Private Equity Career Lessons from 25 Years with Meranee Phing Naaman

Lloyd Metz: [00:00:00] Get ready to peer behind the curtain of the private equity universe with each episode of Best But Never Final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together we'll navigate the corridors of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

Let's go.

Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd. How are you guys?

Lloyd Metz: Good. Good. Hey guys.

Doug McCormick: Great. Sean, how about you?

Sean Mooney: As usual, the year is racing by, and I'm wondering where the sands in the hourglass went, but such is life, right? I think there's a, a TV show during

Lloyd Metz: I was gonna say that's old soap opera Days of Our Lives.

What are you, what are you doing, Sean?

Sean Mooney: Child of the 80's. I [00:01:00] used to watch those, you know,

Lloyd Metz: I used to watch that with my grandmother. Holy cow.

Sean Mooney: Exactly. Sometimes, sometimes I pull out the good ones, right? Also, with introspection in mind and thinking about how the world works. One of the things that I was thinking about that would be great, and we've been talking about is starting to do and continuing to do more of these deep dives in the world of private equity in terms of where we spend time and one of the major, major areas that private equity invests in focus is the consumer markets.

And so what do you think about doing a deeper dive here? And I think we have a special treat in mind with this as well.

Lloyd Metz: Yeah, absolutely. Sean. I spent a good amount of time in the food and beverage space and particular ingredients. And enough laps around the sun, you run across some good competitors and people that you come to admire and respect professionally, and I'm really excited to have one of those people as a guest on our show today.

Just thrilled to introduce Meranee Phing [00:02:00] Naaman, and she's a trailblazer of middle market investing. She is over 25 years in private equity, two decades, roughly, as a senior investment partner at the Riverside Company and has been leading dozens and dozens of deals in the space that we've been talking about here on this show, companies 10 to 35 million of EBITDA, and she's been pretty consistent in finding ways to double or triple 'em over a five year hold period, so that lower middle market private equity investing that we do, she's been there, done that, and really good at it.

Really excited to have her on today. She's got great stories. I can't wait to start the conversation and, and learn more from her. She has also retired from Riverside and is an independent investor and board member and advisor to different funds, family offices and platforms, and is currently working [00:03:00] on an accounting and tax roll up.

So she's got great perspectives. I can't wait to get the conversation going.

Doug McCormick: Let me just say, Mary, I'm, I'm intimidated after that intro. I mean, Jesus.

Meranee Naaman: Lloyd, that was way too kind of an intro. I'm thrilled to be here and, and thanks for the invite. Perhaps a few additional things that I'd mentioned about my background that I thought might be interesting to your listeners. I mean, I really came from a bit of a non-traditional, I think, background for someone in PE, but I think it's really shaped who I am and really helped sustain a longer term career in PE.

I'd really tie that back to my immigrant parents and upbringing. So I was born and raised in Atlanta. My dad immigrated to the United States from Thailand with $60 in his pocket to get his PhD from Georgia Tech. He was the first of eight kids in his family to graduate from college. He ended up opening up the second Thai restaurant in Atlanta in 1980, and this was before most Americans even knew [00:04:00] that Thailand was a, you know, a country in Southeast Asia.

I was an only child and so I was really practically raised in this Thai kitchen. I watched my parents work incessantly 24/7 to really provide me opportunities they, they never really had, and I often say "monkey see, monkey do", and, and so, you know, a strong work ethic and that grit, I think that helped in PE really was instilled in me early on.

As I grew, I really couldn't wait to leave the kitchen. And as a natural extrovert, I was a really super active teenager. I made friends everywhere I went, I could talk to a brick wall. I kind of got along with everyone, you know, that I crossed paths with. So I think, you know, that strong work ethic and really the ability to survive on very little sleep kind of also helped.

It certainly helped when I had three kids earlier in my career and was rising through the ranks at at Riverside. I think I'd also mention this pivot [00:05:00] in my life too. For folks that might be interested. So I, I went to Duke and I was a pre-med.

Lloyd Metz: We won't hold that against you.

Meranee Naaman: Oh no. Are you a Tarheel fan?

Lloyd Metz: No, my brother went to Duke, so I just, I talk trash.

Meranee Naaman: I can't believe you. You're in the family!

Sean Mooney: I'm a Hoya, so I don't have, I haven't lost any love for Duke. So you, you've got the better part of the rivalry. It is really, we're non-rival for you all, let's be honest.

Meranee Naaman: Good soccer team though.

Sean Mooney: Yeah. Yeah, exactly.

Meranee Naaman: I went to Duke I was pre-med. I thought I, I wanted to be a doctor, really kind of inspired by the altruism of my father and our belief and his belief that, uh, education was a great equalizer.

So I really did everything in college to try to convince myself that I wanted to be a doctor. I did medical research at Howard Hughes Medical Institute, I candy striped at the Duke Hospital. What I realized is that I didn't really like being around sick [00:06:00] people and felt emotionally drained by that. So I ended up taking microeconomics and financial accounting my senior year and loved those classes, and they came so much more easily to me than my pre-med ones.

And so after I landed, you know, an investment banking analyst kind of job in New York City, I rescinded it though because my dad ended up being diagnosed with terminal cancer my senior year. And so I went back and ran one of his five Thai restaurants right after college, and it was by far the toughest job I have ever had.

Even more so than investment banking and private equity. But what it really taught me was, you know, operations firsthand and I think put me back down the path and pivoted me right back to finance. So dress kind of history from there.

Lloyd Metz: That's a really fascinating background. And is that how you found your way to being interested in consumer companies?

As you went through your early career and into private equity, is that how you found your way to consumer?

Meranee Naaman: I think it [00:07:00] impacted what eventually was my love for consumer, but really so at DB Capital, I mean I was working on all different types of companies I worked on, especially chemical companies, consumer companies, semiconductor companies.

And then fast forward to Riverside, I chose consumer for a couple of different reasons. Both, I'd say professional and personal. I mean, professionally. I really enjoyed consumer Whenever I, you know, did those deals, I felt energized and passionate about it. And partially probably because it was tangible to me, it was also not subjected to a lot of the stroke of the pen risk that you may see, like regulatory risk in healthcare.

But personally also, right? This was a time when Riverside was kind of moving from becoming, uh, we were generalists to specialists, right? And so we were all encouraged to kind of find a way. To focus our targeted investment efforts in certain industries. And as we were kind of making that shift from generalists to kind of specialists for the first kind of seven [00:08:00] years of my career at Riverside, right?

We were kind of just focused on acquiring niche leaders. So number one, two or three market leaders in their space. So oftentimes, those businesses would have 50% or more in market share and we were supposed to double or triple in size in five years. And at that time, we were a $1.2 billion fund, the predecessor fund was $750 million ,

but we hadn't really changed the size in terms of our targeted EBITDA platform companies I mean it was an average, about $5 million EBITDA, and we were having trouble putting money to work. And as we were harvesting some of those earlier investments, what we were realizing is that, yeah, fine returns, but,

versus the growth that we were underwriting, they were slower growers, and so we really needed to find industries with larger TANS, a la consumer. I'd say personally, I had a great mentor too. She was a partner at the time, and she said to me, to continue becoming partner and rising up the ranks, you're gonna really have to find an industry that you [00:09:00] need to own and drive.

And so I looked around and, you know, I, I didn't think that any of the other number twos would really wanna own consumer. This was 2012-ish. I had just completed my first principle led deal at the time, and it was of a business called Baby Jogger, and it was a premium stroller brand. And no one understood why we would wanna to invest in a stroller company.

There were thousands of stroller companies around, but I had just become a mom. A couple of, you know, years before, a first time mother, and so I was a user of the product and the product had a one handed patented, differentiated fold. You could just lift it one time and it fold immediately. And so it was really great for parents active lifestyles like myself.

And so I really loved the product and the brand and I think helped win that deal with the, the, the sellers around the table. And I certainly was the only mother around the investment committee table, so I really pushed hard to invest in that deal. At [00:10:00] that point there was a lot of early momentum in the deal too.

We had acquired it when it was about $50 million in sales and it was being sold in 50 different countries. And then, you know, two and a half years we grew it to over $100 million sales and it was being sold to 80 different countries. So we scaled it pretty nicely and we sold it to normal Rubbermaid for, uh, a very nice outcome in less than two and a half years

Lloyd Metz: Now that's super fascinating 'cause I remember those days. And this brings me to a question I guess I have for you around consumer and how do you gauge the consumer trends and where they're headed, right? Because around that time Bugaboo, right? Bugaboo frogs were super popular. So how do you know they're gonna prevail against Bugaboo or vice versa, right?

That there's enough TAM and enough distribution and enough room out there for both to win. Or like how do you pick the winners in consumer. Unpack that a little bit for us, using that example of that deal.

Meranee Naaman: Bugaboo was ultra premium, so it was [00:11:00] costing about $1500, $1600 a stroller, I mean, per stroller at the time, right?

And so it was super expensive. And honestly, like oftentimes in consumer, right, you feel like you're squeezed in the middle. But Baby Jogger was actually kind of in that middle, upper premium range and Bugaboo, while it was more of a status symbol that wasn't as large of a TAM, to be honest, because, there are oftentimes in consumer, just universal truths, right?

So I, I often say like at Riverside we had the benefit of having a global footprint. So we had five fund strategies with dedicated consumer investment professionals across four continents, North America, pan Europe, Australia, and Asia. And what starts off as a trend in Europe or Asia could easily come to North America or vice versa.

And that certainly was the case in infant/juvenile. And the universal truth was you will spend as much as you've got as a parent to give the best to your child. So in this particular case, [00:12:00] Baby Jogger was really benefiting from folks that were, were kind of Graco buyers, if you will. So mass stroller buyers that wanted to move up to this kind of mid-tier premium.

But then there were a lot of kind of the Bugaboo buyers of the world that would actually move down because Bugaboo was so cumbersome, it was so heavy, it wasn't functional. There wasn't a whole lot of innovation to it at the time. And I remember like. If you were in New York City, right, and you were living, you know, in a brownstown, right?

There was no way that you were gonna carry that $1500-1600 stroller up three to four flights of stairs, right? You would just park that stroller kind of at the bottom, and people were getting their stroller stolen, you know?

Yep.

Lloyd Metz: Yep. Yep, that is true.

Sean Mooney: That's a big reason why we moved to Connecticut.

Lloyd Metz: This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm, focused on partnering with family and founder owned [00:13:00] manufacturing, service and distribution companies. ICV partners, an innovative private equity firm supporting management teams of leading companies at the lower end of the middle market. And Bluwave, the business builders network connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point, and on time due diligence and value creation needs.

Now back to the episode.

Doug McCormick: As I hear the way you think about these opportunities and talk about some of the things you've invested in, it reminds me of my, my first investment book ever was one up on Wall Street by Peter Lynch. He had the saying, just invest in what you know. I'm really intrigued by your personal experience driving the thesis.

Has that been a common trait for you where you develop a conviction based on your personal experiences versus like kind of clinically assessing the market?

Meranee Naaman: That'd be a cardinal sin. [00:14:00] I mean, I think it provokes interest in certain sectors that I want to pursue, if you will, but I think everyone has an opinion in consumer, right?

And when you're sitting around that investment committee, we're probably the least representative of a group of people that represent the average American. So, no, I mean, this just happened to be one area, because I was looking for also a reason to lean into consumer as an industry specialization kind of early in the, in the Riverside days.

But if you've got an inclination that there is a trend versus a fad, right? I mean you still need to go through all of the clinical assessment, the diligence, ensuring right, that, I mean it's, it's anywhere from not only just validating kind of what that TAM should be, but you gotta look at the sell-through analytics.

I mean, there's just, you know, you gotta look at everything, right? I would not impart my opinion of one on any deal that we did. This was really the only, I'd say, [00:15:00] sector that I had a lot of personal, personal experience in.

Lloyd Metz: And Mary, just to that point, what sort of work have you found most effective to figuring out and deciding or determining if a trend is an actual trend with legs or if it's a fad?

Any wisdom or tips or pointers or techniques you wanna share?

Meranee Naaman: It's not the same for every single consumer sub-sector that we were targeting investments in, but for Baby Jogger in particular, right? We did an ethnography study, for instance, right where it was a two week study where we had 200 parents that we were kind of following to figure out like what were their lifestyles like, why did they like kind of Baby Jogger, what was the affinity to the brand?

How would they rate it versus other brands out there? And so that gave us conviction. We looked at it also all over the world. This was also something that was very advantageous. So since we had offices in Europe and China and [00:16:00] Korea and Australia, we actually ended up using a lot of our colleagues, and

actually going on to event local blogs, parent blogs right? Seeing what they were saying, we actually ended up asking them to go to retail shops in those continents and talking to kind of the distributors kind of in country to make sure that everything that we were hearing from kind of the company and the management team were actually accurate.

We analyzed how, why, when and where expecting parents were making their purchase decisions. We asked, were there ways we could continue to keep that consumer loyal after their first stroller purchase, perhaps through an umbrella stroller when their child is aging up into the toddler stage. In fact, an umbrella stroller was the only stroller category type, not in Baby Jogger's existing product offering, or in its new product development pipeline.

So we focused on acquiring one during our hold. We assessed the strength of Baby Jogger's, patent and [00:17:00] differentiation, and its historical sales by product, geography, and channel. Baby Jogger had the City Mini patented one-handed fold for the everyday stroller, but it also had a robust new product pipeline that could expand the brand into other stroller categories, and we believed that it had permission from the consumer to do so based on diligence and feedback from international colleagues.

We also believed Baby jogger could continue to both penetrate and expand into numerous other countries within Europe, Asia, and the Middle East. And from a channel perspective, Baby Jogger started as a product sold into specialty retailers and we believed it could continue to penetrate and expand into other channels.

Although at the time I remember there was no real channel of e-commerce. Buy Buy Baby was its biggest retail customer and Babies "R" Us was its second, neither of which have standalone bricks and mortar stores today. And I remember one of the things we uncovered during our hold is that both retailers couldn't even, at that point, track what its website and [00:18:00] online sales were.

And Baby Jogger hadn't even started selling D2C. I mean, e-commerce as a channel didn't yet really exist, or at least e-commerce as a channel was not what it is today. In fact, at the time I remember we were trying to project what percentage would e-com eventually normalize to as a percentage of overall channel distribution in the following 5, 10, 15 years?

Would it be 1, 5, 10, 20 plus percent? We just didn't know. I mean, ultimately I think of that as explosive growth for one or so years, and a real trend creates a 10 to 20 year tail end of growth that supports pricing, power category, expansion, and repeat purchases. So analyzing psychographic factors, secular trends, and shifts and growth opportunities where just some of the things we would do to figure out if it was a lasting trend versus just a flash in the pan.

Lloyd Metz: That's super helpful.

Sean Mooney: One of the great things about the consumer industry that ultimately evolved there was the amount of data that that became available eventually.

I [00:19:00] never had enough good taste personally to understand consumer because of like what we'd call the n=1 phenomenon. Like do not trust my judgment on this, but we would buy and build businesses that we would then sell to companies like Nielsen and who are aggregating all these businesses.

So, share a little bit, like how did that data role actually ultimately play your ability to kind of understand how these trends navigate and play in in the more kind of modern markets?

Meranee Naaman: Well, I think in general, I read, observe, listen, network a lot. I'm naturally very curious and I love learning constantly and across funds.

We'd also have consumer industry, offsites and state of the unions. We'd create an advisory board that was often comprised of the "who's who" in the targeted sector. We'd attend trade shows. We'd have annual road shows to speak with sector bankers and industry experts, and we leveraged data where we could, and it was data from all the deals and data rooms that we were seeing and digging through.

And for every consumer deal, we evaluated the potential of the company's growth prospects [00:20:00] against a scorecard we created that tried to assess the customer's enthusiasm and loyalty, often measured by NPS scores, product or service differentiation, often through online reviews, and brand authenticity often through being able to charge a premium or trying to assess if there was a massive cult-like following.

Doug McCormick: One of the things that's interesting about your success is you know, the importance of being early in a trend and identifying segments that gain popularity over time. And so I think that's important in any private equity model, but seems like particularly important in in consumer. So you were super early with a super successful platform in residential home services,

which is one of the most competitive and sought after markets today. And so maybe you could tell us a little bit about the platform investment you made in Dwyer, which ultimately became Neighborly, and I know that's been a, a huge part of your career and a great accomplishment.

Meranee Naaman: Sure. So I've been an investor in home services and like commercial [00:21:00] services for 20 years.

And you mentioned Dwyer, so. Dwyer, which is now called Neighborly, is the world's largest franchisor of consumer service brands focused on repairing, maintaining, and enhancing premium services in around the home. I kind of got involved in home services serendipitously 'cause shortly after I joined Riverside in 2005, Dwyer was actually the first portfolio company I was assigned to as a senior associate.

And so I was part of that deal team for three years and then eventually got pulled off after I got promoted to to vice president. And the first time we acquired Dwyer, it was publicly traded and we took it private in 2003 when it had less than $5 million of EBITDA, and we more than doubled it organically.

And then we held it through the great financial crisis and sold it to TZP, another private equity firm, in 2010. And by the time it kind of came back to us in 2014, I was a partner and I led the reacquisition of Dwyer when it had about $20 million of EBITDA I'd say [00:22:00] in terms of sourcing, so the first time we sourced Dwyer, it was really opportunistic.

Riverside had lost out on a franchising deal, so we ended up cold calling competitors and the CEO picked up the call because if I think back then thematic based investing, it didn't exist in the early 2000s right? And, and PE was much more nascent. But by the second time from the outset, we, we loved the home services industry because we had already operated in this space and had success in it.

This was a good example of kind of inside out investing, right? Versus outside in, we intimately knew kind of the company, so we felt comfortable there. Then we moved to kind of confirming the industry size and, and honestly, it was more confirmatory in nature in 2014 versus when you're looking at a brand new company.

You're really evaluating kind of the micro and then the macro and then the management team and then you know, along the way, right? Your kind of conviction kind of settles in and [00:23:00] naturally increases until you end up finding like your gut and intuition kicks in when you can kind of get all those three right, and there's that great recipe for success.

We looked at again, you know, 5 to 6,000 deals a year at Riverside. There's a lot of pattern recognition to that, right? We know what great companies look like based on best in class benchmarks and, and in KPIs. And the second time we acquired Dwyer, I mean, we honestly didn't spend that much time sizing the industry itself.

In 2014, I remember we said we think it's about $50 billion and we really just pulled it from third party research reports right? So for us, we kind of just checked the box there, right? Based on all the verticals that Dwyer was playing in at the time, we knew it was sufficiently large enough to grow a $20 million EBITDA company

2 to, you know, 3x. So kind of check the box there. And having been in the industry and on the deal team before, we knew that it was a highly fragmented industry with not a [00:24:00] whole lot of national competitors, right? So we really saw this opportunity to continue becoming the largest national player of all things home services related.

So really during the diligence process, we really focused more tactically, honestly, on what was the white space for our more mature franchise concepts like water and fire damage and restoration, like HVAC, like plumbing. So we wanted to make sure there are enough territories for the franchisees to continue adding more territories across the United States.

We really focused on could we really drive same source sales growth. They had really consistent same source sales growth for 10 prior years. I mean, it's always been about kind of like 5 to 10%. It just clips 5 to 10%. But could we continue growing that at $20 million of EBITDA?

Sean Mooney: So first time around you sourced the deal.

I think Riverside was really one of the innovators in proactive sourcing and private equity and built kind of an [00:25:00] unparalleled engine where you got to see the market. And so it sounds like it came through that really kind of proprietary capabilities that you all were, I think, earlier than most on. And in some ways your colleagues there were kind of credited with almost creating the, the business development function in private equity

I would say. And so you see this deal, you see it's opportunistic. What was Dwyer then, like where was it focused within the broader home services space? Was it in one category or two or, or was it doing kind of a whole variety, even?

Meranee Naaman: No, so it was doing a whole variety back then, and so it was, we were eight service brands then in HVAC, plumbing, electrical, glass repair.

It was already there, but by the time we exit, we expanded into eight more service verticals. We were a diversified, multi-franchisor concept platform at that point. Basically what we grew from 8 to 19 consumer brands, 1300 franchisees to 3200 from less than a billion dollar system-wide sales to over [00:26:00] $1.7 billion system-wide sales.

And, and we're serving at that point over 2 million customers. And some of the new service verticals that we expanded into were residential cleaning, handyman, lawn care, window cleaning, things like that. And I think we were really pretty much the first at the time to really realize that, hey, now you're seeing it a lot, right?

You've got obviously a lot of consolidation plays going on, and so this kind of idea of leveraging corporate overhead and ancillary services or shared services across numerous brands is pretty standard today. But back then, they really hadn't been done to a franchisor of that scale, so we were probably one of the first to do that as well.

Sean Mooney: So you saw a large market in early opportunity. You saw a unique franchisor who had already started up probably much earlier than many, this kind of multi-service [00:27:00] set of brands, and you saw the opportunity, it sounds like, in the first version, to further expand the breadth of those through the motions that you've already established in these other markets.

Was that kind of like the first thesis of like, "Hey, we've got this huge market, it's fragmented, it's underserved, we've got an early leader here that we can then even further expand and grab more market?"

Meranee Naaman: Yeah, no, absolutely. I mean, so. Dwyer was kind of the gold standard in franchising and in services at that point.

So our investment thesis succinctly was really, we thought we could acquire a leading kind of franchisor in the US of need-based and maintenance repair services. And we knew that at that point we had checked the box kind of on being a large market. And yeah, there was a lot of back office support functions like finance and accounting and marketing and training and best practices that we kind of could share across the franchise brands.

And we really felt like we could continue to drive new franchise sales and build market share in this highly [00:28:00] fragmented kind of market because we actually, we thought what was a competitive advantage is that we had our own franchise sales development group, and a lot of these franchise concepts get sold through brokers.

And we believe that we could drive that state royalties from those franchise same source sales concepts, and then hopefully, eventually cross-sell across the brands. I'd say the fourth part of that investment thesis was we also believed we could pursue a very actionable add-on strategy. Because the first time we owned Dwyer, we didn't do any add-ons.

And so we had this list of add-ons that we thought that we could go out and pursue to really accelerate domestic and international growth.

Sean Mooney: Why is it that private equity firms are attracted to the franchisor model versus maybe building out and organically constructing new locations over time? And I know it can be both, but what is it particularly about the franchisor model for people who aren't familiar about kind of the unity economics of this particular type of company that makes it really good for investors?[00:29:00]

Meranee Naaman: Franchising's attracted to PE investors because of the potential for nice returns to stability and scalability and manageable risk. It's asset light. There's not usually much CapEx. Since the franchisees typically own or lease their physical locations and equipment, there's usually stable recurring revenue streams and high cash flow if you can prove the franchisee base is stable since there are royalties charged as a percentage of the overall total franchisees sales.

So these royalties often become annuity-like in streams. In general, successful franchisors have high EBITDA margins due to low overhead costs. Since franchisees handle the day-to-day operations and franchisors can also scale rapidly by opening new territories or in new markets, and value can be created by further professionalizing operations, franchisee support, or optimizing procurement supply chains.

And finally, I'd mention the franchise model is also pretty resilient to economic downturns as home services as [00:30:00] an industry is also pretty recession resilient. In fact, from a new Z perspective at Dwyer, oftentimes we'd see an uptick of new franchise openings during downturns as folks were getting laid off and there was more of an appetite from the entrepreneur's time in life perspective to open his or her own business and be their own boss.

And acquiring that franchise blueprint gave them a quick roadmap to get up and running and become a successful business relatively quickly. And so a lot of people are very attracted to franchisors. Franchising is a business model and not necessarily an industry. So it's really hard to find a great franchisor scale.

I mean, so for personally, right? I, I tried even after kind of the, the Dwyer exit, right? To repeat, kind of going back in and, and acquiring another franchisor scale and home services, but it's really difficult.

Sean Mooney: Okay, so Meranee, that makes a lot of sense. In terms of the positives of like franchise model, as you mentioned, it's [00:31:00] asset light, it's high cash flow positive,

it makes lots of contributions in a, in a very scalable way. It's something where you don't have to own a lot of assets. I think some might say some of the downside of the franchise model is you have a lot of cats to herd, there's a lot of persuading. You all have to march to a common beat of a drum. In a situation where you don't necessarily absolutely have to if you're a franchisee.

So a lot of investors will also start thinking about company owned models to get more of an ability to push through common practices more swiftly and more persistently. Is that something that you also think about?

Meranee Naaman: Yeah, for sure. I mean so, that was also one of the reasons we ended up jumping onto the company and model side, because you can, can take all your lessons learned almost from investing in home services on the franchise side and apply them directly to the company owned model side, right?

Because on franchising, it's an arm's length agreement that you have with your [00:32:00] franchisees, right? You can't force change. You've got to convince them that whatever change you want to implement is the right path. That's the one thing that I think we really underestimated at Dwyer when we were in the midst of transforming that business, is that it takes a lot of time to convince them that you need to implement kind of new IT systems.

You need to adopt service typing, right? So you tell them like, look, this is gonna make your life much more efficient, much more productive. You'll make a lot more money. It took us a long time. I mean, so that was one of the key risks in the deal.

Lloyd Metz: Now, I'm just curious on the second hold, the way you were describing it, it seemed like the second time around it was pretty straightforward in terms of getting comfortable buying the company again for the second time.

Doug characterized that, initially earlier in the podcast, is nerve wracking. How did you get comfortable [00:33:00] and how did you get your colleagues and partners comfortable with buying it the second time?

Meranee Naaman: Well, if I look back, it was really tough reacquiring Dwyer. In fact, most partners initially voted down the deal and was really the co-CEOs who really supported me over a five to six months deal process.

I mean for an asset that we institutionally already had owned for numerous years and we knew well and had a good outcome the first time, we diligenced Dwyer the second time for almost six months on an exclusive and proprietary basis. We had 70 meetings and calls going three to four layers down within the Dwyer Management Organization for pretty much a legacy management team that we had worked with before.

In fact, it's the only deal that I can recall where the co-CEOs went physically down to Waco, Texas to review all key diligence findings with management before our final IC. I remember I was pregnant with my twins at the time and grounded, so I couldn't fly down to Waco. And I vividly remembered it almost killed me having to dial [00:34:00] back into those meetings back to back all week.

And this was like pre COVID and before Zoom teams and virtual meetings were common. But if I had to describe what we were able to kind of create in about three and a half years, we essentially grew Dwyer Neighborly from $20 million EBITDA to $65 million of EBITDA, from 8 to 19 consumer brands, from 1300 to 3200 franchise locations, from less than a billion in system-wide sales to over $1.7 billion in system-wide sales.

We served over 2 million homeowners and expanded from 6 to 14 new service verticals. Initially, Dwyer had franchise concepts and water damage and restoration, plumbing, HVAC, glass repair, and electrical. We acquired brands to expand into new service verticals, including residential cleaning, handyman repair, outsourced property management, window cleaning, and lawn care.

We completed 11 add-ons in 5 different countries around the world and created a unique integrated home [00:35:00] services platform of brands that touched almost every part of the home. The first time we owned Dwyer, we really didn't do an add-on. However, during our second ownership, based on the company's scale, reputation, and market position,

Dwyer was considered an acquirer of choice, which enabled us to buy several franchisors at relatively favorable valuations.

Sean Mooney: One question for you though, I'm, I'm curious, is you got a second look at this. Had the business kind of grown substantially since your exit the first time around, was it much bigger?

Meranee Naaman: Yeah, it was bigger.

So when we took it private, it was $5 million of EBITDA. We sold it to TZP, it was $10 million of EBITDA. TZP then grew it and doubled it to about $20 million 4 years later when we stepped into it.

Sean Mooney: And maybe one theme I think will be interesting for listeners here who aren't maybe as familiar, and something that I experienced was I was at a lower middle market PE firm,

we would grow it and then we would probably often love to own it again, but there's no way we had enough firepower to own it again. Part of what I'm wondering is did enable you to do this [00:36:00] because, your firm had developed a micro cap fund and then a large cap fund, so you could then get the opportunity to see these pitches again and have another bet?

Because you've got the stack on size. Was that something that enabled?

Meranee Naaman: Yeah, 100%. I mean, so that was a very purposeful strategy by the firm overall. Because when I first started, I mean we were, our sweet spot deal size wise was $3 to $7 million of EBITDA. And we constantly got pushed up to do bigger deals

as we introduced new fund strategies like the microcap fund, we would put an average of about $75 million equity check size in the main large buy buyout fund, but it was much smaller than the earlier days.

Sean Mooney: It's an interesting, and I think pretty cool evolution of the industry because it used to be your place you played, but now you're finding these multi-asset class funds that can kind of do this, and now you've done six of 'em it sounds like, or they did six of them then.

The best company you know is the one you already knew, right?

Meranee Naaman: That's right. I mean, yeah, you'd rather sleep with the devil that you know than the one that you don't [00:37:00] know. So one of those six actually Sean was HSI. So HSI was a business that the microcap fund in the healthcare space, and then the main flagship fund bought that.

Sean Mooney: And so as you, you get this second opportunity here to own a business you knew, you kind of knew the ins and outs of it, the good and the bad, and the team and, and the opportunities. What were the core things that you did during this second hold that then brought it to the even higher altitude?

Meranee Naaman: So Dwyer Neighborly was the first asset

riverside institutionally bought twice. Now they subsequently have reacquired at least six more. In fact, the third asset we reinstitutionally reacquired was also another portfolio company of mine. We got the opportunity to re-look at Dwyer on a proprietary basis since the CEO, President, and team's values aligned nicely with Riverside and the management team really wanted to partner with us again.

It was also advantageous that a very good friend of mine from business school was also on the TZP deal selling team. [00:38:00] Most importantly, being on the original Dwyer team gave me insights and conviction to really pursue the repurchase. I thought knowing the industry and team was a massive competitive advantage.

We knew the skeletons in the closet and we were able to start developing a growth plan during diligence and made sure that the legacy Dwyer management team was on board with the changes we thought should be made before we even closed the transaction. Since Dwier was the first deal that Riverside reinvested in, there was a lot of trepidation around that IC table, and we almost really didn't do the deal in 2014 because while there were a lot of reasons to like Dwyer: marquee franchiser in the industry, strong franchisee and customer value proposition, low downside risk due to the high cash flow generating franchise model and numerous growth opportunities, and above all, it was an asset we knew well since we had owned it before.

But if I rewind the clock. Dwyer would've represented our fund's largest equity check written at the time, over $100 million dollars. And at that point we were investing kind of $50, $60 [00:39:00] million equity check bite sizes. So there was a lot of discussion around the table about the risk and very little on the upside and what we could do with it.

But we were having a tough time that year deploying capital. So we wanted to invest in a, what we would think safe investment. The group's key concerns were one, first management. Could this team scale and take the business to the next level? And would we be able to attract talent to Waco, Texas? Second, outdated IT systems that wouldn't support the growth and execution risk of changing out the numerous proprietary old systems that we actually created the first time we owned the business.

And three, potential tech disruptive risk. However, perhaps the group's greatest risk was that what I'll call the idiot risk factor, or the overconfident notion that since we owned the business before, we should be able to do well with it again. But if we failed, we'd look like bigger idiots to our LPs and Riverside's investors.

I had the insights from being on the team the first go around and felt strongly that business as usual, our previous [00:40:00] strategies to grow would not be enough to drive outsized returns. But given Dwyer's stability, track record, a high free cash flow model, I believed there was minimal risk of principal loss and a great stable spot to invest a large amount of equity.

And I believe we could also develop a detailed plan to mitigate the identified risk and drive outsized growth. I mean, essentially, I really felt like we could generate 1.5 to 2x by doing very little, but to drive really outsized returns, we'd have to do something different in our second ownership.

And so we, we laid out a plan on all of the key risks on management. We had worked with the majority of the management team the first hold. We knew their relative strengths, weaknesses, and styles, and what management changes we needed to make immediately. Some Dwyer executives had worked together for two to three decades and were homegrown, and we knew we needed to bring in some fresh outside thinking.

Riverside's were concerned that attracting real senior talent to Waco, which is about an hour and a half outside of Dallas, would be extremely tough. However, I knew [00:41:00] Dwyer was the gold standard in the franchise world. So it's where you gotta work if you wanna learn the best in franchising. As a result, we were able to hire a strategic CFO and a European CFO.

We replaced the general counsel, which actually is an important position in the franchising world. We hired Grayson Brown, who's still actually at Neighborly, and we also replaced the VP of marketing with the Chief Strategy Marketing Officer to drive our general strategy. Another concern that the IC had,

so Mike Bidwell was president at the time and Dina Dwyer was CEO. And when we sold Dwyer the first time, Mike, rest his soul, he actually ended up surprisingly passing away two years ago. We officially made him CEO. People around the IC table were concerned about Mike Bidwell stepping into the CEO role.

Because at the time, Dina Dwyer was CEO, but I knew from the first ownership that Mike actually, even though his title, his title was president, he was actually running the day-to-day operations. So I was really less concerned about [00:42:00] Dwyer from sustainability standpoint and more focused on whether Mike could scale up to become CEO of a business twice its size on the outdated IT systems.

We recognized that in order to truly benefit from the scale of Dwyer, we needed to leverage data gained across the franchise base. However, with the existing legacy systems, that would not be possible. And as I mentioned, frankly, we were creating this problem the first time we owned Dwyer. We developed our own proprietary IT system called Zora that just wasn't flexible and subbed part of third party off the shelf software options like ServiceTitan.

But back then, SaaS-based software really didn't exist. And then, so my operating partner worked with Dwyer CIO and a third party toolkit resource to develop a comprehensive IT strategy that entailed constructing a data-centric architecture to enable central repository for all franchisee data to be able to gather and enable cross marketing and data analytics.

This enabled the launch of a consumer facing umbrella brand we called [00:43:00] Neighborly. Dwyer was really a trade brand known to franchisees and within the franchise industry, but it didn't really mean anything to the consumer. Because we had this vision that Neighborly could be a one-stop shop of all things home services to consumers and homeowners.

But to make that vision a reality, we had to fix our IT systems. At the outset, we estimated a cost of $2.5 to $3 million to change out all the outdated IT systems and that it would take us 2 to 3 years to do so. Several IC members thought that the execution risk of this was too high, but I made the argument that technology wasn't a core competency or product offering for Dwyer.

For example, if the IT systems are shut down, it's not as if our Zs couldn't go out and continue providing in-home services. Maybe at the worst we wouldn't be able to collect our royalties in a timely fashion. But a lack of IT systems wouldn't put Dwyer out of business. In fact, that's what I think we get paid as private equity investors to fix: manageable risks and fix things.

And as a fund, I think we were [00:44:00] also influenced by a struggling HRIT portfolio company at the time where technology was its core competency. And as for the tech disruptive risks, this topic certainly garnered a lot of deep discussions. I was living in San Francisco at the time, so technology and the on-demand economy were constantly evolving.

And at acquisition, Dwyer's digital marketing strategy was still nascent, and the VP of marketing was unfamiliar with online competitors like TaskRabbit. We also thought that new uber for the home service models like Handy Book and Thumbtack at the time, and the importance of online reputation management to the consumer decision making process, could change the way consumers find home services and potentially increase price competition.

But we also thought that if we improperly embrace this dynamic, Dwyer as a premium provider scale could also benefit from these technologies. And as we dug in, we learned that most of Dwyer's digital competitors are really online lead aggregators and control the demand side of the equation or the [00:45:00] eyeballs of the consumers since they connected the homeowners to service providers, but they could not control the last mile fulfillment of delivery or quality of service inside the home.

And so they employed more of a contractor model since they only controlled the demand side of the equation or online lead gen. On the other hand, Dwyer controlled the supply side of the equation by having the largest base of captive service-tech connections, which took them 30 years to build. And importantly, this allowed Dwyer to control the consumer in-home experience and quality level. Technicians were the governor of growth back then, and they are certainly still the governor of growth in the industry today.

So we were able to proactively turn the tech disruptive threat into a benefit, or at least into a dynamic that didn't really hurt us. I mean, at that time, Amazon was really wanting to partner with Dwyer, but we stayed away realizing that they could try and learn from us and try to crush us like they did in a lot of other industries like book publishing.

We also had an outside board director that understood digital marketing, e-comm and, and social media to [00:46:00] advise us too. So throughout our hold we were able to continue building out our franchisee base and driving same store sales across most concepts. But one of the largest value creation drivers during our hold was add-on acquisitions.

While Dwyer did not pursue add-ons, historically, we viewed Dwyer as a platform for other service businesses that could benefit from its scale, expertise, and values. I also knew from being on the team the first time that Dwyer Management had a long list of add-on opportunities and relationships that they had built with founders of other small franchisors for a decade or so, and as a result, we made it a core part of our strategy to selectively pursue highly accretive add-ons.

We focused on franchisors, which repaired, maintained, and enhanced residential commercial properties in the US, Canada, Europe, specifically the UK, and Germany. And based on the company's scale, reputation, and market position, Dwyer was considered their acquirer of choice, which enabled us to buy franchisors at a relatively favorable valuation.

And [00:47:00] these add-ons brought new geographies as well as deeper penetration into several new service verticals. We prepared the team by building focused diligence integration processes in order to efficiently and effectively complete these acquisitions. This preparation enabled an aggressive strategy to build out our service circles.

Prior to launching Neighborly and advancing our European growth strategy, we essentially taught management how to do the first two to three add-ons, and then they had to playbook, which they were able to run on their own. This is how we were able to complete eleven add-ons in five different countries in such a short amount of time.

I mean, if you think about it, we essentially closed three to four add-ons per year, and we're actually acquiring Real Property Management, the largest franchisor of outsourced property management services during our exit. So we actually tweaked our whole vision during the exit process. So we expanded our vision of just repair and maintaining, enhancing, not just in and around the home, but of the home too.

Lloyd Metz: That's really impressive, Meranee. I, I guess looking back on the Dwyer [00:48:00] investment or any of the investments that you've led, any lessons learned, any personal playbook, techniques that you've developed that you care to share in terms of what works, what doesn't work? Sometimes you do well by just not doing bad, right?

So keeping a list of things that don't work can be useful to anything you might do differently if you were to have a chance to do it again.

Meranee Naaman: Yeah, all of the above.

Sean Mooney: My life, by the way.

Meranee Naaman: If I could rewind the clock, I think I would've pushed our fund more to roll over and retain a minority stake when we sold to Harvest. We sold Dwyer Neighborly to Harvest for our home services sector setting exit multiple of 15x and then Harvest sold it to KKR for the current home services sector setting multiple of 22-23x EBITDA three years after we sold it to them.

In general, I think one of the more difficult challenges [00:49:00] today in PE is hanging on to A+ assets and it's often easier to grow the platform, you know, than to find another great company. Harvest offered us the opportunity to keep a memory stake, which I think Harvest did when KKR acquired a majority stake from them.

We didn't roll over in 2018 because we hadn't institutionally done that before, and as majority controlled investors, we weren't comfortable giving up control. However, there are several large PE firms with more global resources and are better at scaling much larger businesses. Good news is that while our fund didn't roll over, Riverside's Minority Growth Equity Fund invested in Dwyer Neighborly at our fund's exit.

So they did well, and funnily enough, a friend who was a partner on a mega fund called me during the exit process as they were looking at acquiring Dwyer in 2018, and asked, why would you have invested in such a mundane, pedantic, and blue collar industry of home services? I told this friend all the reasons why, and now that firm is one of the major PE consolidators in this space.

Sean Mooney: Yeah, Meranee I really like that answer. In some ways, I think it speaks to so often how [00:50:00] many private equity professionals have felt frustrated with, you know, maybe in the earlier chapters of private equity where you could buy a company and then you had to sell it and that was it. And one of the ways with business that you've had the rare opportunity is to own a great business, not only once, but twice.

And you had the opportunity to ride with it in ways that very few in PE have historically had. And so in the earlier days of private equity is kind of, you would buy it, you would sell it. That's the end of the chapter. And the industry is evolving so much these days in that it doesn't have to be just one period.

It can go so much longer through all these different options and vehicles, et cetera, that are now available to the practitioners in private equity. And so I think what you're talking about is really gonna resonate with a ton of people in the industry because there's all sorts of options now where you can stick with your best company versus having to almost arbitrarily sell it as part of some sort of five-year fund [00:51:00] construct.

And maybe with this in mind and with our conversation in mind, let's bring our discussion to the next chapter here. I'm always curious when I get a chance to speak with someone like you, Meranee, you've had this iconic private equity career. You've had these tremendous successes, no doubt, with lots of lessons learned along the way, and I'm curious if someone were to approach you today and they were entering the industry and asked you a piece of advice in terms of how you would approach the chapters ahead,

what might be one of those pieces of advice that you'd give them that you wish you knew when you were back in their shoes and were starting your career?

Meranee Naaman: I think I, I encourage those wanting to get into PE to really ask themselves what motivates them or, or kind of what they think they're passionate about.

I think we all know that PE is a maturing and competitive industry. I mean, when I first started, we were modeling 30%+ IRRs [00:52:00] and you had six to nine months to close a deal. And you know now, right? You can close deals in a couple of weeks and 20% IRRs and instead of modeling the same entry and exit multiple, oftentimes are you're modeling multiple contractions.

And I think one of the, the most important traits for a seasoned PE investor is really intellectual curiosity, right? It's just that passion for lifelong learning. We used to talk about the importance of IQ and then EQ, and I think LQ, the learning quotient is equally, if not even kind of more important.

And to be, I think, successful in PE, you know, you've gotta be able to ask the right questions. You've gotta be constantly interested in learning about industries, business models, and, and in sectors, right? And part of our job is really part behavioral psychologist, right? You've gotta be interested in people.

You gotta be able to try to understand what makes people tick [00:53:00] and what are they kind of motivated by? Because as you're kind of putting together that complimentary management team with all the best skill sets, you gotta understand kind of what incentives are you gonna be putting in place to make sure everyone rows in the same direction and towards the same goal.

I love this kind of continuum of kind of IQ, EQ, and LQ, that I've seen a lot of seasoned private equity investors exhibit. It kind of reflects the multi set of skills that I think that you need along this kind of PE career continuum to be successful. There's a saying in our family, with my kids and my husband, we constantly talk about, and it's basically hard work beats talent when talent isn't working hard.

Sean Mooney: I like that saying.

Meranee Naaman: That kind of encompasses the IQ part of it. I do think you have to be smart, but you don't have to be the smartest person in the room later in your PE career, right? Because that's when sometimes you know the soft skills, right? The EQ part of it clicks in, you gotta be able to sell yourself, you [00:54:00] gotta be able to sell your value proposition.

You gotta be able to sell kind of your vision, right? And then I think the LQ right is, is always needed. It just takes a lot of reps and, and hours and, and massive effort to accumulate this knowledge of pattern recognition, of understanding how to take something good or special and make it great or more special.

Sean Mooney: Yeah, I love that advice 'cause I think it encapsulates so much of importance. I think a lot of people think if they're the smartest people in the room, they'll do well in PE. And certainly thank God that's not true for my own sake. But, uh,

but the, but you wrap in the hard work and the curiosity, and that's where the magic happens. And I think for people and young adults who are coming into it and have those three things, the world is their oyster. And it's the most fascinating 3-dimensional chess game that you could ever play. But if you, if you don't, it's gonna be really tiring.

Lloyd Metz: That is very true. Meranee, thank you so much for coming on the show and. For your stories and [00:55:00] your candor and your insights. Really, really appreciate it. Thank you so much

Meranee Naaman: Yeah, thank you guys. I mean, I, I love investing and partnering with founders, entrepreneurs, and I just feel privileged to do what I do every day, so I appreciate the conversation.

I think I'd be remiss though, there's one thing I did wanna mention to you guys that I forgot to mention. I do think that Riverside helped put kind of home services on the PE like radar map. Not because of just the success that we had over the long term, but because of the sell side market study that we did in 2018 when we exited.

So we were, I think, the first to do this detailed market study where we actually finally sized up the real TAM. So, you know, we had a real professional do it, right? So at that point it was $300 billion. And so we then identified, right, all of the fundamental and macro drivers, right? And all the demographic [00:56:00] shifts and basically the shift from do it yourself to do it for me.

And we had sized up at that point, right? That the industry was really 95% mom and pop driven. And so there was a lot of value creation that could be driven by more sophisticated operators. And I remember vividly thinking, oh my gosh, for the next 18 months to two years I saw every single sim in home services, you know, basically cite our market study.

So I, I knew, and you know, fast forward to kinda the Radiant when we were underwriting that deal. We actually did more market diligence and we saw that there were over, 'cause I think a lot of people now are talking about that HVAC is totally done. It's in the mid to later stages in terms of innings. But with right now, I mean we, we identified over 115,000 independently operate HVAC operators and over 100,000 plumbing operators [00:57:00] and over 1 million independent electricians.

So it's gonna take a long time just from a pure numbers standpoint to roll up the industry. Right? So yeah, there's been a massive land grab and maybe a lot of the better kind of a plus tier one assets have, I think, been grabbed. But just like the DPM or the PPM or the vet space, there's a long tail.

That's gonna take decades for this, the industry to continue consolidating.

Sean Mooney: You might be getting some phone calls from some of our listeners for a copy of that report. So thank you so much for joining us. This is really a, a generous use of your, your skills and time here to share everything you've learned, the perspectives, the lessons learned, and that's a, a tremendously valuable gift.

So thanks so much again.

Doug McCormick: Yeah, well done.

Lloyd Metz: Thanks, Meranee.

Meranee Naaman: Thanks, Sean. Thanks Lloyd. Thanks, Doug.

Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on [00:58:00] driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing services and distribution companies.

Learn more at HCIEquity.com. ICV Partners, an innovative, lower middle market private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about ICV at ICVPartners.com. And finally, BluWave, the business builders network, connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point, and on time due diligence and value creation needs.

Learn more about BluWave at BluWave.net. For further information on HCI, ICV, and BluWave, and relevant topics discussed here in the episode, please see the episode notes for links.

Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting, and do [00:59:00] not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.