In this week’s episode of Not So Private Equity, we welcome Jon Van Tuin, Managing Director at P4G Capital Management, a lower middle market, operationally-focused private equity firm. Jon walks us through his career and experiences in private equity.
The Not So Private Equity Podcast and Beyond Consulting are co-hosted by Ken Kanara and Steven Haug.
Steven Haug: I’m Steven Haug, cohost of Not So Private Equity. We have a great discussion ahead of us today. But before we dive in, I want to thank our sponsor, ECA Partners, an on- demand executive search firm specializing in low and mid-market private equity. To learn more about ECA’s services, you can reach them on their website, eca-partners.com.
I’m very excited to introduce our guest, Jon Van Tuin. Jon is a Managing Director at P4G Capital Management, a San Francisco based private equity firm that makes control investments in lower middle market companies. They specialize in manufacturing, industrials, infrastructure, and business services companies. Jon, welcome to Not So Private Equity.
Jon Van Tuin: Hey Steven, it’s great to see you. We’ve been bumping into each other a lot in the conference circuits. So good to see you again.
Steven Haug: Yes, Jon. It sounds like we hit the same conferences there and I’m glad to circle up. I’m excited to talk a bit more about your career in private equity. I know that you’ve seen over 30 transactions at this point. We know you’ve seen a lot and we’re excited to hear about some of those stories. Before we get into the transactions specifically, can you tell us about your career and how you ended up in the world of private equity?
Jon Van Tuin: Yes, sure. I’ve been at this for quite some time, so I’m pretty old. I don’t want to age myself here, but when I was in business school at Georgia Tech, I became interested in private equity. This was in the mid-to-late 80s and it was just really a cottage industry at that point in time. It was really in its infancy when I became interested in it. When I first got out of business, I actually started out on the leverage finance side with Heller, who was a great credit group back in the day, in terms of doing LBO’s and management buyouts in the late 80s, early 90s, and then I transitioned over to another group called GE Capital. I was in that type of role for maybe five years and then I was fortunate enough to get into private equity with a firm in Atlanta called River Capital, where I was able to cut my teeth for the first time in private equity. I ended up being there for about four years. When, what really accelerated my career in private equity is when I made the jump in 2002 to move to New York and joined a private equity firm up there called Bradford Equities, that at one time, was part of Bessemer Trust. I was there at Bradford Equities for 12, 13 years. I eventually became a partner at the firm and was doing a soup to nuts position of, not only sourcing transactions, but execution, and working with portfolio companies to drive value during our ownership period up until the liquidity event. After Bradford, I was recruited out and joined, which is how I ended up in Miami in 2012, with Trivest Partners, a fairly well known private equity firm down here in South Florida. I was there until 2017 and joined a group back up in Connecticut in the Northeast called Clearview Capital. It was a great firm and I learned a lot. There were two different styles between Trivest and Clear View in terms of the way they approach things, both extremely successful, so I got great exposure, not only on different investment philosophies, but really how to scale a private equity firm, particularly in Trivest. I was recruited out of Clearview Capital two years ago, or two-and-a-half years ago, to P4G Capital. P4G Capital had just closed on their inaugural fund and I was recruited to join them and help them in terms of their origination efforts, and also working with the deal team in terms of execution.
Steven Haug: That’s great, Jon. I appreciate you walking us through that. Now you’ve seen different private equity firms in different cities. Right now, you’re working with a firm based out of San Francisco. As you mentioned, you worked with firms in Miami and then up in New York. Are there any differences between the way private equity firms and different cities operate, or is it fairly similar across the entire country?
Jon Van Tuin: I would say it’s really not geographic specific, it’s more philosophical of how you look at transactions, whether you’re more of a growth investor or a value investor. Just to highlight P4G, I’ll give you a little background on the group. I mentioned we raised our inaugural fund two years ago. It’s an institutional-backed fund of 210 plus million. In addition to that we also circled this co-investment vehicle that gives us the opportunity to more than double the size of our fund. I tell everyone to think of us as the $400 million plus fund doing controlled deals, typically in founder-led, family-owned businesses, companies with three to 25 million EBITDA. We are a control investor. We tend to focus, from a very broad level, in the following sectors: manufacturing, industrials, and business services, or tech-enabled business services. We tend to be very opportunistic within those broad sectors given that we’re a first time fund trying to put money to work in high-quality assets in those spaces. We do, though, have one area that we have more of a thematic approach to, and that’s in aerospace and defense. Out of the 15 people within P4G in San Francisco, we have this group called our Portfolio Resource group that consists of five individuals that come from a 20, 30-year operating background within aerospace and defense. That’s an area we know really well and feel like we can be great value-added partners to management teams that we team up with in those deals. Broadly, that’s a high level. Since we’ve closed on the inaugural fund, we’ve done four platform investments, two in A&D, two outside that specific sector, and it’s been a great ride so far. Our goal this year is to do another two platforms. We closed one in January of this year. It’s definitely interesting times in the market.
Then in terms of your question, in terms of different approaches within private equity funds, as I mentioned, I don’t really see much difference. It’s not really driven by geography, it’s more driven by philosophy and approach. When I was at Trivest, they tended to be more value-approached investors. Clearview was much more of a growth equity fund, really investing in companies that had really strong management teams that were in secular growth industries, for example, they were a big investor in healthcare. It really gave me a broad base of exposure in terms of different perspectives on how to invest within private equity. I would say at P4G, we’re probably a little bit of a hybrid. We do look at value, but we also are willing to pay market clearing multiples for those business that are in high growth sectors and we’re comfortable paying 10 plus times multiples in the past and bidding on businesses that were in those spaces. It’s an interesting perspective going from one private equity. You’d think they’d all be the same but they do have different approaches and different value-adds that they bring to the table and that’s been my perspective within the private equity industry here, and at the various stops along the way.
The other thing I’ll share too is that I’ve not only had broad exposure within those different types of investment approaches within private equity, but I have sat on and worn a lot of different hats within private equity. When I first got into this industry, it was very much a cottage industry where you not only sourced the deal, but you also executed the deal, and then worked with the portfolio companies post-closing to drive value up until a liquidity event. Well things have definitely progressed and changed over time and become much more specialized within private equity. I eventually, as I moved over to Trivest from Bradford Equities, and transitioned into more of an origination business development role, have spent the majority of my time since then really on that side of the business. I think I bring a unique perspective because I don’t think there’s too many people on the origination side that also come from an execution side and I’m able to add value for P4G in terms of reaching out to all of our deal referral sources and being able to be a key, senior decision maker in terms of whether or not we’re going to be able to do a deal and provide that feedback in a timely and quick manner.
Steven Haug: That’s really interesting. I can see the value in having someone with an execution background, because when you’re out there evaluating deals, you can see the whole runway, right?
Jon Van Tuin: Right.
Steven Haug: You can see which levers you can pull, and get a good sense of how that company might grow in the future.
Jon Van Tuin: Yes, something that they think is a little unique from an origination perspective, and particularly at the larger banks, when you’re dealing with MD’s at larger banks they want to deal with people on a peer-to-peer level that are part of the investment committee and are a decision maker within the firm. The fact that I’m able to bring that, I think, builds a lot of credibility for the P4G brand out in the marketplace.
Steven Haug: Are there any trends you see in private equity? You’ve talked about some of the changes you’ve seen over the past couple of decades here, turning from a cottage industry to very specialized functions within a private equity firm. Are there any trends that you see in private equity these days?
Jon Van Tuin: Yes, the biggest trend is, when I originally got in the business, was financial engineering. We would pay 5-6 times per business. We really didn’t have to think that much about adding value to our businesses. We just let them grow organically and we would have a 30 plus percent IRR and make three times our money. Given the amount of capital and private equity funds that have been raised over the last 20-30 years, that market has definitely changed. Whereas, when I got in, there was too little capital chasing too many deals. Now, it’s completely flipped to where you have too much capital chasing too few quality deals. As a result, people are paying market clearing or valuations in multiples in transactions and because of that, you need to be able to now, drive returns to add value once you have a portfolio company. There are really three ways to add value once you own a business, and that’s to pay down debt, grow EBITDA, or have multiple expansion. You have to have a value map that kind of drives one or all three of those once you’re in a company. It’s become much more operationally intensive. You’re seeing private equity funds go from generalists to specialization where they can see a low hanging fruit, whether it’s healthcare-focused, industrial-focused, or our thematic area of investing in aerospace and defense. We have a bench, as I mentioned, of five guys that come from a 20, 30 year operating background. We’re able to walk through plants and easily see the low hanging fruit and the value creation strategies that we can bring to the table that a generalist fund is not going to be able to see if you don’t spend all of your time in the space.
Yes, it’s definitely changed, not only in the things that I just mentioned but the processes have changed in terms of how deals come to market. Before, it used to be, “Joe knows Jim over at the Country Club. He started a company 30 years ago, he wants to do something with it. He doesn’t know what to do.” We were the only private equity game in town, so obviously we got the deal. It used to be a handshake deal. 90 days later, we’d own a company. Today, it’s very process driven. The information is out there on the internet. Sellers know what market multiples are being paid for their businesses or for those businesses in their sectors. It’s become a much more efficient market with the amount of capital overhang chasing these private companies.
Steven Haug: When investors are looking at which private equity firm to put their money into, I’m thinking about LP, are they asking questions about your operations team? As you mentioned, that’s become a very important part of driving value.
Jon Van Tuin: Yes, definitely. I think when you’re raising capital, LP ‘s want to see how you differentiate yourself from the other thousands of private equity firms out there. Whether that’s from an operational perspective or a thematic approach in terms of focusing on specific industries, whether it’s a sourcing strategy, that you’re getting proprietary looks, or quasi-proprietary looks. I tell everyone that there are no real proprietary deals anymore. The seller doesn’t just talk to one potential buyer, it’s a matter of degree of how proprietary the deal is. Definitely LP ‘s are very focused on what’s driving the alpha in the portfolio, whether that’s sourcing, how you’re buying businesses up front, what you’re doing once you own a business in terms of value creation strategies, and then how you exit the business there. All three of those things are important factors that LP ‘s look at to evaluate how a private equity fund is adding value through the process.
Steven Haug: Could you tell us a bit about your sourcing strategy, Jon? I know that you hit the conference circuit quite a bit, that’s where we run into each other often, but tell us how you think about going about finding companies to acquire.
Jon Van Tuin: That’s a secret. No, I tell everyone there’s no secrets in private equity. I tell everyone everybody is extremely smart in this business in terms of the talent that’s attracted and at the end of the day, particularly on the sourcing and execution side, it’s all about hustling. Hustling makes up about 90% of the process at the day. I spend a lot of my time staying in front of our deal referral sources, which typically is like a boutique investment bank, a business broker, and up to more of the middle market, sell side M&A advisors that everybody knows in the market. I really try to stay top-of-mind, and how do I do that? We kind of have a multi-pronged approach of how we go to market. It’s really driven by in person meetings. Typically, I’m on the road maybe 60% of the time, traveling to various cities where these intermediaries are located, making sure that I’m setting up face to face meetings, developing really strong personal relationships with the principles at these firms. I do this so that, if there is an opportunity, one, we’re getting to see it because it’s in our box, but more, importantly, so we have a strong enough relationship with that individual that hopefully we get steered as the preferred buyer to the seller if we’re in the valuation range of where we need to be. At the end of the day, that’s all we can ask for is an at bat on an opportunity like that. Last year we had a little over 400 in-person meetings with our deal referral sources or intermediaries. In addition to having these in-person meetings, we also have a digital outreach over 14,000 intermediaries in our CRM that we try to stay in front of. Obviously I can’t meet with all those people in the course of a year, but we do a lot of digital outreach, whether that’s e-mail or phone calls throughout the course of the week, and the year, making sure that we’re top-of-mind opportunities, that people understand what our value prop is, and the type of opportunities that we’re looking for.
It’s become extremely competitive, as I mentioned. There’s been a lot of specialization in private equity. Having an origination deal-sourcing person that’s dedicated to that function has become much more prevalent within private equity. It has become really, required, in terms of if you want to become an asset manager and grown your assets under management to have somebody out in the market that’s constantly sourcing deals, building the brand, and sourcing as many opportunities as possible. My job is really to make the funnel at the top as large as possible. I really focus on other outreach areas that can really drive fuel flow to the firm.
Steven Haug: Can you walk us through one of your recent transactions, Jon? I’m curious about the handoff points of the transaction, as you mentioned your focused on the top of the funnel.
Jon Van Tuin: Yes. Every handoff point within a firm is different depending on the firm. Within P4G, with our most recent deal, we closed on a company in January this year called Lake Air Metals, which is contract manufacturer that does metal fabrication and assembly to a Fortune 1000 customer base. It was a business that we sourced, again, through a process with an intermediary up in the Midwest. I was involved in terms of sourcing that transaction and, the way it works within our firm is, once a deal comes in, we have on a weekly basis a Friday origination meeting where we walk through our whole pipeline of opportunities that came in during the week and prioritize what opportunities we should be focused on from a deal team perspective and what opportunities are probably not a good fit. The ones that are a good fit are something that we allocate resources to from a deal team perspective and move forward on.
I stay involved in that process. We issue an IOI if there’s continued interest. Once an IOI is accepted, hopefully it’s at evaluation level where we get invited to a management meeting, which was what happened with the Lake Air transaction, obviously. I ended up working with the deal team in terms of getting an LOI out the door and then went to the actual management meeting once our IOI was accepted. Once the LOI signed, it’s pretty much handed off. I probably stay involved from just the very high level perspective, but don’t get involved in the day-to-day details of this unless there’s an issue or problem that needs to be worked out with the seller.
Again, we closed the Lake Air deal in the middle of January. It was a really interesting deal because it was previously owned by an independent sponsor. The company is headquartered in Minneapolis and had done a great job growing the business organically and through add-on acquisitions and we were able to partner up with a really great management team that rolled over back into the deal with us. The strategy and value map there is to really, to continue and carry on what the independent sponsor was doing, which was really accelerating the growth of the business organically through a couple of key initiatives, then also doing add-on acquisitions. It’s a highly fragmented market and there’s a huge pipeline that we’re evaluating and working through a couple of them down the road here in terms of where they are in terms of potentially becoming add-ons for us. It was a really interesting deal. I’m really excited about that. I know the whole team at P4G was really happy to get that one across the finish line. Our goal is to do, hopefully, another two platforms this year similar to the Lake Air deal.
Steven Haug: That’s exciting, Jon. It sounds like you’ve been able to carry a lot of momentum through the beginning of 2023, despite various market headwinds, right?
Jon Van Tuin: Yes, it’s been really interesting. If you would have spoken to me at the beginning of 2023…in fact, I told the team, “Look, our origination in terms of deals may be challenged because I’m hearing a lot of processes and a lot of sellers are holding off on coming to market, and we need to be cognizant of that fact if we’re looking to do two more platform investments this year.” Surprisingly, our deal flow has been extremely strong in the first quarter of this year, which has been really surprising. I would say this quarter, this year, has probably been a record quarter for us in terms of the actual number of deals that we’ve seen. Since I’ve been there for a year-and-a-half, and I’ve been focused on the originations, solely dedicated the hard work of traveling around and meeting people like yourself, Steven, has definitely gotten traction. The P4G name has gotten recognized in terms of what we’re looking to do and we have been well received by our deal referral sources. Our deal flow has been really strong. I have seen continued interest from founder family-owned businesses in this first quarter that would like to come to market or have come to market. They tend to be more event driven than market timers. On the opposite side, we’ve seen private equity-backed portcos not come to market, although there’s a lot of deals, if you talk to the usual sellers of these businesses, that have a lot of product on the shelf, they would say that everyone’s holding off bringing portfolio companies to market simply because of the disruption in the credit markets, hoping that comes back. I don’t think that’s going to come back this year. I think if you have a B or a C asset, you’re definitely going to see an impact on valuation, simply because of the pullback in leverage that you’re getting on these deals. If you have an A asset, they have been fewer and farther between over the last couple of years. Given their scarcity, and the quality that a lot of private equity funds are looking to invest in those companies, given the uncertain economic headwinds you’re seeing, valuations for A assets continue to trade at premium valuations, if not higher than what they were in 2021. It’s a really interesting market. This year we’ve also seen a huge uptick in corporate divestitures and carve outs. A lot of these Fortune 1000 companies that were really acquisitive over the last three-to-five years are now facing economic headwinds, corporate layoffs, and are rationalizing their portfolio and really looking at, do we need this “stepchild” asset that we picked up along in an acquisition, and they’re now divesting those assets. We’ve seen a huge uptick in corporate divestures and carve outs.
Steven Haug: Jon, that’s extremely helpful insight. It’s good to hear that you’re doing well through 2023. I appreciate you chatting with us about that. Jon, thanks so much for joining us on Not So Private Equity.
Jon Van Tuin: Yes, I really appreciate it and look forward to seeing you on the road soon.
Steven Haug: I’m sure we’ll run into each other here in a week or so.
Jon Van Tuin: Cool. Well, thank you.
Steven Haug: Of course.