Scott Phillips, Orix Capital Partners | How to Focus on the Things That Matter in Private Equity

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Scott, Very excited to have you join us today. thank you.

And this was when Motorola was Motorola, so I was a fresh out engineer. I mean, it was just the place to be and to work, and I loved that experience. And then at some point in any career, you have to make a decision, do I want to go into management leadership or do I want to stay in technical engineering discipline? So I decided to go the manager track, kind of fast track through my career, had different assignments here and there, and then I had an opportunity to go back to business school.

I went to Kellogg and then I graduated in 2008, which was a tough year to graduate business school.

And at that time, a mentor that was also in private equity got involved with the firm I'm at now. And they were looking to really build out an operational discipline and bring in kind of younger guys, non-traditional guys, to lead that group. And got tapped on the shoulder. Always had an interest in private equity. Thought this would be something later on in my career, more traditionally that I would do, but had the opportunity put in my resume. And here I am and just absolutely love it.

But that, I mean, it's an amazing degree. It's, you know, as you think about being a business builder, it's fundamentally understanding how things work and why they work, having that kind of socratic method in your mind.

Is going to the solutions like that, and, you know, thinking about it from an engineering mindset.

But yeah, the story goes like this, you know, I was sitting in my office and my boss calls. He says, Hey, I need a. You know, you go to Market report for the marketing team of the corporation, and you know the products that you're managing. So okay, you know, put together a report. You'll get a phone call from the media agency, say, Hey, we want to take you in and show your product and everything. So they did. A video, took a lot of pictures of me.

And then my face starts showing up in these industrial magazines, and then my hands, you know, with the product itself. So I actually became a hand model, and it got kind of exciting because I actually was on the cover of the annual report for the company. Now, mind you, I'm not getting any extra income from this at all, so it's purely for fun.

But when they did the earnings report, you know, they posted the annual report on the famous Nasdaq billboard in New York City in Times Square. There, sure enough, there's my face and everything, so I've got a picture of it, so that's the pinnacle of my modeling career. I'll be it short.

After that, I mean, what else is there to do? So I kind of gave up that career.

The good news, you know, after spending a career, you know, my career in private equity, I learned about this. You know, this term that we use a lot, called optionality. You know, if something doesn't go right, you can do something else and still kind of be successful. So it sounds like if this PE gig doesn't work, you can always go back.

But now the broader world does, Yeah, yeah.

That's that's good and things that could be good. So as you go into prospective investments, you look at investments that you've made, what's kind of your yardstick? The things that you look for in companies that say, this is a this is or could be a really good business.

And it's not a bunch of hype, but a true sustainable business model with good customers and tailwinds, so that's, that's a number one. Without that, you don't really have a business long term. Second thing I really look for is leadership, just critical, especially at the CEO level, the vision of the company, and then those number two lieutenants at the company.

How well does that team jive? And, you know, we talk a lot about the human capital, how important it is. I'm a very strong believer in that. The difference when we have a portfolio company with the right leadership team and the wrong is night and day. And you know, really, having a team that's in it to win it, that really understands the PE model, that's after the prize and really motivated by that.

I mean, they really can take that business and transform it and drive it, and I think that's the third thing is really a struggle with that. Depending on what type of companies you invest in in private equity, but to understand the private equity model. And specifically for us, you know, partnering with that management team to really driving the initiatives to go forward and in that mode of partnership. So, a leadership team with confidence. That accepts the influence that we have and the direction that we want to jointly do together with the team. And that open relationship, I think that's key. If that breaks down, then usually there's a lot of trouble as well.

You know, the thing that I think, the lessons you think about the business leaders listen to this podcast is What do you do? If you're not in a good market? How do you do it? And it seems like, at least from my perspective, it's you better find that proverbial pivot if you're in a systematically declining market. It's kind of like, the, you know, the sell the mills moment and kind of a thing. So how do you? If you see a business and they're not in a great market, is there anything that you can do?

Or is it just saying it's just not, it's maybe they can do, but it's not for your firm, for us.

And then if we really need to look and see where the market is going and how to pivot. And really, you know, is it adding additional service lines that we're not offering now that could be additional revenue streams to the business? Is it a particular customer concentration issue, where you know if that customer dies and we're in big trouble? How do we really pivot? Is organic solution or inorganic solution to that? So I think you really got to challenge it with a good, strong strategic plan and then that leadership team to deliver on it. So, yeah, it's that.

That makes a ton of sense. What about on the leadership team side? Are there things that you look for that? Traits or signals are almost like little, intuitive observations where you say, this is a really good team?

And it's just the basic strong leadership that you see in strong companies that are proactively just just driving it and going for it. And then you know how they behave. As a team, too. We spend a lot of time with team dynamics and coaching and making sure that everyone's just aligned specifically to that.

It's interesting, even as we, as I reflect on kind of the evolution of Blue Wave. We spent a lot of time thinking really proactively about what should our culture be? And the first three things, we thought, like, what would be the best kind of companies? You work as a team, you're curious and you have a growth mentality, and you have good values, you're good people. And that was like the first year of the business. We're just missing something.

It's just, this is all great, but it's not clicking. And then we got together as a team and we kind of whiteboarded it and we said, what we're missing is this whole concept of winning. You've got to put points on the board, you've got it.

You know, and you can check it with teamwork and being having good values and a growth mindset. But unless you're also winning, it's kind of just you're not going to move the ball forward. So very few people call that out.

Little did I know.

And then Econ 101 occurred, right? more money came in, same supply of deals, purchase price up, returns go down. But private equity people, they're not just going to let the gravity of Econ 101 impact their results, they're going to do everything they can to defy the gravity.

And so value creation is something that's really important right now. And it shows why the industry and firms like Oryx are bringing in people like you, true business leaders who can create inherent value. How does Oryx approach value creation? And what is your kind of angle towards this?

Yeah, yeah. So we really focus on these and then after close, we really kind of redefine what those are. And then get the right metrics in place in the action plans on an annual basis. And that kind of drives our value creation path forward.

We think if we execute on these, then we will be in a position where we need to be. So that's the first and foremost staple of that. And then we get it approved by the board. I think it's reviewed at the board, so there's a governance aspect of that as well.

So once we get that going, you know, my team is structured with generalists, but we all have a specific discipline. And I thought, you know, what do we really need to drive it? So, for example, we have a generalist that also drives our procurement, supply chain initiatives. So he also drives value creation across the portfolio in that particular discipline, but then also specifically at a company, and same thing with insurance or business processes ERP.

And then we have a human capital person as well, that just drives that culture in the companies. Yes, we focus on that, and then, you know, third thing is we really kind of drive specific initiatives. So is there a specific thing where we bring in? We'll call Blue Wave, we'll say, Hey, we got a particular, you know, value idea here. Do we have someone that we can call that's an expert here?

Let's bring in the expert third party consultant, and then we have a specific project with a timeline, with a deliverable that we just drive and make happen. And that's part of the plan, and that may or may not be part of the strategic plan, depending on the needs, but that's a specific, you know, initiative that we drive.

You're covering a much greater percent of your portfolio, company and resources, but the value added resources that Oryx is providing. People that also have a pretty broad set of capabilities. But then expertise in particular areas where you can come in and say with repetition, this is where you can be kind of best in class.

Companies who are trying to transform their companies in three to six years. Yeah, with probably very like anyone in PE, there's very little room for error. You have to be successful, yeah.

So that's a tremendous asset for these companies to have people like you and your team that can come in as kind of custodians or value added support.

And I think it's that in the constant communication, so usually we set up a cadence where it's a more small group, meaningful meeting. You know, here's where we're at now, here's where we need to be. What do you think?

What should we focus on? what are you focusing on, what can we do together? And that kind of open rapport and dialogue, and it's just an ongoing process of that.

So you really just have to build that right up front for sure, and then continue that through the life cycle.

And you say, here's what we're going to do, but in the meantime, you're doing huddles through the whole way. Or, you know, say, here's what everyone's going to do. Great, but check back in, you know, as you ultimately try to put more points on the board than the other person.

What's the score? Yeah, basically, what's the score?

I think as we, we support a lot of companies as they're trying to get more data intensive. And the path that even we went on, I think everyone goes through. This is the reason why the, you know, the data visualization company Tableau is called Tableau, because it becomes this tableau of dashboards. You know, how do you work with your team? To say we're going to focus on kind of the fewer, you know, few ones?

So what I challenge us to do is a roll up our sleeves as an operation team. And go out there and actually understand what these guys need to see and visualize. If you are managing the company and then as the owner, we kind of know what we want to see. But then really partner with them. And then we bring in the expertise to say we're almost there. Here's the data that we can get from the systems that we implement.

And then here's the dashboards. We can do that, but it's really coming from them to really understand how the business works, the expertise to do that and drive it. And again, it gets back to the critical few. So when you come up with the dashboard, what are the three to five metrics that really drive the business forward?

And we're thinking very strategically about that.

And I know just even from our own personal perspective, the results can be profound when you. And the hard part I found, even as an operator of our own business, is like, you know, when I was in, P is like, Oh, p. Portco. Let's find your key measures, tell us what they are. How hard could that be? And now that I'm in this seat, I'm like, it's hard, it's hard to find those few that matter.

It forces, but it forces you to really understand your business.

It's just us. But then, you know, if there's any that are, let's say yellow big believer in red, yellow, green, simple indicators. Then that gets, you know, a page in the board deck. Yeah, it's kind of private discipline of government.

It's something that's just very odd, kind of mercurial environment that we're living in. As you think about your own portfolio companies and interacting with them, you know, one of the things that I think is real easy in human nature we talk about before in our conversation is. It's easy to kind of like, circle the wagons and stop and wait for this, you know, choppy weather to go past, but that's really is we talk about like, you got to continue to make progress, you got to continue to act.

How are you working with your portfolio companies to not only help them kind of lay the groundwork to be safe and secure, but also find opportunities for success?

And I think you've got to be proactive in thinking the worst is ahead. Back to the winning analogy. The team we play this week, they're really good. Yeah, so we got to up our game and kind of having that that edge to you. So, you know, our biggest focus these days is cash, to be honest with you, with the price now of the debt and servicing that debt.

And how much cash we have, so we're monitoring very closely where our cash is going. We're really scrutinizing the capital we're investing. And then really, really driving a discipline of, you know, what is that Roi that we're actually getting on this? Is this the right thing to do at this point in time or not? And then, if it is the right thing, then making sure that we execute strongly on those things.

So we're not stop growth and investing, we're just being more and more cautious about it. And then I think cash is king, for sure. So really, monitoring the cash flows and understanding where is it flowing, where can we tidy up? And we have tighten the belt. You know, just to get the companies they're not in trouble, but just to get them ready for any rough, you know, continue to rough water.

Yeah, and if you run out of it, you're going right into the drink.

And it's like the post-Bernanke Fed, we're going to keep interest rates low and print lots of money and everything will be good. But eventually, that causes this, you know, too much of anything. Good thing here we are.

And so, you know, if you think about what's happened is a lot of really good companies are getting back to basics. And what does that do? As you think about not only the companies, like in the now, but how that'll impact and support their success as we come out of this, which we will.

Yeah, and then constantly driving that discipline of every year. Let's see if we can get better and better in terms of our fixed cost ratio as a percentage of revenue. And just driving a discipline to get more and more in shape and lean. And then, yeah, when the times pop back up, we're just going to be in a much better position to capture where it is, yeah.

Keeping those balance sheets strong, you know, to jump on those opportunities as they present themselves.

But then February, I get on a scale like, Oh my God, I've got to reign in the chaos and then I'm better for it. You know, in the rest of the year, yeah, but you got to, like, go through these periods, you're going to. You know, it's easy to get kind of caught for me, fat and happy.

Yeah, the good times, yeah, but then you got to tighten it up.

And I'll kill you, yeah.

And it sounds like what you are doing is getting them ready to address the reality. But they're going to come out of this, like, you know, like banshees, you know, rocketing.

And so every day I get to learn these great things and I kind of find myself. I wish I knew that. If there's some things, that if you were to go back and meet the younger, you know, supermodels, God's self, the industrial model, I would have stung in that career.

What would you kind of share with yourself?

Or how do I really get through this and really learn resilience over time, where you really realize, you know, difficult times happen? Those are difficult times of opportunity, of real growth and development. And if you can learn resiliency and flexibility, then I think that that proves very successful later on. So that's, I think that's my two cents in terms of, you know, if I would have told myself a little earlier, you know? Embrace the tough times, the rough times, because that makes you sharper and better, and as you can really maximize opportunity during those times.

Yeah, and everyone thinks, you know, going back, or even the flywheel, right? Everyone thinks when something's humming and it's all good. It was all easy, yeah.

You know, but the reality is going through a lot of losses and a lot of like, in winds and everything in between. To get to something where that flywheel is moving at a hundred miles an hour. And I was like, this is great, but what it really takes, your point is so essential is that resilience is. It's nothing is easy to start, you know? And there's going to be, you know, this kind of trajectory through humanity, where people think it's like, you're happy or sad. It's really a continuum of change and flux.

And it takes resilience to get there, and I think it ties really nicely with what you're talking about. This whole winning mentality is you've got to have resilience.

So, you know, I got opportunity to coach my son's flag football team, and you know, football is big in Texas, even flag football. It's under the lights, yeah.

It's under the lights and everything else. And you know, we make it all the way to the championship and we lose, and, by the way, only the first place team gets a trophy.

And that's, that's the kind of resilience you've got to teach and learn, I think, over time, so it's a great piece of advice.

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