Summary

In this conversation, Jason Neimark, managing partner and co-founder of New Water Capital, discusses his journey in private equity, focusing on the strategies and processes involved in acquiring and managing lower middle market companies. He elaborates on the investment criteria, the importance of quality in manufacturing, and the dynamics of management assessment during acquisitions. The conversation also covers the valuation of companies, the acquisition process, and the role of investment bankers in selling portfolio companies. In this conversation, Jason discusses various aspects of private equity, including the challenges of re-trading in business transactions, the importance of communication with limited partners, and the lessons learned from failed investments. He emphasizes the appeal of food-related investments due to their stability and necessity, while also outlining strategies for improving business performance. Jason highlights the significance of valuing people within organizations and the role of mentorship in fostering growth and learning. He concludes by sharing his ongoing passion for work and the future plans for his firm.

Takeaways

Jason Neimark has extensive experience in private equity, having sourced and led over 40 transactions.
New Water Capital focuses on lower middle market companies, particularly in consumer products and industrial manufacturing.
Quality is paramount in manufacturing, especially for over-the-counter pharmaceuticals.
Trillium Healthcare was acquired as a carve-out from a larger company, presenting unique opportunities.
Valuation can significantly increase with diversification and growth strategies.
Management assessment is crucial; sometimes existing management needs to be replaced or repositioned.
The acquisition process is structured and can take several months, influenced by investment bankers.
Investment bankers play a key role in selling companies, requiring industry expertise and strategic positioning.
The typical holding period for portfolio companies is three to five years, depending on the transformation needed.
Understanding the dynamics of potential buyers is essential for successful exits. Retrading can lead to lower prices after exclusivity is established.
Investment discretion allows for independent decision-making without limited partner consultation.
Learning from failed investments is crucial for growth and improvement.
Food-related investments are appealing due to their stability and necessity.
Continuous learning is essential for adapting to industry changes.
Valuing people within organizations leads to better customer service.
Mentorship plays a key role in personal and professional development.
Taking care of employees is fundamental to business success.
Celebrating team success fosters a positive work environment.
Future plans include continuing to pursue acquisitions and growth opportunities.

 

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Transcript:

JON STODDARD (00:01.049)
Welcome to the top M&A entrepreneurs. Today, my guest is Jason Neimark. Jason is managing partner and co-founder at New Water Capital. He's worked on over 65 buyout and capital market transactions in his career. He used to work at KPMG, and he went to Indiana University. So welcome to the show, Jason.

Jason (00:26.35)
Thanks for having me. Great to meet you by video.

JON STODDARD (00:27.58)
Yeah.

Yeah. So let's talk a little bit about what you do at New Water Capital. I'm reading it's a $406 million private equity fund. That's an interesting number. Why not $400? And you look for lower middle market, middle market deals, $30 to $300 million in industrial manufacturing and services, consumer products, and retail. And I got to ask you about the consumer products when you're

JON STODDARD (01:00.365)
retail. So tell me a little bit about how that started New Water Capital.

Jason (01:05.05)
I'll start, I'll back up a little bit, sure. So from Chicago I went to Indiana University and I did start out in public accounting as a CPA at KPMG doing audit and tax work and then I jumped on the balance sheet as we like to say and moved into mezzanine financing at a group called Midwest Mezzanine Funds in Chicago doing subordinate debt and equity. Being part of that I did a transaction with some folks in the private equity world.

and then made my way further down into the balance sheet into private equity. So from 2001 through 2014, I was at Sun Capital Partners, one of the first people there. Sourced and led over 40 transactions there. We grew from no fund to having $10 billion under management. And from a going back to my roots standpoint, that's where New Water Capital started. So myself and Brian McGee had been at Sun Capital.

some capital for a number of years. Brian worked for me, great principal. He worked out better as a partner. So we wanted to go back to our roots instead of doing these large transactions to go back to the lower middle market. And that's where we started New Water Capital, dealing with the size companies you were referencing, which I can give you a little bit more flavor into our investment criteria and our thought process. But in 2015, we raised a $406 million fund. Yes, it was an odd number.

but it just has to do with some of the demand that we had and also raising new funds as you can imagine. So we have over half a billion dollars under management currently, but all in these lower middle market companies.

JON STODDARD (02:40.921)
Yeah, so let's talk about that process of bringing an idea together and saying, hey, we're going to acquire a number of companies between 300 and 300 million. You create the pitch deck or whatever, and then you start knocking on doors institutional investors. What does that look like?

Jason (03:01.794)
So from that perspective, if you go back in time, the good news was I had a lot of experience. So I had sourced and led over 40 transactions in the middle market, lower middle market, private equity space. So I had a track record from that perspective. And when you start looking at the track record and you look at the focus area that we wanted to focus on, which was lower middle market, most of my track record was there. And what we do here at New Water is,

We do invest in consumer products and industrial manufacturing and industrial technology. We haven't invested in retail in quite a while, just because the retail arena is quite volatile as you can imagine. But within consumer products, what we look for are companies mostly that are contract manufacturers. So we're not the brand builders that you see out there within the private equity world.

What we like to say is we're the custodian of these multi-million and multi-billion dollar brands. So, for example, on the consumer product space, we have an over-the-counter pharmaceutical business called Trillium Healthcare. And Trillium Healthcare is up in Brockville, Ontario. What they manufacture is for all the large CPG companies. So think about your P&G, think about your J&J, your Pfizer, your Church into White, big brand houses, but they don't want to manufacture any more.

So we manufacture, if you opened up your medicine cabinet, I would guarantee you have something. Your Tylenol, your Benadryl, your Sudafed, your Prep H, your Nizoral Dandruff Shampoo. We produce these products for these large CPG companies because they are specialized products, and we let the brand houses then market those products. So if a brand house were marketing a product and they spent...

$5 million on a new introduction of Robitussin. So for instance, we did Robitussin all natural honey and Robitussin with elderberry. Well, we as a small private equity firm wouldn't put those type of resources and dollars behind it. But what we do have is top notch manufacturing facilities with high quality. And the reason I say we're the custodian of these multi-billion dollar brands is we have to put quality first. And quality is important because

Jason (05:15.126)
we cannot have a recall on Tylenol. We can't have a recall on Sudafed or Benadryl, et cetera. So we have to put quality first, on time delivery, and great production in terms of our assets. So if you really think about what we do, that's important. Yep.

JON STODDARD (05:27.589)
Yeah, let me let me ask you about that Trillium healthcare. Do you build because when I go to CVS and I buy Tylenol, you know, I'll just look for the white label Tylenol because it's the same ingredients, just $4 cheaper.

Jason (05:46.742)
Similar, yeah, a lot of it depends on where you're getting it from, who's manufacturing it, so we do not do private label. We used to do some private label up in Canada and a lot of times people say, oh, it's always all made in the same factory. At least that's what I try to convince my wife of. Exactly, when I want to convince my wife to buy the cheaper brand, I say it's made in the same factory. But I do know that it's not. So from a private label perspective, that's a different category. A lot of times they're imported products.

JON STODDARD (05:53.5)
Yeah.

JON STODDARD (06:00.953)
That's what everybody says when they walk.

Jason (06:15.83)
and they're getting them in mass quantity and they're packaging them in the United States, but for the North American and global brand Builders they want to make sure that they have that top quality manufacturing facility that meets all the FDA health care and USDA regulations That are really important to their brand at the end of the day

JON STODDARD (06:36.553)
Let me ask you about the types of companies you target. You say on your site, companies in transition, growth challenge, succession issues, need of sophisticated partner, underperforming businesses, carve-outs, turnaround situations. Did Trillium fit in that? And how did you find the lead?

Jason (07:00.43)
Sure, so we found it from an investment bank. It started out as a broad process, and it was a carve out. So it was tucked under a $400 million personal care soap product business. And this was a little bit of the stepchild business, because it went through some transformation over the years to only focus on OTC. They did no marketing. They didn't have any marketing talent within the organization. And they had a huge customer concentration with Johnson & Johnson. And that customer concentration was about 80%.

So if you're a private equity firm, most private equity firms open the book, they looked at it, saw the customer concentration, threw the book out. Well, we like to peel back the onion a little bit more and understand it. So when we started peeling back that onion, we recognized that of that concentration, as you know, a lot of these pharma companies come together and consolidate. So you had Johnson & Johnson US consumer, Johnson & Johnson Canada, and McNeil. So when you had these three different divisions, they really comprised the breadth of

the mainstay of their portfolio. Two, it takes a very long time to transfer any one of these products that have an active ingredient in it, some type of acetaminophen or pseudephedrine. You can't just pick it up and move it from plant to plant. So they had a very sticky customer base. They never lost a customer to a competitor. So we liked all the, go ahead.

JON STODDARD (08:20.037)
How long is that? I'm curious, what does that number look like to say, you know what, you guys are, we're gonna move it to a new manufacturing plant. That would take more than 12 months. Two years, yeah. Oh, that's.

Jason (08:32.717)
Two years, two years. So unless, like I said, unless you have quality issues where they start thinking and investigating the move and transfer as we call it, it's very difficult to transfer. So that's why from a quality perspective, one third of our entire workforce is in the quality department. Because you cannot let a product come into that factory, go through the processing or leave that factory with any quality issues because of the recall risk that goes along with it. So very,

JON STODDARD (08:58.657)
Yeah, that's a highly regulated. Yeah. How long is a contract with? 88% of the revenue comes from one customer. How long is that contract with them?

Jason (09:02.85)
Any time.

Jason (09:09.442)
So the contract is really more of a volume contract that you have with a lot of the customers, and then it's on a PO base. But what we did here was we saw that as a nice base, whereby then we could build out, because they'd done no marketing at all, and we saw they had a good pipeline going, where we could start building out and diversifying the customer base. So if you fast forward from when we bought that company, I believe it was 2017, till today.

The business right now is trending towards less than 35% J&J. So with that being the case, we built off of the base of this Johnson & Johnson, where it's a very sticky customer base, and then we're diversifying down through other customers such as your P&G's, your Pfizer's, your Church & Dwight's, all the large CPG's of the world. So that's really what we did in terms of execution.

And we're very hands-on in terms of helping with the operations. So we did build out the management team. We expanded their facilities. We invested in technology. We invested in research and development, which these guys never had before. So the customers would come to them and say, I need this. Do you know how to make it? And we would say no. But now we can say we can. We can help you formulate a new product. We can help you develop the new product, get it through the FDA. The good news is we're not making cancer drugs. We're making.

over-the-counter pharmaceuticals that have a much shorter lead time when it comes to developing.

JON STODDARD (10:41.881)
Yeah, let me ask you about the process. You see this opportunity, 88% concentration. Lots of people just say, no, the risk is too high. What kind of valuation did you see it? And was it discounted? And what's the valuation look now that you have 30, that your biggest customer is 35? How does that change the valuation?

Jason (11:06.59)
Yeah, so the valuation was mid single digits and comparable businesses in this space with the diversification and growth are trading in the mid teens. So a lot of value to be created from that perspective, but a lot of heavy work that needed to be done both from a new customer development, from an R&D perspective.

JON STODDARD (11:12.428)
Oh yeah, dude.

Jason (11:32.854)
and then manufacturing. So it's not easy to ramp up the growth that significantly within a portfolio company. And that's what we deal with. So as you think about these lower middle market companies that are in transition, right? So whether it's a family led business that's transitioning out, or these corporate carve-outs were again transitioning again, they tend to be underperforming to their peers. So you look at their unsophisticated a bit, they lack depth of management. So you may have a great...

president or the founder may have been a great CEO, but below that person, there's typically not that much depth to an organization. And that's where we as an organization need to supplant them. And we need to help until such time as we can build their team around them. So we have those resources internally to do that heavy lifting. And that's why we were so interested in the lower middle market, because you can create a lot of value, as you pointed out, by buying it at a discount when it has some...

scratches and dents enhancing value and then selling it in the future. So that's really what we do and you'll see that they have. Go ahead.

JON STODDARD (12:40.062)
Did you replace management? Because normally it's like in that situation, it's a, is the management coachable to be able to see this future that you have envisioned for them?

Jason (12:51.498)
Some yes, some we had to replace some we just had to put in the right seats So some people just happen to be in the wrong seats within the organization. So we did move them We did bring on some new team members to help lead and run the organization So it all depends on what you have and what you have to harness But we prefer to keep that institutional knowledge and build around them With others who are also equally as strong if not stronger. So it really depends on

type of situation.

JON STODDARD (13:21.945)
Yeah, how do you measure that? Do you say, I'd love to keep you on board? Because if the guy's a 400 hitter as Warbuffet says, I don't tell 400 hitters how to bat. They know what they're doing, but maybe it's because they were under a bigger company who kept them on a short leash. Now you say, how long do you give them to say, this is what we envision. We've got to diversify. We're going to do this.

How long do you give them before you say, well, okay, man, you've got to go?

Jason (13:54.802)
Yeah, it's one of those that depends. So we do a lot of analysis beforehand, both from a transaction perspective and then from our operators going in there and assessing. One of the neat things we do from an operations perspective is called skip level interviews. So instead of dealing with just that C suite of individuals, we go down a layer. And that's where you really find out a lot of the hidden secrets of the organization and where the improvements can be made. And who's good and who's not good at the end of the day.

So we do take our time, we're trying to be thoughtful. You know, unlike you hear a lot of times in private equity, oh, everybody's so stupid. They're not so stupid. They obviously got here and built a 60, 80, 100 million dollar company by doing something right. So let's harness that talent that they have and let's figure out how we can augment them. And as I said before, a lot of times it's getting the right people in the right chairs. And once you do so with the proper leadership, you can really make a lot of change in a short period of time.

And we always have the saying internally is like the first 50% is almost free because a lot of that change comes from inside. When you do those skip level interviews and you start talking to the people on the shop floor, a lot of the ideas to change and improve the organization, they're already there. Yep. Exactly.

JON STODDARD (15:09.297)
Right there. They're already there. Yeah Yes, how long do you give yourself to turn it around? I mean is there a you ain't don't make any changes for a hundred days or six months or Or what?

Jason (15:15.138)
So.

Jason (15:20.002)
Well, it all depends on the situation, right? So depending on the situation, some turnarounds or I'll call it improvements, because not all of them are turnarounds, some of them are improvements, can go faster than others. Yes, it was profitable. Yep, so it was profitable. So I wouldn't look at this one was a turnaround as much as it needed some direction, strategic planning, getting the right people in the right place and helping with our manufacturing capabilities internally to really augment their processes. So...

JON STODDARD (15:29.406)
Yeah. Was this business profitable? Okay, yeah.

Jason (15:49.618)
It really does depend and you have to look at each one individually. So it's almost like having kids, right? Not all your kids are the same, even though they all came from you, um, from the beginning and you have to treat them as individuals at the end of the day. What worked for my oldest one doesn't really work the same for my youngest one at the end of the day. So we, we do have to be very cognizant and thoughtful about.

JON STODDARD (16:10.181)
Yeah. How did you buy it? Now, you raised $400 million. Was that in committed equity, or was that debt? And say, hey, whatever you got to do, we'll put a debt. And what did that look like? You're buying something at 1, 1 and 1 half x.

Jason (16:28.042)
Yeah, so the way our deals work in our fund works is it is a committed fund. So universities, endowments, public and private pension funds, family offices, fund to funds out there. So it's a committed fund. And then what we do is we go out and find transactions and then we structure transactions based on putting in the appropriate amount of debt based on the industry, the situation, how much liquidity they need, and then how much equity we can put in.

to generate a return that we find acceptable at the end of the day. So once, as is every private equity firm, once we do find the opportunity and we close on the deal, we call the capital from our committed capital investors. And that's how we fund the deals.

JON STODDARD (17:09.481)
Yeah. And why were they selling that? Why was the larger company and investment bank are reaching out to you? Or you reached out to them?

Jason (17:13.806)
Yeah. So, they were actually, yeah, they were actually part of a family office that thought that they wanted to do direct investing and then they realized it was a little bit more hands-on and difficult to own these companies individually than it was to own them through a commitment like they would make to our funds. Correct. So, they own this business and like I said, it was tucked under the business that it shouldn't have been in which was a personal care business.

JON STODDARD (17:33.693)
put your money to work, right?

Jason (17:43.522)
and they were divesting all of their direct holdings. And when they did that, this was actually one of the last ones within the portfolio. So with that being the case, we were the beneficiaries of this great opportunity that we saw.

JON STODDARD (17:51.569)
Ha ha.

JON STODDARD (17:58.513)
How fast do you move on that? And you say you get an opportunity, you ask for the data room, you look at the financials, balance sheets, everything. How fast do you move on this? Say, hey, immediately it's passing, there's no red flags, let's make an offer on it.

Jason (18:15.774)
Yeah, we're pretty nimble in terms of processes internally. And if we see something that makes sense for us, and we think that the numbers work out, and we can peel back that onion a little bit more, we'll move pretty darn quick. A lot of times it's dictated by the investment banker and the process they're running. So investment bankers will have a pretty stringent process where indications of interest are due 30 days after the teaser and the book go out.

Then they go to the next stage, which is a management presentation for those who made the first cut. After the management presentation, they let you in the data room. And then after the data room and you get follow-up phone calls, etc., then they ask for a letter of intent. So on average, a process from the time that we, if we're selling, engage an investment banker all the way through the process could take six to nine months. As a buyer, it typically takes somewhere around three months, just based on the fact that there is a timeline.

to the way that the investment banker set everything up.

JON STODDARD (19:16.866)
To your knowledge, were you competing against any other buyers? Or, you know, I said the investment bankers were, you know, use you as leverage for moving the offer up or up. Yeah.

Jason (19:21.986)
Sure. Oh yeah.

Jason (19:26.154)
course. Yeah, it's like buying a house, right? You know, they, oh, there's a lot of interest. A lot of interest.

JON STODDARD (19:31.085)
I've got a lot of interest. I got three other offers on the table. You want to get your LOI in at the end of the day. Yeah.

Jason (19:36.35)
Yeah, listen, that's their job and they're good at it, right? They, that's why people hire investment bankers and that's why we hire investment bankers to sell our companies because it helps with the competitive dynamic out there. If you're trying to sell a company one off, well the buyer knows that you're the only game in town at the, at this point in time. So with that being said, they feel like they always have a little more leverage, whether they do or not, they're going to be cute about it. So these competitive processes definitely help keep everybody.

JON STODDARD (20:01.466)
Yeah.

Jason (20:05.634)
a little bit more focused.

JON STODDARD (20:06.417)
That happens on every economic level on that buying. So these companies you buy like Trillium, how long do you keep them? Because this private equity money has a what, five to seven year term rate on it? Yeah.

Jason (20:10.094)
Correct.

Jason (20:24.194)
So fun lives typically are 10 years with some extensions that go along with them. However, I think a general rule of thumb for us is we hold companies three to five years. And that also depends, right? So it depends on what the transformation process is, how quickly you think you can accelerate that process. But a typical time period in terms of from the time you buy it till the time you should be getting it to that point of,

JON STODDARD (20:27.613)
10 years.

Jason (20:54.666)
call it stability and growth that you can go sell it is probably at least three years. Sometimes you get the lightning in the bottle. On the other hand, sometimes you have acquisitions and integrations to do that take five years or six years or even seven years. But you know, you have to re underwrite these things every time you do something new.

JON STODDARD (21:00.092)
Yeah.

JON STODDARD (21:14.125)
Yeah, and do you have an investment banker on staff to help you sell the company or does it you outsource that to somebody else?

Jason (21:21.438)
Yeah, we outsource it. So what we do is we look for the expert in the industry. Typically, the person that sold it to us will be involved in the bake-off, as we like to say. So we bring in typically anywhere from three to five investment bankers who have expertise in a certain category. So whether it's over-the-counter pharmaceuticals, to food, to printed circuit boards and EMS, to automotive, there are different investment bankers that specialize in different categories.

and we figure out who, number one, size-wise and expertise, has the expertise in our area, and then we bring in them to pitch us and say, well, how are you going to pitch our business? How are you going to position it in the market? And how will you maximize value at the end of the day? And then that's where we pick from. But we don't have anybody internally, but most people within our organization have been ex-investment bankers.

JON STODDARD (22:07.002)
Yeah.

JON STODDARD (22:13.077)
And how do you guys rate signing up an investment banker? Number of transactions, money, making sure that they find a home that's a great cultural fit, et cetera. How do you rank those?

Jason (22:26.014)
Yeah, it's a lot of different factors. So when you start thinking about, and first you gotta have the industry expertise. So if you're looking to sell a pharmaceutical business and you're mainly a furniture banker, probably not a good idea. So what we look for.

JON STODDARD (22:42.077)
That's why I have a friend call us like, look, you just if you're going to get brain surgery on your kid, you want somebody that's done a lot of brain surgeries? No, not for surgery.

Jason (22:50.038)
Yes. Yeah. Well, you don't want the guy who deals with orthopedic on your ankle to do your brain surgery, right? You know, that just wouldn't make sense. So expertise within a certain industry category is important. Size is also important too. So when you come into a situation and you can have an investment banker, say from Goldman Sachs, and they're doing multi-billion dollar deals, but if they don't know the market for the lower middle market, which may be...

JON STODDARD (22:57.159)
Yeah, yeah.

Jason (23:18.998)
100 to 300 million dollar deal that's also very difficult. So you got to really be thoughtful of not only expertise but size You know, that's very important then also how they position it and we don't want to give them the answer at the end of the day So they need to look at our asset and they we give them a lot of data But they need to look at our asset and say how would they position? This company to the market and we're trying to get a good understanding of who the potential buyers would be

how you'd position it to them. Would you position it differently to a strategic versus a private equity firm? Who are the likely suspects at the end of the day? Give us a list of who you think you're gonna go to. So there's a lot of different factors and we wanna hear how they pitch the story because at the end of the day, you need to be articulate. And if you can't articulate our story to us, how do we trust you to articulate it to somebody else?

JON STODDARD (24:09.913)
Yeah, as a any of your portfolio companies, you turned them around, you increased the valuation, hired investment banker and they put it in the wrong home or do you kind of care about that after it's gone? Yeah.

Jason (24:21.998)
Um, yeah, I don't know. I'm putting in the wrong home. Yeah. Well, it's not so much. Listen, we're very close with our management teams. We're a very people oriented business within our institution here at New Water. So our management teams are used to having a very strong working relationship and close relationship with our teams. So we do, we are thoughtful about where the companies go at the end of the day. Um, but you never know, right? Everybody says the right thing.

when they come in and they're going to treat your baby well and they're going to do all these, they're going to invest and they're going to look at new opportunities to help grow the organization. But quite honestly, do you really know at the end of the day? No. The neat thing about investment banks is they have these sponsored coverage groups. So these sponsored coverage groups tend to deal with a whole host of private equity firms out there. So they can give you insight into whether or not the person that you're selling to

is a good buyer, not only a good buyer for the future of the company and the management team, but also how they can interact with us when we go to sell with them. You know, are they going to retrade us? Do they have a history of retrading? There are firms out there, believe it or not, that are known to be retraders at the end of the day. So the investment banker, if they have a good sponsor coverage team, can give you a little bit more insight into the listing business. So a retrade is when someone says,

JON STODDARD (25:43.325)
Well, let's explain that at Retrader.

Jason (25:48.946)
Okay great, John I'm going to buy your business for 10 times, you know, $10 million in EBITDA and we're really interested, we did a lot of work and you know they give you a lot of confidence that they have a billion dollar fund and no problems at all, etc. Well all of a sudden you get this confidence in them that they sound like and they appear to be such a good buyer. Oftentimes what happens is you then sign them up.

because they had the highest bid. But then during the process, they start nitpicking based on all these things that they were supposedly supposed to know, and they retrade you down to a lower price. And some is warranted, you know, for sure, right? Some is warranted, right? They open up the hood and they go, wait a second, you're missing a carburetor, your timing belt's off. I got to fix this, I got to fix that. But other times, it's not. They just bid high to lock it up.

JON STODDARD (26:32.317)
Okay, gotcha. Yeah, I've heard that many times.

Jason (26:47.818)
and then they retrade you to a lower price later because they already know they have you under exclusivity. So, it's important, like we're going back to the investment banking discussion, it's important to have a bank that can represent you well, keep the competitive dynamic, and understands the buyer network. So it's almost like a realtor, you know? But smart.

JON STODDARD (27:07.769)
Yeah. And you're in a couple of different markets here, industrial manufacturing, consumer products and retail. Now, are you at a point where you're using the same kind of same investment bankers over and over again, because they have expertise in that?

Jason (27:24.674)
We see a lot of the same bankers over and over again on the buy side, but we tend not to exclusively use the same bankers on the sell side because the investment banking community moves around a lot. So your original banker could have been at Lincoln and now he's at Baird or then he went over to Harris Williams or who knows where they went at the end of the day. So you just have to be thoughtful about having them repitch as we like to say.

JON STODDARD (27:38.414)
Yeah.

Jason (27:54.28)
on the opportunity later on.

JON STODDARD (27:56.361)
Yeah, let me ask you about the communication and area of action between the funds where you get your money. Do they, you have a $406 million fund, how are you supposed to require or obligated to communicate with them about, hey, we're going to make this $30 million investment in a, you know, trillion, let's say we're going to purchase that, we're going to do this, this and this. And

know what do they say it's like oh great go do it or do they have veto vote or or what

Jason (28:28.802)
It's completely to our discretion. So just like we do diligence on companies before we purchase them, the LP investor world does diligence on us, our track record, our strategy. It sounds very similar, right? So they do that, but it's a pool of committed capital that we have discretion over at the end of the day. So we make the investments with our investment committee internally without consultation of our limited partners.

And our investment committee, which is what our investors like, are both transaction-backgrounded folks and operation background. So you take the operations and the transaction people and they're on the investment committee because you get a dual lens into these companies from different backgrounds and perspectives. So what we do do is we do communicate quite often with our investor base, telling them about what we purchased, we do quarterly valuations, we tell them about the performance of the portfolio companies.

And then every year, as is customary in our industry, we do an annual meeting. And we just had our annual meeting with our investor LP base, where we then update them on every portfolio company in depth. And then we also have our management companies come in and present. So not only are you hearing from Newwater as to what did we buy, how's it going, but you hear from our management team as to how's it really going internally, what are we doing, and what's our strategic direction.

JON STODDARD (29:56.189)
Yeah. Now Trillium sounds like a great success story to brag about. Was there any acquisitions you made where the ideas, strategies just didn't work out? Yeah, like it didn't work out. We have to unload it. It's just not working.

Jason (30:10.63)
Sure. Yeah, no, listen, we all have had these boogers, as we like to call them, or scars on our back.

JON STODDARD (30:18.582)
I say this, I think the reason Warubafa kept the name Berkshire Hathaway was to keep himself humble because that was a textile firm that did not work out and he had to unload.

Jason (30:30.486)
Probably so, and you know what? It makes sense because as we say, you can't see the scars on our back, but you seem to learn more from the deals that didn't work out, than if things are all going swimmingly. So yeah, we've had companies that haven't worked out. You mentioned the retail sector. We haven't invested in the retail sector since 2016. We did have a direct and consumer women's apparel business back then that was in-home consultative selling. And that's a difficult business to be in, especially during COVID.

JON STODDARD (30:40.336)
Yeah.

Jason (30:59.466)
Right? So imagine a one-on-one sale of high-end women's apparel during the COVID era. It doesn't really work out. And also, there's been a lot of volatility and change within the retail area. So think about where the transition's gone from bricks and mortar to online. Used to pay for shipping, if you recall, back in the day, to now everything's free shipping, free returns. So from a margin compression. Yeah, well, that's a government issue. That's a different issue than anything else.

JON STODDARD (31:06.969)
Yeah.

JON STODDARD (31:21.305)
So you get charged for sales tax though. Yes, and sales tax.

Jason (31:29.334)
Yeah, there's a lot of dynamics that don't work in certain industries, but you have to have an internal model of continuous learning. So if you're not continually learning and being thoughtful about where different industries are working and not working and different companies are, you're not going to grow at the end of the day. So we always have a saying internally that we can fix a bad company, we can't fix a bad industry. So if an industry is not doing well and the dynamics are...

JON STODDARD (31:54.812)
Yeah.

Jason (31:58.53)
you're going against you we with a little sixty hundred two hundred million dollar company are going to change the industry dynamics at the end of the day so we need to be thoughtful

JON STODDARD (32:09.327)
Yeah, you've got a couple Closmer and ask you about the food industry. You've got a Closmer and baking company, the Perfect Bite and Pegasus Foods. What's the attractance to food related products?

Jason (32:26.046)
Yeah, so everybody eats food, right? So everybody eats food and a good one would, yeah, that's not going away. But people are fickle, right? People are different, but Klosterman's a great example. A 130 year old, fourth generation family led business that wasn't going on to the fifth generation and the fourth generation was looking to retire. So they were looking for a great place and a good buyer to acquire the business and.

JON STODDARD (32:29.702)
Yeah, that's not going away, right? But it's very fickle. I mean.

Jason (32:54.91)
really bring it to the next step through investment, taking care of the employees because they view the whole employee base as their family. They're out of Cincinnati, Ohio. Great business. They're making buns and bread and donuts. So think about McDonald's, Chick-fil-A, Raising Canes, Kroger, your institutional sales such as your schools and your prisons and your nursing homes. So bread is a staple item. Great customer base. Seven bakeries.

And when we invested in it in July of 2022, well, nobody knew where the economy was going. Are we going into recession? Maybe. Inflationary environment? For sure. Well, we wanted a really nice stable asset. And bread is proven through multiple cycles to be that stable consumer non-discretionary asset that actually grows through recessionary periods of time. So from a macro perspective, we really like the opportunity.

because it had a nice base to grow off of. And, you know, QSRs, which are your quick service restaurants, they also tend to grow during these recessionary periods of time. So we like that from that perspective. And then it's a transitionary family-led business that, you know, once you start professionalizing it with private equity, there's a lot of upside opportunity. So we saw a lot of good dynamics there.

JON STODDARD (34:04.442)
Yeah.

JON STODDARD (34:15.431)
Yeah.

Was that founded in 1892? Were the family members still running and managing it or did they have professional management?

Jason (34:28.098)
They brought in professional management approximately 10 years ago, but the one family member was still the CEO and head of the board. So he still had his thumb on the company until such time as it sold.

JON STODDARD (34:39.097)
Yeah. Was that a company that kind of met your criteria that you look for? Or was it a turnaround, distressed kind of situation? Or was it just profitable and available?

Jason (34:52.582)
Yeah, it was a nice transitionary underperforming business. So a lot of upside, and when we say underperforming, we look at it as where are your margins compared to your peers? And if your margins are below your peers, we'll call it underperforming, but they did have nice profitability to build off of, which is what we also like. So it wasn't a bleeder, you know, nice business, great team of people, a lot of depth within the organization. But...

you know, they had some room to improve. Listen, when you own a company for 130 years and you see things somewhat the same way, there's always room for improvement.

JON STODDARD (35:29.405)
Right, right. So that strategy and those ideas like Trillium to see the opportunity with the high concentration of customers is completely different than saying, hey, your profit margins compared to your peers is lower, here's our opportunity here. How do you focus on that and say, okay, here's the three things or five things we're going to do to this company and this is what it's going to look like in five years or three to five years?

Jason (35:58.862)
Yeah, so we bring together, like I said from the beginning, we bring together an operational and transaction focus. So we look at the business from, if you look at Klosserman for instance, or if you look at Trillium, we look at the base business that's there. Is it stable? Is it in a category that is stable to growing, which we really like? Or is it in a declining category, which we don't like? So if we have, whether it's a turnaround, an underperformer, a

or even a somewhat just stable transitionary business, we need from a macro perspective for those boxes to be checked. And if you look at each of those companies, if you look at over-the-counter pharmaceuticals, and you look at bakery and bread products, both of them are growing industries that have a good stable base. So we like that. And there's a great macroeconomic factors that are giving them good tailwinds. Then we started peeling back the onion and looking at the operational challenges, if they're there.

or some of the situational challenges if they're there. And we started looking into those and saying, what is it we can do with this business? And a lot of firms are mostly, you know, smart financial backed people who have transactional backgrounds such as investment banking. But what we do is we take a different approach. We bring our operators into the companies immediately and say, if we believe we can enhance margins by X, Y or Z.

where we believe we can do this operationally if we change around the flow of the facility and then we can open up capacity, does that seem realistic? And we both do our math together, and then we come to an answer of, here's the plan that we believe we can execute on in order to enhance value at the end of the day. And some of it may be strategic planning all the way through customer skew analysis to operational improvements. You know, one of the things that we do at every company,

is a customer and skew analysis. And what I mean by that is, oftentimes businesses over a number of years have accumulated more and more and more customers, but they.

JON STODDARD (38:01.113)
Yeah, a product line that's not making any money and it costs more than it. Yeah.

Jason (38:04.334)
Yeah, exactly. And so we need to look at it and do that skew analysis to determine, Hey, we may need to either raise prices, eliminate a customer and, or eliminate a product category or skew. So it's a, it's a lot of heavy lifting and work and really dissecting it to really understand what is it you have.

JON STODDARD (38:18.076)
Yeah.

JON STODDARD (38:25.197)
Yeah, that sounds like I mean, it's a 1892. Sounds like it's a buy and hold. How how was the conversation like, hey, we need to fix you and sell you in three to five years.

Jason (38:37.586)
Yeah, I mean, that really wasn't the conversation. It was more, hey, we're gonna flip it. And I don't know if flip it's the right word, but we're gonna help, we're gonna invest.

JON STODDARD (38:46.225)
Yeah, I don't think 130 plus year old company goes, yeah, no, that's, yeah, we don't want a new owner in three years, yeah.

Jason (38:53.646)
Yeah, what they were looking for were people to come in and invest in the team and the facilities because they understood that the facilities were under invested and they needed some more depth of their management. And so that's what they were looking for was a hands-on partner to come in and really help them effectuate that change. Clearly they were looking for price, but the brand within their community was very strong. So they wanted to make sure there was a good steward of the brand.

in that Midwest Cincinnati area to make sure that things were going to go well because there are a lot of people within that area that belong to that business. So you're going to see them around town. You're going to go to the local coffee shop and you're going to see and run into the former family of this organization. So they were looking for a good steward who would invest and take care of the people and we were able to demonstrate that through our operational focus.

JON STODDARD (39:48.721)
Let me ask you a little bit of questions about you. Where do you go for advice, mentorship, and inspiration to keep going, doing this?

Jason (40:01.682)
Yeah, it's interesting. So it's one of those things where, you know, there was back in the day. So we'll go back to my accounting days and this will be a commercial you remember. There was a guy at the Dunkin Donuts commercial would get up every day and it was time to make the donuts. It's time to make the donuts. And then that commercial would keep repeating every morning. And that's what he would get up and he looked terrible and he wasn't happy. Well, you know what? When I started out in public accounting, I felt like after four years, it was kind of time to make the donuts.

JON STODDARD (40:17.103)
Time to make the note.

Jason (40:31.266)
and i needed a little bit more and i had a passion for investing and looking at companies looking at the challenges and opportunities there and that's why i started getting into the private equity arena you know these days it'd be very unusual for someone in public accounting to jump into private equity there's uh... you know more inclined for people from investment banking on the transaction side to get into private equity than they are from public accounting so i was pretty fortunate back then actually if you look at where

a lot of my inspiration of improving and growing comes from, it comes from the leadership within our portfolio companies because you can learn a lot from the different leaders we have within our different portfolio companies. Everybody has a different style and approach and things that they've seen in the past. And if you listen to them and all the people as we talked about those skip level interviews below them, you can really understand.

different ways to enhance value, different ways to see things that you may not have seen. And that's really where it comes from. For me, I've learned a ton, not only from our operators that we've brought on internally at Newwater, who have been in the chair, as we like to say, of these companies out in the market, but from companies that we've acquired, the management teams have a lot to offer and they give you a different perspective. And we all learn from each other at the end of the day. We're not prescriptive. We're not one to say,

you must do it this way, go execute. No, that's just not what we do. It's very collaborative. And really, it's inspirational, really, at the end of the day to see them grow, and see us grow, and see our team grow.

JON STODDARD (42:01.263)
Yeah.

JON STODDARD (42:08.389)
Yeah. Have you ever done one of these skip level interviews or higher up interviews and you go, it's like, man, we just, we did just not jive together. I got a weird feeling about that. And then you have to do something later or you just ignore it because he's doing a great job.

Jason (42:24.458)
No, listen, I'll give you a couple examples. We've done some skip level interviews where company not to be named, we did skip level interviews and there's posters everywhere around this company saying how they're so family oriented and everybody's family and family, family, family. And then we started looking at some of their safety records and we're like, hmm, that's odd, but we didn't know exactly. So when we started doing the skip level interviews,

we recognized there were significant safety issues within their factories, and they needed to be addressed. And quite honestly, at the end of the day, they weren't treated as family or if they were, they weren't, you know, the best, they were probably the redhead stepchild that wasn't treated nicely. But, you know, we recognize that those safety issues persisted at a whole bunch of different levels within the organization. So what we did was we actually hired a director who was the head of safety and we made sure that

everybody came to work and left work in the exact same condition and safety was a top priority because you gotta take care of your people first and what the company before said is you gotta take care of the customer first at all costs well they flipped it the wrong way you actually if you take care of your people your people will take care of your customers if you don't take care of your people they can't take care of your customers and it will show to your customers the culture that you have internally

JON STODDARD (43:49.445)
When did you make that change? Like, it used to be, customer's always right to, you know, take care of your people.

Jason (43:56.866)
We've been doing that for a long time because we recognize that's how business works. Yeah, listen, it's important to take care of your customers, but you can't take care of your customers unless you take care of your people. And so that's been a mantra here for a long period of time, and that's why safety was such an important thing, and it was something that we had to move on very quickly because it was extremely important to everybody in the organization.

JON STODDARD (44:20.229)
Yeah. Do you have mentors and what's some of the best advice you've received throughout your career that just stays with you? Like it's ingrained.

Jason (44:29.438)
Yeah, that's a good one. You know what, it's really, I'd say, from a mentorship standpoint, it's the people I've worked for before, and a lot of them's been different personalities and different ways of doing business. And sometimes people say to me, they go, you talk with this one and this one? They're completely different types of people. Yeah, but it doesn't mean you don't learn a lot from each one, and you could take the different pearls of wisdom from each one and apply it to who you are as a person. So.

JON STODDARD (44:42.991)
Yeah.

Jason (44:58.25)
I think one of the big things that I've taken and we utilize a lot within our organization is we help others learn to see things that they may not have seen themselves by listening and not trying to always be, as I mentioned before, prescriptive about we're the smartest guys in the room because a lot of people have things to offer and value to add. And to give people that opportunity to add value at the end of the day gives them a lot more success.

And then if you feel you have a career path and you can grow, people will work a lot harder for you. They'll put their head through a wall for you because they know that you're on their team. So I think that's really what it's about at the end of the day. It's not rocket science, but it's important to us to make sure that we value the people.

JON STODDARD (45:35.494)
Yeah.

JON STODDARD (45:44.025)
Is that a, would you call that a win for you? Like, like a, the, the part where people are, you know, going above and beyond what their normal capabilities and they're because you're behind them. You owe it to them. Yeah.

Jason (45:49.166)
Which part?

Jason (46:01.014)
Yeah, you know what? We look at when people get promoted, we're cheering them on. And at the end of the day, to give them a career path opportunity and see them monetize and win, when we ultimately get to the path of sale, that's important to us. So when we have sold companies in the past, we didn't only compensate the senior management team, we went down to the supervisors and the line leaders, we wanted to make sure that

everybody who contributed within the organization recognized that we recognize them and they should benefit from all the hard work too. It's not just the magic of the CEO and the CFO and the COO at the end of the day. There's a lot more support within an organization that made us all win and we changed lives. I mean there were certain people, you could have been a supervisor and you got a $25,000 or $50,000 bonus. We had people coming up to us telling us how life changing that was. They went and bought their first house.

they were able to take care of their parents. So from our perspective and my perspective personally, to see others succeed, I think is pretty darn fulfilling.

JON STODDARD (47:08.745)
Yeah, let me let me go back to the operators now. You've been through a number of companies here Do you find somebody that wow this guy is a great operator? And he's with this company But we'd love to tap them and bring them over here because you know Like we all watch sports and they do that. He goes man that quarterback was great. I want him on my team So you trade for him?

Jason (47:32.918)
Yeah, listen, I've definitely gone out there and tried to poach some people that I knew were great and actually we have a great example. So our CEO and CFO of Klosterman Bakery were our former CEO and CFO of another food company. We all enjoyed working so well together. We had great success. We understand how each other work. And when we bought Klosterman, you know,

and they were done with their other opportunities, they came to us and they said, hey, listen, I know what you just bought and I know you guys are looking. This would be a great opportunity for us to work together again. We were thrilled.

JON STODDARD (48:14.373)
And now they're on the cap table too. I mean, probably. Yeah, yeah. Well, that's fantastic. I mean, what's next for you? You guys keep doing this for another. And I always measure this by like War Buff or Charlie Munger. They're gonna keep working until they're 90. I mean, they're room temperature. Like, yeah.

Jason (48:17.13)
Of course. Of course.

Jason (48:33.474)
Yeah, as you say. Yep. So, listen, I'm not, I tried taking up golf. It's harder than I thought it would be. I don't have that many hobbies and there's only so much traveling you can do. This keeps your mind sharp. I actually like what I'm doing on a daily basis. Listen, I understand life is stressful and we have our own stresses internally here and every day is a fight, but we all enjoy what we're doing.

I mean, everybody in this office, and you can feel it within our culture, we enjoy coming to work. We enjoy doing what we're doing. As things move on and as I get older, and as the younger folks within our organization continue to grow, will I slow down a little bit more? I'm sure, and I'm sure that they'd want me to because they wanna take on more responsibility. So listen, we get the whole circle of life and we understand how the life cycle of an organization works. So I get it, but not yet, I'm a little young still.

JON STODDARD (49:29.635)
How many acquisitions you have planned for the rest of this year?

Jason (49:34.734)
So we typically do two to four deals per year, depending on the market.

JON STODDARD (49:39.501)
Yeah, and what does that deal flow need to look like for you to get to two to four?

Jason (49:45.41)
So we see probably five to 600 deals per year. So that's the beginning part of our funnel. And then it ends up being two to four per year. So we probably do somewhere between 10 and 20 letters of intent go out during the course of a year after we've done our work on some companies, probably average of 12 to 15. And then we close on two to four of them. So it's a selective process. But the funnel's big at the top. And then it narrows the way down.

JON STODDARD (49:51.377)
Yeah.

JON STODDARD (50:12.225)
Yeah, yeah, yeah. Yeah, Deal Flow. You can never get enough Deal Flow. Yeah, great. Jason, thank you so much for being on my podcast. Really appreciate that. Yeah.

Jason (50:18.038)
It's true.

Jason (50:23.458)
Appreciate it. Yeah, thanks for having me. Have a great day.