Charlie Gifford, New Heritage Capital | Differentiation in Private Equity, Advice to Business Builders

In this episode, we have a fantastic conversation with one of the very best in private equity, Charlie Gifford, senior partner and co-founder of New Heritage Capital in Boston. Enjoy.

I'm very excited to have my friend Charlie Gifford on today. As our listeners may know, Charlie is not only a very successful private equity investor, but also co-hosts one of the best private equity-focused podcasts called Middle Market Musings. Today, we're going to spend some time not only digging into the mind of Charlie and all things PE, but also very uniquely for him. Flip the direction of the mic a bit and do unto Charlie, as he so often does with other thought leaders in PE. Charlie, thanks so much for joining us.

Bostonian, born and bred, grew up in the North Shore in a small, idyllic town made famous by the movie. Manchester by the Sea, which is the name of the town I grew up in and led a pretty simple, idyllic life. Moved to London for three years or four years, grades two through six. Came back to Boston, or I say, Boston. But the only time we ever went to Boston when I was younger, was to go to either Red Sox Games or Celtics or Bruins Games. But beyond that, it was all about just being closer to home, doing stuff with the family older sister, two younger siblings.

And so that's where I grew up, went to high school there. I went to college in the Midwest and business school at Kellogg in Chicago. And got into the whole private equity gig in 1998, in between years of business school.

And then, when he retired, he was chairman actually of Bank of America.

He didn't ever bring his work home, and he's never been one to talk about himself. And he doesn't like to talk about yesterday, he likes to talk about tomorrow. He didn't really give a crap about what you did, or who you were and where you came from, or what your father did or grandfather did. It was almost like he was embarrassed about it, and so I didn't know what he did. Until I went to college. And somebody said, I didn't know your dad was so-and-so, and I'm like, who cares? Because, again, it was never talked about, it was never brought home.

So there was always in the background. I knew he worked hard, I knew he's always put on a suit. I was an American history major in college, didn't really know what I wanted to do, actually. In fact, after I graduated from college, I backpacked through Asia for a year with some friends from undergrad. Trying to figure out, give me a sense, a bit of time to figure out what I wanted to do with my life. I remember saying to my dad when he kept asking me about what I wanted to do and he never forced anything on me. He never said, Bank, you need to do this, or consulting or whatever.

He just said, You know what you find your passion. I'm happy to answer any questions, happy to introduce you to a lot of people. But you got to tell me what you want to do. So I took the time to try to figure it out. What an experience.

I remember him saying, Well, go, give it a go. I bought a around the world ticket that allows you to stop in like 20 places as long as you're flying west. Made it home. No cell phones, obviously, back then, but man, what an experience. Once I got back, I figured that I wanted to do something in finance and ended up in banking. Worked at Smith Barney in New York, worked for a startup, and then ended up going to Kellogg in 1997..

No two businesses are the same. It's so intensely focused on developing rapport relationships and built on collaboration with management teams. I assumed a fight, I mean, I didn't know what the heck it was. But I was fortunate enough to find a job in between years of business school. And on the last day of my summer internship, I got a job offer, which led to an immensely enjoyable second year at Kellogg.

I haven't written a resume since, if my dates are right since, like 1998.

So my internship was at Old Co Heritage Partners, which is a predecessor to our fund. In 2006, myself and my two partners, Mark Trolf and Nicky Norris, spun out to form new Heritage Capital, which is where we sit today.

It obviously turned out to be a very good choice. I feel immensely blessed to have had the opportunity to find the two partners that I've worked with now into our third decade. Which makes me cringe. It sounds like I'm well into my 50s, which sadly I am, but it's been a really fun run. Like anything. Oftentimes, people say, Do you like your job? I usually get asked that after I've had a long day and I'm grumpy about something.

I take a step back and I say, Well, am I intellectually challenged? Every day I come to work? Yes, do I really, really like and trust the people who are my partners and who are my colleagues? Yes.

If you do well and you work hard, we know it's a long lead time game when it comes to having your efforts pay off in private equity. But if you do, can you be well compensated? Yes, so, you know, by those measures alone, it's a pretty good gig. Certainly a different landscape than when you and I started in the late 90s in it, but it's still, you know, looking back, it was a good decision.

I'm grateful to have made that decision with those that have helped me along the way.

But going back in time to when you got into it, what did that industry look like?

But it arrived in a Fedex. And you know, there's no such thing as data rooms, there's no such things as what we know now as traditional QAV. Or REPS. And warranty insurance, all that stuff. That has led to a more and more efficient market. But most importantly, the number of participants was materially low, less than it is today, which just created an interesting dynamic. Because we people here at Heritage have kind of a different way we structure our deals. Some of our listeners, your listeners, might know that we have this thing called the private IPO, which is peculiarly a registered trademark, and it was formed back in the before. I can't lay claim to coming up with that idea, but I certainly hawk it quite a bit and have her now into our third decade.

But the idea is that, you know, if you're going to be successful in a really competitive world, you're going to have something different to talk about to people. You're going to have a better product, better offering. Not to meet the needs of everybody, but instead trying to find a niche that is looking for something different, and that's what the private IPO does. It's a traditional equity recap, but we go the extra step of providing founder owners more control and more of the upside. And so for people that are not long term bullish, yeah, they don't.

Or long, I say, long term greedy. That's not going to be relevant to them. But we just think the most intuitive way to invest our investors money is when the insiders say, I want to vote. Yeah, sure, with my feet, but also my wallet, because I'm too young to retire. And I believe over the next three to five years, you know, this business is ready to really got to take off.

But, you know, I know what I know, but I also know what I don't know. And I really want a capital partner, a top partner, to help me take the business to the next level. Long way of saying, John, is that the importance of specializing, I just think, is really, really important. Again, it's funny to think back in the, you know, mid to late 90s, we were so maniacal about having something different to talk to people about. And it's certainly something that we benefited from, and our investors have benefited from over the last two decades or so. By again, not trying to be all things to all people, but just really trying to focus on that niche. Those maniacal CEOs that are looking for something different than a traditional 80-20 leveraged buyout. And I've often said, you could wipe out a certain large number of middle market private equity firms. Were they to go away with the world change at all?

And my gut would say, probably not, you know, because there's such an unmet need of, you know. The equity overhang continues to grow at an exponential rate. That's why we like what we do, we like to talk to people about something other than just the traditional 80-20 buyout.

The deals would find them. And so, and then the next firm I joined was very generous. We did every kind of security, everything and it worked really, really well. But then you learn how quickly capital is agile, it moves, you know, with lightning speed.

And then before I knew it, every year after that first year, I was like, I wish I was 10 years older because it would just get. At the time, I thought it was just getting harder and in some ways, it was always hard. Because you pointed out all this information asymmetry that we all had, we didn't have nearly the amount of data. But the world evolved quickly. And what I'd be curious is, did you all start pretty early on with the private IPO, or was that something that you evolved to as your firm developed over time?

That's where, you know, owners sometimes hit that ceiling, that they've got their business to that level.

And when they reach out a question point to accelerate growth, that's generally where they reach out to folks. So we moved up market, which we certainly could in doing writing bigger equity checks into a bigger deals. We just think those opportunities would be fewer, in part between, particularly given the fact that we don't buy from other equity sponsors, so no secondary buyouts, that is no bueno.

And the whole strategy is around be the first tranche of institutional capital into these private companies.

And one of the things that was really helpful about that is we could be better at fewer things. The challenge that we all had, though, was there were many more companies that weren't explicitly for control sale than those that were. And it took a whole different mindset, though, in some ways, to be helpful and value added to the companies. That wanted really more of a minority interest partner versus a hand on the wheel kind of controlling interest investor. So how do you all think about that? When you're talking to these founder owners and talking about? Here's the differences and why? This path is something that you should really think about.

How do you get that engagement letter signed, right? Because that's what a banker cares about. They care about two things getting the engagement letter signed and closing the transaction. So it's very much a consultative kind of relationship building exercise and talking to them about something else.

So I think that's a really important component to our strategy, because again, it's really about trying to provide alternatives to a full 80-20 sale. And again, we talk about leverage buy-ins versus leverage buy-outs. Or how this concept of private equity partnership is an oxymoron, because what kind of partnership is it? If the sponsor can fire the CEO, who just closed? Now? Yes, that's an over-exaggeration, but the point being is that it's not a true partnership. The quid pro quo capitalism is the owner gets capital and the sponsor gets control in return.

And we think there's certainly room, and we show that there's room for, you know, differentiated corporate finance solutions out there that meet the needs. Again, not of everybody, but just a select few.

That's okay. We'd rather know that up front. But what we're really trying to do is just to find those folks that say, Wait, you're telling me that I can get liquidity commensurate with the change of control transaction today, keep three of the five board seats, as well as get to up to 50 of the common equity, which equates to, like, 25 equity. Promote a really, really generous promote. If people you know look at that and do the math and say. I can make a multiple of money on the reinvested capital versus just doing a smaller, you know, smaller equity role that's going to be. They're not going to earn as much as that upside.

Then if people lean in and ask those questions, that's a great signal to us that they care about their business. They're long-term bullish, they care about their employees and aren't ready to head to the exit.

So it's not, we don't, we're not staffed to do that. But even more importantly, and it might seem counterintuitive to many, is that we actually like to be compared. Because when they compare what we're putting and how we're structuring our deal versus an 80-20 leverage buyout, then we compare favorably to the people that care about. You know, equity value five years down the road, and you know, there's a. I remember there was a deal that we looked at a long time ago, that we introduced, you know, wasn't shot. Signed up. The business did a bunch of work, but the owner at the end, you know, after like three months, we spent a fair amount of money.

He's like, How do I know that you guys are? How do I know I'm getting fair value? Just like you wouldn't sell your house to the first person who knocks on the door. He just always had that nagging feeling in the back of his head that he wasn't getting the full value that he wanted. So we ended up parting ways. But it was just an interesting exercise and a reminder that, you know, we like to compare and we like to compete. Because if again, people like what we're offering, we find it sometimes. Self-selects. Those that are the most bullish and, you know, represent the best founder owners that we want to partner with.

I'd be curious about your perspective as you turn your lens from kind of the present to how do you see this industry evolving over the next decade?

So private equity fills a huge gap in the value chain for all those entrepreneurs that are looking for some type of liquidity event. So that's not going anywhere. What else do we know about private equity? Private equity doesn't die a quick death. Even firms that have some issues because of the agreements they sign with their investors. It's a long lead time game, right?

You invest over X amount of years, you harvest over X amount of years. So the fallout or the shakeout isn't something that's immediate. So the question is, will those funds that may not be the strongest performers funded? Three years, four years, five years down the road? Don't know that, but I do know that. Because the returns continue to be consistently beating the S&P, which is what all institutional managers are looking for.

They're looking for an alternative asset that they are not going to be made to look bad at in terms of investing. In the eyes of their boss and their clients, private equity has proven to be what you find. Those strong managers with a strong track record, with an interesting strategy, those funds, those are always going to be funded, and I do think that there will always be because of the entrepreneurial spirit of the states. You're always going to have people that are going to be continuing to split off and hanging their own shingle. So I can't really paint a picture, Sean, of how the total number of participants are going to shrink. Despite what I was saying before about.

If you took away a lot of the players in our market, I don't think the market would lose a beat. But there's always going to be money for those strong performers, and even the less strong performers. You have an LP base that are really focused on having asset allocation to the asset class.

It seems like that's what's happening in the industry is. They're figuring their way, they know what they need to do. They don't necessarily know how they're going to get there, but they'll find it because they're so tenacious.

If you were, I'd be curious. If you were to go back and teach a class at your undergrad college, the Great Denison University, about business and life, you know, or one or the other, both. What are some of the life lessons you would share during that class?

You need to develop a product or a service that incorporates what you're good at. You got to identify a target market, and you got to service the hell out of them better than your competition. So that really holds true, it's funny, it holds true across many different. What I do, what you do, Sean man, you're an entrepreneur. You saw an opportunity and you hit it hard and you guys are killing it. Doing a lot of good work for a lot of firms. So I tip my cap, even though I'm not wearing one to you. But so, you know, just thinking about this whole idea and you said it yourself. It's trying to be better at fewer things, and that holds true with, you know, lo and behold, my day job. For now, into our 23rd year. Which is, don't drift invest into venture investing, don't drift invest into industries that you're like, you know what, we're just not set up for, you know, being investors in deeply cyclical or highly commoditized industries. Identify a market, create a product, in this case the private IPO, and work like hell to provide that type of service.

And that's very much kind of what we as a firm have always done. And while it's tempting, right to raise bigger funds and to do bigger deals. And to, you know, get a new team to, I don't know, get into asset management or maybe a senior debt fund. And not to disparage at all. There are a lot of firms that have done it and have been enormously successful, but that's just not kind of who we are. We like our little mud puddle. And we've been able to, you know, stick around again, having written a resume since 1998..

So I guess that says something, it said. Either says we've had a good run, or I'm too lazy to look for a job.

And one of the things they try to really get you is like, try to be better at fewer things. And you know, the Fox is great at a lot of things, but it gets bored and chases things and never really follows through on things. The mole is really good at rolling into a ball with a bunch of little, you know, little spindles all around it, and it will beat the fox every time. And I think what you all do is, you know, kind of summed up. Probably most, you know, both years of anyone who went through business school. All in about two minutes, so I think that's perfectly said.

But back to his, like, his whole adage about being focused, being really good at what you're doing, and you know what was interesting about him. And again, I didn't know about this while he was working, but I learned about it afterwards. Is that he was a lender by trade in any? But what he identified in the way he was successful in building the institutions that he led is that he had a very, very much an equity mentality. And he just saw stodgy, slow moving, very conservative old banks. So everybody did.

And what he always really focused on was being a lender and with an equity mentality and so, and it was something that he got comfortable with. You know? Side note Interestingly, he's never bought a fixed income investment for, you know, himself, or his own portfolio. Because he's just very much. He's a believer in our capitalism and in how our economy is run, and he's, which is amusing to me. But we've got our arguments about the whole idea about.

Hell, no, only equity. But what was really interesting, you know, tying this in? I remember so I was a was still am a rabid Boston sports fan and I blame my dad for that. We had many shared experiences in watching the Celtics win the national championship and the N.BA championship in 81, 84 and 86..

I think I got those years right, pretty sure I did. We were together in the past. Beat the Colts and the Sorry the Rams in the Super Bowl of 2001. And have been fortunate enough to go to probably eight of the Patriots Super Bowls. And have seen a Celtics win a championship, seen the Red Sox win a World series, all these things. The Bruins win the Stanley Cup, did not get to Vancouver. So that's a hole in my portfolio. But be that as it may, but one thing that he did, he was very much into sports. In 1994, he helped Robert Kraft finance that buyout of the Patriots from James Orthwine.

And at the time, you know the purchase price, it was in the 160 million dollar range. Which at the time was by far and away, you know, a high watermark for evaluation on a football team. And people thought he was crazy to do it, but he's only able to do it. Because the relationship that I had with my dad and my dad was, like, went over the tips of the skis. Ended up taking warrants, There's not private information, but he ended up taking warrants because one. He was a strong believer in the civic responsibility of businesses in the city of Boston. To ensure that everybody's doing everything they can to keep professional sports teams in the city. Which is amazing because at the time, the Patriots had an abysmal, abysmal reputation and a terrible track record. But he went against. Maybe what some people, certainly other conservative lenders, would have been comfortable with.

And both Robert and Jonathan Kraft have said many times, and it's in books about, you know? Without him doing that, the Patriots would have not been and not stayed in the city of Boston. So, as a longtime season ticket holder, myself, grateful for that and would have. The last couple of years would have been a lot different if we didn't have those six Super Bowl trophies and all the memories that went around them, you know, to hang on to so good stuff.

One of the things where he was, very unlike your dad, though, was. He bestowed the Cleveland sports teams on behalf of me as someone who was born in Cleveland, so I have had a lifetime of sports misery. And I was born in Cleveland but grew up in Austin, Texas. I could have rooted for the heyday Cowboys teams, could have had just this great childhood of memories of victory. Instead, I think the story is clear.

And so when I had a son and a daughter, I literally had this kind of moonlit tear drop moment, tear going down my eyes. And I told my son, I said, You know, Liam, you can choose any sports team you want, I'm not going to make you root for my teams.

Because of my kind of private equity background, I love nothing better than kind of a deal. And so I'm always looking for, like, the highest rated wine for the lowest price, and so I'm coming up with these little knickknacks like wines. These things called the wands that will take sulfites and histamines out, and these little aerator devices. Now I understand that you have been a tremendous innovator on how to aerate wine, and it made the national stage.

My grandfather was a big wine collector and he taught us at a young age, not a legal age. We also used to have a sip of his wine and he taught us how to aerate wine in your mouth. And it's basically, it's not dissimilar to when you decant wine, or you swirl a wine in a wine glass. You're trying to aerate the wine as much as possible, not dissimilar to what you do with a glass. It's just trying to introduce as much oxygen into the wine itself, and I used to do that with my. Take a big slurp of wine in my mouth and just basically breathe in through your mouth without obviously getting spilling the wine.

I did it a couple of times. We got to know Kelly Ripa, who's a talk show host, and been with them and her family and her husband on spring breaks a lot. I do that all the time when I drink wine. And she's just fascinated by it, to a point where she talked about it on air for like, three minutes. A couple of years ago, I got all these emails. I'm like, What are you? People are saying that you're on Kelly Ripa's show? I'm like, Why are you watching Kelly Ripa's show for the middle of the day?

I don't even think people would do that, but apparently they did anyway. 15 minutes of fame was more like 30 seconds of fame. But anyway, it's pretty amusing.

So, Charlie, this has been an absolute pleasure. Thank you so much for taking time out of your day to share your insights and perspectives.

We truly appreciate your support. If you like what you hear, please subscribe, review, and share. In the meantime, let us know if there's anything we can do to support you, your success onward.