Private Equity’s Lens on Geopolitics: Supply Chains, Infrastructure, and Enterprise Risk

[00:00:00] Lloyd Metz: 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.

[00:00:30] Let's go.

[00:00:36] Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd, how are you guys?

[00:00:41] Doug McCormick: Great. Glad to be here.

[00:00:43] Lloyd Metz: Hey, Doug. Hey, Sean. I've missed you guys. It's been too long. Yeah. Winter's officially here.

[00:00:49] Doug McCormick: Not only that, but you climbed the mountain of 24, and now you wake up and you're at the bottom ready to do it again.

[00:00:55] Here we go. 25.

[00:00:56] Sean Mooney: We all start at zero. Here we go. Time to toe the line. Let's roll. Speaking of like starting over again and fresh perspectives and new approaches to the world and life. We have a new series that we're going to kind of jump into here this year, where it'll be kind of a recurring thing that we'll do over time as part of the broader Best But Neither final show.

[00:01:18] And what we talked about is doing a deep dive into ideas that we're excited about. So these could be investment themes. It could be business ideas. And what we're going to bring our listeners to is kind of like, in some ways, what happens to and with. Investment professionals, when you're in that Monday morning meeting with all your colleagues and say, hey, this is something we're thinking about and you start kind of molding it and shaping it and poking it to see if there's, it makes sense there.

[00:01:48] Does that sound like a good thing to roll into this year with?

[00:01:51] Lloyd Metz: Sounds like a great way to kick off the new year.

[00:01:54] Sean Mooney: All right. So before we jump in and we're going to do a real first live exercise here in a moment, but the jump in, let's set the stage a bit. One of the beauties of the business, Lloyd and Doug, that you are in is you're awash in a sea of information from every which way, and there's no shortage of things to learn and be exposed and be inspired, and that creates challenges and opportunities, but ultimately it gives you a moment and perspective on, hey, this is something we should think about dedicating capital and time and interest into.

[00:02:27] And so. Maybe before we jump into one particular theme, Lloyd and Doug, I'd love to get your perspective. How do you ingest information? How do you parse through this endless sea of ones and zeros to get to something that is actually leads to like, hey, this isn't how we want to spend time.

[00:02:44] Doug McCormick: I'll take a stab.

[00:02:45] So I think the first thing, Sean, you said, hey, you have the benefit of having all this data and information. I think that's true. But in some ways that's the challenge too. It's like parsing through this just massive amount of information to figure out what's important. So I think I think about it in a couple of different ways.

[00:03:03] I think about like economic data. I think about market data by like sector, if you're a defense sector investor or food, et cetera. And then I think about like deal activity and I think there are different sources for each. So like, this is pretty unoriginal, but like to me. Read the Wall Street Journal is super valuable just in kind of like what's going on in the world and what's generally accessible, kind of easy read.

[00:03:28] I think the Fed data is amazing just in the context of like having source data because we work with a lot of the investment banks. And when I think about investment banks, it's not just like investment banking, but asset management. We get access to a bunch of information about how they view the economy and then implications for investing broadly, which I find pretty interesting to help think about the backdrop.

[00:03:51] And I think some of the investment banks do great work around sector research, which we try to have aligned with our, our areas of expertise. There's paid data providers. So CapIQ, Bloomberg, honestly, for us, that's less about ideas and more about if you have an idea of validating, like what the business model looks like by looking at other organizations.

[00:04:12] And then the last one I'd say I think is super interesting is deal flow and the portfolio itself. So 16 businesses that we own across a different set of end markets, I think provides a really interesting backdrop to kind of what's going on out there. I think the challenge is how do you take all that together, roll it up and make sense of it, which is sometimes hard.

[00:04:38] Sean Mooney: It's the proverbial separation of the signal and noise, right? Yeah, for sure. How about you, Lloyd?

[00:04:44] Lloyd Metz: Sure. So I think that's a great question. I ingest a lot of information, whether it's bloggers. Other podcasts. Yes, Sean. I do listen to other podcasts,

[00:04:56] Sean Mooney: lesser podcasts, but others

[00:04:58] Lloyd Metz: do read newspapers and magazines, whether it's Forbes, The Economist and others online and paper version.

[00:05:06] Investors business daily, I think is a great newspaper. I always give it a plug because it's always oriented toward growth industries, growth companies, growth trends in the United States. So whether you're in the depths of the great financial crisis or the depths of COVID, they're publishing something that's new and growing and innovative in the American economy.

[00:05:28] And I think that mindset is pretty useful. So I'll file away different company names or different industries and just kind of make a note of it as I kind of wander through the day or through my life and try to connect the dots as you come across other trends that might be Supporting some of these ideas and when they come together, the light bulb goes off and you start to do a little more in depth work.

[00:05:58] Doug McCormick: Hey, Lloyd, just on that, I think it's interesting you think about, like, what's the so what here? And given our strategy, like, we're a long only strategy, right? Like, we don't have a choice of shorting. So. A lot of times I think the economic information is interesting in the context of what's the implied velocity, right?

[00:06:16] Am I pedal to the metal, get money into the ground, or am I cautious? And then I think to me, a lot of the work really revolves more around what are the sectors that are interesting and what's the economic volatility associated with those sectors as you think about the backdrop. So like. If I'm negative, I still got to get money out the door.

[00:06:34] Can I find recession resistant businesses where I can perform pretty well in that context? So it's interesting because it's not as simple as de risk with less equities and more fixed income or have a short position.

[00:06:46] Lloyd Metz: That's right. And even in the case that you bring up, right, if you want to find something that's recession resistant, the fact of the matter is most recessions are very short, right?

[00:06:56] Two quarters, three quarters, maybe four, but we have three, four, five, six year hold periods. So, not only does that business have to be recession resistant or resilient, on the other side of a recession, it still has to grow, and that can be hard to, a hard, hard combination to get. But, yeah, you gotta think about those things.

[00:07:18] Sean Mooney: It's interesting. There's a lot of new things coming out that I think help with this, but, but what you're talking about is just like, what we talked about, the sea of information. And I remember when I was in your seats, there was nothing that scared me more is like a principal or a VP and one of the partners said, Hey, did you read this article in the journal?

[00:07:37] And I was like, Oh God, the one day I didn't read it or financial times or the economist or there was just so in the meantime, I was at work till four in the morning and I was like, yeah, but which article are you talking about? Try to kind of play it in, but there's just so much. And what is, I think, really exciting about some of the new things that have come out, we used to set up these little, like, info blog aggregators, and it was still a wash.

[00:08:03] There's a guy that I follow, we've had on a different podcast, named Conor Grennan, and he's kind of one of these emergent thought leaders on these LLMs, and he had this great idea through some of the training programs that he did that I also used, where it's just Have chat GPT run a series that you're interested in and so I just set it up so every morning.

[00:08:25] I have it run What are the major news stories of? economics M& A the private equity industry aspiring competitors New restaurants in Nashville and it runs it every morning and just yesterday when I, I just started doing this, I found out that I don't even know an aspiring international competitor of ours went out of business and I was like, wow, and there's always going to be kind of like the foundational cannons, the journal, the investor business daily, the financial times, but there's these other things to kind of catch stuff that I never had before.

[00:08:58] So it'll be really cool to see what comes in. And then when you want to go into a deeper dive, yeah. Google deep research is amazing, has like a primer, chat GPT. So there's cool stuff coming, but what you all are doing is like, that's the art of your business is separating the signal from the noise. And some of that's getting a little bit easier, but ultimately it's the art of like, you could spend time on a thousand things.

[00:09:20] Lloyd Metz: The fact of the matter is the nature of media being what it is, like some of those Wall Street journals and newspapers or magazines, even oftentimes they're getting information late. So I wouldn't rely on those for specific investment ideas, right? Because by the time it gets to them, it's not emerging, it has emerged, right?

[00:09:42] Or it's pretty well beyond emerged, right? I read those to get a sense for trend because I think in our business you're trying to get ahead depending on your strategy. You want to be some degree ahead of the trend, right? So at least for me that that's what I. ingest all that information is to figure out what's a trend and how late or on time or early are you in that trend.

[00:10:09] Sean Mooney: So maybe with that in mind, I think it's a great opportunity to put you in the hot seat for the first one on this episode. Ah,

[00:10:16] Lloyd Metz: crap. What'd I say? What'd I do for this?

[00:10:19] Sean Mooney: So, so I'm curious. So, so you've read all this stuff. What's something that you're thinking about now where you say, you know, this could be an interesting trend that could translate into an attractive investment opportunity from this kind of long only private equity mindset.

[00:10:35] Lloyd Metz: Wow. So for some years, Going pre COVID, probably 2017, 2018, 2019, very interested in supply chain, but not so much from the procurement nuts and bolts and logistics. We've had some investments in logistics that were part of supply chain and that kind of informed this view, but it was more about geopolitical is what it turned into.

[00:11:03] So when you think about supply chains. Whether it's soft goods, hard goods, electronics, or what have you, large point of origin and point of production is in Asia, largely China, also Japan, Korea, Indonesia, Singapore, Vietnam, etc. And in 17, 18, and 19, we started to develop a view. And again, just reading the papers, trying to sift out the noise from the signal, paying attention to some of the growth in China, right?

[00:11:39] China was becoming more prosperous, GDP growing, people becoming more affluent, not only just the high end billionaire class, but the median income rising. You start to develop a view where, hmm, pretty soon China's going to start needing to devote more of their productive capacity to support their domestic economy as instead of import.

[00:12:02] So that means some of that supply chain's got to unwind and find another home. Maybe it's Vietnam or somewhere else. Stick a pin in that. Then you look at some of the political commentary that was taking place 2017, 2018, 2019, and the growing rivalry with China and the US. As well as Europe as well, and you start to see, well, we developed the view that people are going to start pulling their supply chains out of Asia, perhaps near shoring them in the Western Hemisphere, South America, Mexico, back to the U.

[00:12:37] S. Maybe you start to see some of the rhetoric around nationalism globally start to go up. You start to see people questioning international power. Alliances, be they trade or defense or diplomatic relations, started to fray or get put under tension and we came to the view that the world is going to be a little pricklier, less warm and huggy, less kumbaya, more nationalistic and.

[00:13:09] Navigating these geopolitical shifts and swirls and eddies is going to be hard. So we had a working thesis separately around enterprise risk, and so in our view, that becomes a big source of enterprise risk. If you don't read the tea leaves on where geopolitical tensions are headed, if you don't Pick the right place to move your supply chain to and it's disrupted your customers are going to be upset or if you don't put your supply chain in the right country and you wind up in front of some Senate or congressional hearing on c span.

[00:13:48] That's a problem so any of those combinations and there's multitudes of others that's how we came to see the world and so we came across a company. In early 2021, that is a consulting firm that advises corporations, household names that all of us would be familiar with on how to do business with the federal government, as well as consulting with them on geopolitical policy trends.

[00:14:19] And we made the investment in early 2022 and that business has proven our thesis, proved it out well, and it's grown nicely. So we're excited to find other. Companies that are benefiting from this trend of some people call it neo mercantilism, nationalistic economy sort of trends. And so we're excited about that trend.

[00:14:46] I don't think it reverses anytime soon. And then you layer on industrial policy, right? The Biden administration has introduced some 1950s, 1960s style industrial government. Partnership policies, whether it's around the chips act or data centers and other infrastructure spend. That's another area we're excited about, by the way, infrastructure services, right?

[00:15:09] So much has been spent over the last decade in infrastructure, whether that's sewage, water bridges, data centers, distribution centers, warehouses. There's a bunch of stuff, right? And there's more infrastructure that needs to be built. So we're, we're trying to find service companies that feed into both of those ecosystems.

[00:15:28] I'll stop there, but I'm excited about both of those.

[00:15:34] Sean Mooney: This episode is brought to you today by HCI Equity Partners, a lower middle market private equity firm focused on partnering with family and founder owned 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.

[00:15:56] 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.

[00:16:13] I'm really curious on that. And one of the things that I think everyone knows and appreciates is History doesn't necessarily explicitly repeat itself, but it certainly resembles itself. Did you go through any kind of like a historical analysis to see how these cycles had played out previously? Good question.

[00:16:31] Lloyd Metz: I do believe history rhymes and every once in a while, it seems like they sample or do a cover of parts of it. And so, Some people, if you read different things that we ingest, right, are trying to draw comparisons to, we may be entering into a 70s style economy where inflation is higher than you want, interest rates wind up being higher than you want, economic growth is slower than you want, maybe, that's interesting, I don't know, thinking about it, it's possible, some elements of that could pop up, but to Doug's earlier point, I think some of the companies that we're looking for are going to have some pretty clear tailwinds when you're talking about what drives the demand for their business on the geopolitical uncertainty theme.

[00:17:25] I don't see how that tapers off anytime soon.

[00:17:28] Doug McCormick: One of the things that's interesting about that thesis in my mind is you highlight all this volatility or dynamic. Backdrop and you don't have to be right on any of that. You just have to be right on the frequency that this is going to be an issue that companies are dealing with.

[00:17:43] And it's kind of like the guys that supplied the gold rush, right? Like, you didn't have to pick the right vein. You just had to provide the pots and the pans and the picks to support the prospector. So.

[00:17:54] Sean Mooney: As some of my colleagues in prior life who are better mathematicians than I was, I kind of topped out at algebra 2, but that's really all you need, let's be honest.

[00:18:02] They would always talk about the second derivative, right, it's the rate of the rate of change. And you could see it picking up and accelerating and picking up and going faster, and it seems to be only going that way for as far as we can probably reasonably predict. And so, like, you saw all these tensions in these growing, kind of, Pressure points.

[00:18:22] How did that lead you to the business that you invested in a few years ago, the advisory firm?

[00:18:29] Lloyd Metz: I'll say this. We made another investment in 2019 into a logistics business. It moved critical spare parts, largely by plane, around the world. And it had a fairly sizable customer client base of ships that supported U.

[00:18:50] S. government and U. S. military operations. And so, over time, over our investment period, we also saw that activity, that customer, those set of ships become more active. So that also informed Some of our view about confirming that tensions internationally were growing, not dramatically. They weren't spiking, but it was building and specifically then.

[00:19:19] So our antenna are up. And so when we met this particular company, we figured this is squarely on trend and in our crosshairs of what we were trying to find. Once we learned about the company, once we confirmed what they did, and we were talking to people in our network, we met someone who was a client, and this client said, they helped me and my colleagues see around corners.

[00:19:48] And to Doug, your comment, It's not for us to want to bet on whether that particular client is heading in the right direction. What they want to know is, can you help me avoid surprises? Can you help me see around corners? Can you help me avoid embarrassment? Can you help me avoid economic loss? That's what I want you for.

[00:20:08] And for us, we'll go for that all day, every day.

[00:20:12] Doug McCormick: Hey, Lloyd, just to make sure I'm thinking about the business model. So you, you mentioned they're advising customers on this geopolitical backdrop. Are they also advising or in any way directly serving the U. S. government or they're experts in U. S.

[00:20:27] government policy and the implications to this backdrop?

[00:20:29] Lloyd Metz: Correct. All of their clients are corporations or trade associations of corporations, any and all of which you would know. Some of them are established household names. Some of them are new and emerging technology related businesses. Some of which are trying to figure out how to navigate the federal government given this ramped up industrial Spend coming out of Washington.

[00:20:56] Well, how do we get in the way? Of that spend, how do we shape the agenda or at least piggyback on the trend that's coming out of Washington so that it benefits our company? How do we help them get there? So very much a consulting strategy planning as opposed to a lobbying effort. So quite literally, this company works with the corporation clients, plans out the strategy, and then will advise, okay, these are the lobbyists that you might want to consider using, these are the communications firms that you might want to consider using.

[00:21:33] Pretty neat stuff.

[00:21:34] Sean Mooney: It's a really cool business. I actually come across. Organically, when COVID hit, we were kind of mapping these markets as we so often get questions from other PE firms at BluWave, like, we need someone who can help us navigate this complexity. And very, very quickly, we got to your firm, and there were a, almost like universally well regarded from both sides of the aisle.

[00:21:59] And very quickly you understood they could see the world in slow motion. And what I appreciated about that from maybe turning my lens into yours as an investor is there's an inherent ROI in that information is valuable. And then it often leads to the next question and the next question. So it's not like a single Sale, it's a recurring relationship with customers that at first principles adds value to them by helping them make better decisions.

[00:22:25] Lloyd Metz: That's right 100 right. I will tell you Given our partnership with the individuals who are at this firm, I read the newspaper very differently because. Part of the value that they bring to their clients is not only do I give you the information in terms of what is around the corner, but I give it to you well in advance.

[00:22:45] So there's some things that they will tell us in February that may not show up into the newspapers until May or June. If at all,

[00:22:55] Sean Mooney: sometimes you sleep a little less well,

[00:23:00] Lloyd Metz: but they're professionals and they're super, super skilled and gifted. So, yeah, trying to find more service firms that are helping companies navigate these changing geopolitical positions. Trends is something I'm super excited about. I want to find more of that.

[00:23:19] Doug McCormick: Yeah, just, just one other reaction to the way you're describing the business.

[00:23:22] I think it's kind of interesting. It's like there is no intellectual property technically, right? But there is intellectual property and barriers to entry around reputation. And in some capacity, what it seems like you're selling is an element of insurance, right? So I always feel like. The M& A market is a great business because in some cases you're providing services, but you're also providing a board comfort and surety around a quality process that yields a good outcome.

[00:23:48] And so it feels like you've got a differentiated capability and skillset here. It's obviously an asset light business. So you combine those two things, you get really nice margins, good quality business model to go with the backdrop that you described.

[00:24:01] Lloyd Metz: Very much so. And I think I mentioned it on a previous episode and this current moment I really do like businesses that have a element of judgment that does give you some protection I think against pricing and arguably could give you pricing power And so if you can also find ways to distill some of the judgment Pattern recognition into a technology, whether it's a database or other systems that helps.

[00:24:35] They're very active in AI and some of the things that they're working on internally are pretty amazing. So again, good business model. And, and we're trying to figure out other functions where a service provider is useful.

[00:24:50] Doug McCormick: So you've identified a nice business model with a nice backdrop for growth, a demand driver that's not.

[00:24:57] Related to the economy per se, how did you think about what's your angle, what's your value add, and maybe how you thought about price, because it's one thing to identify a great business, it's another thing to buy it in a way that allows you to make money. So how did you like to think about all those, those things?

[00:25:14] Lloyd Metz: You might not like this answer, but I think for the angle, we've had some successful investments in professional services companies. And had reasonable success in having them make that step change in their evolution from a band of brothers, sort of group of individuals that have come together to build something, they've experienced some success.

[00:25:40] Now they want to build something that's more of an institution. So going from a partnership to an actual business. Partnership that's the value add and we've helped companies in our past do that we brought in some resources on the board quite literally some individuals who have been competitors and clients to this type of business who have also been consultants as well as leadership of a consultancy.

[00:26:09] We brought two individuals onto the board to help the founders and the. Partners of this business understand how the journey works to become a more professional institution as well as perspective from your competitors as well as perspective from your clients. So I think that's been helpful and then honestly I think we're pretty good cheerleaders like we're big fans of our port goes and so that sometimes is a big angle.

[00:26:40] Sean Mooney: What I like about the business that you're describing in the genre of businesses a couple fold. And of course, I'm going to use a metaphor here. Get ready.

[00:26:51] Lloyd Metz: You should have a little sound effect when you bring in a metaphor, by the way.

[00:26:54] Sean Mooney: It's coming. It's coming. And so prior life, I invested in information data, analytically oriented and enabled businesses.

[00:27:03] And what we would say is like companies that just have the data, they're in the ingredients business, right? flour, sugar, eggs. There's not a lot of value to that. It's the people who can take all those and make a cake that really have value. So it sounds like you've got some proprietary kind of information gathering, but it doesn't stop there.

[00:27:22] It's not just like a report or something. You're able to turn this into something that is amalgamated and concocted and cooked and baked into something that is advice that makes people take action in a smarter way, which then you can value based price.

[00:27:37] Lloyd Metz: Correct.

[00:27:39] Sean Mooney: I love that. The one thing I'm curious on, like, professional services businesses, in terms of how you think about this, is the age old adage for these types of businesses would be, well, what if all the partners just leave after you pay them a check?

[00:27:54] And so, how do you work through that kind of question of, oh, this is a partnership and they're all kicking out? Maybe compensation on a daily basis as thinking about is like an hourly wage earner to wanting to be a business builder. And how do you protect against that downside and inspire the upside for enterprise value thinking?

[00:28:14] Lloyd Metz: Yeah, there's some art to that. Not unique to our firm. Other firms have invested in professional services firms and people businesses, if you will. But you have to instill an equity mindset and an ownership mindset. So founders roll over a lot of equity to the extent the next generation of partners have equity.

[00:28:38] They roll over some and we invite them to buy more actually. So there's not only incentive equity, but there's bought equity. So at our investment, others came in shortly thereafter and increased their ownership because oftentimes that's part of the tension that gives rise to these opportunities. The founders class, if you will, owns a fair amount of the equity.

[00:29:04] But the next generation, the folks who are driving the business, leading the business, they don't own enough. So how do you start transferring ownership, not only percentage, but dollars at work to the next generation down, and we can help organizations with that. We care a lot about that. Actually,

[00:29:23] Sean Mooney: that's spot on.

[00:29:24] And that's the transition. If you can make that. And then I love what you said also is that they buy equity. It's not that they're just taking thing off and rolling. It's cutting a check seems to have this differential mindset is I'm getting ready to cut a check for my daughter's 1st year of college coming.

[00:29:40] It makes me think differently.

[00:29:45] Lloyd Metz: That is definitely true. Especially when you set up the Absolutely. Capital structure and the governance, right? It tends to give that partner class, that managing director class, more confidence, they will knock on the door. To buy more,

[00:30:01] Doug McCormick: you mentioned how you think you evolve the business from a partnership to a business partnership.

[00:30:07] Maybe you can talk a little bit about how big do you think the market is? And how do you think about using M& A as a way to scale these capabilities? Or is this a, you can use so much organic growth, you can just invest that way?

[00:30:20] Lloyd Metz: That's a good question. And, and honestly, one that we are starting to kick around internally as we look for other service companies in this space.

[00:30:31] Or that benefit from these trends in this particular case, M and a can be complicated, not so much for reasons of, okay, we acquired this other professional services company. How do they fit culturally? How do they fit into our organization? How does their compensation line up that stuff you can either screen for.

[00:30:53] Or solve for right if it doesn't work culturally and you don't do it or you come up with a different plan to start pushing people out or if it doesn't fit compensation wise right like maybe people at the target organization are paid much less so if you brought them to your pay scale then all their profits go away right those are binary kind of issues.

[00:31:19] The tricky part and this is one we're thinking about for this particular company is would m& a make sense if you're. Acquiring a target that delivers a different service line. And can you sharply define clearly and cleanly define this new service line, service offering from the existing service line?

[00:31:43] We're working through that. We're trying to figure that out. The business leaders have been so busy trying to meet the demand that they have. We haven't had that much time to think about M and a, That you might think they're literally trying to hire people and bring people on board to keep up with the demand and Sean, you were right pointing out that there was support from both sides of the aisle.

[00:32:08] Part of one of the things we looked for as we were going into this space is a bipartisan, well balanced organization, right? Because we didn't want to be exposed to a trend, whether Democrats are in the White House or Congress or Republicans are in the White House or Congress. And foreign policy and national security tends to be pretty bipartisan, and that informed our view going in.

[00:32:35] Sean Mooney: Lloyd, I guess as you, as you're thinking about, you have this portfolio that informed this new hypothesis, this new theme that you're looking at, and now you're looking at this kind of new world. How do you even start? I mean, so are you kind of like sizing the market? Do you have a sense for like, there's going to be enough options here to spend time because there's enough ways to play it?

[00:32:55] How do you think about like activating it?

[00:32:58] Lloyd Metz: I don't know. I guess maybe we're still trying to work it out. I think we're starting from a place of we're lower middle market. Given the size of business where we're starting in terms of revenues and EBITDA, the market's more than likely than not going to be big enough.

[00:33:16] Now, can you get this 20, 25, 30 million dollar business to 100 million? May just be the exercise. So whether the market is a billion, half a billion, or five billion. On first pass, as we're starting to ideate, it kind of is big enough. Now, once you get further down the path and we start trying to hire folks or do the work ourselves to size the TAM, but oftentimes we're just starting from a basic place where when you can do some rough math, just eyeballing different spends, the market's big enough.

[00:33:53] Sean Mooney: So you've kind of surpassed the, we would call it the, what do you need to believe test? Like, we know it's valuable and there's big enough, and we might not have maybe even false precision in terms of like the exact number and getting an L. E. K. trained consultant to do a thousand expert calls, but you know it's valuable and it's big enough.

[00:34:16] Lloyd Metz: At least start there and then maybe depending on the, the investor and the investment team, do you do the, some of that TAM work before you find a specific target or closer in, let's say you're in a process, but we're just trying to find the interesting ideas and then find the companies second. And then we can think about TAM along the way, rightly or wrongly, that's an approach we're taking.

[00:34:40] Sean Mooney: And what about these businesses as you look into them, as you think about these business models? Then the next question turns into, do they make cash money? And so, and there's cash money that's the best kind, right? And so how do you think about like, all right, you got it. Is there money to be had that it can not only fuel future growth, but then also lead to a return on investment?

[00:35:04] Lloyd Metz: And I'm glad you said cash money, right? Because EBITDA is not cash. It's not cashflow. Did we talk about that in a previous episode? I forget.

[00:35:13] Sean Mooney: Once or twice. I learned that lesson investing in the auto industry early in my career.

[00:35:22] Lloyd Metz: So our, our experience has been these businesses are profitable and cash profitable. Let's just leave it at that. So this company specifically, plus others that we've been looking at in the space, the tricky part, if you have a business that is a. Professional services model, a consultancy is getting people accustomed to not paying out all of the profits of the business to the partners.

[00:35:50] If you want to have enterprise value, you need to sort of put some kind of governor on compensation expense so that the enterprise can have profits in order to be valued north of zero, right? Okay. Sometimes that's a tricky conversation, but if someone is open to private equity or to having outside investor, third party capital, they've usually crossed that bridge.

[00:36:16] Doug McCormick: So we've talked a lot about the individual attributes of this business and how and why it was interesting to you guys. Did you ever look at this in the context of how does it give you an angle on other pieces of property or theses that you're interested in? Because to me, it's almost There's a Karitsu opportunity here where This insight, this capability would allow you all to make bets in terms of what supply chains are going to grow over time and where you want to locate production for certain manufacturing applications, et cetera.

[00:36:50] Have you gone down that path at all?

[00:36:52] Lloyd Metz: We are starting to. One of the neat things about this business is every time we go visit them or spend time with them, you learn something that. Is not in the newspaper and probably won't be for quite some time and so their ideas from talking with them about their business and what they're seeing in their business that informs some of our views that we're working on finding ways to pursue.

[00:37:18] So it is very much back to that client who said they help me see around corners if you have a sense for where trends are definitely going that's great. Even if they're talking about trends that are likely to happen, right? And again, they're not giving specific forecasts, but they'll just say this is percolating and it could go a, B or C, right?

[00:37:40] We don't know which one it'll head, but at least that informs us to start thinking about, well, if it's a, what do you do? If it's B, what do you do? If it's C, what do you do? So we have gotten some interesting ideas that we want to pursue and that we've thought up and. We'll approach them as a thought partner.

[00:37:59] So if we come up with an idea, we'll bounce it off of them and say, Hey, what do you think? What are your tea leaves telling you? And so they're, they're super helpful thought partners. So yeah, stay tuned. Now that's an angle. We're working that angle and see if it can inform some perspectives on new investment opportunities.

[00:38:18] Sean Mooney: Kind of the last question I have for you, Lloyd, on this is you've gone through the this geopolitical complexity thesis that you have and you're exploring right now. If you believe that it's big enough, you can make money in it. There's a why for being existent in the world. And so you've checked the, like, the upside box.

[00:38:39] And one of the nuances in your business is this duality that you live in, where you've got to also protect the downside. How do you, as you're like in this thesis kind of curation part of the process, or when do you maybe also start thinking about what are the downfalls, the pitfalls? How do we protect the loss side of the equation?

[00:38:59] Lloyd Metz: Yeah, I'll answer it this way. We're of the view that. With almost every one of our investments, given the size of the company that we're talking about, and the amount of growth that we're trying to pursue, biggest risk is in execution. And so trying to get a good read on the leadership team, their wiring, their stomach, how good are they at executing, how open are they to bringing on additional people who are good at execution.

[00:39:33] That's where we tend to focus as it relates to risk mitigation. And we try to take that approach with all of the companies. For this company in particular, the founders actually are high energy, high clock speed folk, and we have added some people to the team who are good at execution. And in this particular case, execution is largely client servicing.

[00:39:59] Right. Managing projects, managing clients, and then hiring enough talented people to support the demand. They've been very astute and quick studies. They've taken almost every one of our suggestions and run with it. So in this particular case, they've been great.

[00:40:15] Sean Mooney: I love really what you teased out there as we kind of bring it through.

[00:40:18] And that was the, I think that all of us seen it. It's like strategy and waxing poetic on the whiteboard is the easy part. It's the execution. That's the hard part, but that's where you make your money. Yep. And so like having that mindset. Whether you're investing or operating is incredibly important. It's the hard, like unglamorous stuff that makes the ROI, the DPI, the IRR and all the other acronyms we get so excited about

[00:40:45] Doug McCormick: super interesting journey, Lloyd.

[00:40:47] Congrats.

[00:40:47] Lloyd Metz: Thanks. We're still working process, so no congratulations are due yet, but really just trying to share a little bit about how the thought process works and how we get. Locked in on on a theme. I don't think I mentioned it earlier, but one of our earlier investments coming out of the great financial crisis was in an air cargo logistics business.

[00:41:13] And from that, we actually started to see first hand what travels by air supply chain wise, and it's the high value stuff. And you literally got to see what airports it comes from on the planet, and where does it go to, and where does your asparagus and raspberry and blueberries come from in the northern hemisphere during the winter, and all the details.

[00:41:37] And that started to give us an appreciation for not just supply chain, but The hubs of economic activity around the world. And so when you start to read the newspaper and see tensions rising in different parts of the world, and you know, those are the locations of major cargo hubs that send you your iPhones or computer chips or clothing or whatever it is, it started to spark some thinking.

[00:42:05] So, so that initial investment started to get us more open. And attuned to geopolitical effects on trade routes.

[00:42:15] Sean Mooney: That is another amazing business, this kind of air freight business. And I know that going back to my auto experience, because you know what else is on those planes? Overseas plants, when you fall behind on your delivery to Ford, and then then what you don't have after that is.

[00:42:32] Cash money.

[00:42:36] I'm seeing how this is all connected and how maybe, uh, how you're playing the right side of this, uh,

[00:42:44] that's

[00:42:44] Lloyd Metz: right. That's right. You got to get paid by your customers at some point.

[00:42:50] Doug McCormick: Thanks for sharing with us, Lloyd. That was awesome.

[00:42:52] Lloyd Metz: Yeah.

[00:42:53] Sean Mooney: We'll check back in on it. It'll be fun to see how this one progresses as time passes.

[00:42:57] Lloyd Metz: Happy to share the next new idea because there are a couple percolating that I'm pretty excited about.

[00:43:02] Doug McCormick: I'm going to take copious notes and I'm going to be a fast follower.

[00:43:09] Sean Mooney: And then when you need picks and shovels for these things, you know, to call, ride the wave. All right, guys. Good stuff. Gents. Wonderful talking.

[00:43:20] Doug McCormick: Thanks, man.

[00:43:20] Lloyd Metz: Thanks guys.

[00:43:23] Doug McCormick: A special thanks to HCI equity partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder own manufacturing.

[00:43:36] 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.

[00:44:10] 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.

[00:44:24] Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

[00:44:34] No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.