Autoren: Nicholas M. Gibson Patrick Floeck
In this episode of our Private Equity Spotlight series, Reed Smith partner Nick Gibson is joined by Patrick Floeck, a principal at Valesco Industries, to learn more about his work in the lower middle market, with a focus on private and family-owned businesses.
Transcript:
Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers.
Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to have Patrick Floeck of Valesco Industries today as our guest. Patrick and his team focus on the lower and core middle market, particularly in private and family-owned businesses, which we'll dive into today. But first, I'll turn it over to Patrick and let him introduce himself and Valesco. Thanks for joining us today, Patrick.
Patrick: Hey, thank you, Nick, and appreciate you having me on. A little bit about myself and Valesco. We're, as you mentioned, a lower middle market private equity firm focused on primarily controlled buyouts and particularly like to be the first institutional capital. We pride ourselves with a long history of being a really good partner and helping family and founder-owned and operated businesses transition into that next stage and evolution of their business cycle. And what that has evolved into is utilizing our fund of capital to help employ things like process and procedure. Building out management teams and putting the right people in the right seats, putting in place the appropriate systems to help manage the business, to allow it to capitalize on the already strong demand that is in the market for products and services that the company provides and offers. And so we've developed a core strength of being a very operationally focused private equity firm that truly partners with the management team to help drive the critical agenda. Our focus is on businesses that are roughly $5 to $15 million of EBITDA, and primarily in the manufacturing, distribution, and some business services. We are industry and sector agnostic. It's easier to say what we don't focus on, which are specialty industries like oil and gas and other commodities, tech, software, healthcare services, et cetera. But if you can make it in a manufacturing plant and it has a strong demand and a unique value proposition, those are the types of companies that we really find attractive. I am a principal at the firm. I've been with the firm about 10 years. I run our origination and marketing strategy, as well as sit on a few of our portfolio company boards and help fundraising and other activities at the firm and sit on the investment committee.
Nick: Very interesting. And what about your and Valesco's approach distinguishes you from other shops that might also take pride in partnering with management and kind of sit in the lower middle market?
Patrick: It's a great question that I've been giving a lot of thought to because it's one that I think is always asked, whether it be by a management team or an LP. And I think, you know, Valesco has been around for 30 years and what we've been doing for the last 30 years, going all the way back to our founders that started out as independent sponsors through our first fund, which was very small, all the way now to our third fund. Which is $435 million. But our strategy and the way that we partner with business owners has never changed. We never wanted to be or set out to be an asset manager or a financial engineering private equity firm that looks to make a platform acquisition and do a bunch of lower multiple add-ons and cut costs in a way to producing a return. We really do focus on building the enterprise value via sales growth, better processes, better systems, capturing additional market share and wallet share, and really growing the enterprise value of the organization all while producing employment opportunities. Employment growth, etc. And so we really focus ourselves on investing in opportunities where we can invest in the growth of a business, as opposed to trying to cut costs and manufacture a return. We believe that returns should be the result of a better business and a better operation after we are finished with it.
Nick: That makes a lot of sense. Where is Valesco at in its fundraising cycle and what are you hearing from your LPs this year that might differ from previous years?
Patrick: We are fortunate in that we finished our most recent fundraise in the summer of 2023 and had raised the majority of that capital by the beginning of 2023. The last 12 to 18 months has been interesting. One of the things that we've been hearing is, number one, the pandemic has increased the hold period and life cycle for assets to the tune of about 18 to 24 months. And so a lot of funds that are looking to raise capital are being pressured to have to exit. However, it's not been the greatest exit environment given the increase in interest rates, the ups and downs of different headwinds in different sectors of the economy, the election coming up. And so what we've heard is a lot of allocators are looking to consolidate their commitments back to a handful of GPs that they know well, which is a little bit different from the last decade or so where we've heard that a lot of allocators had diversified their portfolios amongst a bunch of different GPs. And now it seems like they're starting to make bigger commitments to a more consolidated group of general partners.
Nick: Got it. And you touched on this a little bit in terms of kind of understanding the concerns of management and family owned businesses. What are you hearing from founders and targets this year, particularly with, as you just noted, election seasons in full gear now?
Patrick: Listen, I think I'm not an economist, but in my own opinion is that we've been in a recession for the last 12 to 18 months. It's been a bit of a slow burn. The indicators from history, I think, are different in that we are primarily a services-based economy in the new millennium relative to the past. And so the traditional indicators around what precipitates a recession, I think, are different. You also look at consumer spending and inflation. People don't save as much. There's not the incentive to save or invest as much across the economy. And so I think a lot of businesses are facing challenges and headwinds that have made them flat to down this year. Despite the consistent increase in consumer spending and inflation that we've had over the last few years, I think the recent Fed rate cut of 50 basis points is a really good indication that we've got inflation under control and maybe we were a little bit too aggressive and it's time to pull back a little bit. I certainly think that there is some uncertainty around what happens with the election. The two parties' policies and agendas are so different that I think it's creating a lot of uncertainty for business owners, for private equity firms, and it's manifesting in a way that everyone is just kind of putting deal-making on pause. Because if you have certainty, whether you like the outcome or not, you can plan for it and you can forecast and budget, but you can't plan and forecast for uncertainty. So, we're really not seeing a whole lot of activity right now in Q3 and likely into Q4 this year, but my hope is that by the first part of 2025, it will be a good environment for M&A transactions to pick back up.
Nick: What are some of the trends you've seen, particularly in your end of the market, maybe some that aren't the obvious that are talked about as much?
Patrick: Yeah, it's certainly kind of going back to, you know, non-cyclical and non-consumer facing manufacturing businesses. You've seen kind of a move away from, you know, the residential services, roll ups, the, you know, the med spas, all the things that are have been focused around consumer spending, as well as anything that has financing. Related to it, and really gone back to your old economy, manufacturers that are supporting industries like infrastructure, food and beverage, things like that. Even agricultural deals, we've seen quite a few of. I'd say anything that is large old economy type businesses, as opposed to anything that's service-based or consumer. We really haven't seen a whole lot of activity nor appetite.
Nick: Got it. All right, bonus round now. Patrick, you're a big golfer. We first met over a round of golf and had a lot of fun. What is your favorite golf club in your bag? And then second part is, if you were a golf club among a set of clubs making up your deal team, what club are you and why?
Patrick: Yeah, it's a fantastic question. And I appreciate the heads up on this one because it gave me some time to think about it. But I am definitely a wedge guy. I carry four wedges regularly. And the reason I like a wedge of any different degree is because it's such a utility club that you can utilize from multiple different distances, whether it's a full swing, a half swing a chip around the green you can go a high flop shot you can go a low bump and run a spinner that checks and the reason I like it is that if you can get good with that club you can typically get yourself out of a bad situation so if you hit an errant tee shot and you can put yourself back into the fairway with a wedge in your hand you still have an opportunity to get up and down for par. If you miss a green and you can utilize a wedge shot that's going to get you close to the hole and still have an opportunity to make a par putt. That's what I really like about it. That's where I've spent a lot of time trying to make my game strong. Honestly, it doesn't always work out the way that you want, but I at least think that if I can have a consistent wedge game for the most part, I can typically get myself out of trouble.
Nick: I like it. So are you the wedge guy on your deal team as well?
Patrick: Oh, that's an interesting question. I think we're all wedge players. That's what private equity is, right? Our goal is to come in and be a utility player to help augment a management team that they're hitting the big drives and they're making the big money putts. But along the way, they need some help with things like process and procedure and how do they implement KPIs. They're going to help them look at their business in a different way to make them more effective and more efficient. And to me, that's what a wedge is as a utility. And so I think that's what private equity is in general, or at least our firm, to try and help augment the big money clubs like a driver and a putter.
Nick: I think it's a fantastic answer. Patrick, that's all the questions I had for today. Really appreciate you joining Dealmaker Insights. You've shared quite a lot and found it extremely valuable and interesting. I'm looking forward to having you back on and we'll follow you in Valesco the rest of the year.
Patrick: Really appreciate it, Nick.
Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, Please email dealmakerinsights@reedsmith.com. You can find our podcast on Spotify, Apple, Google, Stitcher, reedsmith.com, and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook, and Twitter.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers.
Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to have Patrick Floeck of Valesco Industries today as our guest. Patrick and his team focus on the lower and core middle market, particularly in private and family-owned businesses, which we'll dive into today. But first, I'll turn it over to Patrick and let him introduce himself and Valesco. Thanks for joining us today, Patrick.
Patrick: Hey, thank you, Nick, and appreciate you having me on. A little bit about myself and Valesco. We're, as you mentioned, a lower middle market private equity firm focused on primarily controlled buyouts and particularly like to be the first institutional capital. We pride ourselves with a long history of being a really good partner and helping family and founder-owned and operated businesses transition into that next stage and evolution of their business cycle. And what that has evolved into is utilizing our fund of capital to help employ things like process and procedure. Building out management teams and putting the right people in the right seats, putting in place the appropriate systems to help manage the business, to allow it to capitalize on the already strong demand that is in the market for products and services that the company provides and offers. And so we've developed a core strength of being a very operationally focused private equity firm that truly partners with the management team to help drive the critical agenda. Our focus is on businesses that are roughly $5 to $15 million of EBITDA, and primarily in the manufacturing, distribution, and some business services. We are industry and sector agnostic. It's easier to say what we don't focus on, which are specialty industries like oil and gas and other commodities, tech, software, healthcare services, et cetera. But if you can make it in a manufacturing plant and it has a strong demand and a unique value proposition, those are the types of companies that we really find attractive. I am a principal at the firm. I've been with the firm about 10 years. I run our origination and marketing strategy, as well as sit on a few of our portfolio company boards and help fundraising and other activities at the firm and sit on the investment committee.
Nick: Very interesting. And what about your and Valesco's approach distinguishes you from other shops that might also take pride in partnering with management and kind of sit in the lower middle market?
Patrick: It's a great question that I've been giving a lot of thought to because it's one that I think is always asked, whether it be by a management team or an LP. And I think, you know, Valesco has been around for 30 years and what we've been doing for the last 30 years, going all the way back to our founders that started out as independent sponsors through our first fund, which was very small, all the way now to our third fund. Which is $435 million. But our strategy and the way that we partner with business owners has never changed. We never wanted to be or set out to be an asset manager or a financial engineering private equity firm that looks to make a platform acquisition and do a bunch of lower multiple add-ons and cut costs in a way to producing a return. We really do focus on building the enterprise value via sales growth, better processes, better systems, capturing additional market share and wallet share, and really growing the enterprise value of the organization all while producing employment opportunities. Employment growth, etc. And so we really focus ourselves on investing in opportunities where we can invest in the growth of a business, as opposed to trying to cut costs and manufacture a return. We believe that returns should be the result of a better business and a better operation after we are finished with it.
Nick: That makes a lot of sense. Where is Valesco at in its fundraising cycle and what are you hearing from your LPs this year that might differ from previous years?
Patrick: We are fortunate in that we finished our most recent fundraise in the summer of 2023 and had raised the majority of that capital by the beginning of 2023. The last 12 to 18 months has been interesting. One of the things that we've been hearing is, number one, the pandemic has increased the hold period and life cycle for assets to the tune of about 18 to 24 months. And so a lot of funds that are looking to raise capital are being pressured to have to exit. However, it's not been the greatest exit environment given the increase in interest rates, the ups and downs of different headwinds in different sectors of the economy, the election coming up. And so what we've heard is a lot of allocators are looking to consolidate their commitments back to a handful of GPs that they know well, which is a little bit different from the last decade or so where we've heard that a lot of allocators had diversified their portfolios amongst a bunch of different GPs. And now it seems like they're starting to make bigger commitments to a more consolidated group of general partners.
Nick: Got it. And you touched on this a little bit in terms of kind of understanding the concerns of management and family owned businesses. What are you hearing from founders and targets this year, particularly with, as you just noted, election seasons in full gear now?
Patrick: Listen, I think I'm not an economist, but in my own opinion is that we've been in a recession for the last 12 to 18 months. It's been a bit of a slow burn. The indicators from history, I think, are different in that we are primarily a services-based economy in the new millennium relative to the past. And so the traditional indicators around what precipitates a recession, I think, are different. You also look at consumer spending and inflation. People don't save as much. There's not the incentive to save or invest as much across the economy. And so I think a lot of businesses are facing challenges and headwinds that have made them flat to down this year. Despite the consistent increase in consumer spending and inflation that we've had over the last few years, I think the recent Fed rate cut of 50 basis points is a really good indication that we've got inflation under control and maybe we were a little bit too aggressive and it's time to pull back a little bit. I certainly think that there is some uncertainty around what happens with the election. The two parties' policies and agendas are so different that I think it's creating a lot of uncertainty for business owners, for private equity firms, and it's manifesting in a way that everyone is just kind of putting deal-making on pause. Because if you have certainty, whether you like the outcome or not, you can plan for it and you can forecast and budget, but you can't plan and forecast for uncertainty. So, we're really not seeing a whole lot of activity right now in Q3 and likely into Q4 this year, but my hope is that by the first part of 2025, it will be a good environment for M&A transactions to pick back up.
Nick: What are some of the trends you've seen, particularly in your end of the market, maybe some that aren't the obvious that are talked about as much?
Patrick: Yeah, it's certainly kind of going back to, you know, non-cyclical and non-consumer facing manufacturing businesses. You've seen kind of a move away from, you know, the residential services, roll ups, the, you know, the med spas, all the things that are have been focused around consumer spending, as well as anything that has financing. Related to it, and really gone back to your old economy, manufacturers that are supporting industries like infrastructure, food and beverage, things like that. Even agricultural deals, we've seen quite a few of. I'd say anything that is large old economy type businesses, as opposed to anything that's service-based or consumer. We really haven't seen a whole lot of activity nor appetite.
Nick: Got it. All right, bonus round now. Patrick, you're a big golfer. We first met over a round of golf and had a lot of fun. What is your favorite golf club in your bag? And then second part is, if you were a golf club among a set of clubs making up your deal team, what club are you and why?
Patrick: Yeah, it's a fantastic question. And I appreciate the heads up on this one because it gave me some time to think about it. But I am definitely a wedge guy. I carry four wedges regularly. And the reason I like a wedge of any different degree is because it's such a utility club that you can utilize from multiple different distances, whether it's a full swing, a half swing a chip around the green you can go a high flop shot you can go a low bump and run a spinner that checks and the reason I like it is that if you can get good with that club you can typically get yourself out of a bad situation so if you hit an errant tee shot and you can put yourself back into the fairway with a wedge in your hand you still have an opportunity to get up and down for par. If you miss a green and you can utilize a wedge shot that's going to get you close to the hole and still have an opportunity to make a par putt. That's what I really like about it. That's where I've spent a lot of time trying to make my game strong. Honestly, it doesn't always work out the way that you want, but I at least think that if I can have a consistent wedge game for the most part, I can typically get myself out of trouble.
Nick: I like it. So are you the wedge guy on your deal team as well?
Patrick: Oh, that's an interesting question. I think we're all wedge players. That's what private equity is, right? Our goal is to come in and be a utility player to help augment a management team that they're hitting the big drives and they're making the big money putts. But along the way, they need some help with things like process and procedure and how do they implement KPIs. They're going to help them look at their business in a different way to make them more effective and more efficient. And to me, that's what a wedge is as a utility. And so I think that's what private equity is in general, or at least our firm, to try and help augment the big money clubs like a driver and a putter.
Nick: I think it's a fantastic answer. Patrick, that's all the questions I had for today. Really appreciate you joining Dealmaker Insights. You've shared quite a lot and found it extremely valuable and interesting. I'm looking forward to having you back on and we'll follow you in Valesco the rest of the year.
Patrick: Really appreciate it, Nick.
Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, Please email dealmakerinsights@reedsmith.com. You can find our podcast on Spotify, Apple, Google, Stitcher, reedsmith.com, and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook, and Twitter.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.