How we build tomorrow’s Great companies

At Generation Equity Capital, we pride ourselves on finding Good businesses and helping them become Great companies. That’s easy to say, but much more challenging to accomplish. There are Good companies with Great potential, but how do we find them? Once we do locate them, how do we determine that they are the right Good companies for Generation Equity? And, how do we convince the owners that we will be great partners for them?

Finding Good companies and helping them become truly Great requires a careful mix of science and art, applied through our disciplined and rigorous approach to small-cap investing. Via our proprietary deal sourcing approach, we work hard to fish upstream where bankers and other firms generally don’t look. We think about our deal-sourcing process as our secret sauce and, as any great chef will tell you, a great sauce comes down to the highest quality ingredients, great technique and the right timing. When a dish is made well, the result becomes much greater than the sum of its parts. It’s special. It’s enduring. It leaves you looking for more.

A primary characteristic we look for are companies which exhibit category-leadership in niche, consumer industries.

Consumer facing companies are in our DNA. For 30 years I was CEO and Operator of three consumer businesses — from paint brushes to bike locks to trees and potted plants. With the exception of my family paint brush company, all of these companies were leadership businesses in their respective categories. This gave these firms significant competitive advantages in pricing, in brand, in product design and in achieving superior margins. I was very fortunate to have worked with many outstanding C-level managers at both my companies and at other partner companies. A handful of the most impressive of those people have become the core of our seasoned group of Operating Partners. They help us find deals, actively participate in the due diligence process, work collaboratively with management in developing the investment thesis and ultimately take on active roles in building these enterprises.

We like to keep things simple yet we need to really understand a business as both a consumer and an operator in order to become comfortable investing. Analyzing overlooked, under-the-radar industries provides significant opportunity within our small-cap investment mandate, as each industry usually has one leadership company that already has a dominant position. While most of these small leadership companies excel in certain areas, because of size and limited resources they generally can’t afford to have best-in-class, experienced people working in every facet of the business. That’s where we come in.

We need to be sure that we can provide significant operational value to the company over and above our capital investment.

This is of critical import to us and to our LP’s, as it increases our upside at the same time that it de-risks our capital investments. Additionally, this is also a valuable consideration to our prospective companies. Why should a Good business with Great prospects want to work with us instead of another equity partner? Because we are able to demonstrate that we can provide real operational, strategic and economic value to their bottom line. With our high-touch approach, we work in an aligned manner with management to professionalize, augment and turbo-charge the company’s efforts. Our message typically resonates well with the kinds of Good businesses we engage. We can help create a lot more value at the end of the day.

We have built GEC to be operationally active with our portfolio companies wherever it is beneficial. From product design to branding to supply chain optimization to digital marketing to finance, we leverage specific Operating Partners’ skill sets as we work together. Our companies get the benefits of world-class operators where and when they need them most, all at near-zero cost. While other PE firms work to apply financial leverage to their investments, we are much more focused on operational leverage. This is the biggest reason for our success to date, allowing our investments to be accretive on day one post-close.

Importantly, we require management’s commitment to our operational involvement from the start.

Our best investments have come when we share a strategic vision with the existing stakeholders and everyone is ready to roll up their sleeves together. We have met with many excellent entrepreneurs who simply want to retain full control — economic, strategic and operational — of their companies and find a passive capital partner. While we respect their decision, that is a deal-breaker for us. The most challenging and important part of our due diligence is being sure that we are aligned with a great owner or management team who is open to working collaboratively with us to build a truly Great, and defensible, business.

Finally, we need to see viable opportunities for growth.

Expecting growth as a requirement to an investment may seem obvious but actually achieving it is especially difficult for leadership companies with significant market share. When we invested in Sherrill Tree in 2008, the company was doing approximately $14M in revenue with 10% EBITDA and was the clear leadership business in the tree-care vertical. Over the past eight years with significant effort by the management team along with the support of 11 operating partners at Generation Equity the company has blossomed into a $35M dominant player in the arborist industry with over $7M in EBITDA. Growth for category-leadership niche companies usually comes in the form of an expansion of channels, an expansion of product lines and/or an expansion of gross margins. All this and more is happening at Sherrill Tree, largely thanks to our active involvement.

We are in the process of raising capital for our new fund to continue to execute on this strategy. We are very excited about the discussions we are already having with several outstanding leadership companies that fit our criteria and can’t wait to start putting new money to work. Helping entrepreneurs and family business owners realize their dreams by building enduring and exceptional companies for all stakeholders is what drives us.

That is Good to Great.

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