Matt Perelman & Alex Sloane - The Art of Franchise Investing - [Invest Like the Best, EP.393]

0:00 I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridge line offers a better way forward, one unified platform that automates away the complexity across portfolio accounting. Reconciliation, reporting, trading, compliance, and more, all at scale. Ridge line is revolutionizing investment management, helping ambitious firms scale faster.

0:25 Operate smarter and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.

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1:29 My guests today are Matt Perlman and Alex Sloane. co-founders and managing partners of Garnet Station Partners. GSP invests in the trillion dollar franchise and consumer services industries. Matt and Alex started the firm in 2014 as MBA students when they bought three Burger King restaurants. Since then, they've invested in 26 other multi unit businesses, from gyms to car washes to funeral homes. GSP is now a leader in its field.

1:54 In our conversation earlier this year, Mark Lazry dubbed Matt and Alex the next generation of great private equity investors. You'll soon hear why. This discussion is a masterclass on franchise investing. We explore GSP's playbook for creating value, the power of Matt and Alex's partnership. and their approach to scaling businesses for successful exits. This conversation is special for another reason. For the last year, we've been working on a print publication that will share the very best of what we've encountered and learned every quarter.

2:22 As the world goes bite sized, short form, and full of platitudes, we are drawn to harder searching, more detailed exploration and understanding. And more emphasis on the very best people we can find. who are doing unique things in both business and investing. GSP is one such firm, and along with many others, they are profiled in our first issue of an upcoming print publication to be revealed next month. We're gonna print a limited edition of them to start. So if you're interested in hearing first when pre-orders go on sale, go to joincolossis.com/slash print.

2:52 I really couldn't be more excited to share with you what we've been working on, including an in depth profile of one of the great investors of the last twenty years, who is a cult figure in investing circles, but has never been profiled or interviewed like this. So now please enjoy the excellent and incredibly fun discussion with Matt Pearlman and Alex Sloan. I can't wait for you to learn even more about them and their strategy soon. Stay tuned next month and for now go to joincolossis.com slash print. We have a chance to talk about

3:21 A lot of history this time, which I don't normally do, and I'm especially curious. To learn about your history because you started the firm so young and you went through this interesting phasing of how you grew your business. Which I'm starting to notice amongst lots of the people that start their firms really young is they go through this early, what I'll call like SPV. Face. Where there's just doing whatever it takes to get deals together, get capital together.

3:43 Have great deals, not lose money. hit home runs early on to earn the right to go into the fund structure and then into the firm building side. We'll talk about all three today. But to begin, I really want to hear the detailed version of the story. about the original Burger King deal. And maybe even before that, just how you guys met. And thought about and talked about.

4:02 What you might do together. I just think these early days are so critical for what the thing ends up becoming. And I actually remember hearing about you guys, I didn't know your names, but I heard about these young guys that had partnered to buy Burger King, so that was going really well. And I was like okay. file that one away. So it's funny to be here with you today.

4:21 Our story is Matt and I grew up together. So we've known each other all our lives. I was at Apollo, Matt was at Catterton. We went to business school. The plan was to go back to Apollo and Catterton after we graduated. While we were there, we developed a thesis around franchise consolidation. And we found a deal to buy five KFC restaurants in Vermont.

4:44 And we thought we could sell the real estate for more money than they were asking for the whole business. So we hired fancy lawyers and accountants that we had no business hiring for a deal that small. We didn't know any better. We spent all of our savings on diligence. And the day before we were set to close. We got a letter in the mail from KFC telling us we were rejected as KFC franchisees. The reasons they gave were one, we had no money.

5:06 So we didn't meet the million dollar financial requirement. Two is we had no restaurant experience. So they told us we didn't meet the operating requirement. And three is they told us we were in college and therefore two young to be KFC franchisees. Yeah, other than that, they love us. That was how we started and look obviously.

5:23 We were really disappointed and we were upset, but we also thought we were on to something. There were a hundred and fifty thousand Tier one fast food franchisees in the country at the time, and our hypothesis was how many millionaire. restaurant operators are there. It just felt like a supply demand mismatch. Rather than looking for a deal and then seeking approval, we said Let's go to the brands themselves. Let's tell them our stories. Let's see if any of them will approve us as franchisees, maybe even introduce us.

5:50 to a deal, to an operator. And all of the brands rejected us except for Burger King. The Burger King management team. introduced us to A guy by the name of Ray Meeks, who was a thirty year franchisee, had twenty three Burger King's based in the Garnett Street train station in Henderson, North Carolina. His business was not doing well.

6:11 And Matt and I spent the summer between our first and second year of business school living with Ray. And his wife Cass and then Henderson diligence in the business. We bought that business in August of fourteen. We're going back for our second year, we added management talent, we added data. capital a capital allocation plan and grew that business.

6:30 from those twenty three locations to what is today the largest Burkey franchises were eleven hundred stores public company. And so that's how we started and we realized pretty early on while we were building value in that business. that there was a much bigger opportunity where we could take the playbook that we were developing while building value there. of adding technology, of adding data, of adding management talent.

6:52 And growing these businesses with M and A and New Unit development and remodels, and we could apply it to what is a much Broader. set of businesses which is the Franchising multi unit consumer services. businesses and fast forward it's been ten years and we've built an investment firm to go after and capture that.

7:08 What was it like living with them? That sounds like a very unique experience. We have so many stories, Patrick. Yeah, we used to say the media rights are worth way more than the company. Hopefully ten years later. That's not still true, but they were terrific people and it probably still are. Yeah. So are it probably looked a lot like my cousin Vinny. We were diligencing our partnership with them, diligencing the business itself. And Trying to figure out where

7:33 the most highest returning places we could be spending our time and capital or within that business. And to raise credit, he was in his mid to late sixties at the time and never had a financial partner and He really embraced us and our ideas with open arms. Yeah, it's funny. We give Ray so much credit and Cass because fast forward we manage over two billion of capital, we've done twenty seven different platform companies that all look very similar to that Burger King deal, but we were from different worlds. Ray was from Munro, Louisiana.

8:01 Never met a Jewish person in his life before meeting me in that We were in business school at the time. We were twenty six years old. We had Again, we had no capital to speak of. It was just like he drew it up. And he and Cass embraced us and the humility What we've realized. over the years is that we always need a ray in each of the

8:21 platform businesses that we build. Right. Right. We'd go around the south east. Buying Burking franchises. Ray was the president of the Southeast Burking Franchisee Association for 30 years. He knew every single one of these franchisees, helped build the system. And Ray would introduce us to these people and he'd say, I'm Ray Meeks. These are my partners, Matt and Alex. They call us the two Jews in the general. And he would say now which one's the general and he would give us credibility. And

8:47 Say look, these guys are gonna treat your people right. They're gonna do what they said they were gonna do. You should trust them. I was talking to Dan Schwartz, who was the CEO of Burger King for a long time and a key partner for you guys, obviously an amazing guy. That itself is an incredible story. Worth reading a case study about. When talking to him, it was clear that Sometimes these businesses are quite misunderstood. The franchisee, franchise or model, sometimes at the corporate level, those two things are intermingled in a way that makes it hard to figure out the business. What was it like for you guys to learn about just that one specific constellation of franchises of Burger Kings? What did you learn early on that was surprising? What do those businesses look like for those that don't understand them? Just let us into the room as you were figuring it out for yourselves that summer. I think it's important to give some of the background of what those businesses look like in terms of the partnership between franchisee and franchise or. So

9:36 If you look at Burger King, and this is broadly true of any of the big tier one brand, at the store level you're generating somewhere between a fifteen and twenty percent margin before paying the brand the royalty. And that royalty is usually Four to five percent. And so that means that after paying them the royalty You're generating call it mid lotens in terms of struggle, he but the margin, take away a couple of points for G and A and you're down to High single digit, low double digit, you bit the margin business. That means that at the end of the day, you as the franchisee are effectively getting caught two thirds of the profit and the franchise or is getting a third. It is a real partnership in that regard. And I think a lot of people At least when we first start investing in the space, don't appreciate that.

10:18 Importantly, there are different incentives, right? The franchise or cares a lot about growing the top line'cause they're taking a royalty, which is tied to the top line. The franchise E cares a lot about driving the bottom line. I think we relatively early on were able to figure out where the different incentives between franchisee and franchise or I And how to

10:38 utilize our skill set, which had been capital structure and team building and that sort of thing to help grow the equity value of these franchisees. while keeping the franchise or super happy vis a vis investing in high returning remodel projects, new unit development, things that grew their top line. But for us, we're also really healthy R O I Cs and very attractive capital projects. The truth is, Matt's saying that the incentives are not always aligned. That's actually not true through cycles and over time. It's very hard to kill these brands. And at any given time, perhaps the franchise or is trying to sell

11:14 dollars for ninety eight cents, which is not good for the franchisees, but For the franchise or owners, they can't do that through cycles and still have a brand that's valued at multiples and these businesses are very, very valuable. So through cycles and over time, that is a true partnership. But any given time, the incentives aren't perfect. How would you explain from the perspective of someone out there that might want to buy a single one of these things and run a single Burger King or a single dominoes or a single something, how to think about the structure of one of those businesses. What are the components? Talk about real estate, talk about ongoing maintenance needs, the things that

11:47 It seems simple. Run a dominoes earn a X number of dollars of profit a year or something, but I'm sure they're just pain in the ass to run and complicated. So just maybe at the unit level, you can pick any franchise you want. What is it like for one of these people to own and run just one of these? And then we'll build up from there. There's three costs that matter in these businesses, and those costs are people, the labor line, costs of goods, and rent. those costs are the vast majority of what's driving the overall profitability or not in the P and L aside from obviously

12:15 Revenue. They're difficult businesses to run. They're people intensive businesses with potentially a fickle consumer depending on where you are in the cycle. That in large part relies on the brand's advertising strength and the overall brand strength. So I would not necessarily recommend somebody go and buy and operate one single unit because I think one unit is relatively risky. You can have a traffic pattern change or bad weather for a quarter and that can dramatically affect your results and the equity value. The Walmart could move. Yeah, the Walmart moves a mile away to a different traded area and now your volume's down ten percent and in these businesses, which are relatively low margin businesses compared to the SA software stuff of the world. If you have a ten or fifteen percent drop in revenue, that could be a hundred percent of your earnings at a thirty five or forty five percent flow through or change in any beta divided by change in sales. Alex and I have focused on scale as it relates to both franchisee roll ups and overall roll ups.

13:10 An R view, scale, more locations, different geographies, and an overall. broader exposure to Geography. And markets, that limits a lot of the Walmart moving or the weather or traffic pattern shifting.

13:24 And historically we've gotten paid for that scale and diversity because it does provide a less risky More stable business. One of the things we realized pretty early on and when we started this Consolidating Burkings. There really were only two institutional firms doing this. Not that we were in any way institutional, but there were sort of two private equity firms at the time that had done franchisee consolidations. And so there wasn't a lot of today family offices and middle market sponsors and even some wealth funds, they love this business. Rewind ten, eleven years ago.

13:56 That really wasn't the case. pretty early on was that the relationship between the franchise or and the franchisee. was extremely important. And at the time People were tired. Baby Boomer.

14:08 retiring, perhaps next generation didn't want to take over the business. These businesses needed to be remodeled. And I'm talking about your franchising generally, not necessarily specifically Burger King. When you'd go to a franchise convention Oh they This and you believe they did uh the idiot this and just very critical of the franchise ore.

14:28 What we realized was if you're gonna become a franchise, these franchise agreements they're very much franchise or favorable. If you're going to take that view and mean it. You should sell and get out. Today and and even back then, we will only get into a system where we feel fully aligned with the Franchise Or. And with the management team and with the ownership group. That's one of the reasons why our relationship with Dan is so important with the three G folks. with the board and with the management team there because

14:50 You're gonna have disagreements, and that's very normal. That's normal in any partnership or any relationship. But the spirit of those disagreements have to be in the best long term interests of the brand. And so we took a what at the time felt to be a little bit of a different approach. Whereas we went in and said, We want to be your best partner. And You have a remodel program. We want to remodel more restaurants than anyone. You wanna build new locations'cause that grows your

15:13 Business We built more Berkings than anyone else during the first four years that we built that business. And obviously we didn't do this out of the goodness of our heart. We did it because we believed in the unity economics. We believed in the returns, but there were things that you could negotiate with the franchise or that perhaps they didn't value that really helped with downside protection for Mad Knight rules one through nine or don't lose money.

15:34 Safety principle is what really matters. You know, World Ten is to generate great returns, and we care a lot about structural protection, the downside protection that the brand can help you with. Help on the downside.

15:46 for us to be willing to take the risk of investing that capital and remodeling, building new stores. And historically there had been a real need for private equity and institutional capital, both a need at the franchise or level and a desire for private equity firms because of how high returning the capital was. For example, when we first invested In the Burking business. twenty three stores with an eight million dollar remodel slash capex obligation. Sounds like a huge number. But that eight million dollars was some of the highest return on capital we've ever deployed. And I think a lot of franchisees then, and it's probably true now, just stared on the barrel of the absolute size of

16:23 needed investment, potential investment, and it scares them off or when you actually double click And even before getting into how you can finance it even more effectively, even on an unlevered basis. those returns are dramatic for the first few years that we were doing remodels and investing in the brand, those were north of thirty percent on level returns and then because of how big these brands are and how long they've been around for it, you can actually get really attractive financing. And then the point Alex raised about franchis oars can give franchisees things

16:52 that the franchiseees really value that's no skin off the franchise or back. In almost every franchisee deal we've ever done, we've been able to negotiate for the brand's right of first refusal. Meaning if you own a unit in a particular system in a particular state, it has to go through us before it can trade. to a third party. And that's hyper valuable to us for all the obvious reasons, but from the franchise or perspective they aren't buying stores, they or at least historically they don't want to operate stores. And so that's a way to really incentivize us to deploy capital in the system without taking away any economics from them.

17:24 Coming back to your initial question, Matter, the other nice thing about doing franchise consolidations is you have access effectively to the entire system's PLs over time. So Matt and I we are very much believe in underwriting businesses through cycles, particularly if you're gonna pay a franchise fee to operate someone else's brand. And in the world of franchising, you have so much data. So even we were buying a twenty three unit Burking franchise back in fourteen. But we were able to access effectively the seventy five hundred other Burger King franchisees P and L's and we could look at them historically. And we could also see Matt talked about the remodel returns on that eight million dollar remodel liability. We could diligence. how those re mile dollars were spent and what the returns

18:04 across the other thousand Burkings that had been remodeled at the time and you could do a cohort analysis to understand What was the trade area? Where was the Walmart? What were the demographics? What side of the street where is the restaurant on? And you could make a much more educated underwrite about the impact of that three mile dollar versus if you're buying a roofing business and you just don't have access to that same level of data.

18:28 The other interesting thing in the franchise ecosystem that's not true of a typical deal is it's a tripartite negotiation. You have buyer, seller, and franchise or and franchisors can do things to effectuate that transaction that's in everyone's mutual interests without reducing their economics dramatically. If we have fifty units of whatever brand and we're buying ten units that perhaps need lot of capital, or they're underperforming for whatever reason. the franchise or can offer to reduce the royalty associated with those stores for

19:00 what say two years and we're buying up six percent margin business because it needs some TLC and help. And they're gonna reduce the royalty by half. So Say they're paying four percent before that. So now our cash flow has gone up by a third for two years, which really helps us finance it and we can redeploy that capital into high returning projects related to that bulldon. And from the franchise or perspective, they're probably thinking about that as an add back and the overall improvement in royalty, which trades at a far higher multiple or lower cap rate than

19:32 Whatever we're buying the franchisee at typically that's value enhancing for them over the long run. How much of variance is there at the unit level across some of these systems? If I looked at today, the very best performing Burger Kings versus the very worst. Or whatever, it doesn't need to be Burger King can be anything. Seems like variance of the unit Obviously the franchise or wants that variance to be super low,'cause then

19:53 Financing's easier and performance is better and more people want to be a franchisee, and on and on. So I'm sure that franchisers are always incentivized to drive down variants. at the unit level, but you guys have probably seen more data on this than anyone alive. What have you learned about unit variance performance variance within a given system. From the top line it varies a lot. And a lot of that is based on location and brand strength. So within different systems you'll see dramatically different average unit volumes, and even within one system you'll see dramatically different average unit volumes.

20:25 Alex and I have taken the view that it's a lot easier through technology to change the variants in the middle of the P L than it is the top line. Yeah. It's really hard to take a million and a half sales per box unit and make it two million. But if that million and a half dollar box is generating eleven percent, and we can see that the food cost variance and the labor matrix is off by three hundred base points. We feel really good that through technology and the fact that we've done this with over three thousand locations over the last decade, you can really I don't want to say easily, but with high confidence narrow that gap over a three to six month period. You might be surprised about the variant. You might think it would be tighter bands than it is in the middle of the PL. In part because franchise is a huge damn. There's been

21:07 so much capital that's flooded into the technology to help manage these businesses in a multi-unit way. And franchise wars help make that tech and the standard operating procedures available to their franchisees. But Depending on the system, the franchisees don't always listen. A lot of operators will base

21:25 Waiver just based on what their anticipated dollar sales is. And they said, So last Tuesday I did ten thousand of sales, this Tuesday I think I'll do ten thousand of sales. And so I need X amount of people. If you actually double click on that and you can do this pretty easily with technology We're less focused on the dollar of sales. We're more focused on the number of transactions because transactions is what drives labor, obviously, not sales. If you take price by ten percent, you don't need ten percent more labor. And then also there's factors that go into a labor matrix that are impossible to do by hand, but with technology, you can do that pretty easily in terms of what's the weather, what are the traffic patterns, is the road construction. It's as localized as is the local high school football team playing tonight. If they are probably gonna need more people. And it usually results in us adding labor at the peak hours to drive throughput. And so you get rid of the veto vote of people walking in saying this is too busy. I don't want to stay here and taking away labor at the shoulder hours. Because the shoulder hours are smaller both in time and dollar size than the peak hours, we're overall adding waiver dollars, but the margin goes up because it does drive the top line and there's meaningful operating leverage to that. That's a huge part of value creation for us.

22:35 On that point, it may sound niche. Talking about franchise, but franchising is a massive part of the US economy. It's over a trillion dollar. part of the US economy, but it's also a very small world. We spent the last Ten, eleven years at every franchise conference, meeting every franchisee, every franchise or

22:50 out there and we've traveled to meet all of the multi unit franchisee operators over these years. And we've Make a point. We ask the same questions. We have Detailed notes. From

23:02 all of them on how they manage their business. We try to take a nugget from every single one of them. The best one sort of early on was a Taco Bell franchisee who would literally do labor by fifteen minute increments. And you'd think based on the weather and all the factors that Matt mentioned. You'd think that means they're reducing labor. It actually typically means adding labor.

23:21 Which is actually a really important point. If you can think about it, labor is the most important part of these businesses. They're people businesses. And getting labor right. is the key not only to the middle of the P N L, but it really is the key to top line. Get satisfaction, net promoter score, and tend to return. And in any one of our markets, our consumer typically is our team member.

23:41 And the customers are typically family members of the team. Cousins of the teams, teachers of the teams, nephews of the teams. So you have to factor that into how you treat your people. And just to put up finer point on that, it's a virtuous cycle, meaning The better labor you have, the better your customer experience, which means that they come back more often, which drives sales growth, which means you have more margin, which means you can hire better team members, which leads to customer satisfaction and thus your sales grow. And so it is a virtuous cycle. The other thing that I think is important to touch on is we invest in simple businesses. We're investing in multi unit businesses throughout the country. They're not

24:18 particularly difficult to understand. The nice thing about that is if you show our team at Garnet Station the top line of a multi unit business, the rent structure of the multi unit business, and what the resultant margin is, we can tell pretty quickly. Good, bad, or ugly, and how we would go about improving it. Sometimes we can improve it. It's too good. But because these are simple businesses and

24:39 We've seen thousands and thousands of them over the last eleven years. With sales, rent, and the output, we have a pretty good sense of where the opportunity is. What if you think back on those thousands? was the most surprising or confusing presentation you ever got. Where you looked at something you're like, holy shit, we can't

24:55 Figure this one out as intuitively as you just described. We've looked at countless and countless Taco Bell deals over the last eleven years. Taco Bell is the darling of the franchisee investment universe. It only comes positively, meaning same for sales always seem to grow It is higher level margins than the competitors typically. New units are created at really attractive cash and cash returns. The remodels always seem to work. It just seems to go up and to the right. And we can certainly be too cheap for our own good. And we've just looked at those businesses for the last eleven years and said, seven times that's crazy. Eight times that's crazy. Who's paying these prices? And we've missed every Taco Bell deal. And we probably would have made money on every single one of them had we invested. I think we're probably hopefully better at this today than we were eleven years ago when we started this at

25:42 my dorm room kitchen table, but That's something that we've consistently missed and we'll probably miss again. What's your theory as to why? Why is that an outlier? Two things. They have better marketing than most. Think about the various talk about iterations of commercial and marketing. That you can think of all the way from

25:59 the Chihuahua up to Pete Davidson recently. And they have a really compelling operating model. Their food is reheated. And so whatever they don't sell the that day, they're able to reheat and sell Following day which We can all debate how delicious that is or not, but It does drop. It tastes amazing. It seems to work and

26:19 marketing drives a higher top line, their food cost model drives a higher Sor EBA margin. That allows for more money to be reinvested in the boxes so they look better. And the top line drives more advertising dollars, which what's forces more people to come in. Human beings, at least in America, are very Pavlovian if there are more talk about commercials on TV this month than the same month the prior year. There's probably gonna be more people who show up to Taco Bell and with comps that have gone up every single year for twelve years, that's really driving that flywheel.

26:51 As we think about our business of Batrick, sort of we think about you ask why is that you're referring to Taco Bell, but why did we miss it? Something that I come back to a lot. I think when we got started, we were certainly guilty of value traps and buying things because they were cheap and cheap for a reason. And so we talked a little bit about our bird working investment. Which Again, happy to spend more time on.

27:11 But it's funny our second investment. was not a good investment. We lost money on it. And it was in some ways was the best thing that ever happened to us. We call it tuition today. We did a consolidation of an auto services franchisee. our view was. It's very low cash flows that we're buying.

27:25 And sort of let's go after it. And it ended up being a terrible deal. That was really eye opening for us. Said huh. First of all, roll ups are really hard. And if you look over time, roll ups are not a great place to invest. The zero rate world notwithstanding.

27:37 Go back before that. It's a tough place to make money consistently. And we always joke it's tough to make less than five times your money in Microsoft Excel in a roll up. I don't think it's ever happened. But in reality, particularly through cycles, again We look at everything through cycles and think about that. It's really tough to make money in roll ups over time. We plan to do this for the next fifty and For us, every single deal has to stand on its own. That's our underwriting. We're not gonna justify one deal by saying we could

28:03 buy the next one at a cheaper multiple and pro forma on run rate. We're creating this thing for X, Y, and Z. We've really pretty much since twenty fifteen, twenty sixteen, evolved our investment philosophy. Although we still very much believe purchase price matters and we're very value oriented. We also really believe quality matters. And we have a saying you don't get paid for degree of difficulty. And we really believe that. So if we're gonna do a roll up and do a consolidation, we're only gonna do it in industries and in businesses.

28:29 They're high quality. And we have very clear definitions of that. But I would say we've missed Taco Bell. We always said oh it's so much more expensive on a relative basis. from a valuation perspective, but we sort of miss the very important part, which is also higher quality. Can you take us back to the most stressful moment you can recall with the auto services business? Sounds like that taught you a ton of important lessons. So I want to hear the lessons, but I'm more curious about the actual felt experience of

28:54 being stressed out that maybe you did a bad deal, you're trying to fix it. You're in your late twenties. It's not like you're seasoned bets at this point. Yeah, Badge is very funny. We are Matt and I We're entrepreneurs, we're founders, we run an investment firm, we invest for a living, we run a business and

29:08 the initial auto services franchise deal. I think that's when we first realise and again I said it was the best thing that happened to us because It was early on. On the one sense the Burking investment went really well really quickly. And that in retrospect actually wasn't great because we thought, Oh, this investing thing

29:26 We could do this and It was very humbling to get beaten up and very quickly. And we move too fast in that investment. We use too much leverage up front. Sail E Spax on stores that shouldn't have been Sailie Spax and we can get into that. But we couldn't have made more Poor decisions if we tried, which was truly impressive. We hired young people, put them in positions of power.

29:46 gave them tons of incentives and turns out, at least in our opinion, these operating businesses, that's very challenging to do, I think. People can do it well. And That's a skill in its own right, but for us we very much believe experience really matters. And today we'll only hire people with decades of experience building value in exactly what we're trying to go and replicate.

30:04 Also, no one had ever consolidated this franchise system before. We were the first ones to ever do it. It had historically been one unit, one owner. I mean, our view some businesses just aren't meant to be consolidated. Perhaps. And we weren't able to benefit from the technology that had been invented to manage these businesses in a multi-no way. We couldn't draw from boards of directors or management teams to learn from their mistakes, to benefit from their successes, or ultimately to sell to one of these successful players. We call it tuition because this was the first time when we had a really big problem. It it was severe, it was big. We were able to ultimately recover. thirty cents in the dollar in terms of the

30:38 Invested capital. Forty. Thank you for it. But look. We were able to

30:44 to engage a consultant who had guy by the name of Howard Norwitz, who has worked with us ever since. And at the time he was consulting with us to help us navigate what was a restructuring, but for a very small business. We couldn't afford to hire as a firm one of the big restructuring advisors, or even frankly the smaller ones. And the business wasn't big enough to support that type of expense. But we really needed the help. And we found uh a guy who had twenty five year background in in distressed investing and in workouts.

31:09 Go to West Point. And he did it. an hourly rate and Howard's just terrific. We call him the left tackle of the firm. After he finished with that restructuring, we asked him to join us full time take a big risk on us'cause

31:21 He was doing very well and was going to go to to an established bank. But We convinced him to join us. He was our second I think it's our second or third employee at the time. He's our partner. And

31:32 Howard Job. technically he runs capital markets, but his job is to make sure that nothing like that ever happens to us again. And that's been the only deal we've ever lost money on, which I do think is a huge testament to Howard. He has helped us. think through structure and plan around Contingency is that frankly.

31:50 Without him having joined the team. That was the last time we ever lost money. What was the deal itself? How much money did you invest to buy? What was the structure? How much leverage did you use? What was the setup of the deal? Fortunately at the time it was

32:04 a relatively small equity check. So we invested three million of equity, we borrowed another five and a half, six million Or to have the opportunity to buy and convert sixteen Mako's Throughout California. Another key learning. We don't tend to invest in that state much anymore given what's happened vision and and whatnot. And then we one hundred percent debt financed the next six or seven million dollars to go buy another

32:30 Yeah. And the issue was Up front, we thought we were buying them particularly well. We were acquiring them at three or four times what had been historical cash flow. And it's not a particularly cyclical business and you could diligence that given it's been around for forty or fifty years. The problem was because we had no technology to operate these things in a multi unit way, and as Alex mentioned, That's a core part of what we do today. As the owner of these individual locations left, we bought the business from them, there would be an unbelievable amount of theft. It was a mostly cash based business that would occur when there wasn't just that level of oversight on a unit by unit level basis. And because we didn't have the technology to manage that, we had to add more and more G and A to help counteract that theft.

33:14 and drive operations. And that led to what was a three times deal pretty quickly becoming a six or seven times deal times leverage times we had sell he's backed a lot of the real estate to use the proceeds to buy the next one and the next one, and we were just wildly over levered. It's a big reason why we don't lever things up front anymore. Talk about capital formation in the early days. What was it like to raise equity capital?

33:38 or some of these deals when you didn't have a track record, you were really young. Obviously the Burger King deal went well, so I'm sure that helped to start, but then you had this deal that didn't go well and you had to keep raising capital. What was it like in those early days? Yeah, it's funny because today there are people who will call us an Apollo and Catterton spin out, which is hilarious because we were so young when we left those firms and actually those firms have been extraordinary to us and some of our greatest mentors and supporters. You could not have done it without their support. Without their support. To this day, by the way. But the reality was we were twenty six and we were associates at those firms. I don't think we knew where the bathrooms were. Other than crying.

34:12 Yeah. But look, we were really fortunate. We were put in business by number of family offices, people who we gone to school with their families or

34:23 Known through friends of friends. And we were bringing deals to these people to help them. to raise the capital. It wasn't a blind pull of capital or saying here's the transaction, here's the deal. Would you consider investing in That was initially how we raised the capital for the Burger King deal. And then once the Burger King deal

34:41 got going and went well quickly. That's what allowed us to then Raise money for other deals. And then In twenty nineteen was when we said, Okay We had done seven deals, they had largely gone well with the exception of one.

34:54 The track record was very good. We said let's raise a fund structure. And initially the the idea was let's raise a three year fund structure. See, do these investors wanna invest in a fund structure? Do we want to invest out of a fund structure? They're Plus and minuses to commingled fun, as you well know, and we could spend hours talking about those considerations. And then Covet hit. And we did two equity deals in that fund and the rest we did and we were buying distressed debt.

35:17 Lones. in other franchise and multi unit businesses in industries that we either had analogous assets or we had looked at previously were the data and the tech that we had put in place to help manage our businesses that were giving us real time information, gave us real insight so that we could underwrite them and move fast.

35:35 And that really worked and that worked. Quickly. And in twenty one, we transitioned. from a family office LP base to our first institutional fund. And then we invested that one over the next two years and then raised our most recent fund in twenty twenty three, which is majority still have

35:52 the family offices put us in business, but today mostly the institutional piece. Seems like the right time to talk about covet. Has to be the worst possible imaginable scenario for what you guys do. And completely existential, I'm sure, like in March and April, you're not having your best days. Talk through that entire experience. Some people say Covet wasn't a cycle, it was only a couple of months. If you aren't owned our portfolio, it was a cycle. I think literally Other than owning perhaps a cruise ship.

36:18 Or a Hudson newsstand in La Guardia, we had about the scariest portfolio in the history of private equity standing in our office on Sunday, March thirteenth, twenty twenty. we had a portfolio that was a hundred percent foot traffic dependent. We don't use a lot of leverage, but when your portfolio goes to revenue zero any leverage. A dollar of leverage is over leverage, obviously. And yep, we had that. And Alex and I obviously never left the office. The two of us would walk there every single day and after we had our ritualistic morning cry. We went to work and battled and We're really proud. I think the team is really proud. The L Ps are really proud.

36:54 Of what we did. We didn't lose a single company. We didn't have to put in a dollar of rescue capital. We didn't breach a single covenant. And we give our partner Howard and our team a lot of credit for that. We put a lot of liquidity and thoughtful capital structure into these businesses up front, obviously not predicting COVID, but predicting cycles that enabled the portfolio companies to both play defense and then quickly play offense by acquiring competitors in June of twenty twenty. Acquiring competitive real estate, acquiring competitors' debt, do things that at the time people thought we were crazy maybe that generated a ton of value for the firm for the portfolio companies and for the investors and we were really proud of that. How did you solve the problems early on? Revenue went down so fast, it didn't come rocketing back. What were you literally doing?

37:40 We chut the businesses we furlough. Yeah. We furlough everyone. We talked to our CEOs. We love that analogy of we felt like airline pilots. Matt and I were be in the office every day. We'd talk to all the COs first thing in the morning. They're on the battlefield. Those are the guys and girls that are actually

37:58 running the business day to day. Matt, I would sit there. We talk to the LPs, we'd give them updates on updates on what we're seeing in real time. We'd watch a movie. Literally just to pass the time and then see your call.

38:09 draw out deal with an issue. Suppliers chapter seven, liquidating. If we can keep the stores open. We don't have any A Burger King CEO at the time, Dan Acadino. Literally stood up distribution and refrigeration business. outside our stores with frozen food trucks in the span of three days because our distributor went chapter seven. It was insane. Getting

38:31 more capital into some of the businesses or helping our franchisees. We own a number of franchise oars. Blending our franchisees liquidity or capital to stay open. That was a good point. Had the franchise not had that liquidity, the franchisees would have died because we were the bank. And we're also helping our franchisees understand what all the government programs were and whether they were eligible, how to go after it. Obviously speed really mattered. think back to all these government programs, getting in the queue early, figuring out which banks were facilitating some of these government programs in which

39:01 Weren't We've great management team, so they were really nimble. The so you have Kona Ice our largest food truck business in the US, incredible founder and CEO. That business. is an events based business. So they park out of churches, little league, schools, and obviously there were no more events. So Tony stood up in the course of two weeks.

39:18 software to allow my customers to get franchisees, trucks. at their homes in their driveways. The franchisees of Kona were all levered and s a few of the lenders were not. Providing for Interesting M work holidays, so

39:32 We had to find another bank to go buy one of the loan portfolios. We had to back to back it off the Kona franchise or balance sheet. While we were negotiating a Main Street loan and it was wild. It was whack-amole. It's funny, one of My mentors at Apollo would talked to pretty often and He said to me, he said, You'll look back and this will be the most fun you ever had And I thought he was nuts.

39:53 In some sense it really did make our firm. How long did the most acute part of that last? How long was there that degree of coordination and whack a mole? I think by May we were seeing green shoots in the portfolio and for our businesses. That were located

40:08 not in North East West Coast major metro, which is the vast majority of our businesses, there was real opportunity to reopen and start recapturing all that share. We knew by May that we were gonna make it, I think. There's that milk and quote we have hanging. Liquidity is an illusion. It's always there when you don't need it and never there when you do. We looked at that every single day and were prudent about going on offense. Certainly by May or June we knew at least that the investments we had made in March, April, and early May were working. Alex mentioned, but we had a lot of insights as to what was going on in the economy,'cause we own and operate several thousand locations. We get daily sales on them and

40:46 one of our better investments during that period was we bought sixty something million dollars, I think sixty five million dollars of the first lean debt of the largest Pizot and Wendy's franchisee, which enter bankruptcy immediately. as Covid began. And That's a business we do well, we had diligence that we had looked at buying it previously. But when we really started what was going on in our Burking, the drive thru part of the business where people were de stocking their pantries and they were heavily utilizing drive through. And because the dining rooms were closed, we had pretty minimal labor costs and profitability was going through the roof. We really tripled down on that pizza and Wendy's investment and that ended up being I think probably our best debt investment ever.

41:27 One of the things that stands out when looking through the businesses that you've invested in. One of the thoughts I had this morning looking through it was just, Holy cow, there's so many of these multi unit concepts. I've never even freaking heard of. I was looking through the timeline of ones that you've bought, some you're the franchise, or like you said, sometimes you're a collection of franchises. Walk through the taxonomy of these things. Burger King, obviously, everyone's heard of. Taco Bells, everyone's heard of. But some of these other things you've bought I had never heard of until looking through your deck. There's food, there's pet care, there's automotive services. How do you think?

41:57 And chunk the world up. Okay, this is in this category, this is in that category. What are the major categories? I wanna start there, but I really want to get into the What are the different features? I'm sure there's trade offs and all these different things. of the kinds of businesses that they are. for those that like this category for investment.

42:14 Yeah. To your point. We've invested across a number of different multi unit categories. You mentioned food and beverage, auto services is our second biggest one with car wash and collision repair. Health and wellness, particularly gyms and fitness. is a category we've played in a bunch and then pet services. You mentioned as well.

42:33 Look, obviously the end market or the end consumer of a Burking business versus one of our more successful deals was a funeral home roll up, for example. There's obviously very different end markets. the ways that we go about driving value in those businesses in terms of Professionalizing them and thinking about building versus buying the next location, that's identical. And we overlay our quality bar onto uh these various multi unit businesses, which we can do because they're simple businesses. And so when we think about

43:05 what quality is to us. There's a couple heuristics we use before we Double click and dig in, but everything we've invested in, every multi-unit business we've invested in over the last few years has been the number one highest average unit volume sales per box in its category. Every concept has at least twenty percent scroll of a margins. This is true of the last five or six years, which is top decile for multi unit. Everything we invest in has sub three year paybacks on new builds, which is important for us'cause it provides both downside protection in terms of capital deployment at high returns, but also Meaningful equity value growth potential. And on the consumer side, they all have the number one net promoter score in their category. The category could be Las Vegas car washes or Our wild business is one best car wash in Vegas the last five years in a row. And they have to have the number one consumer intent to return in their category or microcategory. And all multi unit businesses, different verticals, but wildly similar in terms of how you can think about investing in them, how you can think about underwriting.

44:03 building versus buying the next unit. Now you can think about quality as it relates to the the competitive set. The majority of far investments is thematic. And in order to qualify for an industry The industries have to be highly fragmented. By number of units, not percentage.

44:19 That's very important. To have to be organically growing. for not just our hold period, but for the next buyer's hold period. There has to be real industrial logic to the consolidation. So it can't just be more is more. It has to be more is better. It has to been done successfully before by other private equity or strategics. We very much believe as I've said.

44:36 Experience matters. Experience boards of directors is a huge part of our GSP playbook. And finally, why us? one of our mentors and very successful investor Said whenever he looks at a private investment, he always says, Why am I so lucky to have this opportunity? Am I the fifty the schmuck who's seen this deal and every one of our investment memoirs the the third page is always the why us page.

44:56 our franchisee deals have led to company operated models takes us on average three years from when we first start looking at a theme to where we get a deal about we have a whole process for how we source deals and every single transaction we look at, we have to have an edge. There has to be some reason why we're a strategic buyer. Why do we have a right to own this? What's one or more examples of that? Is there a common bias answer? Taking a step back when you just think about multi unit and consumer services franchising more broadly.

45:23 We live in the greatest country in the world. People take it for granted. People take for granted how massive The US economy is common rule of law, financing. And we estimate for the size companies we target. Again, we don't really invest on the coast.

45:38 It's over a trillion dollar tan. It's a massive market. And in some sense, we're building a firm. To serve as real partner capital. to baby boomers and small business owners. So there's ten trillion. Uh business value.

45:52 That is expected to transition over the next two decades from baby boomers. There's six trillion Whatever the number is of private equity. going after that market. One of our mentors and L P is calls us a build to suit firm for the Leonard Green's odd axes sentinels of the world. We love that.

46:13 Framing We're building a firm. We want partners of choice to these founders, business owners, entrepreneurs throughout the country. And bridge that.

46:23 Bridge to Wall Street and position their businesses to maximize value. And just to provide some color there, so we've done twenty seven different deals or twenty seven different businesses. We've been the first institutional capital into twenty five of them. So the vast majority of the time we're partnering with a founder or with a family or with an entrepreneurial management team. And we're buying

46:44 Anywhere from fifty to ninety percent of the business. And then we are helping them not only turbocharge the growth of that business. Perhaps the family over the last thirty years built up fifty unit business and we're saying over the next five years we're going to build it to two hundred units. It's obviously a different trajectory that requires meaningful investment in terms of G and A But we're also professionalizing the business and diversifying the sources of those cash flow streams across markets and geography, to Alex's point, to sell it to a private equity firm typically one or two notches above us on the size food chain. Of private equity.

47:17 The first seven or eight years of doing this. felt like we were in the wilderness of the wrong side of what LPs were looking for in institutional firms. We cared a lot about purchase price. We talked about that. We use very moderate amounts of leverage, tons of liquidity, and we sell things. We sell companies, all of our funds have been top five percent. And each of the fun vintages in terms of DPI and DPI is returning capital.

47:40 That's a big part of our model. And the first thing we do whenever we invest in a business at the first board meeting is what we call writing the SIM exercise. So we actually write The The sale. the sale document that we want the investment banks to take out to private equity firms and strategics five years later. And every single decision that gets made over the next five years, or in our case three years, refers back to that document. And we are constantly thinking about the exit and the sale and

48:08 our sourcing process is very clear with our Prospective partners. That is the goal. Investors give us a dollar, our goal is to give them three dollars back. Every decision we're gonna make. Is so that when that private equity partner sits around there.

48:20 investment committee table, they're talking about this platform that they have to own. We want each of our companies to be at the very top of our private equity firms hit list. As I think about the features of these different unit level businesses, I'd love to take everything you've learned and apply it to somebody that wants to start a new concept, something that doesn't exist yet. And I'm curious what variables pot to mine. Two for me are obviously brand, I'm sure is really important, but I'm curious what you've learned about what a good brand is in this kind of space. Something like Frequency of use could be interesting. Auto repair, I'm not doing that very often.

48:53 Burger King, maybe I'm doing it three times a week or something. So But if you were just to teach a class at Harvard or something, like okay, everyone in this class wants to launch a new concept that hopefully can get to thousands of units or something. What advice would you give them about the variables?

49:10 to focus on or think the most about. I think the things that drive success in a lot of these multi unit businesses is both obvious statement, the unit level economics I mentioned earlier that we're only investing in concepts that are north of twenty percent at the store level in terms of store level cash flow. And so building a business that has a cost profile that enables that, I think is critical. I think being on the right side of tailwinds, whatever those tailwinds are for a particular industry is critical. Everyone knows the Buffett quote of The management team with a great reputation meets an industry.

49:42 known for difficulty in the industry. survives with its reputation intact. Yeah, I think that that's critical. Don't bet against tailwinds. I think figuring out who the ultimate and market and pay or is critical. The collision repair business we invested in. We love businesses where the customer, the decision maker, is not the ultimate payer. So in that scenario, insurance companies were the payers. And so you would win based on service, reputation, and brand, not price. If you get, God forbid, into a serious collision wreck.

50:12 your insurance company is paying for it whether the Dow's at forty thousand, thirty thousand, or ten thousand. And I think that's critical in terms of Driving Acycle Calda. I will say though, Patrick, I think it's really hard to build a brand, build new company. We're not smart enough to do it. Plenty of your guests who are, and that's amazing. We would say we're not that smart. We love what we do because we feel like it's very simple. And the US consumer what a consumer likes in Texas may not be what they like in Ohio. May not be what they like in Arizona or in California or in other parts. And we have a few of our friends in public markets investing and it cracks us up. We call it hedge fund math when they're looking at oh Chipotle has X number of stores per head in this market and Pro forma run rate, do looking at other sort of

50:51 public restaurant or other Multina concepts and trying to apply those growth rates and like It is. Really hard to scale these businesses. And for us when we look at a concept and think about underwriting growth. The quartile analysis is one of the most important parts of our diligence process. So we try to see how

51:09 dispersed are the unit economics. Is it quartile one is driving all the returns and is there inconsistency, I should say, in the quartile analysis. And that's because if we're underrating growth and we're growth investors, Is the next unit gonna look more like a Quartile four unit or a quartile one unit? And We won't invest in concepts that don't have consistent quartel analyses because we just our view is Again. it's really hard to predict the future. We're not gonna take that risk.

51:33 Yeah, we have a consolidation, a roll up. We call them regional fortress restaurant brands. It's called authentic restaurant brands. We go around the country buying these regional businesses that are beloved by their customers and their core geography. We always say if a brand has customers who have tattoos of that brand on their arm. That's an ARB, authentic restaurant brands type of brand. But importantly, we do not take those brands to new markets. That's really hard to Alex's point. Just because everyone in Pittsburgh loves Pramanti Brothers, which is one of the brand we own in that consolidation, that doesn't mean that people in South Carolina are going to just because perhaps the demos and certain sub markets may look similar. It's also why we tend to focus a lot on purchase price. Our view is if you buy something at a really high in place free cash flow yield or relative high in place free cash flow yield. To generate a really attractive return, you don't need to believe that you're taking it to new markets and convincing consumers to try it, meaning if you buy something it.

52:27 twelve, thirteen, fourteen, fifteen times cash flow and you're under a making three acts, particularly in a environment where perhaps you can't get as much leverage as you used to, you need to really grow that business to make that return. Whereas if you're buying something for what say six and a half or seven times cash flow, there's just obvious mathematical obvious reasons. You need to grow it Far less to make a similar M O I C at the end of that rainbow and We're not smart enough to buy things at twenty times EBITDA and generate three XMYCs off of that. That's really hard. I love how in your deck it says roll ups are really, really, really, really hard.

53:00 Fun to put stuff like that in a deck. So maybe one reason for each really You've done a lot of these. When people fail Trying to do it.

53:08 A roll up. What would you say are the three or four One for each really. Reasons that they fail. One is leverage. Two is integration.

53:16 Not Integrating these businesses. Three is a lack of appreciation. of culture. And we haven't really talked a lot about this, Patrick. We we've talked a bit about culture at our firm, which we take extremely seriously, talk about our core values, but This is That's a big part of what we do. We also have enormous respect for the culture at our partner companies. And while we have an entire GSP playbook for

53:34 how we institutionalize, professionalize that data and technology to these businesses, we work very hard to do it in such a way that honors and respects the culture at each of the businesses. And what we've found is in consolidations, too often people just view them as numbers on a page. They just view it as Excel math. But again, these are people businesses and they're real customer relationships. that matter and if you agitate the wrong person, fire the wrong person, what we call press the red button, you can blow yourself up. And the other problem is people we found is they fool themselves with this sort of adjusted EBITDA, run rate, e bidda, pro forma e bidda nonsense and a world of zero rate and With leverage, perhaps you could sell these things like the hot potato to the next buyer, but People forget in part the Trump tax cuts

54:20 they capp interest deductibility at thirty percent of e bit. So you look at these some of these consolidations and you say, How much of that adjusted EBIT actually turns to cash flow? Okay, how much leverage did you put on this business? Now rates went up by five hundred b basis points. Did you buy caps and Swaps on the debt. If you did or you didn't. What is your tax rate? how much actual cash flow is there in these businesses. And that's what sort of scares us about some of these consolidations is how much of the IBITA that you're underwriting actually turns into cash flow. And we're very focused on that in part because of our Mako experience. But also again, we're students of history, when you look back at some of the failed roll ups, I think a lot of it was believing the proformas and the run rates. And when you're acquiring things and when you're

55:00 in super acquisition mode, you can always have those adjustments. The problem is when you say, Wait a second, what do I actually own? How much of that is real? And can I maintain the culture at each of these local businesses in order for those cash flows to persist and grow? I don't think I've heard someone say that they write the Sale sim As they're doing the deal.

55:20 Ring the bell when there's the opportunity to sell. in our target range, we sell, we create liquidity for our investors. That demands the question. What returns are great in this category? And I'm curious, levered on levered.

55:31 Any way you can slice and dice it. What defines a great in a world where the S P kind of delivers, I don't know, eight, nine percent long term return, something like that, sometimes more, sometimes less. justify illiquidity and fees and all this stuff that comes with this kind of model. What kind of returns are you targeting? And what distinguishes great from good? Look, we always say Our mission at GSP is to generate excess return per unit of risk and to do it with consistency. So whenever we're looking at a deal, we price it

56:00 to generate a three X. That's our under a three X M O I C in five years. We've had ten exits. The weighted average of those exits has been meaningfully above three. that's happened in a shorter time period than five years, so historically We've beat that. We've also had the benefit of uh investing behind the US consumer for the last decade, which is a terrific place to be for all the obvious reasons. Our view is if you're investing in any of these brands and you can create the new unit. for sub three times or you can buy the next incremental bolt on and attractively high free cash flow yield you should be generating.

56:35 Three X plus. That's heroic. I think it's far more heroic the people Who generate Three four five X.

56:44 outcomes investing in businesses. at two or three times the going in valuation. that we do just because your free cash flow yield if you're buying something at fifteen X is going to be pretty low. Super simplistically one divided by fifteen knock off some taxes and working capital and that sort of thing. You need to really grow the hell out of that business to generate a three X. When our world

57:03 Perhaps oftentimes because we're starting smaller. and a smaller, less diversified business is just fundamentally more risky and Worth. Not fifteen times. Our view is we've been doing this for ten years. We're pretty good in terms of Professionalizing and scaling these businesses.

57:20 We should be able to beat that three accent, right? What about leverage? Mentioned several times that you're conservative and how much you use. It sounds like you backload it. You don't use as much up front. You put maybe put more on later once you've gotten your arms around the business. But what is a normal range of leverage to put on This sort of strategy or this if you think about it at the deal level or platform level. How much leverage do you feel like is appropriate? So for most of our consolidations we're actually starting with a hundred percent equity.

57:44 Is that really unusual? I think it's unusual. Yeah. I think it's probably unusual. It's also just because We've done twenty seven of them and More and more from the one. That didn't go well certainly than the other twenty six, but

57:56 in large part that did not go well from leverage up front. And by the way, Had we used more leverage over the last ten years, at least in Microsoft Excel, our returns would be a lot higher. But we probably wouldn't have the sub one percent loss ratio that we have today. I think that certainly would have tripped us up in COVID. And so oftentimes we're starting these consolidations with zero leverage. But we're entering

58:17 start small scale fast consolidation at a nearly twenty percent in place for cash flow yields. You don't need a ton of leverage to make the math work. Once we get these consolidations scaled and professionalized to call it north of ten million of cash flow, then we're back overing the business and swapping our equity cost of capital For That cost of capital. Whatever that is today, eight, nine percent or so.

58:41 And that undrawn development line of credit. revolver or whatever it is, that's enabling us to continue the consolidation and to do it in a really capital efficient way. And to de risk it because A, we've replaced our equity with someone else's capital. And B

58:56 the business is bigger, more scale, more professionalized and more able to absorb the things that come along with leverage. You guys work together in like a fairly uniquely intimate way. You've known each other your whole lives, like you said. So it's like a really cool partnership and setup. When are you two today having the most fun? If you audited the last year, let's say. You mentioned the four things that you do, building the firm, sourcing, fundraising, problems.

59:19 What Would you both say is the most fun part? of what you do together as partners. We're really lucky, Patrick, for a lot of reasons, but We have each other.

59:28 I don't know that it comes across in the podcast, but Our partnership is really special. we value it as much as anything in the world. We believe it's a big part of certainly a big part of our culture and we believe it's a big part of our success. And we have a working style that's perhaps not the most efficient in the world. We sit next to each other or we share an office. We sit next to each other in our office. We Take every meeting together, every call together, every trip together.

59:52 I've sometimes felt bad texting one of you. Exactly. You just know that when you text one of us, the it's screenshot and sent to the other next to each other. We do everything together, and that makes it really fun. And we really believe in that expression that the lows are so much lower than The highs are high, but because we have each other We do always have fun. Even at the hard days.

1:00:17 We're going through it together. Our process is we disagree all the time. So Don't get me wrong, we fight all day long. And it's funny for the new members of the team who joined that sometimes it's like get nervous because it's like mom and dad are fighting and no, you don't have to explain that this is just how it works around here and that's very much part of our process. Matt's a curmudgeon, he's always agitated, he always thinks everything's a disaster. My wife is so fortunate. But we can't figure out whether this started with sort of me being too excited and Matt therefore getting agitated because when Matt's really excited or something, I'm agitated. So it's our process is we take the other side of things. We work with an incredible executive coach, a guy named

1:00:55 Jim Cachalka, I don't know if you know Jim, but Jim's amazing and We've worked together for I don't know, seven, eight years with Jim. And we work on our partnership. We work on Management. And the team and our ambitions and

1:01:07 culture and gym is also part of our process. We don't make any decision unless it's unanimous, right? The investment committee and our firm. It's me not. We would never do a deal unless we both agree to it. If one of us doesn't want to do something, maybe we want to hire Somebody's wanna go on a trip, we don't go.

1:01:21 Matt's very funny. I hate to admit that, but he is the same joke. They're all the same. You get to know him better about you go they're largely the same. And yet for some reason. They are. Scares the team sometimes'cause he's extremely serious. The guy has a photographic memory, like mental math in his head, whatever. But he can go from Just totally joking around and Very funny and making fun till there's a mistake. Page seven. Screaming at it's wild to watch. Probably hard to work for the two of us'cause you don't have one person you're working for two, but

1:01:49 You don't say. We're very lucky to be doing it together. I would say the most fun part is that we get to do it together, doing this Shoulder to shoulder, side by side. Which is awesome.

1:01:59 I'd say the other most fun part, I think you would agree with this, Alex, is getting to know the entrepreneurs, getting to know their families, and then figuring out with them. what the path of success is and We've been fortunate that we've had some unbelievably impressive Partners.

1:02:15 over the last decade and just getting to know them And seeing whatever the crease is in terms of want the opportunity to grow and scale their business and for whatever reason why they need someone else's help or counsel or capital, whatever it is, that's super fun. And then ringing the bell with them at the end of that rainbow. It's a great point. I was listening to the Brad Jacobs podcast with you and he made a point that he doesn't buy businesses from people he doesn't like. That's so ranged true to us. We won't hire an asshole, we won't do business. With jerks. Life's too short.

1:02:44 So much of our process is building that relationship with these founders because when you think about it We're partnering with people for whom their business is their identity. They're part of the social fabric of their communities. Their families work in the business. Sometimes they are second or third generation part of the business. And it's a extremely big deal for them to take on

1:03:05 Institutional capital and partners. For us, so much of our process is Building that relationship so that when we do invest We're very close to our partners and Very close to their family.

1:03:18 They're close with ours and we have a whole program for spending time together and again I said it takes three years. When we start Working.

1:03:26 in an industry till we get a deal done. Sometimes it takes three years and up from when we first meet. a partner'til we get a deal done. So much of our diligence Playbook is building that relationship to make sure that after closing

1:03:38 we don't destroy that culture with our playbook. Haven't talked that much about the playbook, but On average, we're enhancing same source sales organic growth by four to five hundred basis points from pre closing to post closing. We're Enhancing margins by 250 basis points at the store level. We're redeploying cash flows at a twenty to forty percent return on capital. And these are businesses that typically when we first invest, The founder thinks about success. based on how much cash they have in their bank account at the end of the year.

1:04:05 And we totally flip that mindset. We say Success is how many 25% plus IRR projects can we possibly find? That's a huge part of our Playbook, new technology, new ways of doing things and How do you do that without destroying the culture?

1:04:18 So much of that work is done up front. The other thing. Best part. I guess there's a lot of best parts. It's like Howard Marks is the most important thing. There's like forty things. Yeah. Seeing the incentive structures that we put in place alongside

1:04:32 The family or the CEO pay out? We do all the obvious stuff in terms of management option pool and that sort of stuff, but over the last ten years we've come up with I think additional creative ways to incentivize people and for example, for any team member, CEO down to regional manager, every new dollar, not rollover, but every fresh dollar that they write into a deal, which is obviously same security as us, side by side with our security.

1:04:58 we give them one to one additional options on that dollar. So put aside your base management option grant. If you write a check, not roll over, if you write a check for another hundred grand, we will give you on top of that another hundred grand. in terms of option allocation. And Seeing people do that and then three, four, five years later when it pays out and Holy shit. It it worked.

1:05:20 That never gets old. It's another added benefit of Selling businesses. Quite refreshing. So many people are we want to hold this franchise forever, and power law this and the you know. We're not power law people. Sounds great.

1:05:33 Driven by consistency and I think it's part of why We've never had a zero. We certainly don't plan to, but if you look at our returns, it's the opposite power law. Our view is not every business is meant to be grown to the sky. Right, exactly. Not every business is a hundred bagger. Dan Schwartz who we talked about. Dan Dan has this line that you don't actually know until after you've owned the business whether this is a business you want to own for a long time or

1:05:55 that you guys have had that conversation something he said to me years ago that really stuck with me. There are certainly businesses in the portfolio that we want to own for a lot longer than the three and a half years that is historical, but we're operators. We ran our bourging business. We know how hard it is. These are people businesses. We know how hard it is to run these businesses. We're very Tune to cyclicality and The challenges and We also

1:06:17 We wanna have a reputation as good sellers of businesses. One of our mentors who built a big investment firm taught us that early on. This is a repeat game for us. And obviously There's a limit. We don't wanna be the schmucks that we're the next buyer makes the hundred times their money every time. We typically roll over A turn of MYC to benefit from the continued compounding. But we really do wanna be known as someone when you buy a business from us, you're gonna Do well with it.

1:06:40 And it's set up for success and to win because we plan to do this for like fifty years. What this feels like to me is that you are general contractors. That Unlike most GCs have also had experience at each line of the subcontractor jobs. Maybe it's because you did it together, you started young, you Had to figure it out.

1:06:58 But you weren't doing this at some big firm with plenty of resources and then just recreated that setup at a new firm. You had to build it brick by brick. And that gives you this ground level experience. I'm guessing it makes it very hard to bullsh you. in diligence and things like that. And it makes me wonder about innovation. You mentioned that each of these businesses is really driven by real estate or rent. Cost of goods and labor.

1:07:19 And so maybe that's an excuse to talk three times about innovation. What do you think is the trajectory of innovation in these three areas? You heard a lot about Domino's Pizza or something being amazing at technology that makes the things run better. And that's innovative, but at the end of the day I'm still doing something and a pizza shows up and I eat the pizza. The product innovation seems less. Maybe I'm wrong about that. But talk about the vectors of innovation as you see it, having been so close to the ground truth in each of these categories.

1:07:46 It's funny you mentioned Domino's because Dennis Maloney, who ran digital and technology at Domino's for fifteen years and is responsible for so much of that, is one of our operating partners on a number of our boards and Is incredible. Tech adoption is a huge part of that. G S P playbook. It's a huge part of that. same sort sales growth and and marginal enhancement that we talked about.

1:08:05 For us though, it's not Inventing new technology. It's asking the folks like Dennis. to join our boards and to help us think through for this business what is the best in the world. Text act that's out there and let's go adopt it and implement it at the businesses. Marketing is another example. We have a guy by the name of Fernando Machado, who's an operating partner for us. Fernando, if you ask anyone in the marketing world, Fernando is widely considered one of the great marketing executives globally. We first met him when he was working for Daniel Schwartz at Burger King.

1:08:36 winning every award around the world, building tons of value for RBI and for franchisees. And having Fernando on board and helping us think about diligence. Questions as simple as we were talking the other day about our wow car wash business in Las Vegas and whether they should sponsor the local hockey team and how to think about that, how to price it. And what the sort of strategy is. For typical small businesses with

1:08:58 eight figures of Yubita they don't have access to people like Fernando to help you know. Rent. And that that's another area we do love to talk about. Because most people look at rent and they see a fixed expense. But the reality is it's just a contract. It's like anything else. It can be renegotiated. It's an area where you can create tons of value. These businesses, particularly where we do business, which is not major metro.

1:09:20 Whether it's a funeral home or a burger king or a car wash. If our brand doesn't work there. unlikely that another brand is going to work there. So you actually have a fair amount of negotiating power with the landlord. And then these are just contracts. They're typically from the beginning twenty year contracts, but things happen and they change and Perhaps the Walmart moved away, but maybe they've moved closer. Maybe Chick fil A has come in and taken some market share.

1:09:43 Or another car wash brand has built on you. And most people we find look at rent as it's a fixed expense. That's a contract you can renegotiate. And that doesn't just mean you can lower the rent. Maybe you actually can increase the rent, but in return the landlord will pay to remodel your location or there are other terms of these Leases that.

1:10:00 Sort of coming back to the earlier negotiation point. that we know really matter to landlords, things like where is the guarantor, what is the term of the lease, and how much financial reporting requirements are there. And then there are 10 thirty one buyers, sort of moms and pops, doctors and lawyers, and then there's the REIT market. People sort of looked in red and they say it's fixed, when in fact that's actually a huge area of value creation. And it's also funny, investors, L Ps we've found, don't love to hear people, at least in our experience, GPs talk about financial engineering. That's fine. But one of the things we love about the areas we invest and in financial engineering opportunities. We talk about purchase price matters and structure and roll over and

1:10:40 Liquidity and leverage. See, least back is a great area to create value when you're not growing. earnings. We typically use the real estate proceeds to de risk part of the DPI and Returning capital to investors and shareholders.

1:10:53 Part of the reason why we do love this part of the market is in addition to all the tech and data and management. Things you can do to grow the businesses. You also there's a fair amount of financial engineering you can do to de risk and help with safety principle. How often do you own real estate or does the thing you're buying on real estate that you then sell or you wanna buy the real estate or you don't, does it differ by category type or theme type? Say a little bit more about the actual ownership of the asset, the real estate asset itself. So we're rarely holding real estate for long periods of time. I'll excluded to it, but there's a pretty different cost of capital between our operating companies and the landlord. Every business we own has a lease and at the end of the day that's just effectively off balance sheet financing vis a vis the landlord and perhaps cap rates in our world used to be five to six and now they're seven to nine. But

1:11:39 the inverse multiple of five or six cap or a seven to nine cap is still meaningfully above where any of our operating companies are created at. If it's a Seven cap, that's about fourteen X. We're not buying any of our businesses, at least today for fourteen times. And so there tends to be a pretty big gap in terms of financing costs and potential value creation to be had if you can shift some of your operating company cash flow into what looks like a property company cash flow. And so we rarely buy businesses that have real estate upfront because

1:12:11 It's a perfect market. Sophisticated sellers are pricing that appropriately. What we do. Oftentimes is Either. we're figuring out through diligence how many of the leases are perhaps below market in terms of what their rent level is. Maybe the Walmart moved closer to you five years ago and now your sales are two million instead of a million and so

1:12:31 the rent looks lower than it could or should be, that means you can buy back that property, reset the rent to a higher amount, and capture the spread between selling that cash flow at a six cap and having created the portfolio company for six times the difference between eighteen X and six X there. Or oftentimes a lot of what we do is building new locations. And in that scenario There's a multi trillion dollar development industry that exists to capture the spread.

1:12:58 Between development costs and exit costs, and our view has been Why shouldn't we capture that? And so a lot of times we'll buy a piece of land for X million dollars, we'll develop the site on it, and then we'll turn around and sell that piece of land. NSL he's back. to a ten thirty one or a REIT buyer. And that not only reduces your all in build costs, perhaps from a four or five times creation multiple down to a two or three times creation multiple, but it provides for more liquidity because you're getting that capital back. You can decide to reinvest it in the next unit.

1:13:28 either buying or building or you can de risk your equity. By paying out a dividend and increasing DPI. we're able to do this and take advantage of it across the portfolio in part because that arbitrage works because we're creating the opco cash flows. inside of that or 14 times in the example that Matt gave before, so that there is arbitrage. It's not always the case in multi unit investing in part because

1:13:49 You're buying the platform at fifteen times EBITDA, that arbitrage doesn't exist. What about on the labor side? I remember doing research for an investment one time and Some stats about Labor turnover. And first I thought it was annual turnover and then it turned out the day was was actually weekly that we were looking at.

1:14:06 insane fall offs and someone that shows up for one shift that then doesn't show up for a shift the next week or something. So management of the labor force seems like one incredibly hard. And two, therefore, a critical part of margins and whether or not this thing works and a risk factor and all these kinds of things. Is there innovation? In this part of the world and just maybe what's your general commentary on the labor force that makes these things go. And how difficult that is to manage.

1:14:31 So if you look at the average location we own, every time we have to retrain somebody or train somebody, a new employee because of turnover, it costs us about three to five thousand dollars to train them because they're not productive for the first amount of time. And you do that across twenty to forty people per location times couple thousand locations. And you pretty quickly realize that the more capital you can deploy to lowering turnover and recapturing that three or five. It's like the highest ROI you can have. Exactly. And so in addition to incentives and paying people more to retain them to drive guest satisfaction, which drives sales, which drives more money through the door to pay people more to retain them.

1:15:15 There are a number of tech solutions that we utilize where you can have more frontline employee engagement. And ensure that We're doing everything we can to lower turnover and If you look at the fast food business, for example. industry average is north of a hundred percent turnover. So we're not being unrealistic and saying

1:15:32 We're not trying to bring that down to twenty five, but if the industry average is one thirty and we're at one ten, that twenty Percentage point gap is worth an unbelievable amount of money to us. It is one of the benefits of investing in businesses that Perhaps are fifteen or twenty percent EBITDA margin businesses and not forty five percent margin businesses. Obviously forty five is better than fifteen, but the difference being if you take a forty five percent margin business and you make it Forty eight percent, you certainly've grown equity value and that's great. But if you take a fifteen percent margin business and you grow up to eighteen percent, that has a far more outsize impact on the underlying equity value just because the swing as a percentage in terms of EBITDA growth and overall free cash flow conversion is much more meaningful. And that's where we play.

1:16:15 Now the truth is also on the reverse, so operating leverage works both ways. Obvious statement. We've found over the years The best predictor of success in a multi unit business is the tenure of the general manager. And that is

1:16:29 in part why firing people and hiring new people or having a culture like that. That's really not the answer. in our experience and so much of what we believe good management. Is Focusing on our people, focusing on

1:16:41 Training focus what we Talk a lot about incentives, bonus plans. Turnover is something we spend an enormous amount of time on our best CEOs. I have industry leading turnover statistics. And part of their KPIs and bonus is related to their underlying businesses turnover.

1:16:55 I'd love to do a lightning round of some themes. And in each theme, what I'm really curious about is Why you think it's interesting? And also the things that matter as you're looking at them. So in each of these cases, I think you believe in the beta of the thing, but then there's lots of choices within that category that you might invest in. So what are the attributes that you would pick one and not pick the other. So maybe we'll start with auto services'cause we've talked about that quite a bit. So yeah.

1:17:18 Why autoservices and what within autoservices are the attributes that you think drive success. We love Auto services businesses that take advantage of the fact that the US has an eleven and a half year average age of car on the road. This is a car economy. There's

1:17:35 almost as many cars in the country as there are people, and they tend to be very old. And so we like auto services businesses that take advantage of both the age of The automobile. The car park in the US and the fact that for the majority of the US a car, particularly in twenty twenty four, is their largest asset. And they're going to be inclined to need to fix it to get to work and that sort of thing. And we focus on Mission critical.

1:17:58 auto services businesses and the one business we lost money on that we referenced earlier that was focused on what we call cosmic, cosmetic collision, or changing the paint color of a car, things that are discretionary and cosmetic. Today in autoservices everything we own and invest in is mission critical and it tends to be paid for by the insurance company. We also look for how will technology impact these businesses. And so you look at E Vs and E V adoption, we don't wanna have to take a view about E the adoption curve. That's w again, we're we're not smart enough for that. We'll leave that to somebody else. And so when you look at, for example Collision repair centers. You feel pretty good regardless of E V adoption, just when you look at the cost to repair these cars.

1:18:37 the trends are very much in your favor. You look at tire retail, which is where we have a consolidation today. In fact, EV is the torque is actually harder on your tires than non EVs. And so that's a business we believe will persist or some sense benefit from. E the adoption, maybe with car wash irrelevant. So we are very much afraid of Amazon risk or technology risk. We're trying to take a bet one way or the other. About health and wellness. It's a tough place to invest, actually. So we love health and wellness. It's real tailwind.

1:19:03 It's very much on trend. Gyms are a challenging place to invest. We made a number of investments there, mostly in planet fitness, which is a gym franchise or the largest one. But when you think about we're very much afraid of fad risk. So we talk a lot about how do businesses perform through cycles. We're afraid with gyms, even though the unity economics can look really good when they're working,'cause you just don't need a lot of Better gem.

1:19:26 How do these businesses perform over time and how do new entrants impact these gyms? We're very afraid to invest in the next curves, which had X amount of thousands of units and ten, fifteen, twenty years ago, and today obviously does not. Well the reasons why we like Planet Fitness, it's so big. The ad budget is so much bigger than the next five guys combined. That there's a real mode in terms of The fact that they have twenty plus million customers across the US and the brand really does mean something.

1:19:53 What about early education? That's one that popped out at me. quite a lot. It's multi unit business. wary of regulatory stuff and where the government reimbursement is. We're always looking at how do these businesses perform through cycles. So And importantly, we have zero government pay or exposure across the portfolio. were afraid of fad similar sort of fadress there. We're afraid of how these businesses perform and

1:20:17 recessions and recycles over time and that's a business where your people similar story, but Maybe even more extreme. the customer experience and the people part is extremely important there. I mean ever you're dealing with kids. So we love the category, but there are a number of things to watch out for. What makes you like it, setting aside the risks? The secular growth is unparalleled. There is just more people spending more money every month to put their kids into extracurricular programming than there was the same month last year, and that's been consistent. Obviously take away a few months from COVID.

1:20:48 over the last ten years and the vast majority of the growth in that category has been driven by traffic, not price. You can't ignore that. You have to spend time on it. Talked a lot about selling. Talk about the buyers. Often other private equity firms. What do they want? What are they then gonna do? There's gotta be return left on the table for them, obviously.

1:21:05 Talk about this interesting chain of this capitalism chain, so to speak, where you're doing one specific part of the value chain. But then you have key relationships with upstream buyers. We haven't really talked much about that. So you don't have to name them, but if you just think of the concept of a buyer that you've sold to before, who are they? How big are they? How much money do they manage? What are they looking for? That SIM that you imagine when you buy the business, what's the perfect SIM to them? Help us get in the mind of the person that's buying these things from you. So we have call it two point three, two point four billion of AUM. On average we are selling these businesses to people who have two to four times that amount. So they're five to ten billion dollar private equity firms. We are typically

1:21:48 scaling these consolidations up to caught fifteen to forty million of free cash flow. That's where we found is a real sweet spot where you have just very large addressable market of potential buyers. You have all of the US Middle market. that spends time in these businesses looking at them. And you even have some of the larger guys who are coming down market to start a consolidation and then grow it dramatically. So we build these businesses up to fifteen to forty million of EBITDA and then we sell them to larger private equity firms. I think in large part what they're looking for is consistency, professionalization. and scale across multiple markets. And at least in our roll ups, we've gotten paid historically to show that it works not just in one micro market or DMA, but that we have a consistent track record of doing it across markets. So we'll start a roll up that's in two DMAs and four years later it's in seven. And importantly the band of outcomes within those seven DMAs is

1:22:43 Very narrow, so they can underwrite. Yes, I'm going to pay a higher price on a free cash flow yield basis or a lower free cash flield basis than perhaps these guys created it at, but they've built the professional engine for me to take this business from 50 to 200. And we've gotten paid from taking it from 15 units to 50, and we're more than willing to roll over a turn of M O I C and be as helpful as we can possibly be. We've stayed on the board several times of businesses we've exited to larger private equity firms, all of which have gone so far. And I think that their view is

1:23:17 These guys have de risked This platform in terms of it's professionalized, there's a really healthy tech stack, it's diversified across several different markets, they can lever it in a way from day one that we didn't feel comfortable doing when it was a fifth the size. So there's just a natural return that comes from The cost of capital arbitrage there, obviously. And then they're betting on the fact that we took it from fifteen to fifty locations and they can take it from fifty to two hundred. We've learned so much from staying on the boards of businesses that we've sold.

1:23:47 and rolling over and watching some of these firms and how they create value. And our goal in any time we can we travel we make a point to go see every one of our competitors, even if we're not traveling for that. business and discipline we learned early on from Incredible Operator in franchise world was very easy to hate on your competitors. The goal in every single competitive site visit is to take three nuggets, three positives. You can't walk out of a competitor without seeing three positive things from that site visit. We do the same with Sponsors sometimes will joke that don't want to meet your heroes because we feel good about proud of our own firm.

1:24:19 But We always try to take what are the positives away from it. And every one of the boards that we've been involved with and and the businesses we've been involved with after we've sold the business, we've learned a lot that we can then take to our businesses. What do you think are the major risks to your franchise? So you've achieved one level of escape velocity, right? You've got Big teams, sophistication, history, data, you've got all this stuff that would make you better suited to be a buyer than

1:24:43 The next twenty six year olds at H V S or whatever. So you've gotten to a certain level. Which is awesome. But very often from to that level started thinking about We don't wanna lose this position. So we think about risks. What would be the things that would have to happen in order for historical returns, which have been in excess of your targets?

1:24:59 to somehow be way below your targets. Even if you're working your asses off and your team's great and you do sourcing well, do all the stuff. What do you think would have to happen for Forward returns to be materially worse than past returns. We believe our culture is a huge part of What has driven the returns and what allows us to win deals and build value for our partner businesses and

1:25:20 Matt and I are very focused that as the team has grown, we have Twenty five mass professionals, twenty operating partners and operating executives, got a team of eleven in the back office. How do we maintain that culture and make sure that we maintain the ownership culture, the values? that we believe have made us successful. And we send every year our our two favorite

1:25:39 books as a holiday gift to all of our partners and One of them a few years ago was the Michael Dell autobiography, Play Nice but Win. It's a book we loved and one of the takeaways from that book was as he was growing his business, he felt that the challenger culture was what allowed him to win against the sort of coastal larger players. And he wrote down his core values and he sent it out to the whole team. That really inspired us. We did the same thing and our core values document hangs in the bullpen in our office. We send it out. every quarter along with our quarterly letter. We talk about it all the time, maintaining that culture.

1:26:11 for us is the thing we worry most about as we grow and we're extremely focused on it. That's right. The only other thing I would add is I think To the extent we've been successful over the last ten, eleven years, we've been able to Price quality. And sometimes that means X free casual yield and sometimes that means

1:26:28 lower free cash yield for higher quality. And I think to the extent that we can continue to price things well and not overpay. I think that's driven a lot at the results so far. What do you think is the most unique thing about how you source relative to others? I think a lot of our best deals come from the virality of relationships within the portfolio itself. We've had a number of really successful deals and ultimate outcomes that were sourced by relationships driven by CEOs and founders that we had previously done business with.

1:27:00 That's gotten a lot easier today where we have twenty seven of those people times X amount of network and Y amount of phone calls versus Seven, eight years ago, there were five of them. Our goal is to be the capital. Partners of choice.

1:27:15 for founders and business owners around the country. And that is how we built our firm and that's how we approach every relationship. It's a repeat game for us, part of why we tell founders we're gonna disagree and there are gonna be ups and downs. But if we screw you somehow, it's not just about this one deal. It's about how you talk about us in the market. And we give a list to every prospective partner of everyone we've ever done a deal with and we say call them all. And we encourage them mostly to call founders and partners of company we've sold so they can see no longer work with us. See there's no longer any sort of incentive for them not to tell the truth. And what they'll say is

1:27:53 We do we say we're gonna do And we worked really hard. We are difficult. We're rigorous. We're analytical. There are bumps in the road, but our incentives are aligned.

1:28:04 And we have fun along the way. The other thing which relates to that in terms of sourcing deals is We're relatively young. We're both in our late thirties. And a lot of people who graduated college at a similar time period that we did. We graduated during the GFC. The world's been pretty up and the right since then. There's been a lot of investors who have incredible track records since then and How much of that is beta versus alpha. A lot of it tends to be lever beta. And I think we're smart enough to know that we have massively

1:28:34 benefit from that. And because of that, we are students of history. You've seen some of the books in our office and we've sent you them. We have pretty much every finance book written from nineteen seventy nine to two thousand twenty three. We read them religiously. We reread Predators Ball, which is the story that started them all every January, and we have a very healthy appreciation of cycles. And having an appreciation of that and how it informs capital structure and valuation and liquidity, I think we have a better appreciation of that than most people our age, and certainly not nearly as good of appreciation of it of people who have lived it. But Fortunately we have mentors around us who have

1:29:11 Why do you read Predators Ball every January? I think that people our age don't have a full enough appreciation for what Michael Milken both built and set into effect in terms of his creation in terms of high yield securities spawned the ability for private equity to exist at the speed, size, and scale that it is today and We always get disappointed when we interview younger people and we ask about that time period and they look at us like blankly.

1:29:39 And I think a lot of the thoughtness of that era, and obviously there were accesses too, but a lot of the thoughtness is lost amongst people in their thirties and forties today. And I think it's important to Reread that and appreciate it. And it's inspiring. You had people in that book who were our age who built some of the most incredible successful companies on earth when they were even less experienced than we were at the time.

1:30:03 with far less of a roadmap. We stand on the shoulders of those giants and benefit from that. They didn't have that. You mentioned how pioneering they were. What is your philosophy of cap structure? Cause so much of what Milken did was I guess. Create the opportunity to have a philosophy of cap structure in the first place.

1:30:19 You said to go all the way to the thirty thousand foot view on capital structure. How would you sum it up? I think I would sum it up in terms of Liquidity in downside scenarios is always worth more to you over a longer period of time than max leverage is in an upside scenario. And what does that mean for us? That means entering with low leverage. That means never maxing out firstly in debt capacity. On the downside case, firstly in debt is by far the easiest thing to raise, particularly if you have baskets and caps and availability for it. And when Microsoft Excel maximum leverage works wonders in real life. It can lead to poor decision making.

1:30:56 And Zero's both of which we actively try to avoid. You've said cycle so many times. Maybe it's just an opportunity to ask what that means to you. Is that just Variance in demand for lots of different reasons. If you had to think about what is a cycle, why do you care so much about cycles? How would you describe it?

1:31:12 Yeah, I think a couple of thoughts on cyclicality. One is private equity, at least in the US, has a tendency towards recency bias, both in terms of what they think the underlying cash flows of a business is. the distribution of outcomes tends to skew towards What's focused a lot on the last twelve months and less so on three years ago.

1:31:32 In terms of underlying earnings, as well as what is the right multiple for this business. It's the last twelve deals have traded at X, so it's probably close to X. I think both those things ignore that at least in our world where everything we touch touches the US consumer, there's cyclical elements to both those things, both in terms of the underlying cash flow and what the Appropriate market multiple. for these businesses. And so we like to diligence not only the earnings streams over cycles, but also the valuation across cycles. The other reason why we're so focused on cyclicality and it's probably because our portfolio was So in the eye of the storm of COVID is

1:32:07 never waste a good crisis. Some of our best deals were done in April of twenty twenty, in the depths of the Covid crisis and God bless undrawn debt financing and committed equity capital, but we have the luxury of being able to go on offense at those times and That's where, at least in our experience, you can really generate the excess return per unit of risk. you're taking and we certainly wouldn't be able to do that in twenty fifteen as much as we can in twenty twenty four.

1:32:34 Because we didn't have a fund back then, we didn't have committed capital. We probably weren't able to get the size of undrawn committed debt facility as well as obviously equity as we can today. But today With two point three billion of AUM, tons of undrawn capital, both in the fund and the portfolio level through D Lox development lines of credit and that sort of thing. Shame on us if we can't take advantage of a crisis. What's the closest you guys have ever gotten to like a terrible argument or a terrible disagreement between the two of you in all these years?

1:33:04 We disagree every single day. About everything. That's the process that Hopefully drives. At least the outcomes we've had so far, but

1:33:12 I would say it's never personal. But it's always personal'cause we know each other so well. But in a loving Why, like, here's your bias that you're bringing into this, you effing idiot. And because we've known each other for over thirty years, you can say those things and Go out to dinner that night and That's Tuesday. You have to remember we have three meals together four days a week.

1:33:32 Every Monday through Thursday, breakfast, lunch, and dinner every single day for eleven years. There's things that I could say to him that if I said to my wife I'd be living on the street. And what do we do on Fridays? We have breakfast and lunch on Fridays, but not every Friday dinner. It is very special and we're very sensitive to it.

1:33:48 very sensitive to Matt and Matt's very sensitive to me. But that doesn't mean we don't scream at each other. And I do think I give Jim A lot of credit. for that because we work at it. We work very hard at our partnership. We've been through a lot together. Our partnership is extremely solid and we have the confidence to know how important that partnership is for what we do.

1:34:08 I think we also both recognize that there's a zero percent chance we could do this by ourselves. Some people can I find that incredible. To be able to withstand the woes. By yourself and still. fight back to the highs. I couldn't do it. I think Alex would agree that he couldn't do it. And having the other person to balance, Yes, this is awful, but here's the light the end of the tunnel and we gotta fight. And by the way

1:34:30 You have to fight. There's no alternative. If we were ever very low at the same time, that'd be really bad. But that hasn't happened yet. I've been in scenario with you guys and your L P investors a few times.

1:34:41 And I've been in lots of those scenarios with lots of other combinations in my last fifteen years. It stands out that you have a notably good relationship with your LPs, both Professionally and personally. Maybe just say a word about that. What drives that, how intentional that is, and how you think about that side of the business. It's one of your two customers, right?

1:34:59 We work for L P and One of our core values is accountability. We say all the time in our business L Ps, L Ps, L Ps, we work for L Ps. Everyone on our team knows that. We talk about it all the time. What is in the best interest for L Ps? That's why we're so focused on alignment and Not taking fees or anything else that's in any way. Not aligned with R L P's making money.

1:35:20 And so we view that relationship as extremely important. We're also again we mentioned the word cycles a lot. But we want LP is who really understand what we're doing and what we're building and appreciate it and Who will understand that in cycles when things inevitably recession come, sales decline.

1:35:40 who are going to be excited to invest additional capital. behind our platforms when We call the short capital. Or say the opportunity is there. And so that's part of why we spend so much time on our quarterly letters.

1:35:52 Not just the sort of intro few pages, but also company by company. It's why we spend a lot of time with our LPs and our partners and We really want them to understand. Our investment philosophy, how we approach the businesses, the management teams. So that we could do this for the next fifty years. We've benefited massively from our LPs over the last eleven years and we were originally put in business by a number of family offices of people who had built asset management firms and

1:36:21 those people have, I'm sure, forgotten more about investing than we'll ever learn and We did and continue to for everything in terms of guidance and mentorship and being as thoughtful as possible about building the team and whatever the problem children in the portfolio are. And

1:36:38 Royce Yodkov, who is our HBS professor, or professor of business school, rather, who founded Abre, who's the R Y in Abre. He took us under his wing twelve, thirteen years ago and Forever change our life. by his guidance and introducing us to Abreel P is and just being there. for the darkest days of Covid on the phone and we wouldn't be here without people like that.

1:37:00 Managing other people's money is an enormous responsibility. We take that responsibility extremely. Seriously. We don't just view it as oh, we're providing a service and They have to invest it somewhere and Not a supplier, they're a customer.

1:37:14 They're a customer and we are extremely customer focused. And we're also All of our money is invested in our funds every dollar we've made. And We're terrified of our wives whom we love.

1:37:25 And we take the responsibility of managing other people's money extremely seriously. So spending time with them, getting to know them, making sure they understand what we're doing and how we're doing it. And our approach to it. I think it's just a part of that. Was the comment about being terrified of our wives, them thinking that we're over allocated to our funds. Because mine does. Good excuse to ask my traditional closing question. Get two answers. What's the kindest thing that anyone's ever done for you? Each of you.

1:37:51 For me, and I know Matt will agree, the kindest thing anyone's ever done for me. is my parents and how they raised me and my siblings. Matt was raised similarly. But I was given every advantage growing up education otherwise by parents. still are extremely involved and Dad was on the board of our school and went to every

1:38:10 Game and Parents helped us with homework. They were home for dinner every single night. very loving, supportive family role models. They were also extremely tough in their bar for success. Ambition.

1:38:23 Hard work. was always extremely high and is extremely high. And we're forever thankful to them for our siblings. When we talk to our parents, our siblings, our family. other every single day and we're forever grateful. Yeah and

1:38:36 Certainly agree with that. My parents are as important, impactful, meaningful and Motivating. as Alex is, who I know very well and love dearly. My wife and Alex's wife have also picked us both Up off the floor.

1:38:50 Many times over the last eleven years. of doing this together and we'd be Broken destitute, certainly without them. I do have to add, one of the best learnings from my parents was picking the right partner. And certainly my wife, I'm not sure I could say I picked her. She more picked me.

1:39:04 I'm forever grateful to my incredible wife, but also partners in life and Matt is much more than just a business partner family and I want to make sure I add that to the list. I also should mention my wife has known Alex longer than I have. They went from pre school through college together. And true story G S B is her brand child. She was the one who really suggested we start working together twelve or thirteen years ago. And then look, the guys at RBI restaurant brands international Who ones Burger King They gave us a shot.

1:39:32 to enter their system and become franchisees when every single other Tier One franchise or shut the door on us when we were twenty six years old and I don't think they did it out of the goodness of their heart. I think they thought that we were on to something and we could help them consolidate their system and grow the royalty stream, but we are forever grateful. Dan Schwartz, Paul Freeborg, Alex Masedo, we simply wouldn't be sitting here today had they not seen something in us back then. So true, Paul Freeberg, who's been my mentor for twenty years and was on the board.

1:40:01 Daniel Josh Cubs as well. And Brian Feinseyma though I know you know and have interviewed who was extremely helpful in that as well. Um If you enjoyed this episode, check out Join Colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

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