I figured that out, I bought 10 pairs of everything and I just roll through that. So I have 10 pairs of the same exact shoes, of the same belts, of the same pants, 10 pairs of three different types of shirts, of three different types of blazers. And even the socks, I've got about 40 different pairs of socks, all exactly the same and made it very easy. So I'm never the fashionista of the bunch because it's usually very plain. I usually will either be in dark blue or dark black, and I will look that entirely up to down.

So I'm never the fashionista with a bunch of unique fashion trends going on, but it definitely saves me a bunch of time. Probably hours and hours and hours of time.

I have Ferragamo's. Yeah, go back to the store, resold the shoe, redo the whole shoe, send it back to me, and so I got six pairs of the same shoe. And I keep doing that every time one goes bad. I don't have time to go to a cobbler or a shoe guy. You know, tell them what I want, you know, they know what to do, and you're done.

And so very simple as well.

So I said, Oh wow, okay. So I'm like, all right, I'm done with these. Now I'm gonna have to figure out so I might have to get Ferragamo's. That's something I'll add back into my life.

I'm gonna replicate that and so, and they're very comfortable shoes too, so that's great.

They have one pair of AirPods. You're on the phone all day, and what would happen is because you're on the phone all day. It would die on you and then you'd have to find another pair of headphones. Yeah.

So I always have two pairs, while one's in my ears, one's charging, and then you just swap them out all the time. It's the best investment. They keep upgrading them, so every single time they upgrade them, I keep giving the old ones to my wife and keep having to buy new ones constantly.

So it's almost like disposable now at this point. AirPods. That was one of my best investments after I did it. I'd say the other one actually is something we do more on our team as a firm.

Our view is that our memory isn't so great. And particularly what one person might remember coming off of a call versus what another person might remember might be totally different. So now, while the simple task of writing things down can be very useful. What we've done is actually on internal meetings, we actually will share notes and write out exactly what's happening as it happens. So it's like, documented live. And to us, it creates a massive amount of alignment internally among the team and creates a lot of productivity, and it costs almost nothing.

Now the thing we do externally is if we're on the phone with people as third parties and we plan, you know, potentially trying to extract lots of notes. Like, we're trying to do diligence with an owner of a business. And it's going to be two, three hour call and we've got lots of questions. What we'll also do because the amount of time that one person said they heard one thing, and another person said they heard the other thing is a million of those is. We will use a bunch of OCR readers and plugins to teams and Zoom that will just literally transcribe the exact call, so we can just go back to it as well. So our view is writing things down. But live is a very good use and very low cost investment.

You're like, Yeah, they are, so yours is much more purposeful than my accidental version of that. And I love the note taking because that's something that I, particularly as a I won't, I won't totally age myself. But the old noggin doesn't work like it used to. So that kind of deal where you can just memorialize it and then take the recollection off the table and the objectivity. Make it a single source of truth, I think, is an amazing idea.

Oh, okay, great, we're aligned again.

It really helps us when you do this, so thank you in advance. In the meantime, if you need to be connected with the world's best in class PE grade professional service providers, independent consultants, interim executives, or anything else, give us a call or visit our website at bluewave..net. That's b-l-u-w-a-v-e, and we'll support your success onward.