Private Equity Spotlight: From Lending to Leading with Gretchen Perkins

I'm very excited to be here with my friend Gretchen Perkins. Gretchen, thanks for joining. You bet.

What are some of the ways you grew up as well?

But I don't know what industry I want to be in. So that actually was really fortunate for me, because I really enjoyed the exposure and underwriting of credit to a food and beverage company, a real estate project, engineering firm, you name it, an auto supplier. I was in Detroit, Michigan at the time working. So I had a nice career in lending and really hadn't thought much about private equity. When I joined private equity, it was pretty early days and very early days for a business development, specifically professional.

And one of my former clients, a small at the time private equity firm in Detroit, Michigan, Long Point Capital, called me and said, hey, we're looking for somebody to do business development. And they were starting their second fund. And that's pretty common. They do it themselves, the execution folks, for the first few years. And then they get a portfolio and they got board meetings.

And then it gets hard to get back out and do that outreach that needs to be done. And so they came to me and said, we really appreciated how you called on us when you were a lender, calling on us regularly to see if you could provide us debt. We need you to do that with deal sources. So business brokers, investment banks, wealth management, accountants, attorneys, etc., the whole service provider world. That's how I got into private equity.

So I entered after I had had years in financial services and all these capital connections and ACG functions around the country were not a thing. at that time. There was a few broker conferences. And I think ACG Chicago was the first one that had what is the first capital connection. And one of my colleagues at the time, Scott Huncher, who is at Huron Capital now, he said, go, find the three or four people who do this role best and do what they do.

That was how I got into business development. And then I met Dave Malizia and Jay Jester and Bob from Riverside, Bob Landis. And they were the three that, at the time I started, were already doing this. And I just shadowed them, and they were all incredibly generous. And over time, this role, the dedicated business development role, has really boomed over the last 20 years, because typically funds that have a dedicated biz dev function deploy their capital faster.

And so that's how I got into private equity. And then, after Longpoint, I joined Huron Capital. And then, after Huron, I joined my current firm, Avance Investment Management, three years ago, when we were starting the firm.

I'm with you. Thank you.

I love speaking in front of a crowd. I think that has to do with watching my father do that every Sunday. And my mother was born too early. She was born in the era when women really didn't work outside the home. And she really was the person who inspired me in building my network.

Because we grew up in a small town, born in Detroit. My father was moved to St. John's, Michigan, right in the middle of the state, in a tiny little rural community. That's where I spent most of my childhood. And my mom was in everything.

She was on the library board. She was in the J-Sets and the J-C. She was the 4-H mom who taught crafts and cooking. And she just did a ton of things and was super active in our community. And I think between my dad's oration experience and just living amongst my mother, who was a power broker in our own little town, I think those two things really shaped me.

Also had, I have an older brother and a younger sister, and we all felt very heavily the burden, not burden, but it was just, don't embarrass the family. Don't do things out in public that are going to embarrass your dad at the church.

That's why you need the Business Builders Network. Visit Blue Wave at bluwave.net to learn more and start a project today. So maybe segueing here, I'd love to turn the page in one of the things that I think you've had this really unique situations from the beginning of your career all the way to today. You've been looking at hundreds, if not probably in the thousands, of companies a year now, right?

Just the fact that when we and anybody in our industry invests in a middle market or lower middle market business, we're bringing heaps of experience of best practices we've seen over our careers across a bunch of different industries. But for me, I would say the top two things are number one, strength of management team. You can solve for maybe an underperforming management team, but you lose time to create shareholder value if you've got to change horses or rebuild a whole management team. So strength of management team is number one. I'd say.

second thing I look at is the underlying sector, and is it growing, or is it a two, three percent a year grower? We at Advance want to invest in businesses that are generating organic growth above typical inflation numbers of two to four percent, because in all of our businesses, we want to augment management team systems, capital to continue organic growth and achieve better than GDP organic growth. But we also want to, where appropriate, we want to play the add on acquisition consolidation growth strategy as well. So we look at a lot of businesses and they're fine businesses. They have a founder on, they have a good management team, they have a good CFO, good go to market strategy, but the sector isn't growing and that's less exciting to us.

So strength of sector growth and strength of management team are the top two.

If you don't fit and see the world the same way, it's very difficult to come together on what the strategy is going to be for our three to five year hold time frame and how we're going to grow the business and optimize the returns for all of us, because our management teams are always rolling over. That's important to us as well. So it's making an assessment of coachability or not. You can just get clues to that if you're in a management presentation and maybe we offer up an idea like, have you thought about this? Yeah, that won't work because of this.

And you do that two or three or four times and get shut down like, yeah, no, that's something we've already tried. Didn't work. This doesn't work. Those are some key signals that maybe this person really wants to take some chips off the table and still wants to stay in and run the business. Those are both great things.

But if we aren't aligned together and they really don't want our input, then that's not a good fit for us. Things that you can see in a management team are hopefully a thoughtfully built out one. You sometimes see these businesses that it's all CEO and CEO is doing everything and maybe they have a controller instead of a CFO and that controller has been there a long time, or maybe their head of sales has been there a long time. So if you see long term, that means all these people like working together and the financial results they put together that we're looking at and saying, oh, we like this business. Nice growth.

You can see you've got a good functioning management team there.

And they go, oh, that's interesting. Right. And will they make something up or will they have a thoughtful answer? or will they, even more importantly, say, you know what, I don't know, let me get back to you.

Absolutely. That's a big red flag for us. That no one else either feels comfortable speaking in front of the CEO or no one else knows.

Then I'd say, oh, I'd like to put my briefcase in your trunk. And I'm looking to see if there's golf clubs in the trunk. If you have golf clubs in your trunk, your world's going to change, buddy.

is this private equity evolving from kind of craft Michelin star restaurant experience to more of a business. And I think when both of us started, it used to be kind of one or two, maybe three, note song. And now it's this symphony of motion between the business development teams, the deal teams, the operation teams, the port co-leadership. And it's all kind of moving together.

In addition to the normal finance and accounting office of the CFO and the execution people, they very specifically built this firm to have each of those capabilities. And so it was their vision. And you don't often find that level of specialty in a firm our size. You see it in the big, giant ones, KKR and all the big, giant asset managers. But you don't often see it here.

And I saw the empty org chart when they were explaining their vision to me. There was an empty business development box. Empty head of research. So that was their game plan from the jump. And then we've filled those out.

And it's the first time I've had these functions along with my business development effort at any of the firms I was at in the past. And it is incredibly powerful. And I'll just give you a couple of examples. So there's all these deals coming in, right? Deals, deals, deals.

And that's fine. I kind of pushed back on that. We need to bring in more books every year. It's got to be up and to the right for this direction. We just need to see more deals.

And I kind of feel that my job is to educate the deal providers on what we want to see. And so they're only sending me things that are actionable. So if the numbers drop, but the quality improves.

We go through them every Monday morning meeting. And the head of research, my colleague, Natanj, was a partner at Boston Consulting Group. He's incredibly experienced in doing the type of market studies that us PE folks engage when we're really serious about a deal. So to have that capability to just eyeball every SIM that comes in is immensely useful. So let's say I have a diverse ownership in a sector that I think is great and it has strong EBITDA margins and appears fragmented.

Natanj will look at that and then maybe at the Monday morning meeting, he'll show up and he'll say, yeah, this market really is not growing. It's like a two and a half percent grower. And that's kind of like, wah, wah. OK, it helps with deal triage. So, like nobody can fall in love with a deal and just find out way far down the process that, you know, this isn't really growing that much.

So it's incredibly efficient for looking at all the things that are coming in and deciding where we have a real angle, where we want to lean in hard. So we decide that and then Kabir, our head of human capital, starts identifying executives who can be just helpful in us and thinking about the right questions that we should ask in a certain industry. Executives that might have connections with add-on candidates. Executives that could create our real board of directors at this company. And, of course, these people are immensely helpful.

They always have decades of experience in a space and they can weigh in on the competitive environment because maybe they were at a competitor. Ideas that they've seen at big companies that might be something we can implement at a smaller company that we would be investing in. So those three functions are working together. Every deal that we're going to take more than a passing look at. So that's just at the front end.

And then both of those capacities, research and human capital, are equally as entrenched with the deal teams and helping build out one of our portfolio companies. We've brought in approximately 10 new executives, VP of marketing, VP of franchise operations, just a lot of different functional heads at this portfolio company, which is growing great. Had grown before we added these people, but we're trying to augment the management team so we can scale it so that we have enough firepower in the C-suite to scale where we all want to take it. So really powerful, really different. And that is part of our special sauce.

And that all credit goes to the founders, because they had all these empty boxes. That was their clear vision from the start. And I was fortunate enough to be able to fill one of the boxes.

I mean, it's hugely important and it's the number one reason we get called by firms like yours today is we need to get people.

Let's go find deals. And now maybe we're pivoting to a different space because we're concerned about wage compression. Another good example of labor issues is all these residential services deals. We like residential services and there's certain ones that we've taken a management meeting and starting to learn about, and they have great growth, great, incredible growth plan. And while we don't dispute your marketing machine and your ability to generate demand, can you really hire enough technicians, be it HVAC, roofing, landscape, whatever it is.

Can you hire enough people to meet that demand? We don't argue the demand characteristics. What we argue is, can you really achieve that without hiring all the people actually doing those residential services? So constant. I'm not surprised.

that's your number one area. It's a really big consideration in anything we invest in.

Because I'm in the market.

You got a base customer for pretty much all the things. Good to know. It's an area of need in Nashville.

And so I'd be curious, what are some of the top value creation opportunities that you are kind of thematically engaging in your portfolio companies and their leaders today?

And so we do look at things opportunistically. But our main mode of investment is to focus on certain sectors that we have thematically decided we're enthusiastic about. So, number one, it kind of shapes our whole strategy is the thematic investment. As you would expect, many of those places are highly popular. So there's a lot of people going after the same businesses.

So that's where we need to create our angle. And, frankly, when we're pursuing an investment, the ideal scenario is I talk to an investment bank and say, hey, it's January. What should we be getting ready for? coming down the pike in second quarter, third quarter, fourth quarter? Maybe they share a couple of opportunities.

No names, of course, just sectors, companies in certain sectors. And we will use our research and our human capital capabilities to get really smart, very, very smart, and already have in place the executives that are going to help us think about this business, so that when we do show up for that management presentation, we're very much ahead of the game on knowledge and we can speak very fluidly with a business owner and the business owner will know, oh, they really know my space, which is hugely important. So that research function, again, comes into play in that type of scenario as well. We have a variety of different companies. We have some technology companies.

We have a construction equipment leasing business, consumer insurance, brokerage business, a personal care products ingredients business. So I wouldn't say there's certain strategies that we're applying to all, other than in each case, we have worked very hard to build a very active and helpful board of directors who can bring ideas and who weigh in on the strategy for our investment in our whole period. And that in many cases, those are transformational boards. It's the first time the seller, the business owner, has all these smart people who know his or her industry really well, trying to help the CEO grow faster than they could have without us. That's the name of the game.

We're supposed to come in and help them achieve growth above and beyond what they could on their own. And that's why any business owner is going to choose to partner with a.

And so you are doing the work, the research, the data, and that's informing not only where you're investing, but the lanes in which you're investing, because you're research first. And there's this beautiful concept of expected value, the percentage of probability that something will happen times the outcome. And what you're describing there makes me think, oh, that's Moneyball, and let's be the Oakland A's, which is pre-analytics, you know, Boston Red Sox.

He's like, hey, Gretchen, have you ever thought about meditation? And I hadn't. And then I went and got trained to do it. And it's a complete game changer. My kids will tell you.

My kids are grown now. And they will tell you, kind of before meditation, mom is a different person than post meditation. mom. I'm just less torqued, fly off the handle, don't get so upset and take everything so personally, because we're all competitive. You're not in this industry if you're not competitive.

I've probably been doing that like eight years now, once in the morning, 20 minutes. And if it's a really bad day, maybe twice.

It's got to be rested. And you got to, in some ways, like rejuvenate it. If you don't, the wheels keep on spinning. And I'd be curious for you, even like I try to do it 10 minutes a day and I still have hard time with 10.. Are you able to kind of find and carve out that time to do it?

And it's really a superpower. The one tip, and I will tell you, I went to like a four day course, so I went in with both feet. And one thing they will tell you is everyone's like, I'm not doing it right because my mind's just jumping all over. And my trainer said, no, you're doing it perfectly. Every time something comes into your head and you put it aside, you're cleaning the cash, so to speak.

Oh, nice. So it's OK. It's great if a bunch of things are coming in and you're not at the state of complete blackness in your mind. You're doing it exactly right. Oh, I got to go to the grocery store.

OK, set it aside. All right. You've cleared some space. I got to pick up the kids. OK, take it away.

And over time, you will find that it will make a change in you and your ability to focus. And my trainer also told our class that she said, now, I don't want you to use this in a bad way, meaning every 10 minutes, I believe this is the metric, every 10 minutes of meditation can cause your body to feel the same as one hour of REM sleep. So don't just meditate and then sleep five hours a night. Like, don't do that. That's not what this is for.

Do it in addition to getting a full night's sleep. But if you think about it that way, whether that's true or not, I don't know. But psychologically, it helps me. on those nights when I sleep terribly and I have a big day. It's like, all right, let me get my sleep in right now in this 20 minute meditation session.

That's my number one.

OK. And that's the only thing I know. But I do know that the guy who is the monk on it, anytime I go to bed earlier than my wife, he has this 10 minutes go to sleep thing and he's got the most chill voice of all time. And I am lights out.

Like, well, why is that not on your website? No one has ever been able to give me a good reason. But I have just discovered this. Everyone's probably cracking up. I just discovered this.

I literally discovered this past weekend.

All right. Well, Gretchen, we have covered a lot here. I've learned a ton. And so thank you. Thank you.

Thank you. And a thousand percent appreciate you taking time out of your busy schedule to join us here today.

I'm really just tickled to see your success and enjoy working with you.

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