Interview – Glenn Oken, Mangrove Equity Partners
I recently spoke to Glenn Oken with Mangrove Equity Partners in Tampa, Florida. With some minor edits, the transcription below captures our conversation surrounding private equity investing and his firm. (Italics text are Glenn’s words.)
Mangrove Equity Partners is a lower middle market private equity fund headquartered in Tampa, Florida. The team has always been keenly focused on the lower middle market, which I will define as investing in privately held companies making between $2 – $10 million of EBITDA. We invest in companies throughout the United States and Canada. We can invest overseas, but other than Canada, it’s reserved for add-on acquisitions.
The team has completed roughly 138 deals in 60 industries. A lot of our brethren who have that type of experience and have had the returns that we have migrate into larger funds. This categorically means that they have to invest in larger companies. But we are smaller deal guys. We really enjoy working with family businesses and entrepreneurs.
Early in my career in private equity, which started in 1989, I realized that private equity was to a large extent falling short on the promise that was being made, to be materially helpful and effective in assisting portfolio company owner/operators build value and reduce risk, to help them grow and optimize certain functional areas. I didn’t feel like that was the case in my old firm at that time, nor in the industry broadly. So, we fixed that.
About 17 years ago, I was fortunate to recruit a three-man internal operating team to my firm. This included guys with multiple engineering degrees as well as business degrees. Most importantly, they had a great deal of experience as seasoned operators in companies much like the ones in which we invest. They were serial CEO, COO and CFO types. They truly can be materially helpful to entrepreneurial companies in a critical ways that have optimal impact in building enduring value.
We have invested roughly half the ownership of our firm in Mangrove’s four-person internal operating team… and it has made all the difference. Whether it’s playing defense and weathering natural disasters (in one case), industry dislocations or personal disasters at companies, they are extraordinarily good at playing defense and preserving value. They have proven themselves to be outstanding in building value playing offense in a great litany of ways. A lot of entrepreneurial companies will reach an inflection point. It can be from limitations of capital or limitations of human capital (people with the experience, the ability and the time to address whatever opportunities or problems that a company might be facing).
Our job is to come along side the portfolio company and its people with both capital and operating capabilities to help work through those inflection points and optimize the value of a business while, very importantly, being the right human beings. You could have all the sophisticated tools and operating experience and capacity in the world, but if you do not have the excited buy-in of your partners in the portfolio company, throughout the organization from the plant floor to the owner/operator running the company, then it doesn’t do anyone any good. It’s very important to have the right mindset with respect to being helpful when asked and having the skill set to make it a very positive experience for everyone. Change is scary and it can be difficult. It’s our job to make it less so and to help people to see not only the benefits to the company, but also for them personally. We want to make a company work better AND make it a better place to work. It is great fun to see renewed engagement and excitement throughout an organization as we work together in a skillful way towards our common goals, with the attendant rewards for achieving them.
Deals per year?
It varies greatly. I really wish that the private equity world wasn’t one of feast and famine. I’d love to tell you that I understand exactly why the pace is what it is when it is but, even after all these years, I can’t. It varies. Sometimes it’s three deals a year. Sometimes is six. Sometimes you don’t have the stars aligned and you might not even do the three. It varies.
How do you generate deal flow? What channels work best?
We have been fortunate to build very strong and, in many cases, very long-standing relationships with intermediaries throughout the U.S. and Canada. Some of these folks work for regional investment banks. A great many are people who are themselves entrepreneurs. They may have a one-person shop or they may have a handful of professionals working with them. We have also been quite successful backing independent sponsors who bring meaningful value as transactors or operators. The vast majority of our transactions have been brought to us by intermediary relationships. Given Mangrove’s differentiators, including our ability to work through complexity to close deals and then add significant value, a great many intermediaries think of Mangrove as a strong partner for themselves and the target company.
In the last 24 months, do you feel like you are in a competitive process for deals?
It varies greatly. Certainly, the industry has become more competitive in respect to the number of organizations that have real money and know how to get a deal closed – particularly if you look at it relative to when I started in 1989. The industry really wasn’t much of an industry back then. It’s far more efficient now.
The key thing for someone in our position is to have real differentiators. Those key differentiators to me include being able to genuinely move the needle and be materially helpful to entrepreneurial companies. Since most of the owner/operators we partner with keep a significant piece of the company, they care very much about what their partner brings to the table in addition to capital. It is great fun in our first meetings with owner/operators, as the dialog is genuine, and different than with private equity people who are just number guys and deal guys. It goes way beyond financial engineering. It is operator to operator, at times engineer to engineer.
We are culturally very different from most money guys. We have a deep understanding of operations, their challenges, and quickly establish that we are regular guys and people of our word. We compete best when a company owner/operator cares deeply about his/her company and its people. We act like a true partner to owners and their people throughout the organization, from the very first conversation. There’s a mutual level of excitement between the company owner and our people.
Another important differentiator is our ability to work through very complex, at times hairy situations and get deals done to the benefit of the intermediary, company owners and Mangrove. We can look at what stops many competitors and divine whether complexity is peril or opportunity, and have the ability to harvest that low lying fruit for all shareholders.
Having been in 60 industries is yet another differentiator. We have learned a lot in those experiences and we can bring that to the table.
What is your preferred way for an investment banker to approach you with a deal? What is most efficient for you? How do they get your attention?
Well, it’s not hard to get our attention. I have had plenty of intermediaries over the years express surprise at our responsiveness. Why wouldn’t we extend that courtesy? Deal sources are our life blood.
Some deal sources send opportunities via email and some just call. We really don’t care. There are only a handful of salient details that we need in order to give some quick and meaningful feedback. If we know that a company meets our size criterion, has the potential for solid margins, suggesting that it’s not a commoditized industry, but there is still more information that we need, we just ask the right questions. Having been in so many industries, we will often know what questions to ask to vet an opportunity in a particular industry very efficiently. We hear from intermediary friends that our questions help them to develop the understanding they need to determine if the opportunity is worth their time and how to best represent the company.
How do you grow a company once it’s in your portfolio?
One of the most important things is to listen and to learn – to find out from people at the organization what the drivers are, what are the strong points and what are the weaknesses… what are the vital few things that will have the greatest impact on the business.
One of the things that entrepreneurs may not inherently have is the ability to determine which opportunities and which activities are the most critical, and to focus accordingly. They lack the information systems and the analysis of the information to accurately drill down into what those activities or what those functional areas are that are going to be most critical. That’s something that we bring to the table, the ability to help them figure it out and then to roll up our sleeves with them and figure out what tools the company and the individuals running the company will need to optimize those functional areas.
These things are different for each company, but there are some classic common areas for improvement. I mentioned one of them, and that is information. If the leader of the company does not have adequate information from which to make decisions and doesn’t have an adequate road map to navigate, clearly, he isn’t going to have as much fun in making those decisions nor is he likely to make as good a set of decisions. Helping people implement new information and financial/accounting systems or optimizing utilization of existing ones is critical. One of our operating partners specializes in systems and the teams that utilize them. Shortly after closing he will make that a very early priority.
Another functional area that is commonly suboptimal in entrepreneurial companies, particularly industrial companies, would be sales and marketing. Whether the opportunities are domestic or overseas, our guys have been very successful in helping to build those teams, build that infrastructure and build those processes that will really lead to a successful sales and marketing organization. Simultaneously, we help entrepreneurs build the capacity to meet the increased demand created by improved sales and marketing.
Another functional area that is classically an opportunity in entrepreneurial companies that our operating guys will work on would be strategy. Our guys are good at helping people work through a very simple but effective strategic process. It’s very easy for anybody, even in our industry, to get lost in the details and not see the forest for the trees. A sound strategic plan identifies areas of greatest opportunity and value building, and creates the road map of how to execute to capitalize on those opportunities.
Do you find that entrepreneurial owners/founders/CEOs aren’t doing these things because they lack the capital or because they do not know what they are?
It varies greatly. Sometimes it’s because the entrepreneur is trying to do too much on his own and can’t be everywhere and tackle everything. It’s very rare to find in any one individual the broadest set of experiences and capabilities, let alone time and capacity, to optimally manage all functional areas. Very few entrepreneurs seem to enjoy all functional areas equally, and may neglect those that are not fun for them. A recapitalization often relieves owner/operators of the functions they least enjoy. Even within our own firm, we don’t have any one individual who is an expert and excellent at everything. We have different people with different experiences and different skill sets. As part of organizing one’s time or distributing effort amongst the team, we have different areas of focus and responsibility. It varies, but capital, time, experience and focus all can lead to a functional area of business not being optimized in an entrepreneurial setting.
How do you approach relationship building within your firm, your portfolio companies and in the industry?
Culture is vital in an organization. It’s vital in our organization and it’s something that we pay a lot of attention to and protect guardedly. That’s an area in its own right that we think is crucial and where our internal operation guys pay a lot of attention in our portfolio companies. We work very hard to help preserve the healthy cultural aspects of family-owned businesses or entrepreneurial businesses. Very often, there are cultural aspects within any group of people that aren’t healthy. We are very conscious of that. As friends and partners, we try help an organization build or maintain a healthy culture and to have it be a great place to work.
We emphasize this at our own shop. Some of the characteristics that are very important to us would include honesty, mutual respect, accountability, intellectual curiosity, team mentality, hard work, and fun. It is incumbent upon us to choose people who understand that, appreciate that and honor that. We respect each other sufficiently enough to really encourage people to speak their mind and to be candid and respectful in the process.
It’s important that people be listened to throughout the organization. And we hope that we live that. It’s important for people to be self-aware and by that, I mean to be willing to receive constructive criticism well, and to recognize when actions are not healthy or helpful. To us, these are some of the components of our healthy culture. At an operating company, the same things are important.
Have you ever passed on an opportunity because of culture?
Yes, we have passed on situations where we did not feel that a company owner would be a good partner. And that’s really what we are trying to accomplish. We are trying to be the best partner we can possibly be and that involves both capabilities and culture. It requires that we have the goods – we know how to be helpful, but we also know how to be fair, generous, flexible, responsive – all of that. Integrity would be the most critical cultural aspect of any potential partner, and we have walked away quickly when we felt that lacking.
Valuations are high right now. How much of that do you see pushing down in the lower middle-market?
It’s accurate to say that the lower middle-market has not had quite the same expansion of multiples as the larger deal market. It’s just a question of supply and demand. There is a lot more capital chasing middle market deals. The increased competition for deals does include the lower middle market and the increased pricing is impacting the lower middle-market, but not to the same degree.
What are some things that have changed in the last five or six years?
There are some new entrants or types of practitioners that were not as prevalent in the past. They would include family offices, some of whom are professionally staffed with very experienced people and some of whom may not be ideal buyers because they have not proven themselves to be people who will efficiently close a deal and be an ideal partner.
The other somewhat new entrant would be the independent sponsor. There is a real variability in terms of the type of people that choose to be independent sponsors. Some are extraordinarily good professionals in terms of deal execution and in some cases in terms of operational assistance. We were fortunate to partner with an individual on a deal that was an independent sponsor that we’ve known for a long time. It’s been a wonderful partnership. The company has grown roughly 4X and he has been a force multiplier for us at that portfolio company. He has both of those skill sets. He was a private equity professional in a very respectable pair of funds.
There is also another type of independent sponsor that doesn’t necessarily add that value to the relationship. One of the effects of independent sponsors is that some may drive up the price of an opportunity without understanding or caring about certainty of close and the impact of that pricing and resultant leverage. Some people managing processes will discount that offhand, some won’t.
From an intermediary standpoint and deal sourcing standpoint, while there is still a great wealth of buyside intermediaries that we compensate on a success basis, there aren’t as many smaller buyside intermediaries as there were 20 or 30 years ago. I think a lot of those individuals have retired and some of the very talented buyside intermediaries may have morphed over to a dedicated search model, whether on an unretained or retained basis, they will search within a particular industry with a certain set of criteria on behalf of a fund.
A projection that doesn’t seem to be ringing true is the projection that with the lofty prices that some people are paying, there would be a rash of failed deals and failed funds, leading to a decrease in competition. The deal and fund failures may be happening, but I believe a great many of the professionals involved are not going away, and therefore, not reducing the number of competitors. Rather, some of these investors are reconstituting, acting as independent sponsors or teaming up with family offices. What is not happening yet, evidently, is a return to rational pricing by virtue of a return to an historical supply and demand dichotomy.
There is a secret sauce for certain funds. They genuinely care about the companies and genuinely care about the people they deal with whether it’s the intermediary, lender, founder of a company or a guy on the plant floor. I’m just proud and pleased to work with the fourteen people that we have in the Mangrove family. That’s the most important thing a company owner could undertake – spending real time with as many people at a fund as they possibly can to try to understand what that fund and its people are really all about. Spend some meaningful time, at least on the phone, with portfolio companies that have partnered with that fund and find out what the experience was like in good times and in bad. How did people contribute? How did people behave? Would they do it again?
Watch the video to hear how Mangrove’s portfolio companies comment on the firm’s unique culture and private equity partnership.