“If you don’t have any type of dashboarding or KPI system, it’s a major deduction on the value of your company.” - Sean Edmonson
On this Expert Insight Series, we interview Sean Edmonson of Tecum Capital Partners. Since 2006, Tecum has invested close to $1B across the middle-market. Tecum focuses primarily on backing founder- and entrepreneur-owned businesses with strong leadership, operating in manufacturing, business service, and distribution sectors.
Sean oversees fund investment activities including deal execution and negotiation, due diligence, debt finance negotiations, and portfolio support and value creation. Before Tecum, Sean worked in commercial and industrial investment banking, gaining experience in strategic advisory, sell- and buy-side advisory, and raising capital. Sean currently sits on several boards including BP Express, Connecticut Electric, FSC Lighting, National Power, and F&S Tool.
In this series installment, Sean shares how Tecum has used the power of data in their portfolio companies to become a top performing fund in their category.
Watch the full interview, listen to the podcast episode, or read the highlights below.
Top 4 Takeaways:
- Dashboards and KPIs help align private equity firms and their portfolio executives on the value creation plan, which empowers leadership and drives accountability.
- There are several ways lower middle-market companies stand to benefit from proactive investment in BI.
- Data differentiates portfolio companies through higher valuation and faster exits.
- “Tread cautiously, actively invest” - an economist’s advice for private equity firms in the current economic headwinds.
How Private Equity Uses Dashboards and KPIs to Empower Portfolio Companies and Drive Accountability
“Empowerment comes down to alignment early on.” -Sean Edmonson
Generally, many of Tecum's investments require process changes in order to create value. As a best practice, Tecum aligns early with company leaders to co-define the pillars of their value creation plan. They then work backward to identify the process steps and the performance metrics needed to create accountability and increase value over the holding period. These efforts lead to dashboards that empower management teams to advance the plan rather than spending time digging for data and producing reports.
This process creates what Sean calls “a culture of empowerment.” He adds, “Folks don’t want to be handcuffed or told by higher ups what to do. They like having a culture of accountability and understanding what winning looks like.”
Using Data in the Lower Middle-Market Investment Landscape
“At the heart of many of our success stories, is a central focus around data to drive decision making and accountability within the organization… they have reliable data to make good decisions, and they use it to drive their work.” - Sean Edmonson
Because high-performing employees like to see the score and have insight into their performance, the most successful manufacturing and services companies provide real-time (or at least daily) visibility into the KPIs most important to each employee’s. Sean says, “I'm a huge believer in radical transparency. And I would say with some of our best run organizations - especially where I've seen it come to life - is in manufacturing organizations. It's a very complex operating environment. Given tolerances, throughput, and some of the dynamics that go into world class shops, those folks like to be measured, and they like to know what winning looks like on a given day.” Additionally, “In our best run services companies, service technicians have really strong visibility into production goals in a given week. And they know when they're up or down as they work towards that weekly target.”
Chuck Coonradt, in his bestselling business book, “Game of Work,” asks, “If winning isn’t important, why do we spend all that money on scoreboards?” With this in mind, investors should increase BI investment throughout manufacturing organizations to increase job ownership and encourage achievement.
Data Increases the Valuation of Manufacturing Companies
A primary consideration for Tecum when assessing valuation during due diligence is data. They seek to understand a company’s accessibility to and grasp on the numbers. To what extent is the management team able to rely on data to inform decisions and strategy?
“If you don’t have any type of dashboarding or KPI system, it’s a major deduction on the value of your company if you’re looking to sell to institutional investors as a platform.” – Sean Edmonson
When evaluating a company's readiness to grow and increase in value, a primary hurdle is weak or underdeveloped systems for automating data intelligence. Non-data driven companies require a cultural shift, process refinement, and technology integrations that can take months or years. By contrast, companies with the greatest potential already have a system for organizing and surfacing their data. According to Sean, “If you have data that gives you 70% of the picture, helping you to instinctively make good decisions, you are ten steps ahead of the rest of the market.”
An Economist’s Advice for Private Equity Firms
An economist who recently advised Tecum on the current economic headwinds advised, “Tread Cautiously, Invest Actively.” Tecum does this by watching the consumer environment, over-equitizing new deals, and performing tiered scenario planning. They invest actively in durable industries and companies with strong employee bases and highly skilled workers.
In this hawkish market, a defensive stance feels natural, but leaders must face the facts that a purely contractionary response leads to median company performance (Birshan et al, 2022). Similarly, Blue Margin recommends that companies adopt an offensive, expansionary stance (informed by data) during economic challenges. History favors the brave.
More on Tecum Capital
Tecum means “with you” in Latin. This branding guides Tecum in how they build partnerships, focused on establishing trust and strong relationships with founders. They’ve been investing in the lower middle-market for 17 years and have resisted the temptation to go up-market. For Tecum, great people, passion, and strong character matter more than the size of the company.
As Sean puts it, “We're really passionate about helping these folks go out and win and succeed. And a lot of them care about their legacy. A lot of them care about their people. And they want to know that when they look across the table at someone, it's more than dollars and cents. It's always a really honest approach… it's being good people and working hard.”
Tecum also prioritizes process improvement, documentation, and execution. They identify constraints early on in the investment, then they look to equip portfolio executives to advance their companies and capitalize on investments in technology, equipment, and people.
If you’d like to connect with Sean, do so via LinkedIn or the Tecum team page. Tecum Capital can be reached here: Tecum Capital
If you'd like to explore how Blue Margin's team can help you use data visibility to drive growth and inform decision making, contact us below.
Other Expert Insights Series Interviews
- Notch Partners: Finding Executives for the Right Deal, at the Right Time
- Andy Scott, CTO, on Data Transformation at Hydromax USA
- Adam Coffey’s Exit Strategy Playbook
- Birshan, Michael, Seth, Ishaan, and Sternfels, Bob. (2022, August 29). Strategic courage in an age of volatility. McKinsey. Strategic courage in an age of volatility | McKinsey
- Mehndiratta, Manish. (2020). Why a data-driven culture matters and how to get there. Forbes.
- Willink, Jocko. (2015, October 20). Extreme Ownership: How U.S. Navy SEALs Lead and Win St. Martin’s Press.
- (Article note: In the full video, Sean references Jocko Willink. For reference, Jocko is a retired United States Navy SEAL who received the Silver Star and Bronze Star for his brave actions in the Iraq War. He wrote this #1 NY Times bestseller book.)
Jon Thompson 0:04
Welcome to Blue Margin's Expert Insights Series. This series was established for mid market executives and PE firms looking to use data analytics and dashboards to put growth plans into action and increase the value of their companies. Today we have the pleasure of welcoming Sean Edmondson from Tecum Capital. Sean has been with Tecum for five years. He's also a board member for BP Express, Connecticut Electric, FSC Lighting, National Power and FNS Tool. Tecum is a PE firm operating out of Pittsburgh and founded in 2006. They invest operationally in lower middle market companies with strong management teams, almost always entrepreneurs. Typically in that 10 million EBITDA range and under. They've invested close to a billion dollars to date. As a VP at Tecum, Sean takes the lead on investment activities, including sector and company analysis, performing diligence, negotiating debt financing and working with portfolio management teams. Prior to joining Tecum, Sean worked within the industrials investment banking practice of Brown Gibbons Lang, in Cleveland. And he also worked in the commercial banking division of Wells Fargo. his experience ranges from strategic advisory, sell and buy side advisory, raising capital across the middle market for both private and public companies. It's great to have you here today, Sean, really appreciate you joining us,
Sean Edmonson 1:36
Jon, thanks for having me, really appreciate it.
Jon Thompson 1:39
Yeah, you bet. So Sean, we're excited to have you here to talk about operational excellence, which I know is a cornerstone of Tecum strategy. Tecum, as I understand it, means "with you," which I think speaks to fundamental philosophy in your approach to working with portfolio companies. I wanted to ask about the resources and support that you provide to your management teams, I know that having strong empowered leaders is really an essential ingredient for how you view success in these investments. Can you talk a little bit more about the ways that you support and empower those teams?
Sean Edmonson 2:18
Yeah, of course, I'd be happy to and I think just to kind of dive in on a point to maybe talk about, like, the maturity or lifecycle of some of these companies, and maybe their philosophy, given that many of them are, let's call it three to 10 million of EBITDA family founder owned, I would say more often than not, these successful companies, maybe at times have it, the point of sale, and we're getting involved in partnering with folks is, is oftentimes just because they feel as though they're hitting a glass ceiling, or maybe trying to de risk. And then I'd say more often than not, the cornerstone of a lot of these companies is really good culture and some tenured employees, but often maybe falling short on scalable, pro processes, leveraging technology alongside more established processes. And then I'd say, especially as it pertains to people, relating to a repeatable process around recruiting, training, retention and continuous development. So I would say, where we start, oftentimes, when we get into our companies, and some of the resources we provide... we have a lot of background and experience in helping our companies build training programs. And really kind of, I'd say, system monetize kind of their recruiting process, and how they go about retaining talent just given more often than not human capital is a major, I'd say, value driver of a lot of our businesses. So I'd say on that front, that is definitely a key staple with us and as we've added folks on to our team that don't come out of traditional industry, like David Bonvenuto, for example...he built one of the largest apprenticeship programs in the state of Pennsylvania. So leveraging expertise like that, on the on the processes on system side and resources, for our size firm, we go to market as a lower middle market fund, we don't have a full captive, operations team. So we, we do have best of breed consultants that we leverage, but I would say at its heart, where we always focus before you go throw money at problems is real, really understanding process breakdowns, as it pertains, whether it's a manufacturing company, a service company, or distribution company, and really hone in on documenting those processes and understanding where those constraints are. And then ultimately, when you get to a point where you have a good product, good processes in place, leveraging, technology appropriate for the company, and that's really kind of some of the core tenants of how we oftentimes get our investments off the ground in the early stages. And probably more so for the theme of the discussion, I mean, technology, we love to leverage it. And I think the key part is you got to get your processes right, to be able to use it appropriately. So,
Jon Thompson 5:15
Yeah. And having those processes mapped ultimately, I assume you're looking for where the points that create value, how do we measure those? And then how do we service that to create accountability and focus and keep top of mind awareness around those? Is that part of the process, once you've mapped the various processes, documented them, really understood them, cleared out points. That constraint then is, is it about measurement and feedback at that point?
Sean Edmonson 5:40
Spot on. I think that's the biggest thing, because oftentimes, it can be an emotional discussion when you're challenging a long established process. And then it's like, well, where are our pain point? Where are our pain points? Why are we winning? Why are we losing, and then let's start measuring, frankly, those things. And I'll give you an example. Today, we were talking with one of our CEOs and a new platform we just closed on. And he's saying a key constraint for us, or maybe why we're not converting as many leads as we'd like is, there's a delay in how fast our sales folks are getting in front of customers from the point a lead is generated. So it's like, well, let's make sure we're measuring it, prove it out. And then we can start to really prove whether or not that is, indeed a fact. And that's a really simple data point. But it's powerful as you kind of think about throwing money at challenges or issues in a business, more often times, it's like, let's evaluate the process versus not just hire more people and buy more equipment.
Jon Thompson 6:42
Yeah, well, you've touched on something they're a big part of the value that we try to bring to the market or to our clients is elevating a culture of accountability. But we find that you can't hold people accountable unless you empower them as well. You can't just dictate especially you're talking founder operator, going in there like a bull in a china closet and saying, Here's how things should be done. I imagine you may have tried that. I imagine it hasn't worked, if you have, how do you keep the operator, the founder, empowered, engaged and still improve their processes? Make tweaks, redesign the model where needed to improve outcomes?
Sean Edmonson 7:29
Yeah, yeah, that's a really, really great question. I would say over the years, admittedly, we've gotten much better at this, but is we've kind of honed in on the how of empowerment, it really just comes down to getting alignment early on, in the investment more often than not, as we alluded to earlier, as I alluded to, we're, we're bringing in key folks as well to assist teams where maybe there's kind of deficiency of talent, or maybe just historically hasn't been an area of focus. And at the onset, I think maybe one thing that is unique for us is we don't give false advertisement or representation of, hey, we have this unified playbook that we're going to run that's going to create all this money. I think we have the utmost respect for a lot of these businesses and different industries. And there's not a unified playbook that works on these companies. So more often than not, we're working hand in hand with our executive teams to really kind of form the pillars of that value creation plan, over the course of the investment, and really work our way back. I mean, where do we want to go in five years? And then what are the steps you got to take there in the next 12 months, the next 36 months, and then check and adjust along the way and back to kind of empowerment. You gain that alignment early on with your team, really kind of challenge, let's say, kind of the needle movers in that plan. We create a strong cadence with that team, and then we empower our leadership to check in with us as we work with them. And admittedly, I mean, we have a finite amount of time, just as much as they do. We can't be at these companies 24/7. So really, what we're looking from them is, hey, if we're all aligned on the onset, it's your responsibility as the executive team to come to us based upon areas of expertise we have, where you need us to help you guys scale and go execute. Otherwise, we're assuming, based upon measuring and driving that accountability, that you're going to drive the plan. I think folks really appreciate that. Because ultimately folks don't want to be they don't want to be handcuffed or have folks sitting you in the ivory tower, telling them how to run a business when ultimately that that's not my job, and that's what we get paid to do. And I think there's just a mutual respect. And that goes a long way in terms of kind of establishing that trust and ultimately that empowerment that they feel to go get things done.
Jon Thompson 9:48
Yeah, that's great. I want to touch on that point of alignment and trust. I think PE firms of old were more dictatorial and found that that did not work well. They, like all of us are looking for what's that formulaic approach, it sounds like each one of your engagements is very custom, depending on the company and the makeup of the people and so on, that's similar to us, it would be great if there was a stamped approach to doing it. But that tends to only fit a very small percent. So getting that alignment with your management teams... we find that alignment and trust fails when people don't know what's happening. So even though you're trusting them to execute and trusting them to come to you when they need expertise, if you're in a fog, and they're in a fog, that invites scrutiny that invites micromanagement that invites a lot of questions and a lot of ad hoc phone calls and meetings and PowerPoints and Excel spreadsheets and so on. How do you maintain that alignment so that you don't end up in that obtrusive position?
Sean Edmonson 10:52
In fact, to the tune, back to the size of our companies, companies we're investing in... I mean, oftentimes, what we're starting out at is really just kind of understanding the data in our world. And the challenge is laggard data, right. And I'd say more often times than not, you're at least, you're at least a couple of days behind, best case scenario. So, tools that we leverage, oftentimes here, we're looking to leverage, business intelligence tools, and understanding kind of where there's real time data that can help us make decisions within a couple day lag. And oftentimes trying to establish those dashboards and reporting KPIs early on. But there's definitely you got to strike a balance of what is, I'd say, functional information that we can use to both drive accountability and make decisions, but not inundating a management team with just kind of this data proliferation exercise. Admittedly, that is where we always try to get on with our companies. And I'd say more often than not, we're introducing, I would say, weekly KPIs and kind of scorecards, if you will, for the first time, and it can be a, it can be a major culture shock to them. But ultimately, what we find is folks that kind of want to operate in that environment of empowerment. They like having that accountability, and that, frankly, that that's built that trust.
Jon Thompson 12:22
That visibility is empowerment, not being able to see does not put you in firm footing. And a sense of empowerment, we found is sort of the premise of what we do, do you have something of a formula in the first 100 days to get an OKR dashboard in place to make sure the value creation plan is sort of memorialized, and being tracked at a high level? How do you how do you go about that? Or is it more ad hoc, depending on what the acute needs are at a particular company?
Sean Edmonson 12:51
Obviously, it varies by industry, right? Especially there can be a bit more complexity in a manufacturing environment than there is oftentimes and in a service environment and or a distribution environment. But I'd say we really out the gate, really just get down to kind of a basic dashboard of tracking our value creation plan and responsibilities at the company, and then who is assisting on the investment team to drive that execution. And then oftentimes, to back to working on those dashboards, we're trying to figure out what the team will, what do you have now that can drive or influence decision making, rather than Rome is not going to be built in the day, so let's not even attempt that. But let's understand kind of where there's good data points you guys have, where we can really start working off of a concrete set of facts. And you kind of combine those two, and it can be a really good recipe for success. And then what we find oftentimes is, you get a good cadence with that team, and then you go into kind of your first budget phase with folks. And you really start matching kind of that dash, your dashboarding with your budget, and then ultimately they see how it ties into the vision of the company. And that can be really, that's the recipe for success when everyone sees kind of how that compounds into the ultimate goal where you're working.
Jon Thompson 14:11
When you're establishing those early KPIs and surfacing them, first of all, what tools do you typically use? Is it usually Excel or using a BI tool like Power BI or Tableau or something?
Sean Edmonson 14:21
Yeah, it depends on the sophistication of the company, I would say what we've been finding as of late, especially with the cost of BI coming down substantially over the last couple of years and the applicability of it, we've more often than not been shifting datasets into Power BI just because a lot most of our companies for better for worse run on Microsoft licensing, and it's just built in. So oftentimes, we'll bring in some outside consultants to help build them. And then sometimes you'll have some kind of talented folks in house that can help build it. But more often than not, these companies are not 30-40 billion dollar EBITDA firms. So it's a combination of us assisting and then bring in some outside expertise.
Jon Thompson 15:08
Do you find that there's a lot of manual entry up front? Are you typically going right to source information or exports of CSVs? And Excel from transactional systems?
Sean Edmonson 15:20
When you get with our size companies, I'd say more manual in nature.
Jon Thompson 15:24
Yeah. And is that I assume they're inputting into Excel? (Yeah, spot on) And then over time, are you connecting Power BI directly to data sources or using a data lake or data warehouse and then connecting to that? Yeah. Or is this the lead now your purview?
Sean Edmonson 15:42
The latter is typically where we're going. And there's honestly, there's some good BI tools we're finding too. And some of the new ERPs out there, like Acumatica, for example, has a lot of powerful BI tools that are embedded within their system.
Jon Thompson 16:00
It's interesting that overlap, the Venn diagram of of reporting that comes directly from a system like Acumatica, and Power BI that will take data from different systems and combine them. We use HubSpot here, we use QuickBooks, we've got various systems, we use the reporting out of those tools, but then we also load everything into Power BI for deeper analysis and sort of that company view of things. Do you find that that dividing line challenging between reporting directly from the system and saying, we need to put this in BI? How do you deal with that?
Sean Edmonson 16:39
I have an outside expertise area, but I mean, I would say functionally, we have a lot of experience here, it really goes back to that empowerment with your CEO and your C suite. Because more often, what we're finding is, here's what we need to see, as we as we all get a lot as we have that alignment. And then more often than not the CEO saying, Well, for me to do a better job of managing the company, they're working with the CFO and driving them down the decision making saying, Well we can't have these huge lags and getting information, and what do you need to be successful here? So ultimately, us as a team can make more efficient decision making. And then that's kind of where we get that introduction of well, do you just start using BI? Do you have kind of embedded BI tools with certain systems. But I think one proliferation that we're seeing more often than not to, especially with acquisition strategies is obviously you have disparate systems. And then it's more of a necessity out the gate to get everything through kind of a unified bi overlay. Yeah. And that's, that's probably in our lifecycle. That's where we're probably in the early stages of, I'd say, really kind of mastering that exercise. Because it is it is like some people get inundated with this obsession around having one ERP and businesses out the gate when you do acquisitions, and it can be really disruptive and a huge waste of money, frankly, and before they kind of just get their full integration plan, let the let the system run parallel, and then maybe integrate six to 12 months out.
Jon Thompson 18:24
Yeah, we concur with that philosophy, if you if you wait for the integration that can really grind things to a halt. If you can consolidated the data layer. You can keep things running smoothly, and then do that systems integration on the back end. I want to keep beating the drum of data here first. I'm curious how much of your success formula I know you're sort of upper quartile for your strategy among PE firms. How much is data part of that save versus personal relationship? And then I got a follow-on to that.
Sean Edmonson 18:59
Yeah, that is a really hard question. Because we've been, we've been fortunate to be a part of some really strong success stories, and I would categorize them. Sometimes it's better to be lucky than good. But I kind of reflect on that question and tell you, I think at the heart of some a lot of those success stories, I would say an outsize majority have some type of central focus around data to drive decision making and accountability within the organization. They may not. They may not spend an excess amount of money on automation and systems, but they have reliable data and they make good decisions and they use it to drive their work. So they know that. Yeah, that's really I would just, I would really emphasize that kind of our size of the market.
Jon Thompson 19:47
Then, do you think in terms of pushing that data visibility through the organization to the shop, floor, etc.?
Sean Edmonson 19:55
I would say transparency like I'm a I'm a huge believer in radical transparency. And I would say with some of our best run organizations, especially where I've seen it come to life, frankly, is in manufacturing organizations because they can, it's such a, it's a very complex operating environment, and folks just given tolerances and throughput, and some of the dynamics that go into world class shops is those folks need to understand, they like to be measured, and they like to know what winning looks like on a given day. So I think more often than not, a lot of our organizations, they have that, that push through within certain datasets to where they understand exactly what a good day looks like, and what a good week looks like. So I yeah, I would definitely emphasize that, and then even like, even on the service, and the service world I think given just the dynamics of that world, it's not as static per se, as a manufacturing shop with a machine. So if you will, but more often than not our best run companies, their service techs have really strong visibility with production goals in a given week. And they know when they're up or down as they work kind of towards that week target. And sometimes you have bad days, good days, just given some of the dynamics around maybe drive time, things like that traffic, there's things that you can't control. Yeah, exactly.
Jon Thompson 21:30
I love what you say about folks wanting to know if they're winning or not on a given day, those are the employees you want. I know, some folks are concerned about exposing performance data being like a wall of shame, or some sort of sinister accountability methodology. But for those who are accomplishment driven, want to make a contribution, have agency in helping the business succeed, they tend to want to know, what's the bogey I'm after and am I getting there?
Sean Edmonson 21:59
I mean, I'll tell you this. On the employee side, there's two distinct examples of that. One that we were directly a part of, one that our operating partner Dave was a part of. And one was related to we had an our one of our transportation companies, we had a major cohort of drivers that just didn't drive safely. It was just instilling a bad culture. And we took a step back probably for 12 to 18 months. But he came to the board and asked, Can we fire? Can we terminate all them because we're not going to win these blue chip clients with a driver base like that. And they terminated them, and then they put in a culture of accountability and data and that, I mean, it just it changed it, it took some time to rebuild, but then you got the right people around the table. And we've seen that time and time again, folks want to be around folks who want to win. And ultimately wherever you are sitting in a company, whether you're working on the shop floor, or you're sitting in the C suite, folks want to know that they're aligned with the people that are sitting next to them.
Jon Thompson 23:03
Yeah, yeah, you want that winning culture and without a scoreboard? It's tough to get the team rallied for sure. I mean, I know I'm preaching our our message, but believe it it's tough to fire people nowadays. I mean, I'm hearing this trend of acquiring companies simply for the personnel. This is a tough period right now for for human capital.
Sean Edmonson 23:24
Yeah. I'll say this. It amazes me, you get into some of these companies and you hear the challenges they're having with their with folks. And they have no visibility on market comp, they have no visibility on who are their outperforming employees who are their underperforming employees. And it just all kind of stems back to their culture of accountability and even how you hire people and pay people.
Jon Thompson 23:54
Curious if you got that phrase radical transparency from Ray Dalio of Bridgewater or if you pulled that from somewhere else, I know it's not too uncommon.
Sean Edmonson 24:02
Who I actually got it from is, Jocko Willink. I know Jocko is a big believer and I love Ray Dalio as well. But yeah, that's a big thing with Jocko Willink.
Jon Thompson 24:15
Yeah, great. I know that you're involved in the diligence process and analyzing sectors and analyzing companies and so on. Do you see a big difference between companies that have a grip on their data, they're wired for data and those that are sort of see to the pants? Does it make a big difference in terms of valuation speed of transaction? How you view them? Or is that not a primary consideration when you're looking?
Sean Edmonson 24:40
Yeah, I would say it's a it's a major consideration for us because we always look at it from the viewpoint that if you have if, let's say you're you're deficient in your systems and your processes and how you manage your organization, we've often found you can throw as much money at consultants as you want, but it's really a cultural shift. And oftentimes that can be 1218 month lag between process refinement and then getting systems in place and ultimately getting the technology in place. And it can really kind of hinder the speed at which you can co execute your value creation plan. So for us, I would say what I would say is, there's definitely a balance, right? I mean, if you're a 4 or 5 billion dollar EBITDA company, there's a balance of how much money you can spend on your back, and your back end, on the systems and your supporting personnel. But back to kind of what I was saying in some of our successful stories is they have a really good handle on key data sources. And what some of our best executives say this all the time, if you have good info, or if you have enough information that gives you a 70% of the picture, and you can instinctually make good decisions off that you're I mean, you're 10 steps ahead of most of that size of the market.
Jon Thompson 26:00
Yeah. And where they don't I assume for the unknowns, there's a there's a subconscious or intentional discount. That happens,
Sean Edmonson 26:08
of course, yeah, that and that goes back to just having the respect for folks that have been in the industry for a long time is it oftentimes is instinctual, but they have a data pattern that they use to drive their, the core of their decision.
Jon Thompson 26:22
What's your process for assessing that data? Enablement? Is it standard?
Sean Edmonson 26:28
I wouldn't say it standard, I would say I've been probably early on in my career, I've been exposed to some really strong manufacturing organizations and some really bad manufacturing organizations. And I would say, manual, the manufacturing sector is, I'd say, probably one of the most data intensive industries, and I have a lot of respect for people who run those organizations, because it's not easy to do. And what I would say more often than not, is within that world really got an appreciation for what good data looks like and how you use it, to frankly, go and win. And, more often than not, with our, with our deals that we're evaluating, I mean, you're asking people, What are you using to make kind of decisions let's call it weekly monthly, daily, if possible. And you can oftentimes get a really good feel for kind of the culture of accountability and systems that they use just by asking those questions and seeing what they're leveraging. And that typically gives us a pretty good feel. So I, I will, I will tell you this off, if you don't have any type of dashboarding or KPI scorecard that you're using, with your team, it is a major and it is a major deduction on value, I would say in the value of your company as you're looking to sell to institutional investors as a platform.
Jon Thompson 27:56
Yeah, that's great. Appreciate that. Do you require a monthly board book a standardized report?
Sean Edmonson 28:03
Yeah, we, I would say, maybe 60 to 70% of it, I put kind of in that conforming or standard structure that folks just need to see. But then really try to tailor the kind of last third of it to what we need for that specific industry in that business. And based upon the processes and data available, just to make sure that we're measuring I'd say key commercial and operational drivers of the business.
Jon Thompson 28:31
So, okay, let's talk about the current headwinds that I think we can still speak to as current interest rates, increased costs, on materials, logistics, etc. In that environment, what is Tecum doing to reduce risk today? And positioned themselves well for tomorrow? How are you thinking about that?
Sean Edmonson 28:53
Yeah, of course. I think there's a couple factors there. I mean, we, I'm not going to pretend to be an economist, we ironically, just had our annual meeting two weeks ago and had a really strong economist out to present. So fairly refreshed here, but what I would say just generally, trending cautiously around the consumer environment, or any type of secondary consumer exposure. I think from the way we're looking at it, if there's any type of gray area around consumer discretionary or consumer discretionary impacting an industry, I think just treading cautiously probably being a bit more defensive. What we're generally seeing is the consumer pocketbook is really strong still, and I think we believe in that viability, but emotionally just given kind of the noise in the market, there might be just some tightening, which, obviously folks are seeing in some ecommerce businesses, things of that nature. I would say generally in a lot of our transact, or a lot of our partnerships as well and even new deals, we're evaluating new deals (that) were evaluating or closing on, we're really looking to over equitize those just to shore up the balance sheet to operate those businesses for the long haul. And then on existing or more tenured holdings within Tecum, I think we're just trying to get our organizations to really think about, in the event, there is a slowdown, how do you manage through that? And do you have that plan in place, we kind of call it like a, tier two, tier three to tier plan of profitability decline and kind of how you manage that. And then the challenge is, is just given the unemployment rate as well, no one wants to let folks go, that's never a goal. Right? Ultimately, companies got to do what they got to do to survive. But the challenge is, is that that lever is really off the table, frankly, at least from our view, as you look about, as you look at kind of employee retention, how tight the labor markets are. So it's really trying to hit depository, yeah, it's not an easy environment to operate in by any means. And you in the headlines, oftentimes can differentiate can differ substantially just from the facts. And what we're seeing right now, so it's just one of those things is I would just, I think I'd kind of kick them headline is, treading cautiously actively investing is if you look, but it's we're really focused on durable industry, and more often than not to is investing in companies where they have a strong employee base with really, I'd say moats around their skill sets, more highly skilled workers, things of that nature.
Jon Thompson 31:38
So yeah, Aren't those the most likely to have the moats breached by recruiters?
Sean Edmonson 31:46
You would think so. But oftentimes, I mean, if we always are benchmarking comp and checking return, attrition rates within our companies. I mean, it's you pretty you identify that stuff early on, if there's a culture issue, and folks don't like where they work. I mean, it's not all of a sudden going to change when we invest, right, you're you're probably not making that investment. If there's high turnover in your below market, things of that nature, or you're addressing it before you close on behalf of the employees. I mean, we're, we're really, really big on job growth within our companies. We that's a that's a measurement for us internally.
Jon Thompson 32:23
Then focusing on career path and other other things that are requiring extra attention nowadays. (Yep. Exactly.) Interesting. Separate from headwinds, when they're not in place, do you tend to be a reasonably even mix of discretionary and durable? Or do you tend to towards towards the durable side?
Sean Edmonson 32:47
Probably generally, as a firm, I'd say we're probably 80% durable, if I had to guess. I mean, we we've done really well. And I would say more consumer discretionary industries or industries that are more exposed to kind of inflationary pressures, like building products, obviously. But really try to stay the course of a bell curve, if you will, with more, I'd say kind of durable, manufacturing and services. ,
Jon Thompson 33:17
So some big PE news from last month, Biden signed into law, the IRA, not what you'd think but Inflation Reduction Act. From what I understand this is a win for the PE industry providing some tax relief on carried interest. Can you explain how this legislation might positively impact PE firms and mid market companies? Are you familiar with that?
Sean Edmonson 33:39
Yeah, extremely. I'd be happy to. And I'll just try to speak to it as more of a broader audience. So generally, our industry is compensated by outperforming a general performance benchmark. So in our world, it's typically 8%. And the some of the items being thrown around in regards to the inflation reduction act as a way to create more tax income was shifting rules of carried interest for let's call it private equity professionals that are allocated carry, whether it's a general partner or mid level employees, working their butts off for these companies. And some of the thoughts, generally in Congress that were floating around, were related to the duration in which you would need to hold an investment for the carried interest to qualify under capital gains versus ordinary income. So just for simplicity, for broader audience, ordinary income taxation, let's just call it the simple number of 37, 38% versus cap gains of 20%. That that was a key discussion point there was the major item I had last seen was folks who are trying to press for a five year old versus a three year three year hold. And that's what the current limit is, we have to have an investment outstanding for our carried interest to qualify for long term capital gains versus ordinary income. If you move it to five, I think it was it was, the traditional hold period for a lot of committed funds is typically in between that three to five. So it's disincentivizing. Oftentimes, these, these really positive outcomes for both management teams and investors, like, so that that was a big driver here is they kept the duration at three years, they didn't mess around with the taxation. And that has been kind of a big win, just with the environment. I mean, I think generally, as you look across, where money is shifting and values being driven, and the public and private markets has been a big shift into the private equity asset class. So it's nice to see that they're still trying to maintain an incentive that rewards groups for, working really hard oftentimes, to drive these benefits for pension funds, endowments, things of that nature that ultimately that benefit employees and things like so.
Jon Thompson 36:15
So I'm sorry, did it stay three years?
Sean Edmonson 36:17
Yes, that was a big thing.
Jon Thompson 36:21
Is there a possible positive? Not that you'd ask for this, but positive possible positive outcome? I'm going to five years in that. It encourages more organic, I guess, honest growth, as opposed to optics for valuation and multiples. Is that Is that a thing?
Sean Edmonson 36:36
Yeah, yeah, I mean, I would say for us, and just for context, like our control equity arm, is we operate, we raise money from families and institutional capital. So we don't have the committed fund pressures of having to kind of churn and burn these companies. It's something that we take a lot of pride in. And I think if you look at our website, and Tecum, I only really focus on sustainable value creation. So I kind of hear that point. I don't know what the answer is, because I'll be honest, there's a lot of folks making a lot of money right now. And aggressive buy and builds with companies that aren't fully integrated, a lot of multiple arbitrage. Obviously, there's not going to be kind of a one size fits all, as it pertains to their site, I see kind of that viewpoint, and I can, I can appreciate it. But then it goes back to at the end of the day, if you go talk to maybe a pension fund or an endowment at the end of the day, what they care about is that we're hitting the return profiles that they're allocating their money to. And ultimately, you want to incentivize the private equity asset classes, investors to be driving real value in these companies, whether people perceive it to be or not.
Jon Thompson 37:49
So for economic growth, yeah, good thing. What's your average hold period?
Sean Edmonson 37:55
For us, over our history, we actually are just talking about this, our average hold period is, is typically right around 48 months, or we tend to be right in there. Yeah, I'd say we tend to be long, we tend to be longer than that many firms that you see, I will tell you on the control side, our structure currently is in place. Not that we want to force short or longer hold, but we want to be opportunistic, about being able to hold the company for an appropriate amount of time and do its best, just with our trajectory.
Jon Thompson 38:28
So it sounds like you're a little more focused on operational optimization as opposed to multiples arbitrage. Is that a fair?
Sean Edmonson 38:37
There's a balance, right? I would I would tell you is I we definitely don't fall at the higher end of from a buyer profile of we're going to be those folks, lobbying and bids it, 15 times, things like that. But over the years, we've kind of changed our tune a bit to where we'll pay up for for businesses where we have really defined views of how to grow them. And it is a balance, right? I mean, you do have to have some discipline about how you buy these companies, if you can make appropriate add-ons, and you have good outcomes for the sellers and use a platform that drives arbitrage. That's great. And then you hope there's kind of a backbone of a good organic growth plan as well. But I will tell you, maybe just to summarize how we look at things. We're never going to make an investment that's predicated upon an aggressive buy and build strategy. There's a lot of firms that do that. And for us, it's just we've seen challenges on it.
Jon Thompson 39:37
So yeah, last question, then we can close out. What is it that differentiates you and causes you to win in bids for these companies? Over the field? Yeah. Yeah. If you had to point to what's the kernel?
Sean Edmonson 39:55
Yeah, I mean, if you take a step back and you look at kind of the culture of our firm. We've been investing in companies of this size for now for 16 - 17 years. And have intentionally stayed in this size of the market rather than chasing upturn funds, things of that nature. To make more money, and management, these things, things have kind of that rhetoric, if you will. And we really just relate to a lot of these business owners and we have a good feel, I mean, what I always say is, our job is much more of an art than it is a science. And, frankly, it's not a job you can do if you don't enjoy, especially this size of the market. Right. And I think that's kind of at the heart of it. If you ask a lot of folks we've partnered with is, we're really passionate about helping these folks go out and win and succeed. And a lot of them care about their legacy. A lot of them care about their people. And they want to know that when they look across the table at someone, it's more than just kind of dollars and cents, and we stick to what we know, we've never misrepresented things. And we work really hard with these folks who drive good outcomes, or at least, fit fail, when sometimes it does happen. But it's always a really honest approach. I don't think there's any secret sauce or anything that is completely unique to each. Yeah, it's just honestly, it's being good people and working hard. And I think if you look at the table, that's, that's how we approach it. And we're not, we're not going to win them all. But I think we're confident that if folks partner with us, we've had some really good outcomes.
Jon Thompson 41:32
Yeah, I'm convinced without getting a high horse, that that approach to business not only leads to a more comfortable life, but better outcomes financially. And I'm sure that that entrepreneur owner, if they catch any whiff of vigilante, that that is no go. Yeah,
Sean Edmonson 41:50
You would think so. But I am always amazed at what people will do for money. I mean, so it's you try to stay the course. But I always say this is the people that have cultural alignment with us are the people that we want to be working with and those that don't, it's no harm, no foul, and we'll probably find the right partner for that. So
Jon Thompson 42:10
great. Well, thanks so much. What is next on the horizon for you personally? And professionally?
Sean Edmonson 42:15
Yeah, yeah. So our big thing is at Tecum, right now, we have a big growth capital strategy that's been around, that's kind of our legacy business. And we had launched a control equity arm probably four or five years ago with a single family office. And we recently relaunched our control equity business with that in house operating expertise, so I'm really looking to kind of build that strategy out aggressively alongside our growth capital fund, and really kind of bring that partnership of that in house operating executive alongside an investment team, to the lower middle market, which you don't always see. So our kind of goals here the next three years is, we're going to build that our portfolio aggressively and help our portfolio companies win. And I think evaluate whether or not we move to more of a formal committed fund or kind of stay is more of a opportunistic long term vehicle. And we're really excited about that. We think it's just a different flavor and the lower middle market and we We like playing here. So that that is kind of where t come is really focused on right now. Is building out the strategy.
Jon Thompson 43:28
Yes. If you had to guess in in your lower middle market sector, what percent of PE firms actually have true on staff operating partners with deep executive experience?
Sean Edmonson 43:41
Very low, you might see pictures on people's websites, but oftentimes, they're their 1099 consultants that are getting paid a fee to be on there. Especially I always say kind of that sub like, three to $400 million fund profile, and our kind of investment criteria maps out like a $300 million fund. And then there is not a lot of folks kind of with that sector, or thesis-driven expertise. So we are really excited about it.
Jon Thompson 44:11
That's great. If folks want to get a hold of you, what's the best way?
Sean Edmonson 44:14
Yeah, if you go to our website, it's www.tecum.com. My contact info is on there. I'm also on LinkedIn, I'm not on what social media for better for worse, but if you reach out through either of those two avenues, you can get a hold of me and I'm pretty responsive.
Jon Thompson 44:29
Excellent. Well, thanks so much. This has been really insightful. I appreciate your just openness and willingness to share what's working for you challenges and so on. Grateful to you.
Sean Edmonson 44:39
Thanks, Jon. Thanks for having me. And thanks for helping Tecum get their name out there as well. Talk soon. Thank you all.