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Private Capital

The Definers Episode 5: Tide Rock’s success raises questions about private equity

In a recent article, The Wall Street Journal reported that investment firm Tide Rock buys up small companies as private-equity firms do, but it shuns the often steep debt that buyout shops use to fund acquisitions.

In another article, The Deal reported that Tide Rock seeks companies that either have strong reoccurring customers, are resilient because they have diverse customers or operate in an industry with low volatility, or that sell essential products or services to loyal customer bases.

What is the Tide Rock team getting right that others miss, and what can we learn from it?

We ask Tide Rock President Brooks Kincaid how unlevered buyouts work, what that tells us about the leverage accepted in traditional private equity, why that matters for founders looking to exit or grow, and Tide Rock’s operations mindset.

 

Chris Gale  00:02

Brooks, thank you very much for coming on. I am super excited. Gale Strategies loves working with Tide Rock because what you guys do is just fascinating, especially in today’s environment. Folks coming onto this know that Tide Rock practices unlevered buyouts, which usually throws folks from the very beginning because buyouts are usually levered. We’ve all been reading about how much leverage there is and how much debt there is out there. So, before you tell us about Tide Rock, any insight on how leverage somehow became the orthodox/normalized thing out there in all of this credit and debt that’s in the private capital markets these days?

Brooks Kincaid  00:59

First off, Chris, glad to join you, and look forward to chatting here.

To answer your question, I think at the end of the day, it’s great to use other people’s money to make money for you. Debt can – or at least in general – end up being a lower cost of capital. And interest is tax deductible. So, those are both attractive elements that can lead to it being a tool in the leverage buyout structure. As someone who’s trying to raise capital, it makes returns look good or makes an investment potentially pan out. Debt can make returns look better in a spreadsheet. If you’re modeling it versus living in maybe the real world, you can underestimate the risks of investment and the ability to support that debt. So, the positive impacts of it help drive its use. If you start thinking about some of the risks, though, you may underestimate the impacts of sizable, unexpected events, which in the last couple of years have been particularly notable, are things like the loss of a major customer, a global pandemic, COVID, material supply chain shocks. Things like that don’t necessarily make their way into financial models as cleanly as the use of leverage might.

The use of leverage allows for a fund to also buy bigger companies. You can make your equity dollars go further and, in buying bigger, not be overly concentrated. You can effectively just spread the wealth a little bit more. That all sounds really good, and that is a core reason why it’s become a pretty common use. But it does underestimate the risk that exists. That is particularly true when you start looking at the use of leveraged buyouts when you’re investing in smaller companies. They are just more exposed to some of the risks for which debt is not a great tool. Some of the uses of debt and the covenants and other things that come with debt make it a square peg in a round hole, at least in our view, for use with small businesses.

Chris Gale  03:27

I like that you’re pointing to risk. Just to be clear, when we’re talking about debt or leverage, we’re talking about transaction leverage, like you would have a line of credit, I imagine?

Brooks Kincaid  03:45

We’re talking about amortizing transaction leverage. For example, we’re buying a company, and a third party is coming in to support and contribute to the sources of capital necessary to close that transaction, like underwriting the deal alongside the equity sponsor and then putting in a structure for the repayment of that debt in both interest and principal. That is different in our view from what I would consider growth-oriented capital – be it equity or the use of a line of credit. There are certainly working capital needs in all businesses that lend themselves to using a tax-efficient, interest-bearing line of credit, but that is very different than covenant-related amortizing debt.

Chris Gale  04:32

Perfect. Okay, so you used the word “growth” and used the word “risk” before. I know the story of Tide Rock, but if I first hear what you were saying about leverage before, are you saying that Tide Rock purely protects against risk? Or what do you accomplish for investors on the upside? What’s the attraction to Tide Rock for investors?

Brooks Kincaid  05:01

The attraction for investors to Tide Rock is that we can deliver the alpha that can come from investing in smaller businesses without the same risk that you might otherwise expect if you were to structure it in a leveraged buyout transaction. What we also do is further reduce the risk by focusing on effectively returning capital, or returns, to our investors sooner by virtue of consistent quarterly distributions. So, if you think about it, an investor comes in, they have principal at risk in any private equity environment. They’re putting that principle at risk to get returns back from that. In our world, because we make distributions consistently and at a high yield level, our distribution to paid-in capital, the sort of realized returns, is right out of the gates. So, a quarter into investing with Tide Rock, you’ve taken principal risk off the table because you’re getting a distribution out. If you’re doing it in a leveraged buyout transaction where you’re not receiving those distributions, you’re betting on the total value to paid-in capital, and the large majority of that is in what’s considered residual value to paid-in capital, so paper gains and all of that are terms related to the return that an investor is expecting on their capital. In our case, we are aiming to provide very high total value to paid-in capital, or multiple of invested capital, but along the way, making sure that our realized returns are there, which, at the end of the day, just reduces the risk for our investors. That’s what we’ve been able to demonstrate and attract investors to from the very beginning, as we’ve been able to do not only on an individual company basis but throughout all of Tide Rock as we grow our portfolio and further reduce risk via diversification. That combined return profile has become very attractive for our investors.

Chris Gale  07:22

Okay, so then I’m going to ask, maybe, the public relations question. You’ve talked about the benefits in return for the investor, the positive side, and the absence of the negatives of debt. So, you and the team that built Tide Rock in the early days, in the chicken and egg sequence. Was that debt bad? Can we do something without debt? Or was it [a case of] we really want to achieve higher returns? Maybe if we get rid of debt, we can do that.

Brooks Kincaid  07:58

I think, to some extent, it’s a both/and. The original premise is that we believed that the micro market or the lower middle market was a sector with inefficiencies that was an area of opportunity for us. We believe that, to be successful, we need to have a greater focus on operational improvements and fundamentals of value creation in our investments versus financial engineering – in broad strokes, let’s say the financial spreadsheet, leverage-oriented model that I was referencing before I put that in sort of the financial engineering bucket. With that, we were saying, ‘Hey, we’re going to focus on driving fundamental value creation,’ and that was going to enable us to build successful businesses that not only would be able to generate free cash flow but also create equity value growth or multiple expansion over time. So, from day one, we said, ‘Hey, we’re not going to lever our transactions because that won’t allow us to then efficiently pass through returns on a regular basis to our investors, and it will distract not only ourselves but our operators from the fundamental value creation and operational enhancements that we wanted to have them focus on.

If you think of a smaller company, there is a lot of fish to fry. You’re a CEO or a management team. You are fundamentally focused on value creation or operational enhancements. It’s complicated to then also have to think about managing your covenants and third-party banks, who, frankly, don’t care as much. They care more about making sure that their debt gets paid back, and so that creates another distraction relative to the focus on value creation. So, to your question, it was that they were the chicken and the egg at the same time. We were able to start small, at least from a focus standpoint, number or quantity of companies, make sure that we were able to execute upon that thesis, that we could drive fundamental value creation through operational enhancements in an unlevered structure, and create value that attracted additional investment dollars, which allowed us to go do that across multiple companies, which further reduced risk it by diversification. That snowball started to roll, and now it’s become easier for us to do that at scale.

Chris Gale  10:38

This is, maybe, my last question contrasting Tide Rock explicitly to the LBO or the sort of classic private equity model. But I know that some folks are on this call who are also taking on what is the standard orthodox model in their particular industry and challenging it anytime you’re presenting something new. I remember when Ryan was working with the Wall Street Journal on this. Tide Rock is doing something different. When did you start seeing investors and also sellers start to realize after seeing you that they were accepting something that you shouldn’t accept in private equity, in that amount of leverage? And when did you start seeing people understand that Tide Rock represents something that I think we’d like to see as more of a standard if more firms could do it?

Brooks Kincaid  11:39

I think, like most things, ideas are great. Proof is better. As we grew in scale, we started to show this was a model that worked not only for one company, not only for three companies, not only for five companies, that then started to build upon itself and investors who had, let’s say, larger pools of capital to allocate, maybe being concerned of, ‘Hey, I like this strategy, but I like it as a one-off,’ versus ‘Can I deploy $10, $50, $100 million behind it to do it at scale?’

As we started to show that, yes, not only could we do it on an end of one, but we could do it across five companies, 10 companies, etcetera, that started to build upon itself. That was complemented by the fact that, as we were scaling, we were also further reducing risk by virtue of diversification. That was really the tipping point. I think for sellers, it depends on which one you ask. So, for certain sellers, I think a lot of them resonated out of the gates with – ‘I’ve never liked debt. I didn’t want to have debt on my business, and I understand that maybe that prevented me from growing. I’ve always wanted to grow, but if push came to shove, I was not going to threaten my livelihood and my net worth by putting debt on the business.’ They were told by their advisors, ‘Hey, this is the only option that exists. Either you’re going to get sold to strategic, or you and your people may or may not exist anymore. You can get bought by a private equity firm, but you’re going to have some leverage on the business, and if you want to roll equity with them, you’re just going to ride that risk.’ They didn’t know that we existed. So, there is an education that comes with each of our engagements to help the sellers understand how we’re different, why we’re different, and what that means for them, whether they’re looking to completely exit and move on, or they’re or they’re or they’re going to roll some equity, and they want to be part of a second bite at the apple. Fortunately, that education resonates pretty well with a lot of them because they philosophically are aligned with it. That’s just something that we have to educate them as we go through the process.

Chris Gale  13:59

I want to come to operations. You were talking about the philosophies of some of these sellers or some of these businesses that you’re acquiring. Some individuals listening here are big fans of operations and know an awful lot about very operationally intensive businesses like electronics manufacturing. You have this insight about leverage, but you were talking earlier about enabling the operations, enabling the execution of these companies. What advice or lessons can you share with others who’ve come to realize that insights are cheap if you don’t have the operations down? What do you do there?

Brooks Kincaid  14:52

Like I said, from day one, the focus was on fundamental value creation. You need to have successful operations across all aspects of the business to do that and to do that well, particularly given the sort of size and scope of business that we are typically buying, or our entry point. Our focus early days was not only on the fundamental structure – okay, we’re unlevered – but then also on how are we going to support our businesses? And we wanted to say, ‘Hey, insight is necessary. It is important. But if it’s insight alone, you’re then exposed to too many exogenous things that you can’t control.’ That’s not something where were comfortable with. So, we wanted to complement the insight thesis, and investment thesis, with a playbook orientation. We were going to say ‘Hey, we’ve learned a lot as it relates to operations, be it in sales, actual operations, finance and accounting, talent acquisition, marketing, all aspects of some fundamental business operations. We’re going to distill a lot of that learning and love and leverage that to provide a bridge to our companies from their current point where we come in, to what they need to be as they realize their fullest potential. And the earliest of those was focusing on the top line, on revenue, most often our sellers, founder, owner, and closely held business. They have a very high-quality product service. They’ve got some unique aspect or differentiation that is attractive to us, but the world doesn’t know about it. And between two choices, many have said, ‘Hey, I’m focusing on making sure that I maintain that quality product and service, and I don’t want to rock the boat at least. I don’t want to rock it too much. I mean, I don’t want to take on risks that I’m uncomfortable with. I don’t want to change my lifestyle.

There becomes an artificial constraint on the company’s growth. One of our earliest insights and focuses, is on saying, ‘Okay, how do we come in and start to apply a playbook mentality to relieving that constraint and allowing for the business to start growing?’ We have an internal saying that the sale solves all problems now – obviously not all problems, but it certainly helps – and a growing company then provides for the investment into resources and other aspects of operational enhancement that are necessary to support that growth and continue that growth. We initially focused on providing the playbook to sales, then translating that down into the supporting elements of sales – talent, marketing, corporate development, finance, and accounting – everything to make sure that we can support a growing organization. We went as far as to structure our organization to reflect that. A typical company at our entry point isn’t going to have a CMO, isn’t going to have a talent acquisition department, isn’t going to have a finance and accounting department, or maybe they have an accountant, but not a CFO. They probably don’t have dev, and they certainly don’t have someone who’s focused on operational excellence. We have constructed Tide Rock to have all of those things – and not just external accountants. They’re fundamental parts of Tide Rock, and that allows us to function as a bridge for the companies as they go from where we start to where we are trying to take the company and realize its highest and fullest potential.

Structuring that way also allows us to make sure that the specific functional elements of the playbook are appropriately communicated to the appropriate people in the organization. So, we’ve got a CEO, but we want to make sure that our VPs of sales in the companies are operating according to the playbook at the highest and best potential, and they’re operating their business in the best way possible. The controllers are the same thing. So, if we can professionalize and improve all aspects of or all functional areas of business, we help the CEO execute upon the insight that we had and give him or her a significantly higher likelihood for success. That’s ultimately our game. We believe a playbook, operations-oriented perspective towards insight-driven investment pieces is going to have a much higher likelihood of success if we focus on the operations versus just the insight.

Chris Gale  20:03

Excellent. I was smiling there. Brooks probably understands, because we have a list of questions, and I have questions, and Brooks, much like my middle school teacher in theater, kept up with me when I jumped to the chorus and in the middle school musical. I think you covered both points. The one thing I wanted to maybe ask is we haven’t touched on fit-for-purpose yet, and I know that you guys have talked about fit-for-purpose and the benefits on many levels, including operations. What can you tell us about that?

Brooks Kincaid  20:48

So, fit-for-purpose, meaning sort of how we fit for people who are looking to sell their company or at least bring on a partner, I think there are two different profiles, both of which Tide Rock has unique value props for. The first would be a closely held founder-led company or seller who is looking to retire, either because of personal reasons, just they’re ready for retirement, health reasons, etc. Tide Rock’s value prop for that seller profile is, one, we are going to be a good landing spot for their legacy and their people. Our orientation is towards growth, versus, say, coming in for cost reduction and so we’re going to be giving them their employees, that opportunity to go and realize career growth and expansion and to build upon their legacy. Some of these people have spent 10, 20, 30, 40 years building this business. They want to see it continue beyond them. And that’s certainly a value-prop we provide. Number two is that we don’t have a third-party dependency for sources of capital. We are the decision-makers. I’m the head of our capital employment side of things, so myself and our investment committee decide whether we’re making the deal or not. We are not dependent upon a third party to decide whether they are going to fund the deal, which can drag on both in terms of time and just deal execution risk and then three timing.

 

So, because we have the capabilities in-house, our ability to execute diligence and make a just yay or nay decision is in a matter of weeks, not months. We can execute a deal from LOI to close in 45 to 60 days, not six months or nine months. And when you’re running a business and you’re looking thinking about exiting, it’s difficult to both do a once-in-a-lifetime transaction, while also having to wear the multiple hats that inevitably, the owners and CEOs of these small companies typically do. So, when you combine all of that, that’s a fundamental value prop to that profile of the seller. The other profile that is applicable, and we’ve had several of this type, are parties who have realized that they’re starting to reach a ceiling with either their capacity or their risk tolerance, etc. They do fundamentally believe in the growth proposition for their business, and they see it. So, they’re looking for a growth equity investor. They’re, they’re comfortable giving up majority control, which we require, but they want to take a second bite at the apple. So, we allow them to come in with philosophically aligned preferences for growth orientation, lack of risk, adding leverage, and an opportunity to realize the benefit of that direct role along the way via quarterly distributions. So, it’s not only on the come, they’re getting it every quarter, and the opportunity to go realize additional value, equity value growth, which, if we realize our investment objectives, should give them sometimes equivalent to what they took out on the front end.

For founders or sellers, that combination of values is really important. One other thing I would add is that there’s also an option value for them of being able to continue to ride and see that second bite of the apple but understand that it’s not solely dependent upon them. Yes, we’re going to come in and give them a lot of resources and support functionally, but we do also have a top internal talent acquisition department that can help identify who’s going to be the new torch bearer of the company. As this person eventually wants to take retirement, we can then go find the right person to take over that CEO reign as the company grows and scales and potentially moves on to another chapter of ownership.

Chris Gale  25:15

Fantastic. We have time for questions from the audience, and I do have one here. How do you source deals in the micro-EBITDA environment you’re working in? How do you find these businesses and these founders and the types of operations you’re looking for?

Brooks Kincaid  25:45

We have a couple different channels. We built a sizable corp-dev department internally. And so over time, we’ve developed an engine for sourcing and finding companies in our size range and investment area. And we spend a good amount of time on direct B-to-B outreach, engaging with founders and owners and their advisors to make sure that we’re not only aware of them, but also when they are interested in selling, and so there’s a lot of direct proprietary sourcing that we do, and that serves two functions. One is not only the proprietary platform science, the initial investment in a company, but our model is often investing in the company and pursuing organic growth, but also inorganic growth. One plus one equals three. So that corp-dev department can source a new platform, but once we’ve got a new platform, they can then also go and source purpose-specific add-ons for that company. That’s one channel another is we maintain a broad network of relationships with other deal-sourcing providers. We have brokers and buy-side individuals, people who are boots on the ground, talking to founders and owners all the time, and ultimately resonate, can provide can connect us with sellers for whom our value-prop resonates. Those are the primary channels we don’t generally engage with, investment banks and conventional like big bake-off processes when they just don’t generally fit for us, and given the size range in which we play, those are typically less applicable. The last part is, we also engage with a lot of advisors. So even including this, the former owners of companies that we buy typically know owners of other businesses, and if their experience has been positive with us, as many have had, then they become a very good deal referral channel for us.

Chris Gale  28:07

I don’t think I can slip in an additional question and finish on time. So, for any remaining questions, we will circle back to you directly, if Tide Rock will help us out with that. Thank you very much, Brooks. I really appreciate this. Thanks, everybody, for joining, and happy holidays.

Brooks Kincaid  28:31

Thanks, Chris. Happy holidays everyone.

Categories
Operations Private Capital

The Definers Episode 4: Private Capital Consulting With Kwame Lewis

There’s private capital technology consulting. There’s private capital fractional CFOs. There’s private capital operations consulting. There is private capital funds administration. But is anybody really knitting it together into a single coherent package that anticipates what’s coming next for the private capital industry’s very considerable operations blind spot?

We won’t speak for our guest, but Gale Strategies will go on the record saying that the “front office” of private capital – for all their purported understanding of how technology rips up and transforms the playbook for every other industry – is missing the boat on their own industry (please pardon the mixed metaphors). But there are exceptions, and those exceptions are the ones to watch. We’re talking about front offices that get it and who see the CFO/operations leader in the correct light in view of every other industry. And a consulting firm to watch in that context is LewisLevy who are defining the seem between more traditional consulting for private capital that represents the opening way forward.

Chris Gale  00:02

As I think many attendees know, but there are probably folks that don’t know, The Definers webcast and podcast series on Spotify focuses on folks who are defining their marketplace, either in the process of defining it, or having successfully defined the marketplace and are leading where it’s headed.  LouisLevy Consulting is a relatively new venture, though it’s a relatively new venture doing something that you’ve spent a career focusing on developing. Can you update us on what you’re doing and the service that you’re offering?

Kwame Lewis  00:44

Thanks, Chris. Thanks for having me here. LouisLevy Consulting is the brilliant child of myself and my partner, O’Neil Levy. We are former PwC auditors. Actually, O’Neil was my manager. That’s very exciting. Anything that I know is because of him, or don’t know, haha. We both were in the industry. I was a CFO at ACORN Investments. He was a finance director at Bain Capital. And then we ended up finding ourselves at TMF Group doing CFO services. Chris has heard this tagline from me. While at TMF, we did another podcast called having the CFOs be their best selves. That’s what we’re here to do. We’re here to help, especially fund CFOs be their best selves. There’s a lot of consulting out there for corporate consulting for companies and that type of thing. But there’s not been a focus, at least in my estimation, on the funds and the funds CFO, the fund complexes, and so on. There are folks out there that do it. But you know, what I want to do is come up with this new name, this new focus, called funds consulting, focused on fund managers, their back offices, their operations, making sure they have the same strategy and vision work and processes and procedures that many of the other companies have.

It’s focused on the managers, because, again, managers have a very short, I call it life span, compared to some other companies, right? If you think about it, the fund managers that are out there in front of the private equity and VC space have only been out there for maybe  50 to 60 years. They haven’t been out there for hundreds of years, compared to companies and so on. They’re still trying to find themselves. There are lots of things going on, too, including outsourcing and co-sourcing and technology. There’s lots of different things that are out there. Trying to figure out the minutia, figure out what’s going on out there, is a lot. CFOs have their day jobs. They still have to run their finance teams, run their operations, keep the GPs happy, keep investors happy. Having a firm like LewisLevy to come in and provide that short-term help and expertise is something where I think there is a need in the market. It was a great 2024. We’re already up to 12 clients and growing, and I’m very excited to continue to see what this need in the market could present. What are those 12 clients asking you to do that they can’t? You and I both know that many tech consultancies could help.

Chris Gale  03:45

Private capital identifying tech and integrating and implementing it. There are fractional CFO services. There are fund administrators. Tell me more about this category you’re defining – fund consulting. What is it that these 12 clients are really looking for?

Kwame Lewis  04:04

That’s a great question.  This is how we break up our firm. I call it the three pillars of LewisLevy. The first one is that fractional CFO. Think of folks that don’t have a CFO. You know, newer funds, emerging funds maybe on fund one, fund two, and they can’t afford, or don’t want to afford, to bring a CFO in-house. They come to us to help them to stand up their finance functions and offer them advice. You know, O’Neil and I have more than 40 years of experience between us in the industry – answering questions, answering technical questions, working with auditors and fund administrators, etc. Just being the CFO for those clients. That’s half of our clients.

The other half is this, the pure play: funds consulting, whereby we come in on a short-term basis and do whatever the client wants. One project we’re doing is financial statement prep. I did a technical accounting memo this year that was cool, bringing back my PwC days. We helped one client switch fund administrators, which is a thing, by the way, guys. Folks have not thought about that. There’s a lot that goes into that. Any type of switch, switch of fund administrators, switch to technology causes risks. There are technology folks out there, technology consulting, but just the daily like actual consultant moving things around, doing reconciliations, etc. is challenging We help clients with that. That’s the second pillar.

The third is called a staff augmentation. If somebody leaves, or somebody goes out on maternity or you need someone to come in and do some short-term projects and stand up what’s happening at the fund, we could come in and do that. I say this, especially to all my fund administrator friends: we don’t do fund administration. We live with the fund administrators, complimenting them, helping them be better. You know that some of their clients may say they’re not getting what they need from their fund administrator. Usually, the reason for that is they just need a CFO. They need someone to pay attention to the fund administrator and the client, translating what needs to happen to make that relationship go more smoothly. Same thing with the auditors. We do audit prep. We do tax prep again. We don’t do the tax filing, but there are a lot of things that need to get done for the audit and for tax that we will be able to help facilitate. We stand in the gap. We try to help our clients just get things done and try to be quick and nimble about it as well.  Literally anything that you can think of to help folks do or be successful, we will do.

Chris Gale  06:58

It strikes me that’s a diverse set of services, rather than partnering with a consultancy that focuses on a subset of those, is there a common thread that you’re finding runs through them?

Kwame Lewis  07:17

Yeah, funds. Other consultants, like in the Big Four, or other consultants you see out there, will have more generalist approaches. We have chosen this niche of being a funds consultant.  Because of our backgrounds, because we’ve sat in the seats of CFOs and controllers and so on, we could help make things happen a little bit more quickly, speak the language, that type of thing.

We also love the emerging managers. Few firms out there do that, help emerging managers get up and running. But if you want to start a fund, like Kim Kardashian – by the way, she started a fund – the first person they should be going to for a lot of people is going to their lawyers or their bankers or fund admin. Really they should come to a funds consultant/fractional CFO for funds because we could help shepherd and tell you what you need to do, walk you through some of the terms, and the LPA and different things like that. You really can come look for us to get your fund off of the ground. That’s emerging managers and established managers, helping them with strategy, and thinking through just how they want to grow their firm. They’re going to raise another fund. Should they outsource that? Should they should they bring in technology? Should they co-source? There are a lot of different things that need to be thought about. We could help them think about it and document it. That’s the other thing. With our audit backgrounds, we’re really, we really focusing on documentation, and a lot of people don’t. They just don’t have the time, etc. We get to come in and help do that for them.

Chris Gale  09:03

Tell me more about that documentation, because I think I have a sense of where that might be headed.

Kwame Lewis  09:11

There are two things I compare it to. First, a lot of the audience may know that there’s a second thing called SOC twos, or SSAE 16s, that fund administrators do. Basically, they document and test the operating effectiveness. They call it the controls of an organization. Generally, fund managers don’t do that. They don’t need to do that, but what they do need to do is to document what happens. Because guess what? People move on. People switch around, especially in this environment. Folks are changing jobs and doing different things like that. You know that documentation remains and stays with the firm. Once that person leaves or whatnot, you want to be able to figure out what they were doing. The other thing it does, with the SEC coming in and looking at your processing procedures, folks have compliance procedures but having an accounting policy manual lets them know that you’re a mature firm. You thought about your documentation. You thought about your policies and procedures. You’ve documented it. It just helps these exams go much smoother compared to having to cobble it together and scramble when they get in. Documentation is very key for this industry. Because of time and resources, however, people have their day jobs, and they focus on getting that done, which is important and true, but to find that time to be strategic and to do that documentation, that’s where we could be helpful.

Chris Gale  10:58

What goes wrong when you don’t do documentation?

Kwame Lewis  11:15

Lots of things go wrong when you’re not doing documentation right. Things get missed. You have errors. Once someone is not around, or anything happens, all of a sudden the folks who remain have to pick up and do it. That’s where we come in, offering short-term resources. You may not be able to hire another person on the next day, but you could bring in LewisLevy to stand in the gap. It puts pressure on resources when you have to figure out and explain and train folks to do stuff when someone moves or changes and so on. If you have that documented, if you already have that there, then you know that’s helpful. There’s a checklist, a control element to make sure that the same things happen across your funds, right?  Lots of people have two to five funds. They have co-investing entities. They have SPVs, a lot of different things happening. Having that documentation, that checklist, to make sure that things happen in a standardized way reduces errors, reduces strain on resources, that type of thing.

Chris Gale  12:36

From what I’m hearing, conversations can start with any number of pain points. I need help with this, I need help with that. I need help with an emergent thing. It’s an acute thing. I want to solve this. Knowing past conversations between you and me, there’s a difference between hustling and getting stuff done and then documenting how it got done so that it can be done better and better. Maybe you want to establish the preconditions for things like automation or software or data organization.  I’ve been involved in many things where a manual or an SOP has been set up to the point where it’s super comprehensive, and so much so that people like me are like, ‘Oh, I don’t want to read it. I just want to, you know, just show me how to do it so I can do it.’ How do you both document effectively and then facilitate that documentation being used and becoming a living thing rather than something that goes on the shelf?

Kwame Lewis  14:00

That’s a great question. The answer is technology, right? Like everything else. There is technology out there that brings it to life. I think you’ve spoken with them. Exchangelodge is software that we partner with. We do all the documentation with Exchangelodge. It’s what I call an audit program. There’s a workflow component to process, a documentation component so when you put it in there once, it’s repeatable. You could say in these five steps, Sally would do step one; Joe would do step two. It’s all alive within the software, this dashboarding, which everybody’s very excited about. Because you just want to look on your phone or on your laptop at any given time to see where everything is. You don’t have to call someone and say, ‘Oh, where are my financial statements.’ You could go in there and see the status of everything.  You have your processes in there. You have that checklist effect where you make sure it’s standardized and repeatable. There’s a repository of information in there as well. You can put in documents. There are audit trails in there to see who did what, when, and who changed what. It is cool and exciting. Exchangelodge brings this new, exciting feel to documentation, especially within funds. This particular software is focused on funds, private capital, that type of thing. It’s really cool and exciting.

Chris Gale  15:54

Are there particular experiences that led you to decide to focus on this? I’m focusing on this documentation idea because, in our work, you’re describing a thing that a lot of our clients have become super focused on. We serve clients in the health tech and biopharma space where we have seen demand from, let’s say drug companies, shift from ‘Can you help me find discoveries?’ to ‘I can’t find enough pathologists, and I don’t want to burn out the people I have, but I need to figure out how to get more work done.’ We need to solve these workflows. There is this focus on workflows – not even necessarily individual productivity, but the productivity of the team as a whole, and how each individual works with themselves. What I’m interested in is, in private capital or in the fund space, are there triggers that, if I put you on the spot, are there particular triggers that highlighted for you that not enough people are doing this? It’s creating a problem if they don’t, or rather, people can succeed if they focus on this.

Kwame Lewis  17:44

There are two – I call them two stories. I’m a storyteller. One story is, again, back in my time at ACON Investments, we had a contractor there and the contractor outstayed me. I left. He just did everything that I wanted, which was fantastic. I had my staff, and then I had this contractor that did all these wonderful special projects whereby, because there are things that pile up on folks’ desks, there are things for this guy, and he would do them. He did implementations. He did anything you wanted done. He would do it. I try to emulate him, or at least have LewisLevy emulate him, to be that solution, folks’ short-term solution. It’s a series of short-term projects that have kept him busy for 10 years. That was one. The second thing we did was purely by happenstance. We had a summer intern reach out to us. Just, randomly, she did an internal audit. I was like, “Yay, great.”  I took her, and we literally did interviews with all of my staff and docs, came up with this documentation, and did this whole procedure manual.

This is something that obviously we’re focusing on in funds, but this is for every industry, including healthcare, pharmaceuticals, etcetera – having that person to document everything, see where and what your current state is. Another thing you hear a lot about Chris is transformation. Everybody’s about transformation. Transformation, transformation. But can you transform something you don’t know? What are you transforming from? What are you transforming to? Taking that stock – it’s another PwC term, they call it taking stock probably, like, 20 years ago – taking stock of what you have, seeing what the current state is, documenting what is happening today. In that document, you already start to see there may be holes, there be maybe areas of improvement that you want to plug in. It gives you that pathway and direction to say, “Okay, now I know what my areas of improvement are. What could fix it? Is it more people? Is it technology? Is it AI? I know everybody’s excited about AI, but what are we trying to fix today? That’s where that documentation, taking that time to take stock of where you are today, will help lead you into tomorrow.

Chris Gale  20:29

I’m going to reveal ignorance on my part because we serve a lot of tech companies. We serve GPs. We do serve some professional services firms, but I don’t have that much experience serving consulting firms. Is that documentation process that you’re describing typical of the consulting process? Or is that something that you’re focused on, or maybe something you’re importing into the fund space?

Kwame Lewis  21:02

Within consulting, the pure play consulting term is called the “target operating model.” What they’re trying to see is what the model is today, and then, based on preset terms and conditions, what we want the target operating model to be tomorrow.  That’s something that consulting firms focus on, I think. It’s our background of being auditors. My partner, Neil – we had a meeting this morning – and he’s a big believer in documenting even the meetings, like having agendas ready and having the things written down. It’s really cool. It just solidifies your thoughts. It helps prepare you for that meeting. That’s how we try to approach it at Lewis Levy, to try to document as much as we can. We don’t want to be there forever, by the way. That’s the nature of consultancy. We’re not going to be the CFO for 10 years. We’ll be there for a year or two. But, when we leave, we want to have that legacy that continues to propel our clients forward.

Chris Gale  22:26

You’re bringing in elements of a sort of consulting model that really hasn’t been deployed in the fund space, it sounds like. Maybe there are people familiar with it, but no one’s drilling down on it in the way you are.

 Kwame Lewis  22:46

It’s not that everybody doesn’t do it. What I’ve noticed is, the top 10 to 15 firms would have something in-house to do it. Or they may reach out to the auditors or reach out to the big four, and so on. Who would say no, right? Because if you know Carlisle is calling you to do something, you find people, and you do it, right? But being able to have that particular expertise, especially for the middle-market managers – the vast majority of managers out there are middle-market – the next level will be emerging managers. They need help with documentation for the established managers, documenting their processes. They just need someone to provide that expertise to help them think through as they do that fund launch to make it easier. Usually, what ends up happening, especially with emerging managers, it’s just a GP take. I call it the short straw man, right? They draw the short straws, and someone has to go look at fund administrators and treasury and lawyers. You know that’s not what they want to do. They want to be out there doing deals. We help that. We help take the operational burden off of them and help them there. People do it. But again, the focus is more on the day job, getting things to happen, making things happen.

Chris Gale  24:13

If I understand you correctly, firms, when they reach a certain scale, have to do it because, if they don’t, they aren’t going to stay at that scale very long, or they are going to plateau, right? What are the advantages of doing it sooner? I’m asking a theoretical question. In your experience, if you think about firms that have integrated a documentation approach to their processes earlier, what have you seen in terms of how that allows them to grow and progress differently?

Kwame Lewis  25:04

Basically, this is how you know private equity and venture capital firms work. They raise funds. They raise fund one, fund two, from three, and fund four. As you raise more and more funds, there are different nuances to the funds, right?  There may be co-investments that go along with it, or there may be a different structure – AIB, or they may have parallel funds, or they may have different investors – so there are a lot of things that go on and happen. And so, to remember all those things, to remember the simple things like “Why did we do this in fund one versus fund two, and now we’re going to raise fund three?” How are we going to do it? What are we going to do? In this case, that documentation helps with the strategy? The strategy of building your firm from fund one to fund 10 is totally different as you go along. Trying to document and remember all the things that happen as you go along is almost impossible. Really. It’s almost like every fund is its own little new company. You have to remember all the nuances. Then other people use different strategies, right? You have a private equity fund versus a credit fund versus a real estate fund versus, you know, something else, right? Trying to remember all these strategies, all these nuances in your head, and having them not documented anywhere, it’s crazy to think that somebody could do that.  That’s why I’m spending that time and understanding documenting what’s there so that it stays within the firm. Even if personnel changes or people get promoted or move on to other things, you know that that documentation is there forever.

Chris Gale  26:40

I’m inferring from what you’re saying that, if a process was working, you probably practice it internally at LewisLevy as well. Is documentation a one-time thing, or is it an ongoing process? I’m re-asking a previous question, but I’m fascinated by this ongoing documentation process.

Kwame Lewis  27:20

It’s like anything else, always evolving. That’s why having software, trying to do it in software, versus doing it in Word or Excel, is very powerful. You can see that evolution in front of you. For example, you have a fund one and they had, you know, 10 investors doing one set of things. You go to fund two. You would think, “Okay, well, all my processes should be exactly the same for fund two. Oh, but wait. Now we have foreign investors.” So, you can see in front of you how things more often change and evolve. Doing it in technology helps do that and helps keep everyone on the same page. The other thing with errors, Chris, is that maybe someone didn’t see something somewhere because it’s in somebody’s email. This helps everybody play from the same score sheet and keep everyone together and keep everything in one place.

Chris Gale  28:18

We’re out of time. If you’re open to it, I’d like to have a follow-up conversation. I know people that we do work with would like to hear more about this. This is called The Definers, and it would be really interesting if someone could see the client list because what you’re describing seems to be an exceptionally hard skill for any organization to have. We’re about to have an off-site on Wednesday here at Gale Strategies, where we’re going to be trying to work out processes so we can continue to scale. It does seem to be a topic of the moment for what we’re seeing in our marketing world in multiple industries. You’re a friend of the firm. I would be willing to bet that if we were to look at those 12 clients and the ones that are long-term clients for you, it’d be really interesting to see what their trajectory is compared to other firms in that life cycle.

Thank you, everybody. We really appreciate it. Stay tuned. We’ll have more. Thank you so much. Kwame.

Kwame Lewis  29:39

Thank you for having me.