George Jagodzinski (00:00):

Today we learned why not all private equity firms are the evil board sucking the souls out of companies, why generalist funds are basically an endangered species, and how rolling up 17 proud independent businesses requires equal parts diplomacy, strategy, and beer. We talk about operating partners becoming the real engines of value, how brand strategy can make or break the success of a portfolio company. And yes, we recorded this one over drinks.

(00:25):

My guest today is Scott Markman, founder and president of MonogramGroup, a brand consultancy that's been shaping private equity stories since the days when no one even knew what private equity was. Scott created the Antares Capital brand from day one, and he has over 30 years experience working with private equity. Scott also hosts a podcast called Beer Stories for Private Equity, hence the venue for our episode. Please welcome Scott Markman.

(00:47):

Welcome to Evolving Industry, a no BS podcast about business leaders who are successfully weaving technology into their company's DNA to forge a better path forward. If you're looking to actually move the ball forward rather than spinning around in a tornado of buzzwords, you're in the right place. I'm your host, George Jagodzinski. Scott, this is very exciting being here with you tonight.

Scott Markman (01:28):

Thank you, George, for having me on your podcast while I'm going to be on my own podcast, being a guest on my own podcast, which is alternate reality, but that's where we are.

George Jagodzinski (01:37):

It's the inception of podcasts that's going on right now.

Scott Markman (01:41):

Absolutely. And which of us is Christopher Nolan? I don't know. On Beer Stories for Podcast, I can't speak to yours, but I always have a beer, so cheers.

George Jagodzinski (01:50):

Cheers.

Scott Markman (01:52):

And for those of you listening and watching and who have seen me recently a few times, this is Sapporo, which was the name of my first dog. I overindex from the loyalty to Sapporo.

George Jagodzinski (02:06):

That's great. And I have a Mezcal Negroni because it's my delicious favorite drink in the world. So one thing that we have in common is we're both doing a lot of work in private equity, and that was the theme of some of this conversation. You've been doing it a lot longer than I have.

Scott Markman (02:19):

This is the parlor trick that I lead with every conversation in private equity. Going back to 1996, I was six years into owning the agency and trying to build a company practice. And my next door neighbor, we were watching the cars one day on a Saturday afternoon. She says, "You know, the guys that I work with are going to be leaving my company and maybe they can be a client of yours."

(02:40):

I'm like, "Great." "So I'll introduce you." "Great." So she introduced me to these guys and I pitched the business and I won. And the company is called Antares Capital. And then I'm going to assume for a fair amount to my listeners and yours that that is like saying you build like Microsoft. Because in private equity, Antares Capital is a very household name, a loosely invented private credit as we know today, and they're a colossal institution.

(03:10):

They manage I'm going to guess 70 billion. I don't even know. Today they're owned by the Canadian government, and they may have five or 600 employees. And they are one of the, if not the largest player in middle market private credit. They're one of the top two. And so to say, "Well, you know, I kind of invented that brand from scratch 30 years ago," instant credibility.

George Jagodzinski (03:33):

It's awesome.

Scott Markman (03:33):

And it's like, I'm not a name-dropper, but it kind of works. So I do it pretty often and I level set the we know what the hell we're doing. And then say Fast-forward to today and our client count in the sector of private equity is about a hundred clients.

George Jagodzinski (03:48):

That's impressive. Well, this is really just a facade for me to suck as much knowledge out of your brain as possible. I figured a great place to start is since you've been in this space for a while and PE's been growing more and more, how is it different today from what it was?

Scott Markman (04:03):

When I started, it was not a sector. It was individual firms doing these strategies mostly on the equity side and then growing the credit side and the investment banks and whatever. But it was individual firms. I don't know, it may have been a few hundred doing this stuff. Fast-forward to today, what are there, four or 5,000, depending on who you listen to in every stripe, in every sub-sector, every scale, every stage of tenure going on.

(04:36):

I mean, there are, what are there, at least 30,000 private equity owned portfolio companies and maybe 40 or 50,000 people working in the category. That's a colossal order of magnitude greater and more complex and nuanced and siloed, nichified than in 1996. And bear in mind, I'm not a finance guy. I don't have an MBA. I mean, I took a year of marketing in college, but I didn't understand this stuff and I don't know anybody else in marketing did either.

(05:12):

And so it took me a couple of years to sit through meetings and fake my way through, oh, I know what they're talking about because I really didn't. And then once the switch flipped, then it just became a lot easier. And today I walk and walk into a private equity meeting and talk shop and five minutes later they know that I can navigate my way through this stuff, but that's hard.

(05:36):

Another way that I would say is the specialization. With scale comes creation of subsets of this in terms of business model, sector they invest in, the sheer scale of things. They all define by assets under management or the range of EBITDA of the company's looking to buy, or they look at we do industrial services or we do healthcare or whatever. And so everybody's got their swim lane.

(06:10):

And back then it was mostly generalist firms because that's all there was. And that's all they could be. Today, if you're a generalist, you're a little bit ripe for the picking. It's not a good thing often to be.

George Jagodzinski (06:25):

Yeah, I wouldn't put my money in that. I want a really tight investment thesis, right?

Scott Markman (06:29):

The way that they are shown the kind of deals they want is to opt into a narrower swim lane. And they may have one or two. We have plenty of clients who do that. And there are generalist firms, but most opt away from that because it's challenging in the sourcing of deals and the sourcing of capital. Because again, the LPs, their family offices, their institutional investors, want definition and predictability.

(07:04):

I can put my six million into any one of 400 firms knocking at my door and why you, well, part of that is I know exactly what I'm going to be investing in and I'm going to put my faith in that, that this firm understands investing in industrial middle of the supply chain, blah, blah, blah. And that's like a more concrete, tangible thing to say yes to as opposed to, "We're just good investors and we'll kind of cover the landscape." And we think that's a tough sell.

George Jagodzinski (07:37):

How have you seen the operating expertise grow? I mean, for me, operating partners, I've just seen them get more and more roll your sleeves up, get some shit done. And those are people that speak right to my soul because they're essentially consultants within their PORTCOs and just getting real change done. But I feel like in the past, people I talked to, they're like, "There's really no one like that in the firm."

Scott Markman (08:00):

Okay. So I would say prior to 10 years ago, having people on staff who are operating partners or operating executives essentially did not exist. What they would do is most firms would have a coterie of people they knew in business or from other PE firms that were a little bit older. They retired and they were just on side hustles, be on the board.

(08:29):

We brought onto the advisory team of PORTCO 12 because they had knowledge in the category, or they had scaled the company before, or they solved the tech problem and they were brought in as paid advisors to address that need or opportunity or problem. Great.

(08:49):

Now, I mean, the firms that don't have operating people on full-time and are pretty senior and came out of McKinsey or came out of successful other companies and they're on staff now, regardless of the stripe of investment profile, very few firms that have an army of... Some individuals are army of people. Oh, departments, they're just ops people. I met with some folks over the last couple of days here in Boston.

(09:19):

And that's mostly who we're trying to target because they're the folks that will bring us into these companies and recommend us and play a role in the work that we would do. That did not used to be. And so in that trend, it's become easier for us to sell our expertise and our value at deliverables into these companies because there's somebody on the other end who prioritizes it and understands it.

George Jagodzinski (09:48):

Yeah. I wonder if it also helps the public view of what private equity is also. When I think about it very broadly, I think people think it's like the evil board that's just swallowing up companies and tearing the souls out of it. But from my experience working inside, especially within growth funds, when you've got a strong operating partner, you are unlocking the potential energy that's in that organization and turning it into kinetic energy.

Scott Markman (10:18):

Could not agree more. So there are certain publications in which the leading one is The New York Times, who have played this trope out for a long time, which is the big boys, the Carlisles, the Blackstones, the TPGs of the world are these hoover suck the life out of companies, load them up with debt, put the money in their pocket, sell them the carcasses, all that stuff.

(10:47):

That stuff definitely goes on, don't get me wrong. But because we play in the world of the lower middle market and sometimes the middle market, what goes on in those levels of private equity is wildly different. So a vast majority of the companies we work with, the intentions are more I'll call it honest. Even today, they're not really about financial engineering.

(11:10):

And what they do to these companies and the value they create, the benefit that they impart on these companies of which we're a part of is wildly more positive and common than what The New York Times will talk about while they squeeze Party City dry. Well, they did, but that's one out of 10,000 data points. So it's an easy angle to write about on a long-term basis, and it's with companies that are in the public eye anyway.

(11:46):

The companies that you served and I've served are this big and they're in Rural Texas and they're doing machine-driven parts that go onto airplanes or something. And it's not sexy. It's complex. It's abstract. It's hard to understand. But telling the story about Party City and whoever ruined them and sucked them dry is an easier story to tell. Then they suggest, "Oh, that's all a private equity." It's not lazy. It's very simplistic.

George Jagodzinski (12:15):

Yeah. And the lifeblood of the economy and our country are these companies you've never even heard of that are actually...

Scott Markman (12:22):

It is the backbone of America, and your company and our company, the PE firms that we serve are making those companies. Now, there is consolidation, absolutely. We work on a lot of what are called roll-ups, consolidation fraction markets, but the benefit that is imparted on these companies is 5X downside to the negative.

George Jagodzinski (12:41):

Completely agree. And where you help is in... They need to do something different from a brand strategy perspective, from a innovation with a capital I. They've been successful to a certain point and now they need to do something different. And so something we had talked about before is how the heck do you... You're both balancing herding cats as far as this new organization and then getting them to do something very different that they've not done before.

Scott Markman (13:10):

In the world of brand and name over the door and potential change of that and consolidation of that, and then presentation of a story, a value proposition, what are you going to do for me, all of that stuff is really the foundation of brand. 90% of the people that we serve in private equity have never been through that. Both at the PE firm level, maybe, but at the portfolio company level, no way.

(13:39):

Our clients are entrepreneur, founder, created companies in these business to business niches. They make widgets to go into widgets or services to go into services. And they built wildly successful companies, but not because of what I could have done for them. They were great salespeople. They were great engineers. They were great at managing teams and maintaining relationships, all these really essential parts of running a business.

(14:11):

But branded marketing as a knowledge and a competency as to why they were successful to the point that private equity bought them, very uncommon. Well, then as private equity is, let's say, in a roll up doing this consolidation and they're going to buy... Our biggest is 17 at once. And you have to herd the cats around that stuff and get, "Well, here are your options and here's option A, B, C and D about a brand's architecture. Is it a one brand? Is it a bunch of brands?"

(14:42):

Whatever it is. And then you have to get consensus on that and then have to go build the stuff and then take it to market across all these local markets and whatever. That's hard. And these people are a little bit freaked out at times. "You mean my name's not going me over the door anymore?" No, it's not. I understand the concern of that because I've built this agency over 36 years while my name is not over the door. It's MonogramGroup, not Markman. I get it.

(15:12):

It's been my life's work. I get it. But at the end of the day, if someone wanted to stuff $5 million more in my pocket because of what I'm going to do for them, what are you going to say? No, I don't think so. Yeah, you're going to say, "Yes, I want that." Okay, then with all due respect, we're going to be respectful, we're going to be thoughtful, we're going to be detail oriented, but we're going to make it go away because I want to get you $5 million more in your pocket by rolling over equity.

George Jagodzinski (15:35):

Yeah. The interesting thing I find in those situations is I think sometimes it can be viewed that these people are resistant to change, but I don't know that that is always the case because I think it's just that they don't know what change looks like. They've been doing the same thing and possibly in multi-generational organization and they've had success from that. So they just don't even know what change even necessarily looks like.

Scott Markman (16:00):

Change is hard.

George Jagodzinski (16:02):

Oh yeah.

Scott Markman (16:02):

It's human nature. We're all wired the same way. Change is hard. Going on a diet. You've got to train for a marathon. You have to start that regimen of training for eight months in advance. It's hard. And to stick with it and believe in the end outcome, the benefit and enjoying the journey and all these things, it's too abstract for most of our clients.

George Jagodzinski (16:25):

Yeah, yeah, it's very difficult. And so I always love to hear some stories from the trenches if you can protect the names of the innocent and all of that. Help make this a little bit concrete of maybe an example where you've been able to help someone do something different that they hadn't done before.

Scott Markman (16:43):

I can name names because the company was sold two years ago to another private equity firm and the RP firm client harvested the value and all that good stuff.

George Jagodzinski (16:53):

Okay.

Scott Markman (16:54):

There's a company that is known today as SurfacePrep. It's pretty well-known in the lower middle market private equity universe because of its history and its recent sale years ago. They were created by a firm in Chicago called Frontenac. Maybe 10 years ago started a process to roll up local yield companies in this classic fractured market, which is the distribution of industrial abrasives.

(17:25):

What? What is that? So what industrial abrasives are are about 500 SKUs that are made out of very specified minerals that are as fine as sand up to rocks, and they are used to impart a surface on a metal part. So think about a titanium rod in your knee in order to be biologically ready to go under your knee. On that rod, it has to be a surface that is very polished, pristine, and sterile and all of these things.

(17:57):

Well, the way to get the surface on that titanium rod is by sandblasting out of a nozzle a certain spec industrial abrasive. There's massive applications for these, but it's a local yokel, very... The distribution is its by very nature local yokel kind of category. So Frontenac hoovers up maybe 10 of these in every corner of the country, and they package it and they sell that company to CenterOak Partners in Dallas, who was our client.

(18:31):

Well, CenterOak's thesis was completely different. They wanted to create a national brand because they wanted to go into companies like SpaceX and sell at the enterprise level corporate to corporate.

George Jagodzinski (18:41):

It's very different.

Scott Markman (18:42):

So in order to do that, they had to create a master brand and create all the marketing and selling infrastructure in order to have a foundation built to be legit to do that and then to train up their local branches to then go use this material to then take the company on some level in general into that world. So we did all of this work. Now, what happened was there were about 15 or 16 entities. So we did all the research and did all the planning.

(19:13):

What happened was there were four of the entities, one was up here in New England, I think in Boston, that had such local brand equity of their original company that to get rid of it in the near term was going to be damaging. So there were four brands out of the 15 where we created a version of the house brand, logo, kept the name, and then endorsed it as a SurfacePrep company for a period of time. Then we built out the master brand for all this other stuff.

(19:43):

There was one entity that was kept privately labeled up. We built all that stuff out, and then they hired a marketing team. They had none. They created a marketing team and then we trained them up. Then they went at it. The deal went really well. They went into Canada. They're now into Europe. I think when they sold two years ago, they might've had 25 entities from originally the deal was like 16 or 17 or whatever it was.

(20:07):

So we built the foundation and the assets and the structure to all of a sudden one day stand up a big national company because they were the market leader when SurfacePrep went live. So fast-forward to a little bit less than two years ago, it was sold from CenterOak to Nautic up in Providence, it was a very big private equity firm, for a ton of money. And while I don't know all the particulars, I promise you that the value of the brand or the balance sheet was a 10,000 fold order magnitude bigger than what we got paid.

George Jagodzinski (20:41):

Yes.

Scott Markman (20:42):

And so the value created in that was through the roof. Now, when this whole idea was sold, I had to sell into 17 general managers who had to say yes. Now, again, four of them said yes, but. And so we built out a interim transitional solution to address the local needs without killing the house. And so we split the needle, whatever the metaphor is on that, and everybody was happy. But I walked into that room with 17 GMs. I had to get them all to say yes. And again, none of them had been through this before.

George Jagodzinski (21:20):

And so if I'm hearing right, it was a little bit doing the yes, and to get them on board rather than forcing it down their throats.

Scott Markman (21:28):

And I had to be prepared to pivot and adjust and deal with my client CenterOak, my clients, the C-suite of SurfacePrep, and I had these 17 other clients that had to play along. That was hard.

George Jagodzinski (21:44):

I bet. And people might be sick of me talking about it, but I'm a huge common language guy. I would imagine in those conversations, creating common language for them to know, "Hey, I'm still going to be this local thing, but I'm powered by the larger brand," and just those types of frameworks.

Scott Markman (22:00):

Rationalizing brand is critical and valuable, but it's hard and a little bit unknown to the practitioners on the front lines. And so the habit forming and the training and the coaching to start to play on one team is a big deal in these big roll-ups that are happening all across America right now in a variety of industries.

George Jagodzinski (22:25):

So you've been at this a little longer than me. You seem very excited about it. What gets you excited, keeps you excited?

Scott Markman (22:34):

Number one, I love the craft that we pursue. The idea of research and diligence and strat work and foundational work and creative work and execution work and launch work and training work I just find to be fascinating, and I have felt that way for a long time. A. B, to your earlier point, I happen to love dealing with the kinds of companies we do because I know we make such a big impact. So we're able to do world-class work. Our agency is that good. We are at the top of the heat.

(23:15):

I'll put us against anybody in America. But doing it for the companies we do it for is fricking gratifying. It just is. I love our private equity clients. Doing it for the founders and the leaders of these companies and frontline people is even more gratifying because they don't know what they don't know. And then what happens is they see our work and it's like, oh my God, I just got the keys to a Maserati.

George Jagodzinski (23:46):

Yeah.

Scott Markman (23:46):

Yes, sir, you did.

George Jagodzinski (23:47):

And I could be proud about my new company, and I have unlocked potential.

Scott Markman (23:52):

100% of the time. From this side of the fence, that is so gratifying.

George Jagodzinski (23:58):

Yeah.

Scott Markman (23:58):

Now, the journey, the creative, the strat journey that we go through even on our side of the fence is just phenomenal. We work in a very collaborative agency. We enjoy working with each other. We enjoy the process together, and I've never lost that. I mean, I'm a designer by education, and I have a BFA from Washington in St. Louis. It's what got me excited when I was in college. I love the process.

George Jagodzinski (24:28):

I love the process. Well, I'm curious if you ever have this experience, which is when you're dealing with these abstract challenges, a lot of times I found us getting to this point where you're just, you've consumed so much information, you've looked at so many different options, and you just start to feel lost in the woods. And you're like, are we ever going to get the hell out of here? Are we ever going to be successful? But then somehow, every time you do get on the other side of that in that moment.

Scott Markman (24:52):

But you and I have this thing in common, which is complex problem solving and then selling the solution. We have the same thing. We say all the time, I'm sure it's your firm, we live in the world of gray.

George Jagodzinski (25:05):

Yes.

Scott Markman (25:05):

There are no right answers. Now, there are I'll call it preferred answers, but there are no right answers. It's not black and white. It's not a spreadsheet calculation. And so to invent that or invent options and then go sell what you believe in and even have a backup plan, that's an art.

George Jagodzinski (25:29):

Yeah. It could be exhausting. It's exciting and exhausting at the same time too, right? There's some self-doubt that happens throughout the journey.

Scott Markman (25:36):

The selling of the work like... I don't know. I'm thinking of... It's a little bit like being a pitcher on the mound and it's just you, and you're either going to win or lose. All eyes on you. But you're so confident and excited about the opportunity and your abilities and it's like, bring it on.

George Jagodzinski (26:01):

Yeah, yeah. And then you get enough wins under your belt and you're the pitcher that every team wants to have. And that's a really good feeling. I like to be the operating partner's best kept secret that they just want... Well, not best kept... Let's take the secret part out because ideally they're just telling all their other operating partner friends about us, right? But yeah, I love that value. So we could talk all night. I know that you've got to get somewhere and I probably do as well. Something that I always like to finish on is in life, in your career, what's the best advice you've ever received?

Scott Markman (26:34):

Treat people really well, enjoy the journey, and don't take shit.

George Jagodzinski (26:41):

Simple, but profound. I love it. Hey, since we're in person, we can finish this podcast episode on a cheers. Thanks for listening to Evolving Industry. For more, subscribe and follow us on your favorite podcast platform and pretty please drop us a review. We'd really appreciate it. If you're watching or listening on YouTube, hit that subscribe button and smash the bell button for notifications.

(27:02):

If you know someone who's pushing the limits to evolve their business, reach out to the show at evolvingindustry@intevity.com or reach out to me, George Jagodzinski on LinkedIn. I love speaking with people getting the hard work done. The business environment's always changing, and you're either keeping up or going extinct. We'll catch you next time. And until then, keep evolving.