Private Equity Spotlight: Building Future Leaders with Bob Belke

I'm very excited to be here today with Bob Belke. Bob, thanks for joining us.

How did you get into this industry of private equity?

If you look at where this industry was in the mid to late 90s, it wasn't really an industry. It started evolving into an industry, I would say, in the late 90s, and so, obviously, and where it's evolved since then, it's been unbelievable. It's been great to be part of that ride. I grew up in a small town. I grew up in a very small town in northern Wisconsin.

It was a town of about 1,200 people, just west of Green Bay. It was a place where, let's just say, not a lot of people went to Wall Street. As a farming community. of my high school class. of, I'm going to say, 90 kids, 10 to 15 of us probably went to college.

That was a big deal to go to college. My parents were both teachers. They valued education. For whatever reason, I've always sort of been this very driven person. I'm not sure exactly where it came from, but I've always been driven to kind of want to be successful.

I went to college at University of Wisconsin. My journey ultimately was really rocky. I tried coming out of school to go do M&A on Wall Street. I tried actually out of, ultimately, business school to get one of those jobs, and no one would hire me. I'm not sure why.

Maybe it was a bad interview or whatever. I had kind of a bit of a rocky journey. I graduated from college without a job. Literally, my first job out of college was ultimately to go work for a retail brokerage firm, trying to sell stocks to individuals. It turned out to actually be more like that, what do they call it, the boiler room of your movie?

Yeah, of course. It's kind of like that kind of operation. That was my first job out of college. I was really bad at it. I did not last a long time, needless to say, so fits and starts.

But ultimately, out of business school, I ended up, I was at TIA Cref, a large pension fund. Admittedly, it wasn't really the job that I wanted out of school, but it was the job that I got. When I was there, they were just starting a private equity group within the pension fund to invest. They had a small group that started to do fund investing, and then a group that was going to do direct investing. I raised my hand and pushed to try to do that, and so it was literally me as an associate, and two managing directors.

None of us had any clue what we were doing. No one had any background. It was the perfect spot. I was literally sourcing, executing deals. I was sitting on boards as an associate just out of business school, built this portfolio of eight companies in two years, which was sort of Herculean.

now, when I look at it. Back then, it was like, well, you're not investing very much, because the pension funds used to investing hundreds of millions of dollars in bond deals. That was my first step in a course. I pretty quickly realized, wow, one, this is great. I love it.

Two, you're really not going to make a lot of money in this industry. probably being in this particular situation. That sort of prompted me to go out and find a job with a real GP. That's actually the job I'm in today. I've been with the firm that I'm at for coming up on 25 years, actually.

That's sort of been my path.

You just kept on going and finding a way, finding a way, finding a way, and then you ended up in this industry in a way that you wanted to as a child.

I ended up going to school with some. ... My roommates were from northern New Jersey and of course, they're all going to New York and I was like, what is this? I racked up lots and lots and lots of rejections and I finally convinced a couple of places to entertain me. But your way, there was a draw to it from the beginning where I almost feel like I was a passenger in life because I'm like, what are you going to do to my roommates?

I love that story there. It made me to kind of peel back the onion one layer deeper. One of the questions, Bob, that I love just asking people is, we know you better if we knew this about you. I think we just learned a lot about you. Are there any other kind of tidbits of trivia that you'd like to share?

Whoa. Yes. So I was actually in the national spelling bee, like the one that you see, they have it on ESPN now.

So he got to go on David Letterman at the time, but they didn't televise it at that time. But no, that was something, I don't know. I actually worked really, really hard to do that. That was not like a luck thing. That was a two years of sort of memorizing words, kind of thing to do that.

And, but there's a catch. It was one of those things where I was always a little bit miffed that I had to take Latin because I grew up in Texas. Why can't I take Spanish? So I'm like, I was like, I'm not going to learn Latin. What I did, though, have is a pretty good memory, at least back in high school.

It's a very different situation today. And so the whole period of our progression was translating the Aeneid, all four years. Oh God. And what I figured out I was really good at doing is I could remember an entire chapter of the Aeneid, side by side in my head of English and Latin. Wow.

And so I had an English Latin translation side by side of the Aeneid. And so I could just commit a chapter to memory and I would come up with just one, I could do two. And so I would, for four years, come up with the most elegant translations you could ever imagine. And then, eventually, my teacher made me go to a competition where it wasn't on the Aeneid and I just got totally wiped out.

What are some of the things that you look for that are important to you? And, by extension, really, every CEO should be thinking about as they are building and growing their companies.

And we know what's a fit and what's not a fit. For us, we sit in this, I'd say, lower middle market pocket. The typical company that we're going to invest in, it's going to look like maybe 10 to 20 million of EBITDA earnings before, you know, interest taxes, and it's going to have probably a couple hundred million enterprise value to start. That's sort of the typical profile. Founder owned and founder driven is not an absolute requirement.

But the vast majority of deals that we're going to do, we're going to be the first outside institutional capital into a founder run or management run and controlled business. We find that, like that's, the sweet spot for the most value creation opportunity in private equity, and also companies of that profile that I mentioned. There's a lot of them. They're still under the radar for the most part of a lot of the investment banks and a lot of the heavy processes. That's not to say that there aren't interested buyers in anything that we're going to do.

Of course, there are. But it's a wonderful entry point. And things that we look for, it's the potential. Like you talk about operational excellence, for instance, and I know that's frankly, firms like yours, Sean, our firms are people that we use and folks that really help us in our investing, in our activity with our companies. We don't need companies to be operationally excellent when we make our initial acquisition.

We don't want turnaround. We don't want to stress, we're not, that, we're not those investors. We're growth investors. But I would characterize what we want to do is try to accelerate growth. So it has to have the makings of a good platform.

It has to have a backable CEO with the right sort of vision. And so the ability to sort of unlock that person to not feel like he's every check that he's writing is out of his own bank account and which constrains growth, to be able to unlock that person to build and grow. So the ability to build, help build the platform through add-on acquisition is something that we do a lot of. So it's not an absolute requirement, but I would say for us that it's a lever that we pull more often than not. Most companies that we get involved in have not done any M&A previously and then posted the deal with us.

We average about five deals on average. Some will be less, some will be more. Some will become serial acquirers. That's certainly part of it. I would also say we've been in sort of the business long enough where we've made acquisitions in most spaces that we want to continue to make acquisitions.

So, as a specialist investor, you're leading with knowledge, and that's where the world is today in private equity. Regardless, if you're not there, you're lost. It was a big advantage to have grown up there, to have started there throughout. But so most deals that we're going to do today, we've either owned companies in the subsector of the subsector we're investing in, or we have the right executives and we can talk a little bit more about our value creation process and the way that we think about applying resources to companies. But they're going to be in spaces that we know very, very well.

Right. And one thing I'd be curious about, Bob, is you think about your management teams, and usually there's a couple of varieties, and sometimes it really depends on companies, but sometimes you have an entrepreneur where they're feeling constrained. And I get it as an entrepreneur, too, where you feel the weight of the world on your shoulders. And at some point you have more to lose than to gain when all your capital is in the ground. in this company.

It's like with the farmer analogy, I always felt like I was a farmer in private equity. It's like I look good on paper, but everything was in the ground. So it's the same way as an entrepreneur. And sometimes you're also bringing in kind of leadership teams to support that. How do you all think about that within your organization in terms of kind of coaching up who you have, enabling a CEO to go to the board if they want?

How do you think about that kind of continuum?

If they want to keep going and keep building and keep driving. They'll come to us. It's a wonderful self-selection mechanism that occurs naturally. So it's going to be backing that individual to put him in the position where, yeah, they don't feel the constraints that we talked about. We're obviously guidance and we're helping to grow and build these businesses, but they are going to continue typically through the life of our investment.

But unless something goes wrong, that's usually what we're looking to do. But where we see the greatest change and where it's the company on the back end of our investment is typically going to look very different from the front end is going to be the team around that individual. I mean, there are often key people who are drivers and who are going to be drivers throughout and will continue to be, even post our investment. But usually all the buckets aren't filled, and sometimes some are filled, but they're not filled in the way that they need to be to build a company from, let's say, 10 million in EBITDA to 50 million in EBITDA, or maybe even more, if we're really successful. That's sort of a different profile.

And so we spend a lot of time building that out, and that evolves throughout the life of the investment. A lot of it tends to happen pretty quickly, frankly.

if you're a business owner and you're thinking about bringing in private equity capital, what a firm like Bob's and your firm can do to kind of free the constraints. And so it's kind of this fuel. You're kind of running on a quarter tank as an entrepreneur, but suddenly you got the tank filled up and you know, you can go so much further with safety measure and kind of freeze the fear modules in your brain that you can take bigger steps and go a little faster. Yeah.

and what's Gantt charts, it's timelines, it's what do we want this to look like in in six months, in a year, and then applying resources to those areas. And the nice thing is that CEO that we're backing, like they're on board with this. This is part of the plan. Right. And so, again, there's a bit of a self-selection, because if people are scared by these things or because change is involved in this, then you want to figure that stuff out earlier rather than later.

And one of the big reasons was because the way that you all approach, not only making choices before you even start partnering with a company, but then this multifaceted approach that you have. And so I think you talked about human capital, which makes a ton of sense. As much as everyone wants to talk about chat GPT taking over the world, private equity just seems to be hiring more and more. And our data shows that time and time and time again. And so I appreciate what you said on the human capital side.

What about some of the other facets? Where would you kind of dig down into?

We own about 20 plus companies at any given time. So that is a key, that is definitely a key area. The finance function is that one very frequently needs a fast development. And so I would say we are always in the market for talent there. And I'd say consistently in any given year, there's going to be a lot of evolution to the finance functions within our firms.

Those are a couple of examples.

That's all reliant on the finance element. But yeah, you're blind without it. And oftentimes companies in the stage where we're making the investment, that's one of the biggest early hurdles that we need to get through. And sometimes that can inhibit what you're able to do right out of the box with an investment, because ideally you want to just hit the ground running. Right.

You want to be able to go out and do a bunch of acquisitions and you got to get your house in order first in many cases. And it starts with that function.

So, maybe as a transition here, I appreciate all of those aspects, because the name of the game, as you pointed out, is in private equities, value creation. And you're doing these things across the spectrum with your portfolio companies. You're providing resources. And that's clearly, I think, a reflection of getting ahead of not only where the industry came from, but where it's going. And given that your firm is really one of the more established private equity firms in all of private equity, given the longevity of your PE firm and how long you've been in the business.

Bob, I'm curious to hear what is kind of your perspective on the state of the PE industry today?

I would say 10 years ago, of course, everyone, most firms probably had some advisory council or group of people that you put in your marketing deck. They sat on some boards. There was no process around that. And it was mostly, frankly, marketing, I think. The industry was just at an earlier stage.

You use your networks. You got good deals done. You got good returns because you're paying a relatively low price. There's financial engineering. And there was always someone on the back end sort of willing to pay more.

And, of course, you wanted to improve the companies that you're invested in. And yeah, that was part of it. But the process around that and the way you do that, if you're a private equity firm today and you don't have that, you're behind. That's not part of your playbook. I think you're behind.

And five years ago, you weren't behind. Today, if you think about where you get returns today, you're not going to get it by buying cheap. There's too much capital and it's gotten too competitive. It's much more challenging to get it using leverage, given where we are today. And the risk return of leverage in this type of environment is tricky.

Multiple expansion, I don't think you're going to get it with multiple expansion in the traditional sense, meaning the overall industry just continues to go up from a multiple standpoint. No, it's come down. It's come down in the last couple of years and I think, continuing to come down. So you're having the opposite effect there. It's what you do with the companies when you own them, how fast you can grow, getting the margin expansion, building operationally excellent businesses, taking companies from the size, I'll just use my firm, 10 million in EBITDA to 50 million in EBITDA, OK, you will get multiple expansion from that.

Two things, the growth profile of the business has accelerated. You're going to get multiple expansion for that and you're going to get multiple expansion from being a bigger business, effectively. But it's the value creation and the growth that drives returns. And you have to have a playbook, a truly legitimate playbook that works to do that. And I think that the industry is, there are firms that do that very, very well and actually have for quite some time.

And then I think there's a lot of firms that still really don't do that as well as they'll need to. ultimately, because the industry just, it's as you would expect, it has gotten, it's going to continue to be more competitive.

We got people and we were incredibly tenacious. And so we're not going to let just the weight of econ 101 pull down the returns through gravity. And so everyone says, okay, we're going to do more. We'll create more value. And I'd be curious just on your perspective about, cause.

I think what, what actually evolved, even through like selfish altruism, is this tremendous kind of societal benefit, because right now private equity is this huge job creator, is huge, kind of like bringing services and products to places where they didn't exist, in part, because it has to, I'm curious what your thoughts are there.

I think the thing about who our investors are, right. It trickles through and it's been wonderful, but it's gotten to a stage now where 20 years ago or 25 years ago, when I was at TI Cref, they were just starting to invest in that, in this asset class. that was new. And that's where all the pension funds were effectively. at that point.

Most funds are 10, 20% plus in private equity and they're now over allocated. So we kind of had this virtuous cycle, right. Of, money started to flow in. firms like ours would make investments. We'd have good returns.

More money started to flow in. People saw the returns. It accelerated the capital supply to the industry. And it just went on, and which has been phenomenal, right. It's been a tough deal.

environment. Everybody wants money back and they're over allocated. They're pulling back the capital supply. If that starts to translate into returns and you start to see negative return experience, well then, you know, are the high net worth investors who are now the future of this asset class, are they going to come in as we expect them to come in? because that's sort of what keeps the engine going, it's finding new sources and new pools of capital.

Don't know. I think it's going to be really interesting to watch this play out in the coming years. I think there's a lot of things like there's a lot of portfolio companies that were done in sort of the boom years of 2021 that are going to need to be exited in a few years, that supply, how's that going to play through. 10 years ago, for us and most of the industry, you sold your companies to strategic acquirers. That's what you did.

The idea of selling to another private equity firm was very foreign. 80% of our deals back then were sold to strategic acquirers. It's flipped. Now, 80% of our exits have been to other private equity firms in the last two funds, or at least current fund.

And that, because I think, goes to a big kind of thing that we talked about earlier. is this like inherent, genetically encoded tenacity in grit of the people who go there. And the other thing that's been really fascinating to watch is the industry becomes an industry is to development of secondary markets. And I think what private equity industry is the only one where the primary market is substantially larger than the secondary. And you see these other markets kind of evolving, whether it's continuation vehicles or P firm selling to other P firms or through a slice of their fund.

Or these other kind of GP stakes, they're all coming in to kind of give different avenues of liquidity that I think will probably serve that next generation, or certainly vintages to come, to alleviate that pressure. And so, as I compare the maturation of the P industry versus others, we're still way behind, you know, public markets.

I just think of like what we do. I mean, our average company doubles the number of employees from the time that we make the initial investment to when we exit, right? That's a dream that should be, you would hope that would be viewed as a positive thing, but it's obviously more complicated than that when you're dealing with the political element.

But most of the time, I'm, like, you know, Sean, by the way, the last seat of the plane, and the worst thing that could ever happen to me was I get upgraded by Avis because I'm in a rental car. so much because then I'm going to look like a jerk coming up to the portfolio company and like, OK, it's a car like this is a little bit different than the 80s movies that we loved when we were kids. So maybe Bob is a transition here. One of the things that I really appreciate, kind of peers, friends, colleagues in the P industry, is we're all kind of voracious readers, because that's part of how we kind of stay two steps ahead. Right.

And why we always had this, the saying, and I think a lot of industries, but in P in particular, it's like, don't recreate the wheel. And so I'm curious if there are any books that you've read that you have some takeaways from, or that kind of had made an impact on how you view the world.

It's a book called Die With Zero. Have you heard of that one?

Okay. I kind of get the concept there, but it's more than that. Right. It's, it kind of turns the, I'm going to save my whole life for a fulfilling retirement until I get enough money to retire and then live comfortably in my elderly years. That's your life model.

It kind of turns that on its head a little bit. The idea is you should be investing in experiences when you're young and you shouldn't be afraid to, if you think about right. The typical life, you're making most of your money when you're old, when you're older, when you're my age, right? Your fifties is, that's your harvesting years. And that's when you're supposed to be at the peak of your career.

And so you have enough money so that when you retire, right, you can then spend your money. And, but here's the problem. You don't have your health. You may have your health, but there's limits to how long you're going to have your health. And, frankly, you never know when you're going to die.

So if you sort of back up and you say, no, when you're young, you may not have as much money or as much free time, but look, you have your health. And there are a lot of things that you should be doing. It sort of balances out. You know what? Maybe I shouldn't be throwing all my savings into the 401k early.

And maybe I should actually be going to do the aggressive mountain climb that I'm not going to be able to do, or whatever it is. And having the mindset, throughout your life, of investing in life experiences is kind of like the philosophy. And I thought, and look, I just read it. I'm, you know, 53, and I just read it now, but it struck me as, yeah, it's a good way to think about things.

And so, and so we're like, Oh, we got to do more than trips to Florida and like, do some things meaningfully with our kids. And then, in that same vein, I was having a conversation with my brother-in-law Milford, who's a orthopedic surgeon. And he goes, what are your hobbies? What do you do to have fun? And I said, I don't have any hobbies.

I work and I spend time with family. That's all I have time for. And he kind of took me aside. He's like, you need to like do things that are more than just work and family. Cause to your point, he goes time and time again, I have patients who wanted to wait and they wanted to do all these things and they thought they would climb the mountain or do the sport or learn something, and then their bodies just start giving.

And he was like dead, serious and a hundred percent right. And he's like, I'm going to call you. And this was just not too long ago. He said, I'm going to call you six months. You better have a hobby.

Okay. Well, maybe seven months I'll have a hobby. But we get it. We're all in this hamster wheel where it's just time. Yeah.

So I can't wait to read that.

You can sort of think. your way to happiness is that there's a sort of a lot written about that subject. I've always been a big believer in that, that your thoughts ultimately become your life, right? And I believe that you can do whatever you want to do, whatever you put your mind to, but you need to, it all starts with what's running through your mind every minute of every day.

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