Demetrios Dounis, Heartwood Partners, Good People Build a Strong Foundation

Sean Mooney:
Welcome to the Karma School of Business podcast. This episode is brought to you today by BluWave. I'm Sean Mooney, BluWave, founder and CEO. BluWave is the go-to expert of those with expertise. BluWave connects proactive business builders, including more than 500 of the world's leading private equity firms to the very best service providers for their critical variable on point and on-time business needs.
In this episode, we have a great and insightful conversation with Demetrios Dounis, partner with Heartwood Partners, a leading private equity firm headquartered in Norwalk, Connecticut. Enjoy. Today we're very fortunate to be with one of the best of the best in private equity, Demetrios Dounis, partner with Heartwood Partners. Demetrios, thanks for being here with us today.

Demetrios Dounis:

Thanks for having me. Appreciate it.

Sean Mooney:
So Demetrios, you've had one of these storied careers and private equity before entering PE, working with blue chip firms like Deloitte and UBS, and then jumping into the wild world of private equity. I'd be really curious maybe just to kick things off, what attracted you to private equity and how did you get into this business?

Demetrios Dounis:
Well, Sean, I wasn't raised in the house where we were discussing money matters or finance. We were discussing electrical jobs and the behavior of students in grammar school classrooms. And my mom is a retired public school teacher and my dad is a semi-retired electrician. I say semi-retired only because my father will never stop working. He enjoys working too much and it was a windy path to private equity for me. And I studied accounting in college because I thought it would be a great base for business. And I started going out and going down that accounting track and somewhere along the lines I got exposed to the larger investment banks as an accounting client like Morgan Stanley. And that really pique my interest, their business model, the M&A transactions. That curiosity really nudged me into finance and ultimately I networked heavy and got that opportunity that you mentioned at UBS to join their investment banking group and work primarily as an M&A advisor. And investment banking for me, like many folks is really where I got my first taste of private equity.

Sean Mooney:
That's great. A lot of that resonates with me in that I grew up in Austin, Texas, away from the financial centers. And as a younger man, I spent my time in the back of manufacturing plants with hard helmets and steel toe boots and those type of things. And when I ended up in the East Coast going to college, my friends first said, we're going to go do investment banking. And my first question was, "What's investment banking?" And then I got an investment banking and by that point I think Google was around and I said, "We're going to go do private equity." And I googled what's private equity? And then 20 years later I was still in private equity. But that resonates a lot and it fits with a lot of the same experiences I had.

One of the things that I really like asking people to get to know people better and share more about yourself to others is just the simple question we'd know you better if. So if I were to ask you that question we'd know you better, how would you complete that sentence?

Demetrios Dounis:
Yeah, this is a fun one. I'd say you'd know me better if you've watched the movie My Big Fat Greek wedding from 25 years ago. And there are some great kernels of truth in that romantic comedy if folks can go that far back. And I think that movie could very well apply to a host of cultural groups in the United States. But like that movie, I'm big on family, certainly big on food, and especially big on celebrating happy moments.
And I'd say the folks that have worked with me and the people here at Heartwood know that I encourage the group to enjoy personal and professional wins and events like birthday parties and christenings and engagements. And in the case of work really try to push celebrating important milestones, be it an exit of a portfolio company or perhaps closing a tough add-on acquisition, both of which we did last week or managing through an important transition in a portfolio company. So I think that movie for me, I think shares a lot of insight and truths.

Sean Mooney:
I love that movie. It makes it to our Netflix list every year. It's something that as someone who grew up in a large family, but of the Irish variety it was is very similar except our food wasn't as good.
So would love to transition here, get your thoughts about some of the ways that you think about business. And in many ways at BluWave we're fortunate to work with firms like yours and get exposed to what I think are the best business builders in the world. And I think a lot of the questions that I get from those that are curious about private equity when I was in private equity and now when they're thinking about how do these people think about business, how should I think about building my own company? What are they going to find important if they find it important, I should probably think it's important as well for my own business. So as you think about all the companies you've looked at and how you've built value over time and assessed value in companies historically, but also every day to day in this new normal, what are two or three of the most valuable traits in a company that you look for when considering an investment?

Demetrios Dounis:
It's a great question and I think I've been fortunate to work with and learn under some really fantastic investors. So they've certainly been a contributors to some of the thought process here as well. But what I look for in a company today really is a great organizational culture. When I look back at a number of the transactions I've been a part of in 10 plus years, it's the common thread throughout the most successful transactions that I've been lucky enough to be a part of. Like most private equity and deal folks, I end up attending a number of different management presentations and plant tours. And really I spend a lot of time trying to understand the people and how the team interacts, how they describe the business and the opportunity. And in some cases you're in these meetings and it could be a one person band where one person is doing all of the talking or in some cases where perhaps folks are afraid of that one person on their side of the table.

And in those situations I have learned, no matter how impressive the business looks or how well the numbers are presented and the growth, we run fast away from those types of opportunities. I have no interest in stepping into those types of situations and life is too short. And I believe that private equity is a patient investment strategy and because it's going to be five years typically of a partnership, you want to make sure you get along with the people that you're partnering with. And I've had that in a number of my transactions and it's certainly the first thing, one of the early things that I look for in an opportunity.

Sean Mooney:
I think that's a spectacular insight because it speaks to the culture, it speaks to the collaboration, it speaks to how much involvement you have in the team other than maybe the single founder involved. And that was absolutely one of the things that we would always look at is there one person talking the whole time? And particularly when you're investing in a founder owner business, that means there's going to be a lot to do to empower people and change the organization in such key person risk. I think that's a very keen and unique insight because it shows so many things about the company and the organization and not only where it is but where it can go in a really short, fast-paced environment during a six-year period.

Demetrios Dounis:
Well, I think the last few years I think have thrown a lot of curve balls at us with the pandemic and inflation and interest rates. And having a strong team we think has that ability to overcome some of these challenges and create a lot of opportunities, create wins perhaps what I didn't see when I had initially underwrote the opportunity.

Sean Mooney:
I think that's spectacular. And similarly, one of the things that I would always look for is, if the CEO did just a very little bit of the talking during the management meeting, it usually means you have a really good team.

Demetrios Dounis:
Well said.

Sean Mooney:
And that's something that I've tried to do here when I jumped into the entrepreneurial land is try to do as little talking as possible, which also foots with my reluctant extroversion and introverted posture. So just hire better people and let them do all the good stuff. One of the things that I love about the private equity industry is this tenacity, this grit, this ability to work through change, this ability to overcome this mindset that you're going to get through things and find ways to get through both the good and the bad. And this concept of this too shall pass. I'd be curious, Demetrios, what was maybe one of the harder things that you've encountered in business or life over the last five years or so and how did you think about taking on that challenge?

Demetrios Dounis:
It's a great question and it's really a personal one and one necessarily that we didn't want. My wife and I had a very close family member who dealt with a serious health issue. That family member was a young adult, just a wonderful person and brilliant and kind and professionally accomplished and somebody who we spent a lot of time with. And unfortunately that close family member didn't get better. It's very hard accepting that loss and especially this time of the holidays. And the lesson from that is for me is just makes us value our family and friends even more. And really nothing is promised when it comes to health. So I think it has certainly reinforced the need to enjoy life and to again, celebrate happy moments and importantly to do the right thing, to conduct yourself, to do the right thing when no one is looking and how we like to behave. Certainly, I think it has conversely taken me to believe that you shouldn't tolerate bad behavior.

So my wife and I really make it a point to avoid people with negative energy and sharp elbows or big egos. And it doesn't mean that you aren't willing to make the hard decisions and avoid disagreements. I think quite the contrary, I think we find those conversations is easier because you're not dealing with topics that are life or death because we've dealt with that. And I think it allows you to do it in a much more open and truthful way that I hope others will respect the way it's done with integrity.

Sean Mooney:
I really appreciate your perspective and this sober take on life. It's something that I personally, I think still deal with every day and probably many in this industry where we are so forward looking and so objective oriented and that was one of the biggest challenges I had probably through much of my career, was never smelling the roses. It was just look next, next, next, next and the next thing you know, I think at some point my kids were probably like, "What's your name? You can call me dad. Like, well maybe." So I think it's those moments that cause you to say, you go around this track once and that's it. And I think your observation and insight in the way you live things are things that I think particularly we've all seen during COVID where we all got broken into little tiny digital boxes is a great perspective to have as we're all coming back together again.

Demetrios Dounis:
Our profession is so transaction oriented. You get sucked into the what's going on with your family of companies, how are you closing that next transaction? You lose sight of the bigger picture. So I've just found it's really important to reset and I'm lucky enough to have that strong family foundation, which makes it much easier to do what we do in terms of the deal world.

Sean Mooney:
Absolutely. And thank you for sharing that because I think that's something that we can all take to heart. As we think about the business of private equity and how it's evolving. And I think when probably you and I were entering the private equity world, it was as much about optimizing companies as anything. We take a company and make it better. And the name of the game in private equity these days continues to evolve into how do you transform these companies and make them not just be better but be all they can be in a very good and positive way. So I'd be curious, how does Heartwood and how do you think about value creation and attaching resources to your portfolio companies to help them along that path?

Demetrios Dounis:
It's a great question and to your point, private equity isn't a cottage industry anymore and these processes are competitive and it's important to have a plan, a value creation plan. And I would say our philosophy is probably different than many and by choice we don't have an operating partner model at Heartwood and I think it really has to do with how we like to collaborate and partner with founders and management team owned businesses. We do have what we call a value creation specialist team that focuses really on three core disciplines. First human resources, human capital. The second is a marketing branding E-commerce and the third being operations. So you can think of things like lean as well as cybersecurity ERP initiatives. And we have three seasoned and fantastic executives who work with our family of companies, our portfolio companies on very distinct projects. And it could be a project focused on succession planning or relaunching a website or rebranding effort that we try to put forward in many cases.

And then the group also spends a significant amount of energy around topics like cybersecurity, which is increasingly important to limited partners and just the sophistication of some of these bad actors out there have, especially when you're bringing a family owned business into a private equity portfolio. There are areas of investment that these family owned businesses just haven't been as focused on, but where our institutional investors and bigger private equity firms and strategic investors down the road do care about these processes in place.

And I would say the difference that we have is that these three specialists are employees of hardwood partners and work with our portfolio companies of free of charge. And really once that specific project at a portco is complete, they're moving on to a different portfolio project and we're very fortunate to have a many case studies highlighting some real portco wins from the contribution of the value creation specialist teams and these projects and these individuals are really partnering with management. So it's very collaborative, it's very iterative and it's very rewarding to see the results of both the management teams hard work as well as the value creation specialist folks.

Sean Mooney:
I love your collaborative approach and we've been fortunate to see how you all operate quite a bit and it's this great middle approach where it's not a hammer and everything's a nail. It's this idea of like we're going to come in, we're going to truly collaborate with founder owners who generally have know what they're doing, but get use a little extra help to go to that next level. And you're bringing in resources across the core areas that matter. How do you get the right people in place? How do you help lift revenue? How do you improve operations and how do you shore up the safety and security of the business? So I think you've checked all the boxes.

Demetrios Dounis:
We try and I think we're always trying to get better at our craft here and find ways of helping our portco grow.

Sean Mooney:
That's great. One of the other questions I think we get a lot of, and this is not only from just people in the business world, but these are even family friends who are considering bringing in private equity as a partner. And as you mentioned I think aptly it's not a cottage industry anymore. There's relatively large number of private equity firms, all of which are doing things in different ways. There's going to be the right partners for right people in different situations. What advice would you give to a business owner when they're thinking through how do we bring in a private equity partner to help take us to the next level?

Demetrios Dounis:
We often try to understand how we can set ourselves apart from others. And many cases we're being asked for advice simultaneously when we're looking at a prospective investment opportunity. And I suggest business owners really treat taking on a private equity partner like a marriage, not a business transaction. I would ask that private equity firm for references and call them and allow yourself to pick who you'd like to speak with. And that's something at Heartwood that we're proud of, the fact that we share a full list of the teams that we've been lucky enough to work with over our history and let sellers and management teams pick who they want to speak with. And I always encourage them to ask questions about how we operated or how that private equity firm operated when things didn't go right and do they have an operating partner model where someone is camped out in their office once a week?

And I think it's important to do that similar due diligence on these private equity firms and partners just like we are as investors into these businesses. And the other thing would probably, the advice I try to give is just around leverage. And there's so many private equity firms, I think over 2000 firms operating in the US and so many of these folks are going to tell you that they're different. And to your point, they are very different small and big differences between sponsors and family offices. I would really try to get at what makes that particular firm unique and makes them stand out from the crowd. And at Heartwood we believe we're remarkably different because of our low leverage approach and current yield model. And I think it takes folks some time to understand how much leverage is going to be placed onto their businesses.

And I think it's important for folks to understand how that leverage is going to impact the company and will that impact their ability to invest in people and growth and safety and every month or every quarter that bank or lender has to be paid. And the more leverage you take on, certainly there's a incremental risk that you take on as well. And if you stumble, that group is still expecting you to pay them. So it certainly can become a burden if you have a hiccup. And I would say to you today, leverage is much more expensive than it was 12 months ago and certainly less available. And that's a big part of how some sponsors have been able to generate a real attractive return for their investors.

So your previous question about value creation I think is something that I encourage some of the folks that I know who are thinking about taking on an investor to really consider. Is that growth, is that value creation that private equity firm is going to look to create is it going to come from growth initiatives or is it really from financial engineering or cutting costs? So I think those are really some of the things that we try to encourage some of the businesses that we get exposed to think about before they decide to bring on a partner.

Sean Mooney:
I really like your takeaways there. One of the things that I was always surprised about when I was in private equity was how seldom people would ask to do references on us. And we were very proud of our references and maybe we should have offered them proactively, but I was shocked. People, like you said, it's a marriage, they're often rolling into this transaction and we're joined at the hips for three to seven years. And the fact that people wouldn't do that, I think it's tremendous advice for anyone that's thinking about a significant business relationship like this. And then certainly the observation around capital structure. In times like these in particular, the debt isn't there and if you need the debt to get the returns, it's probably going to be harder. And then in any situation, debt is such a great multiplier of outcomes, both good but also bad. So from an expected value perspective of how you're going to do, if you're playing the extremes on debt, there's just a higher level of risk that everyone should be thoughtful about.

One of the things that I think is going to be very active in this coming year is going to be this concept of making add-on acquisitions. With a softer economy, maybe with competitors making poor choices on capital structure and going to be in need of white knight buyers to help their own organizations make it through the choppy water that we're going through and that's coming ahead. I think a lot of people are starting to think about how do we either proactively or in a white knight way make acquisitions within our own areas of business. And I think it's also an area that is a lot harder than people think in terms of one plus one does not equal two and seldom doesn't equal three if you're not thoughtful about it. So what would maybe some of the advice or some of the risk you'd point out to business leaders that are starting to think about making add-on acquisitions in the next near future?

Demetrios Dounis:
It's a topic that is top of mind, especially in the environment that we're in today. And I think folks in general are seeing a pullback in new platforms coming to market and less steel flow as we like to refer to it. And at Heartwood we think of ourselves really as platform builders. In many cases we're helping these portfolio companies really complete their first substantial add-on and really the advice we would give them is really take the time to build the right infrastructure in place so that you can focus on driving the growth of the core business. I've seen a lot of add-on acquisitions as I know you have over the years. Some can really enhance the platform and the value and some can take away from it. It can be a valued detractor and add-ons really should be core to the strategy and not just be done for the sake of doing an accretive deal.

And we see many times where a company embarks on an aggressive add-on strategy, you're left at the end with a hodgepodge of trade brands or brands where some of the part doesn't really add up. So that's the first I think advice that I would give someone who is thinking about that approach or is really committed to it as part of their strategic planning. And I think importantly, you better make sure that the add-on won't be a distraction to the team and the core business is going to remain very well managed. And the best way that you can do that is to have the right infrastructure in place in terms of finance and HR and technology and operations. And in our experience, it really takes at least the first six months to make sure that you've got the right framework in place before you are putting additional capital at risk.

And I'm sure you know, this in some cases you don't have that luxury. An opportunity sometimes may present itself earlier and in some cases the companies are ready sooner and in other cases the right thing to do is to take a little bit more time. I think almost everything about private equity, I have found is a bizarre mix of having to run super fast but also be patient simultaneously. If you can't do both, you are not going to be as successful as you could be. I often have this conversation with family members and I say we're completely different than hedge fund, where you're focused on what you're doing today and what you're going to buy today. I think a private equity mindset, at least in my experience, has been very different.

Sean Mooney:
Those are great takeaways. A couple things that struck me, this whole idea of prepare for success and that's no more important when you're thinking about bringing in a whole nother company into your company. This whole concept of let's measure twice and cut once and make sure you have what you need to be successful because you're right, if you do a bad acquisition, that can be incredibly destructive. One plus one is not always two, whether you're bringing it internally as your core or using expert resources to rent, getting the right resources in place is critically important.

And I also loved your takeaway, Demetrios, on this whole idea of, I think some people feel we're just going to put a bunch of stuff together and everyone can point to one instance where they got away with it, but inevitably that's the outlier that everyone thinks they can get away with. But every other one, no one ever buys it. I'm not buying this rag ragtag lot of companies you stitch together.

Demetrios Dounis:
It only takes one. That's where I think our industry's very fond of saying that expression in terms of a buyer, but I just think that the market today is just much more sophisticated. You need to expect that buyers are going to do the hard work and they're going to challenge your assumptions, challenge your management team. And I think again, if you have this strong foundation and make the right investments in place, good things will happen.

Sean Mooney:
That's great. One of the things I always love to reflect on in private equity is how much you learn every day. And I was, I'd say modestly successful in an industry where everyone was mostly smarter and more capable than I was. And the only way I got around it was by constantly looking and seeing what other people were doing and learning from that. So in particular at BluWave, we're working with all sorts of folks like you. Every day I have things I wish I knew before and even after I liberally borrowed everyone else's best practices for an entire career, it got supercharged here. So now I'll send this email about all the things I wish I knew then because it's just amazing. If I had to come up with any of these things myself, I would've been in a lot of trouble. So I'd be curious, if you were to go back in time and meet your 22-year-old self, what would be one of the top pieces of advice you'd share that you wish you knew then?

Demetrios Dounis:
I only wish I had this chance. I think I echo some of your thoughts here. I would tell him good things are ahead for you. You're going to graduate from a good school like Rutgers and have an opportunity for a great career in public accounting to start. And that you're going to be able to participate in a really dynamic business world and cool things that you're going to be able to do professionally and personally. That would be the first advice if I was able to go back to the future again, another 25 year old movie reference. But the other piece of advice I would have is network and hustle Trump's pedigree. I didn't go to Harvard or Yale. I'm the son of a public school teacher and the son of an electrician who had one truck, one sole proprietor business and I've had a nice career in private equity and it's because of the hustle. And there are those who have that pedigree that you'll compete against and they'll think that, that's enough. And in most cases, those folks will fall by the wayside.

Sean Mooney:
I think those are wonderful pieces of advice in terms of go with the journey, you're going to get there when combined with hustle. At the same time, those who work harder, you have to be smart enough in this world. It's the hustle that I think in many ways dictates the winners from the losers. And maybe just a quick anecdote, I had to even outline this. A friend of mine was talking to one of the administrators at Yale, which I certainly did not go to. I didn't know any of those pedigrees, but he was delaying the story. And he goes, "Well, even within Yale, who are the successful people?" And he goes, "Without a doubt it's the B and C students that hustled. And those were always the best people." So even within that cadre of the universe, you can have opportunities, but it's what you do with it and how hard you work that I totally agree, made the whole difference. And if it were up to pedigree, I would've been out of the business a long time ago.

Demetrios Dounis:
So agreed. And the harder you work, the lucky you get. It's funny how that adage, I think has proved right many, many times.

Sean Mooney:
Demetrios, I really appreciate you taking the time to share your insights here. This has been really spectacular and as always, I've learned a lot from you today. So thank you so much.

Demetrios Dounis:
Well, thank you. Very kind of you to appreciate the kind words and the opportunity to participate here. Really enjoyed it.

Sean Mooney:
Thanks so much.

Demetrios Dounis:
Take care.

Sean Mooney:
Special thanks to Demetrios for joining. That's all we have for today. For more information, go to BluWave.net/podcast. Please continue to look for us anywhere you find your favorite podcast, including Apple, Google, and Spotify. 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 your success onward.

Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.