Buy-and-Build Playbook in the Core Economy at GSP | Alex Sloane & Matt Perelman - EP.499

0:00 Being small is scary in a roll-up, and it's true because if you take any one of these consolidations that we're involved with and you picked one of the underlying assets, there are fundamental micro market risks to that asset. Perhaps they have one customer that makes up 20% of the revenue. Or if it's a business that's dependent on traffic patterns or weather, you have the micro market risks of traffic patterns or weather. Through scale and diversification of those revenue streams, those numbers on a percentage basis and on a overall risk basis start to come down. So that 25% customer in the scheme of our grand enterprise becomes 2%. That weather event that could have swung your revenue double digits in Q4 now can only swing it by 80 basis points cuz it's blended into an overall consolidation.

0:47 >> >> I'm Ted Seides, and this is Capital Allocators. >> >> My guests on today's show are Alex Sloan and Matt Perelman, co-founders of Garnet Station Partners, a $4 billion private equity firm focused on buy and build investments in founder-led core economy businesses. Alex and Matt are lifelong friends who took an unconventional path out of business school acquiring a 23-unit Burger King franchise in North Carolina that they scaled to 1,100 locations before selling it back to the franchisor.

1:29 That operating experience became the foundation for their investment firm. Our conversation traces that evolution from operators to investors. >> >> We discuss their shared desk partnership and culture of debate, and the Garnet Station playbook from sourcing lighthouse businesses and moving quickly in fragmented markets to building diversified platforms through disciplined capital allocation. We also cover lessons from scaling through cycles, the role of speed and integration in buy and build strategies, and how they think about risk, exits, and long-term value creation.

2:06 Before we get going, >> >> it's still travel season. Partner meetings and board meetings, the Capital Allocators CIO Summit, Berkshire, and Milken. Across planes, trains, and automobiles, you're bound to run into a few snags. When they're unavoidable, I try to remember Will Gaddara's story of the pilot who lifted everyone's spirits by bringing families into the cockpit. >> >> But it's not always easy, which leads to my most recent pet peeve, speed limits. When I travel to certain places, everyone religiously follows the speed limit. In Florida, along A1A, if you go much over 35 mph, there's a good chance you'll get a ticket. In Sun Valley, I once got stopped for rolling through a blinking red light at a whopping 4 mph.

2:54 >> >> Once I adjust, I find it relaxing to drive slowly. It reminds me of the Pixar movie Cars when the old-timers off Route 66 drove low and slow. However, when I'm in Connecticut or New York, I'm a totally different driver. I need to get places, and if I'm running late, I'll end up on a single-lane road for 5 miles behind someone driving annoyingly slow. That person is probably driving 35 mph, the speed limit.

3:25 But it's common knowledge in those parts that the flow of traffic is well above the speed limit with maybe 7 mph over as the whisper number statute. For the life of me, I can't reconcile the two. >> >> Either we should drive the speed limit or not. Or maybe we need a lot more variability in what the safe speed limit should be. So my new pet peeve depends entirely on where I am. If I'm in Florida, get off my tail. I'm already going the speed limit.

3:55 >> >> If I'm in the Northeast, you better hurry up if you're in front of me and you're only driving the speed limit. The only way I know to gain the benefit of such different perspectives is right here on Capital Allocators. Thanks so much for spreading the word. Please enjoy my conversation with Alex Sloan and Matt Perelman. >> >> Matt, Alex, so excited to do this with you. Thank you, Ted. Nice for having us. Very excited to be here. I think with you guys, we need to go all the way back to your upbringing.

4:27 Matt and I grew up together. We've been best friends since we were little kids. We grew up three blocks from each other. We started our careers. I was investment banking at Goldman, Matt was at Citi. I was at Apollo, Matt was at Catterton doing private equity there. We went to business school together planning to go back to those jobs after graduation, but while we were there, we developed a thesis around franchise consolidation. Except every franchise brand rejected us as franchisees, except for Burger King.

4:59 And I know you did an episode with Dan Schwartz and Alex Bearing from 3G. They talked a bit about giving young people the opportunities to be successful. That's what happened. We first invested in a 23-unit Burger King franchise business that was based in the Garnet Street train station in Henderson, North Carolina. They gave us the shot. We were successful with that business. That allowed us to grow. We ultimately got to 1,100 franchises. We're the biggest in the country, took the company public, and sold it about 2 years ago now for over a billion dollars back to the franchisor. So it was quite a journey and a lot of ups and downs, but that's the origin story. That's how we started the firm. I want to pick through some of that.

5:41 How does being best friends growing up translate into working together? I think it's a asset from the standpoint of we've known each other for 30 years. Matt, we're older than that now. It used to be 30 years, but longer than that now. >> Yeah, we've known each other for far more than 30 years. We share a desk. We have one big polycom speakerphone between us, take all of our meetings together, all of our calls together, and all of our travels together.

6:06 There's something to the fact that having known each other for so long and being so comfortable with one another, we can get at the truth. We can get away from worrying about people's feelings versus getting at the right answer. People who start working at GSP with that are initially terrified because they see the two of us yelling and bickering and arguing with each other all day, but that's very much part of our process. We can say things to one another that perhaps in a private equity firm where two partners came together and spun out from larger firms and everyone's being a little more polite, it would take longer to get to the right answer or to get to a place where there's agreement or disagreement.

6:46 And because we know each other for so long, I think we can short-circuit a lot of that. How does that play out in your respective personality types? For those that know us well, they know we're actually very different. We look similar. I take offense to that. >> >> We grew up together. We were trained at similar parts of the cycle, different firms with different investing styles certainly, but on the surface, there's a lot more similarities. We've both been happily married since we were young.

7:12 We've each got three kids, around the same age, go to school together, spend all of our time together, but we're actually very, very different people. To Matt's point about bickering and fighting and disagreeing, we take the opposite side of pretty much every argument. I tend to be the optimist, which is strange because of having been trained at Apollo. Matt tends to be the pessimist. He hates everything, which again is strange having been Take offense to that, too. trained at Catterton.

7:39 But then when Matt loves something, I hate it. I don't know whether that's intentional or if that's reflexive, but we have an executive coach that we work closely with that we've worked with for a decade who helps us manage through conflict and think through strategic issues and people issues. The fact that we are the same age, we're trained during the same financial cycle at similar institutions, makes the fact that we disagree on everything important from the standpoint of I think one of the real risks to our firm over the last 13 years is group think. Having a environment where people are supposed to disagree, particularly as you get closer to potentially closing a transaction, and avoiding group think is something that I know the two of us spend a lot of time on, our senior team spends a lot of time on, and our executive coach spends a lot of time on.

8:25 Alex's line from one of the Adam Grant books that he's always espousing around our office. The book was called Think Again. That's a huge part of our process is you can get in a room, everyone nods their heads and says, "Yes, this is a great idea. Are we going to make three times or five times? Who knows, but it's going to be great." Let's think again there because some of those sorts of discussions are actually the most dangerous ones.

8:45 So what looks like a traditional background, New York upbringing, banking, private equity, Harvard Business School, how did you decide to do something different from what would have been then going back on that traditional path? I always remind people talking to investors, prospective LPs, or prospective team members, who spend a lot of our time recruiting, you have to think of GSP differently in the sense it's not like I was a partner at KKR and Matt was a partner at Blackstone and we got upset with our economic arrangement and decided we could do it on our own.

9:17 Our firm was very much built organically. We think of ourselves as entrepreneurs. We run a business. Our business is there to produce extraordinary risk-adjusted returns. We had this idea, which literally started as a phone call 4 days into business school where I called Matt and said we should open a Wendy's or an Auntie Anne's in Harvard Square. That led us down a rabbit hole where we realized that there was a compelling opportunity to buy resilient businesses at very attractive prices, add technology, data science, capital, capital allocation, management talent, grow them through M&A and organically.

9:54 It was an entrepreneurial idea, and when our office, we have the original business plan from the first deal we looked at. It was five KFCs in Vermont. Ultimately, that KFC deal didn't work out, but what we realized while building value in the Burger King business was that there was a massive opportunity to invest in fragmented markets, high-quality businesses behind this baby boomer generational transition. 10 trillion of assets or so set to change hands over the next two decades where we could build an engine to be the capital partners of choice to America's best founders. And we built an engine to go after that opportunity set, which is ultimately our firm today. Where did that entrepreneurial instinct come from?

10:38 I think we had the benefit when we were at business school in our early to mid-20s of being inexperienced, relatively dumb, and very unencumbered. So, we could go and take a risk, which to us it didn't feel like much of a risk because either it would work out and hopefully the transaction be successful and perhaps we could do a second one or a third one. We had no money. We had no mortgages. We weren't married yet. We had no people relying on us. Our view was even if it doesn't work out, we'll have become hopefully far better investors from the operational failure and the things we would have learned from it. Surely, Catterton and Apollo, our former employers, would be even more interested in hiring us cuz we've operated and learned from the experiences in the failure. So, today, would we go out and sign a bunch of personal guarantees and put it all on the line? I hope not. If my wife's listening, then we definitely would not.

11:32 >> >> But at the time, it felt like a total risk reward in our favor. It was either heads we win or tails we can potentially win a different way. I'll just say our prior firms were incredibly supportive of us, which I think was amazing and we're forever grateful to those mentors there who enabled us to take this risk and feel like we could do it. And our parents, too. And our families who were incredibly supportive. I think we joke about our mothers who were a little bit confused when we told them we were leaving our fancy private equity jobs to become KFC franchisees. That initial conversation stung a little bit, but incredibly supportive families and incredibly supportive former firms that gave us the confidence to go out and try it. So, before we dive into what happened with the Burger King franchises, what did you get out of going to HBS?

12:21 HBS was an amazing experience. We learned a ton and made a lot of great friends and built out our network. It's been great to us. I would say though that it starts further back at Harvard College where my group of friends has been incredibly successful and helpful to us as we've built the firm. And it's people like Josh Kushner from Thrive and Alex Taubman from Long Lake and Reed Raymond at Apollo and Brian Feinstein at Bessemer. My brother Jake was also at school with us and built an incredible business at Springdale. The list goes on, but without that group of people being very, very close to us, I really believe we wouldn't be able to build GSP.

13:00 The other benefit of going to business school is it gives you two years to spend a lot of time on whatever entrepreneurial pursuit you want to think about. The other thing, which I don't think we had a full appreciation for until we started reaching out to people, was an HBS email address is a really powerful weapon. We would email CEOs of huge companies that we were trying to learn from and they would all reply cuz of the email address. I don't know if they thought we were trying to write a case study about them or what, but we always tell younger people, you have two years to use this weapon, use it because people will reply.

13:38 Royce Yadgof was our professor we met at business school. Royce, the RY in Abry, built Abry with his partner Andrew Banks. Royce teaches a class at Harvard Business School called Financial Management of Smaller Firms, which is the most popular class at HBS. It's three sections, standing room only, very hard to get into. Matt and I were fortunate that we did get into the class and it in some ways changed our lives because the support from Royce gave us the confidence to keep going. It certainly helped us institutionalize the firm when we went from our initial set of investors to building an institutional investment firm, Royce was instrumental with that and making introductions and serving as an advisor and reference for us. So, another person who without his mentorship and support, I think we wouldn't be here today.

14:28 Alex, you mentioned buying a franchise at 23, selling it 10 years later with 1,100 franchises. There probably a lot of steps to get from 23 to 1,100. What were some of the highlights of that journey? I was thinking of the lowlights. It certainly was not a one-way street up into the right from 23 Burger Kings to 1,100 and the billion-dollar sale. There were a lot of ups and a lot of downs. There is that saying the lows are so much lower than the highs are high, which is how Matt and I feel about it and one of the reasons why I'm so grateful for having Matt and my partnership with him because that is what kept us going is having each other in some of the darker days. When I think about that journey, I think more about COVID when the stores were being shut down and our suppliers were filing for Chapter 7 and we couldn't even get hamburgers, let alone people to staff the restaurants.

15:20 The banks were agitated and we had to jump through a lot of hoops to get liquidity. Then you got through COVID and all of a sudden you got punched in the face yet again with all the inflationary challenges and the value wars. I think about the resilience that that showed in our ability to get back up and fight through it, get extra liquidity, and stand up our distribution business so that we could distribute hamburgers to the restaurants and all the things that we had to do in order to make it through those really tough times and see the other side of it. I just think about the bad times also.

15:53 >> >> When we took the business public, it was May of '19 and we reverse merged our 220-unit Burger King and Popeyes business into a larger Burger King business and became the largest shareholders of that company. The day we did the deal, we merged in at 8:35 a share and the stock ran up that day to 10. And we're high-fiving. We think we're geniuses. This is amazing. 8 months later, the stock's at 98 cents cuz of COVID and a bunch of missteps we had made. You can imagine the stock's at 98 cents. Alex and I are some of the only people in office in New York City in March. The bonds are trading in the 70s. The lenders are organizing against us. However smart we felt the day the stock popped to 10 when we did the merger, we felt 100 times dumber on that day.

16:41 We ended up battling through that and did a bunch of stuff that was relatively smart in retrospect. The stock gets back to seven and we're okay. We made it through and now it's middle of '21 and then boom, inflation hits. Our beef cost go from $2 a pound to $4 a pound. Lower-income consumer, which was our core consumer, was relatively squeezed and the stock goes back down to a dollar. We're ready to exit again. Fortunately, we were able to bring in a new CEO, Deborah Derby, who's now the CEO of one of our businesses. She took earnings in that business from a trough of 60 million a year at year-end 2022 to when we sold the business a year and a half later at 150 million. Talking about the highs being high and the lows being low, you're never as smart as you look and you're never as dumb as you look.

17:28 The truth is somewhere in the middle. George Roberts from KKR has a line, as long as the capital keeps flowing, eventually good things will happen, of which that story would certainly be true for. And Royce Yadgof has a line, as long as you keep the chess pieces on the chessboard, you can keep playing. We would repeat those two things to ourselves during COVID when, you can imagine, our entire portfolio looked like some version of that Burger King business cuz it was all revenue zero and it was dark days for us.

17:54 Where you guys started was operating these franchises. What did one Burger King franchise unit look like when you bought it? And what did you do to improve it? I'll take you back to 2014, which was the first Burger King investment we ever made. The unit economic at the time was about 1.1 million of sales per box and about 11% store level margin. What we saw is that through technology and thoughtful capital allocation, there was a real opportunity to increase the overall equity value. What we were able to do pretty quickly was line up all of the 1.1 million-dollar Burger King P&Ls in the country that had similar wage state profiles, through benchmarking, see that these particular restaurants were off by about three to 400 base points. Some of that was food costs. Some of that was on the labor line. This was our first iteration with investing in technology to grow the enterprise value of these businesses. Within that business, we put in food cost software, which allowed us to pretty quickly see where the variance in cost of goods sold was coming from.

19:06 Was it waste? Was it a re-portioning? Or was it theft? Then we were able to start managing to that. Eventually, we moved the store level margins within that business from 11% to closer to 15 or 16%. If you think about a business that beneath that store level EBITDA line has G&A, so the 11% store level margin was maybe 7% EBITDA margin, and we moved that up to 12 or 13%. That's quite material. The examples today are actually similar to the examples back then, perhaps on a larger scale with 4 billion of AUM today versus 23 Burger Kings, but you'd be surprised how many founders we come across and we'll show them what tech adoption can do to their business. Their first reaction is, "Yeah, but I don't want to invest $2 million in whatever enterprise solution you guys are talking about." We'll show them that the $2 million investment yields an 18-month payback, and here's how we can finance it. More often than not, a white bulb starts to go off in their head, and that's been a real important driver of organic growth.

20:10 As you're building, growing this franchise business, at what point in time did you decide to branch out and create Garnett Station? Pretty quickly. About a year into building the Burger King business, we got a call from the former CEO of Burger King who took a job running another franchise system and said, "I've watched what you guys have done providing capital, technology, data science, organizational design, and rolling up the Burger King system and helping professionalize it. Would you consider doing it in our system?" That deal led to them the former Chief Marketing Officer Burger King called and said, "My wife runs this business. I think you guys should consider helping her professionalize it, buy it from the founders, and grow it." One deal led to another deal led to another deal. You look today, we have 36 investment professionals, 24 operators, 14 in back office staff. That has entirely been built organically when we realized we need operating partners to help us bring the technological changes and the innovation and the supply chain and the marketing and the integration because it used to be Matt and I running our Burger King business, and now we need to build a real firm to go do it.

21:19 So, it was very much organically. It was COVID when we realized coming out of it that we should build an institutional investment firm as opposed to deal by deal SPV family office capital because we felt like having lived through that cycle and fought through all the challenges that came with it demonstrated that we could invest through cycles. We started in 2013 through early 2020 late 19, everything was up into the right. The fact that our returns were good, it was almost like table stakes. But surviving what was a very challenging period for our portfolio, getting through it, and not losing a company, not needing a dollar of rescue capital, growing equity value across the portfolio, and then exiting those businesses proved to ourselves and proved to the institutional LP world that we can do this in a repeatable way, and that's what inspired us to build an institutional business.

22:14 I'd love to take a step back and break down how you go about doing all of this. If you think of GSP, what is it that you're looking for in the type of company that you want to buy and build? The first thing we are looking for is we invest in founder-owned businesses. We feel like a lot of the alpha that we've been able to create over the last 13 years is partnering with founders, being the first institutional capital into their businesses, and helping them scale those businesses usually through M&A.

22:51 Ultimately to a scale to a level of diversification, to a level of revenue mix through integration, technology, capital allocation, managerial talent, and governance, create platforms that larger private equity firms want to buy. That's not something we learned in business school, that's not something that we learned in investment banking. That's what we learned from getting our teeth kicked in as operators ourselves. We were the CEOs of our Burger King business for the first few years and made mistake after mistake after mistake. Those mistakes have added up to a healthy appreciation for operations, for integration, and for what true partnership with a founder looks like.

23:36 That's been the single biggest overall alpha generator. We care deeply about the quality of the business even if it's a single unit. We do basically two things at GSP. We do what we call start small, scale fast build-ups where we have a thesis around industries that we want to pursue. But we're also value oriented, disciplined on price. We say we're purchase price matters investors. So, to the extent we're not able to find businesses in those industries that meet our quality bar, that are of a size and scale 20 plus million of EBITDA that we can buy at our purchase price matters valuation, we build them. So, we start as small as a million of EBITDA, board of directors, management team, a technology stack, and we go out and we'll literally buy one unit at a time. We've done that 20 times across the portfolio.

24:26 We are willing to buy businesses that are only 1 million of EBITDA one unit, but they have to meet our quality bar. In order to meet our quality bar, you have to have been through multiple economic cycles. In our experience, you can't have a quality business without a quality founder. Are we willing to put in a new management team when we invest in a company? Of course. But we care deeply about the founder, not just the business they built, but also the type of person they are. We will not do business with bad people, and that's a core tenant of the firm. When you're buying a business from a founder, they're always going to know far more about the business than you certainly up until the point at which you buy it. If anything, they've probably forgotten more about that business than you're even going to learn after you own it.

25:06 The integrity of that founder is critical. Because we've done so many of these founder-owned acquisitions over the last 13 years, we probably have a decent sense for what good looks like. We don't invest in newer brands, we don't invest in newer business models. The youngest business we've ever invested in at GSP is 17 years old. The oldest is 90 years old. The average is somewhere in between. That's critical. We need to be able to diligence and understand what do cycles look like for these businesses. If you take some new hot sexy brand or business model or sector or concept, people can certainly make money doing that. That's just not us. We're not smart enough to make a macro call or a brand call or take a bet on something new. You don't get paid for a degree of difficulty. Restaurants are hard. They're really hard. We're very proud of our returns in restaurants.

25:56 It's about 20% of what we do, but we have very much diversified away from restaurants trying to get into better businesses. If you look over the history of our firm, early on you could argue we were guilty of value traps, buying businesses cheaply for a reason. What we learned is that we can buy high-quality founder-owned companies in good industries with real tailwinds, and you can do it at our purchase price matters value discipline. We don't have to buy challenging businesses or turnarounds or businesses in challenging categories.

26:30 That being said, if there are 10 to 12 investments in one of our funds, there'll be anywhere from one to two restaurant investments. That quality bar is a critical part of the evolution over the last 13 years. If you looked at our earlier deals versus today, there's a much more clear set of heuristics for what quality looks like. If you take multi-unit businesses, of which restaurants would certainly be one of them, they qualify for investment from us, business has to have at least 20% store level margins.

27:00 Business has to have new units that pay back in 3 years or less. And has to have the number one average unit volume or sales per box in its category or micro category. If you look at our first two deals, we'd be over three on those quality heuristics. Now, the first one being the Burger King business was ultimately a successful outcome, but I do think there is something to that we don't get paid for degree of difficulty. What's raised the quality bar here and make this a little bit easier without sacrificing price discipline. Thematically, what are some of the areas you've gravitated to? We are fast followers. One of our favorite ways to be inspired for themes is to look at what some of the great firms that are bigger than we are and have done successful consolidations.

27:42 Industries that are large, highly fragmented by number of units, organically growing with real cyclical tailwinds, industries where bigger is better. So, there's real industrial logic to the consolidation, industries where other firms have successfully consolidated before. We never want to be the first one through the door. We want to benefit from the technology that's there to help manage these businesses in a consolidated way. We believe experience matters from a management talent perspective. So, we love to bring on management team members who've been part of successful consolidations from other firms, and then we want to know that there is a put to the strategics.

28:20 We want to know that there are a bunch of strategics out there that would want to buy our businesses once we've built them. The last thing I'll say is we're value oriented. We care a lot about multiples on single unit acquisitions. We won't do consolidations or we won't build businesses in industries where bolt-ons don't trade at our target risk rewards. So, those are the key criterias. We have franchise investment, we have consolidation in commercial services, residential services, auto services.

28:48 We estimate of the 10 trillion in of assets set to change hands over the next two decades, within that 10 trillion, we estimate about 1.2 trillion is the TAM that GSP that we have a right to win in. So, it's a massive market. And whenever we get questions about, "Oh, there are a lot of firms doing buy and build," that's great. We welcome the other firms in the competition. These industries are so massive. We have a consolidation in tire and auto services business we invested in 3 years ago when it had less than 5 million of EBITDA. Today, it's 25 million of EBITDA. It's a $250 billion market with 150,000 M&A targets to go after. So, it's an amazing place to invest. These are very fragmented markets, and we feel we have a long runway before these things get too consolidated. Whether it's a platform or an add-on acquisition, what does your diligence process look like to get comfortable that something makes sense?

29:42 On average, it takes us two to three years from when we first start working on a theme until we get a deal done in that space. We have a whole process for how we attack the battlefield in these categories. Ultimately, what we're trying to get at is what is the lighthouse? What is the lighthouse for business quality in that specific industry? Then, we're not doing rocket science. The beauty of being industry specialists, there are three numbers that matter in these businesses. Once we've mapped out and gotten comfortable with what that lighthouse looks like, we can tell you quickly whether we're interested in investing in your business and what price we'll pay. One of the advantages of doing a deal with us is we can move very quickly.

30:22 One of the reasons we love doing roll-ups, build-ups is because the nature of investing in consolidations, no individual deal can kill you. We're investing between 100 and 150 million of equity, but individual deals can be as small as 5 million of equity. You can afford to get one or two of them wrong if you're buying 20, 50, 100 acquisitions over the life of your deal. In fact, Matt has a saying, "If every deal is right in a roll-up, we're either not taking enough risk or not moving fast enough." It's okay to have a bad deal. That's the beauty of the model.

30:56 You're able to get the most amount of capital into your winners in these consolidation strategies. So, it's one of the reasons why we love these build-ups. It's an elegant model. That's a great point. You're able to buy them reasonably well, so your unlevered in-place yield is pretty high. That affords some real downside protection above and beyond the fact that we're typically structurally senior to the roll-over. Then, on the inverse, if something's really working, you can continue to feed the capital and grow it to be a larger, more concentrated position with less risk than doing something up front and putting 15% of the fund into one deal. If you look at our largest investment to date, it's a consolidation called Authentic Restaurant Brands that we started 4 years ago with a $20 million equity check. Today, it's a several billion dollar company across a number of different brands within that portfolio.

31:50 That's gone really well. So, we've continued to feed the capital and we feel like that's the dearest strategy in terms of how to allocate capital across a portfolio. You've mentioned speed. Once you've identified the lighthouse, why is speed important? Speed is important because of diversification in roll-ups. In these consolidations, when you buy a single unit or a single commercial roofing business, there is micro market risk. There is founder risk. There is personnel risk. When you start to do a consolidation, you add multiple units or multiple service businesses, multiple branches, you diversify that risk away. And when you think about what drives a multiple of a business, it's growth and stability. The nice thing about diversifying and getting speed in these consolidations is you are adding diversification, you're improving stability in the consolidation. Alex's brother, Jake, who's a very successful investor, has a line, "Being small is scary in a roll-up." And it's true because if you take any one of these consolidations that we're involved with and you pick one of the underlying assets, there are fundamental micro market risks to that asset. Perhaps they have one customer that makes up 20% of the revenue. Or if it's a business that's dependent on traffic patterns or weather, you have the micro market risks of traffic patterns or weather. Through scale and diversification of those revenue streams, those numbers on a percentage basis and on a overall risk basis start to come down. So, that 25% customer in the scheme of a larger enterprise becomes 2%. That weather event that could have swung your revenue double digits in Q4 now can only swing it by 80 basis points cuz it's blended into an overall consolidation. So, that's why speed is important and being small is scary. The way that we counteract the speed point with safety of principle and downside protection is we've rarely used leverage up front in these consolidations. That's a big part of our model. That allows us to go faster without having the risks of senior bank covenants. And when I say go faster, I don't just mean on the M&A side, but on the team building side.

33:56 We're taking businesses that typically have anywhere from 1 to 3 million of G&A and over the course of 2 to 3 years, that G&A is going to approach 8, 9, 10 million dollars. Doing that in the face of bank covenants while you're doing a bunch of M&A, while you're integrating, to us, adding leverage on there feels like an undue risk, particularly when the in-place unlevered yields are high enough where you don't need the leverage to make the math work.

34:22 That's part of why when you look at our team page, we often joke we must be world's worst GP owners because we have so many people relative to our 4 billion of AUM, we've got 70 some odd people. It can seem ridiculous on a head count per AUM basis, but that's very intentional. Our model is people intensive. It's time intensive. It's all-encompassing. We joke about some of our mentors and friends who run firms where they're buying incredible businesses, paying market multiples, and showing up to board meetings, and everything seems to go up and to the right. That's not what we do. We are buying founder run companies. Our GSP playbook is very involved. We have an incredible operating partner, value creation team, and operating executive team. Them and our deal teams do a lot of the heavy lifting in order to build these consolidations in a thoughtful way. It's also why we care a lot about getting the industry right. If you get the industry right, and then the trends right, and you're investing in cyclically growing industries that don't have risk from disintermediation from technology, you're going to have secular tailwinds from the industry we believe will continue to grow over time.

35:26 If you do it with low leverage and great management teams, we believe we're going to win over time. That's why we have the confidence to move quickly is because we're picking industries we are very, very thoughtful about the long-term growth prospects for. And so long as we don't leverage them too much up front, we feel like we can get through cycles and get through any blips. I want to circle back on something we talked about earlier, which is if you bring together the tailwinds that you've done your work on, you understand what the lighthouse is, you want to move fast, how do you prevent yourselves from groupthink of doing acquisition after acquisition and making mistakes along the way because you want to move fast?

36:07 So much of our process is looking back at the acquisitions. That lighthouse changes over time. In fact, some of our best deals don't go all that well from the beginning. We did a funeral home consolidation. The first quarter was a disaster under our ownership, and that ended up being the best MYC deal we've done at our firm. So long as you're willing to think again and make changes to what business quality is and attract great management teams, get the big trends right, you can build a diversified platform in a growing category and benefit from the tailwinds.

36:38 In Microsoft Excel, every roll-up looks easy. But in reality, operations are hard. These are people businesses, particularly in a world where technology is changing so fast. Building in technology change management, roll-ups are actually really, really hard, and particularly through cycles. Well, if you think about what blows up roll-ups over time, at least in our experience, it's two things. It's leverage and lack of integration. We touched on earlier, but we don't use leverage up front in these consolidations. We'll add it later once they're 10, 15, 20 million of EBITDA and have quote-unquote earned the right for leverage and have the G&A in place to handle it. And the integration side, A, we're J-curving the G&A of these businesses dramatically to absorb the incremental units in the assets acquired. And B, Alex touched on it earlier, we're only doing roll-ups in categories and asset classes and businesses that have been consolidated before. The benefit to that is there is off-the-shelf tech solutions that have been created to manage these businesses in a multi-unit way. So, you don't run into the problem, which happened to us in our second deal, the only deal we've ever lost money on, where we had dis-synergies. Every time we bought an additional unit, we actually had to add G&A because we did not have the technology in place to manage it in a multi-unit context. There's plenty of people who can be pioneers, you know, be the first to roll up a category or maximize leverage, catch the cycle the right way, and make a 14X. That's just not our model.

38:07 What are the biggest challenges of integrating additional add-on acquisitions or stores? Visibility. People think about back office as some back office function. In our experience, getting the CFO right, getting the systems right, having treasury and cash management and FP&A and the right dashboards in place is so important. You can really fool yourself with run rates and add-back nonsense, particularly in a roll-up where you're buying a lot of stuff. At some point, you have to figure out what are the cash flows of that business.

38:38 Having a warning light system in place, which has become so much easier to do with the advent of AI and all the technology that's been invented, you can identify problems in real time and you can fix them. These are people businesses that we're investing in. In our experience, we believe culture matters, people matter, labor matters. Having the systems to identify where the problems are, what the cash flows look like is important, and I think a lot of people dismiss that. How long does it take to buy a platform that you've done an acquisition and have the right tech pipes in place so you have the dashboard you need to run it the way you'd like to? Before we go about it, we will not invest in a consolidation unless we have a lot of confidence in the tech platform. That is table stakes for us.

39:21 When I said it takes 2 to 3 years from when we first start looking at an industry until we get a deal done, part of that is figuring out what quality is, the lighthouse, but a lot of it, too, is making sure we have those pipes set up in place well before we even have the first asset. Want to ask you about capital allocation. You're buying businesses, there's a financing component. What do you see as the most important levers of capital allocation in success of one of these businesses?

39:46 It's two things. One is what is the pipeline and opportunity set for inorganic growth. We are actively avoiding categories where the bolt-ons are trading outside of our price range. There are categories today that people are having success rolling up, whether they be resi HVAC or pest control or in a prior cycle for perhaps vet, where the platforms trade at big prices, but the bolt-ons also trade at big prices. You have relatively small bolt-ons trading at maybe eight to 11 times cash flow.

40:20 For us, that is fundamentally less interesting than similar end markets where the platforms are trading at 12 to 15 times, but the bolt-ons, because of micro market risk or just lack of private equity heat, are trading at, let's call it five to eight times. To us, those are more interesting opportunities. A lot of the time we spend in diligence on a category and on the initial purchase within that category is spent on building out the pipeline, so we can think about within how much confidence interval range do we have that we can get the next 30, 40, 50 million to work at an unlevered low to mid-teens return, and then with a dollop of leverage, once the business is ready for it, now without even getting into organic growth, you're up into the high teens or low 20s.

41:08 The second capital allocation decision that is critical to us is where are the pockets of technology implementation and investment to drive organic growth. Directionally speaking, the businesses we're investing in are GDP plus growers. Perhaps their markets are growing at 3, 4, or 5%. We have found that through partnerships with our operating partners and management teams and founders with tech implementation, whether it's estimating software or labor management tools or site selection, we're able to increase that organic growth rate typically by two or 300 basis points, which in pockets of venture capital might not sound enormous, but with us, if we're buying a business and creating a platform for six times cash flow, and we're taking the organic growth rate from three to six percent, 40-plus percent of that increase in sales growth is flowing down to our bottom line, that's material in terms of equity value creation, particularly when you pair that with the fact that we are able to typically sell these consolidations for a larger multiple than we created them for because they're scaled, they're diversified, they're professionally managed, they're well-integrated, and they look like what firms want to pay up for because they are M&A engines.

42:25 How do you decide when a business is ready to take on some leverage? It's a combination of two things. One is what is the depth of the G&A line. Do we have a CFO, a controller, a head of treasury and cash management? Are all of the warning lights that we touched on earlier in place so that we're able to spot things in real time if something isn't coming to fruition in the way that we underwrote it. So, that's the people side of it.

42:52 And two is size and scale. We have found that the credit markets are far deeper, cheaper, more flexible, less covenant-laden, and friendlier to consolidations that are, let's say, 15 to 20 million of EBITDA in size and scope versus something that's five. What does that mean in terms of practical timing for us? That's usually 12 to 18 months after we invest in a business. We've typically deployed the preponderance of the equity we've allocated to that roll-up, the team is fully formed, we have all the warning lights in place, and it's at a size and scale where we can then go to the market and get a number of term sheets and create real competitive tension around that financing.

43:30 One of the reasons why we love investing in these categories is because there are tons of high ROI opportunities to redeploy the cash flows. Before we get involved in these companies, typically these founders are not differentiating between investing and spending. Their measure of success at the end of each year is how much cash do I have in my bank account, and we totally flip that mindset to how many 20-plus percent IRR projects can we find. It's particularly true as we've done more in these commercial services consolidations where working capital is a real thing, and you think about a founder-owned business, maybe it's a third-generation family that's got a bunch of mouths to feed.

44:08 Even though there are tons of growth opportunities, they have to think about the working capital investment to go capture those projects. Those are opportunities that we love because we're not capital constrained in that way and don't think about businesses that way. But it's funny because the Wall Street Journal had an article the other week about how popular these halo businesses are, high asset intensity, low obsolescence. This is in reaction to some of the AI and software problems.

44:34 What we have been doing for these last 15 years has been so out of favor and so uncool. It's funny to see this swing back toward these types of companies. The other point I'd love to make here is that every one of our partner companies we think about as though we're going to own them forever. Obviously, that's not the model. We sell companies, and it's a big part of our process, but our view is what gets us to the returns that we're proud of is having the mindset. That's why we care a lot about price, because our view is if you're buying a business at a double-digit in-place free cash flow yield in a growing category with a great management team, and you don't put too much debt on it, that is a recipe for success. So, every decision we make, we make as though we're going to own it forever, and we care a lot about integrating these businesses, and we care a lot about how they're managed. I think that's been a big driver of the returns. When you come at it with the mindset of wanting to own something forever, and you have an example like a tire company with 150,000 units, you can imagine continuing to do this for a long time.

45:33 How do you think about the exit strategy? We fight about this all the time, Ted. Our view fundamentally is investors give us a dollar, our goal that we're striving towards every day is to give them $3 back within a reasonable time period. That's a 25% or so gross IRR. Our job is to build these consolidations to a standpoint where they are M&A machines that can continue to buy things at reasonable prices, integrate them, and grow the underlying business they bought so that, you know, if they bought something for six under our tutelage, they were integrated down to four, and some other buyer can continue to underwrite that, we should consider selling. Larger firms perhaps have different cost of capital than we do.

46:21 Larger firms are able to lever things when they buy them from us in a way that we couldn't when we started them. Market forces are going to be market forces in terms of what's popular and in vogue for people to buy today. So, when you put that all together, a lot of our job as managers is to listen to the market and to understand where the pockets of opportunity are for us to create liquidity for our investors and for our management teams. Having said that, we're glad to roll. Most of the exits we've had, we've rolled equity into the deal. We've benefited from that not only economically given the buyers have tended to do well with businesses we've sold them, which is a good thing, but also we've learned a ton from remaining involved with a bunch of these businesses. There's a firm on the West Coast we'll give a shout-out to, Side Door Equity Partners. We've been on two boards with them from businesses we've sold. We've learned enormous amounts from watching them deal with founders and management teams and think about different growth initiatives and how to prioritize and size the prize of those.

47:23 That's been hugely beneficial to us over the last 13 years. When I say we fight about it all the time, I think it's part of our process. On the one hand, we're building these businesses we're really proud of, and we talked about being able to feed our winners and continue to grow and compound. On the other hand, we have the scars with some of the early businesses of having lived through cycles. We understand that when the opportunity is to return capital to our investors and generate great returns, that's the tension that we have, and that versus the incremental IRR. When you're talking to a founder that you're trying to win the deal, how do you position that tension with wanting to be their partner forever and treat it that way, and the knowledge that in the structure that you're in, you're ultimately probably going to sell out in a few years? We're very upfront about the point that we are a private equity firm. Our goal is to monetize the investments within a reasonable time horizon with our founders. It's self-acting. If they have an issue with that, there's probably not going to be a partnership, and if they don't, then let's turn over the next card and talk about it.

48:24 That also comes to the discussion around incentives and incentive alignment with us and the partner companies. One of the things that we've spent a lot of time, effort, and energy on over the last 13 years is coming up with incentive and governance structures in place to make sure that people are maximally aligned to a successful exit. And so, what does that mean? For us, that means the importance of rollover in a founder-owned transaction. Founders are typically rolling anywhere from 20 to 50% of a transaction with us. Also, incentive economics above and beyond that, general private equity hygiene is to allocate a 10% management incentive plan at the time of the deal, and we do that, and that's important, but what we found is going above and beyond that to create even more alignment in some of the, I'll call them, upper-tier outcome cases.

49:17 When we do a deal with the founder, we present to him or her, as well as their whole team, what the management option program looks like, but we also explain that if they are willing to write a new check into our deal side by side with our security, we will give them additional one-to-one options on that dollar. So, if you write a check for $100,000, Mrs. regional manager, we will give you above and beyond your base options another $100,000. In addition to that, we are for about providing incentives above three and four x outcomes. We call them super options.

49:52 Our view is the incremental dilution above a three or four x is more than worth it for the incremental incentive for these people to be maximally aligned with us and we've had a number of those outcomes come to pass and that's the best part ringing that bell. With you guys as founders of the business, your own operating experience, what you've done, how have you gone about building Garnett Station to take all of those lessons and scale them with your team?

50:20 We view the opportunity to bring in great people as an investment. One of the effects of the DPI problem in the broader industry is not just on LPs, it's also on investors. Right? And you think about VP, principal, MD, even partner level investors who've been at firms for a while and haven't seen their carry paid out. There are succession logjams that have only gotten worse. We've really gone on offense to recruit talent from other great firms, people who we brought on that years ago we we never could have got to join our firm and that's one of the ways we've been able to grow our business is attracting great talent and investing in the team, not just on the investment side, but also if you look at our operating team and value creation team, we brought on Will Gadsden, our COO and partner, about four years ago. He's an unbelievable accelerator of the business. I will often say to each other, I can't believe we ever had a firm without having, you know, Will there to really manage and ensure our processes and our back office is up to the same standards as our investment activities.

51:27 Our third hire we ever made is our partner Howard Norwitz, who we call him the left tackle of the firm. Howard has a 35-year background in debt and distress. When we brought Howard on, we certainly could not afford him. That was an enormous investment, but an example of looking back, without Howard, we never could have built the firm. So, I think investing in talent, not just at the partner companies that we've talked so much about, but also at the firm has really allowed us to grow the business.

51:56 There's been tactical things we've done as relates to hiring from having operated the companies in the early days that we've learned. For example, we have an operating executive program where these are all full-time employees who go and live in market shoulder-to-shoulder with a CEO of each of the consolidations and help them with executing and implementing the 100-day plan. When we were running the businesses ourselves in the early days, one of the things we quickly noticed was it would always take us a lot longer than 100 days to implement the 100-day plan and make sure that all the integration and the tech adoption and the things that go along with the social ownership were happening. An aha moment occurred to us as we started doing this ad hoc in an informal way years ago where we would have people spend real time down in the portfolio companies was that if we actually put someone there whose sole job was to project manage that process, that was a real accelerant for us. So, I think that's been a huge part of the value creation the last few years. Then two, a lot of it's good luck, honestly. I mean, Alex talked about Will and Howard who we built the firm without, but our very first employee and hire was at the time a 24-year-old named Jordan Goray who came to meet with us to get advice on going to business school and now, 12 years later, is mission critical to the firm. He's our right-hand guy and we couldn't have built the firm without him.

53:22 How have you systematized and organized the 70 people underneath that leadership? It's no different than a lot of firms, but we have a an investment team. Jordan helps oversee that. We have a number of deal quarterbacks on the investment team who report into us and have a VP, those are principal and partner level, and they have a VP, a senior associate, and often an associate on deal teams. They then report into me and Matt, who are the investment committee. Will oversees our CFO and our back office activities. We have a business development five-person team that's done an incredible job helping source opportunities and give me and Matt leverage where we used to have to do every first meeting.

54:04 Now, with a business development team, every first meeting with founders, our business development team is able to not only handle the first call, but actually handle the first meeting, then help decide whether Matt and I should fly out and spend time in person with the founders, which is a big part of our program. So, investment team, business development team, and then all the back office activities of the firm. How do you think about where to take GSP from here?

54:29 That's a question that Matt and I think a lot about. I'll say one of our mentors, Brian Friedman from Jefferies, who's a really thoughtful guy. We were meeting with him a couple of months ago, partly on this question. Where we come out is putting one foot in front of the other, not having these big, hairy, audacious goals. Proud of the business we built. We've got an incredible team. We're investing in industries that are growing with huge TAM, rather than saying, "Oh, we have some goal that do x number of deals in y sectors." Continue to put one foot in front of the other, stick to what we're good at, what we know, the playbook that we've developed, and continue to generate great returns. We certainly don't have an AUM goal, that's not the business. Our goal is on the incentive side. Brian was very helpful in clarifying that type of thinking. I think the problem, if you say, "Well, we want to do a deal in this space or we really want to do a deal of this size or we want to get to this AUM," is that you may make decisions to force yourself into that and ultimately that may prove to be a misstep. So, I firmly agree with Alex, putting one foot in front of the other and not changing the model has gotten us here and hopefully in another 30, 40 years of doing this.

55:40 And we love it. We have the best time. We love what we do. We love working together. We love working with the team. Our favorite part is working with the founders of these businesses. I was on spring break with my kids, but I was on the phone randomly yesterday with Tony Lam, who's the founder and CEO of Kona Ice, one of our best friends. Been invested with Tony and his wife Susie for seven years now. Unbelievable founder, person, close friend. Talking about AI and technology and innovation and learning from him. You know, he runs a food truck franchise or business. You might think, "What can Tony Lam do to help you with AI and innovation in our firm?" But Tony's brilliant.

56:14 He's extremely helpful to us and a great friend. So, we love what we do. We're just going to continue putting one foot in front of the other and continue to grow. All right, Matt, Alex, you know what's coming. So, I'm going to get a chance to ask you a couple closing questions. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few and each are working on a product or service we think will be valuable to our community.

56:39 One is Ascension Data. Ascension provides workflow software for compensation that allows you to track, plan, and take care of your team. We're excited for you to check out how they can help solve the sticky pain point of compensation. There's a link in the show notes so you can learn more. And here are those closing questions. Matt, what was your first paid job and what did you learn from it? My first paid job was when I was 14 years old. I worked at a pet store in Connecticut called Pet Pantry. Wasn't old enough where they could pay me in cash compensation, so they paid me in kind and I had a lot of pets. They would give me pet food and dog food and interesting wheels and contraptions for my various animals at home and God bless my parents for putting up with that.

57:26 It taught me A, the value of hard work because every day I came in, I would clean out the exact same cages and refill the same bowls and food and it was relatively wrote, but I think doing that at a young age does teach you the value of showing up on time and working hard. And B, I think there's something to be said for everyone having to work in retail at some point and deal with tons of people, tons of different personalities, and some of the more complicated factors being relatively young and working in a retail environment is something I learned a ton from. I will certainly force my kids to do something similar once they're 14 years old. It was a great experience.

58:05 Alex, what's the best advice you've ever received? My favorite advice is my wife's grandfather, an incredible entrepreneur built an amazing real estate business from nothing, used to tell me when he was alive, "Every deal is the enemy and never forget that." And we talked a little bit about groupthink and our fear of groupthink and think again and every deal is the enemy is hung a sign in our office just to remind us on the one-yard line, "Never get comfortable. Never let inertia take you through a deal. Never let, quote unquote, pattern recognition allow you to invest money. Make sure you're thinking again on every single assumption and every set of due diligence." We say that a lot in our office. So, every deal is the enemy is my favorite piece of advice.

58:46 Which two people have had the biggest impact on your professional lives? For me, I would say number one is my wife, Annabelle. She's allowed me to spend the time, effort, and energy traveling around the world with Alex the last 13 years doing the things we've needed to do to build the firm and she's picked both of us up off the ground from the lows of the last 13 years. But equally as important, she actually suggested that Alex and I work together while we were in business school. So, GSP is very much her brainchild. Her and Alex have actually known each other for longer than I've known either one of them. They went from preschool through college together.

59:25 We both give her and Alex's wife, who's also named Alex, a ton of credit for helping us in the early days of figuring out our partnership. Two is Royce Yudkoff, who we mentioned earlier, who's our HBS professor. For me, and I'm sure Alex agrees, has been our most impactful and important mentor and thought partner over the last 13 years. Even to this day, almost 15 years later, whenever we have a serious problem, our first phone call is to Royce. He's just an unbelievably thoughtful, smart, humble individual who we all ought to I'll start with my wife as well, Ted. That wasn't my plan to answer, but I'm going to get in a lot of trouble. Probably a good move.

60:04 >> My wife is an incredible, amazing person and wife and mother and business person in her own right. >> Keep going. >> >> But, in terms of most impactful on my professional career, the two for me, Paul Freeburg, who is now the executive chairman of Continental Grain, who was the CEO of Continental Grain, has been my mentor for 20-some-odd years, and I guess saw something in me when I was a teenager and has been there for me every step of the way. He's our largest investor, has been there in the depths of COVID every Sunday, 2-hour phone calls to strategically and psychologically get us through the lows.

60:40 I'm forever grateful to Paul. The second person I would say is a man by the name of Mark Becker, who unfortunately passed away about 2 and 1/2 years ago. Mark was one of the very early partners at Apollo, one of the first employees there, and is a senior partner there. Mark was the first person I met in business, other than my father, who I wanted to be like. For me, he was the first person other than my dad where I saw you could be very professionally successful, family successful, philanthropically successful, and I wanted to be like Mark, and I still do.

61:14 What's your biggest investment pet peeve? My biggest investment pet peeve is when people seem to have all the answers and won't simply say, "I don't know. Let me get back to you on that." Particularly with our team, I'm completely fine, and I know Alex agrees, with people wanting to go do some extra work or analysis to get at the right answer, but I am not a big fan of people responding to things off the cuff without full diligence and confirmation there. Drives me nuts.

61:43 For me, Ted, is when people don't write things down. I can't stand when meetings and people aren't taking notes. It drives me insane. All right, guys, last one. If the next 5 years are a chapter in your life, what's that chapter about? Certainly, the first 10 years of us building the firm was very much that. It was us building the processes, the team, and building the overall enterprise to go execute on our mission of hopefully continuing to generate attractive risk-adjusted returns and do it consistently. When I think about the next 5 years, I feel like today we're very much in replication phase. Over the last three or four or five years, the engine has started to hum, where Alex and I don't need to be involved in every single decision. We don't need to negotiate the same credit agreements that we used to 10 years ago, or put our nose in documents that maybe we would have six, seven, or eight years ago. The team is in a place today where we feel like everything we're doing is based on processes and decisions and substance and form that we put into place four, five, six years ago, some intentional, some unintentional. Today, if we were to look at the next 5 years, it would be the replication phase era, hopefully, of our firm. I'll just add to that, Ted, which is not only replication phase, but what gets me so excited is all the AI and all the technology that's changing and focused on how we bring that to help grow our businesses and improve our outcomes. I get jazzed about all the things that are happening, and we're very much leaning into all of the innovation and change. Matt, Alex, thanks so much for sharing your journey.

63:20 Thank you, Ted. Thank you, Ted. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one, and see you next time. All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed