In this week’s episode of Not So Private Equity, we welcome Mike Fritts, CFO of Paragon Films, a leading PE-backed manufacturer of stretch film products. Mike joins us to provide insight into the world of private equity from the perspective of a CFO.
The Not So Private Equity Podcast and Beyond Consulting are co-hosted by Ken Kanara and Steven Haug.
Steven Haug: This is Steven Howe, cohost of Not So Private Equity. We have a great discussion ahead of us today. Before we dive in, I want to thank our sponsor, ECA Partners. ECA is an executive search and on-demand consulting 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.
Now, I’m very excited to introduce our guest, Mike Fritts. Mike is the CFO at Paragon Films, a private equity-backed, industry-leading manufacturer of stretch film products. Their stretch films are thinner, stronger, and greener than the other films on the market. Mike has seen the company through significant growth and a number of private equity transactions. Mike, welcome to Not So Private Equity.
Mike Fritts: Thanks Steven, happy to be here.
Steven Haug: As we mentioned, you are a CFO for Paragon Films, a private equity-backed company. Tell us a bit about how you ended up working in private equity.
Mike Fritts: I came to Paragon after recently working at a publicly-traded midstream energy company. A recruiter reached out to me looking to fill the CFO role at Paragon, the current CFO, or then CFO was looking to retire. By happenstance, or accident, fell into working for private equity. I started at Paragon in August of 2013. During the beginning of 2016, the entrepreneur founder of Paragon Films, decided it was time to sell the company as he had no natural heir or succession plan in the family, and that started our journey into private equity in the early 2016 period.
Steven Haug: Mike, I can tell you that one of the things we see often in recruiting is that whenever a company is purchased by a private equity firm, a CFO is one of the most common positions that are switched out. Can you tell us a little bit about how you stuck with Paragon so long and about the journey from being a privately held business, to now going through a few different owners.
Mike Fritts: Yes. I feel extremely fortunate to have lasted as long as I have. The very first private equity sponsor that we had has a CFO summit for their portco CFO’s every two years. I went to the first CFO Summit that they had when I was under their ownership. They had the CFO’s in the room, I think there was 20 plus CFO’s of their portfolio companies, raise their hand if you were the incumbent in the company prior to Wind Point ownership and I was the only one in the room that had survived that transition. So I feel extremely fortunate, but it’s been, as you mentioned, an interesting change and the requirements are different between the two roles, working for a smaller family-held business, and then the demands of what you may need to do under a portfolio company or private equity ownership.
Steven Haug: Let’s dive into some of those details. Are there things that you had to start doing or maybe some things that you had to stop doing once you were owned by a private equity firm?
Mike Fritts: The very first thing that we had to do, specifically in the finance/accounting/IT function was really broaden and deepen our FP&A function. It wasn’t as robust as what many private equity companies want in their portfolio companies. That was an area in which we were extremely light, so that required some rearrangement of job duties, beginning to do some things that we hadn’t done before but that were in my background from previous companies, much more along the lines of 13 week cash flows, five year plans, annual operating plans. The monthly variance analysis that we did at the time probably wasn’t robust enough for what the PE company did. That was probably the very first thing that we had to do under private equity ownership and that we weren’t doing previously with the entrepreneur founder.
Steven Haug: Mike, tell us a bit about the type of toolkit that a private equity-backed company is looking for in their CFO.
Mike Fritts: I’ve seen a few different tools in that toolkit, but one of the things I would generally say is that the CFO, today, of a private equity portfolio company is more of a generalist than they have been in the past. As such, there are a lot of different paths to that CFO role from investment banking to consulting, to Big Four accounting, to coming up through FP&A. My background was in the standard, traditional Big Four accounting CPA route. I did get an MBA along the way, but that was the path that ultimately led me to this job. Generally, the CFO is wearing a lot more hats today than I did in this role maybe ten years ago, whether it be the FP&A function, strategy, the work in corporate governance, as well as just the simple blocking and tackling that needs to happen on the day-to-day accounting/IT basis. One of the biggest differences is wearing a lot more of those hats.
Steven Haug: Do you think that starting your career in public accounting may have given you some of the tools that you need in order to be successful and hang in there through a number of transactions?
Mike Fritts: I think so. It definitely gave me an understanding for the pace that things were going to happen in private equity. They definitely happen a lot faster than they do in the privately held companies that I worked for in the past. I definitely wouldn’t say it’s not an exclusive path that you have to take or go that route, but it definitely opened me up to a number of different industries, business processes, and ways of doing things that were valuable along the way into this position.
Steven Haug: Let’s talk a little bit more about pacing, and I’m not so much curious about the day-to-day, as much as I am of the period between transactions. Let’s say a private equity firm acquires a company. Ultimately, that private firm is going to need to transact again to recoup their investment, pay their LP’s for loaning them the money to buy the business in the first place. Are you just heads down doing CFO work and then one day you get tapped on the shoulder by the private equity firm who says, “Hey look, we’re going to sell in six months or we’re selling it next year. Go ahead and get everything ready for another transaction…” Tell us a little bit about the time in between those two things.
Mike Fritts: We’re on our third round of private equity ownership, so I’ve been through transactions with the entrepreneur founder, and then through two full terms with private equity. In those two individual terms it was much more collaborative with the private equity sponsor. During a transaction or sale process, one of the things that I and my team had to do was put together the marketing materials, and a five-year business plan. As we got closer to the successful execution of that five-year plan, conversations with the private equity sponsor looking at the market and assessing when the right time is to exit and how. It’s not necessarily getting tapped on the shoulder as much, though I’m sure that happens in some instances. We knew that we were performing ahead of and to the five-year plan as we put forth and as we got closer to those goals and objectives, we internally started the conversation with our sponsors in both instances.
Steven Haug: As I think our audience can recognize here, because you’ve been through a few transactions, you’ve seen and led a lot of growth inside of Paragon Films. What are the different levers that you have to pull at different stages in the growth of the company? I’m thinking here about the transitioning from any organic growth to any inorganic growth. Have you had to make that shift, is that something on the horizon for Paragon Films, and how does that affect the finance office?
Mike Fritts: Through the first two transactions with our private equity sponsors, inorganic growth was something that we had modeled, that we had looked at, and had participated in, but we didn’t execute or close any of the deals that we looked at. 100% of our growth during both of those transactions was organic and one of the things that I’m most excited about with our current PE sponsor is their appetite, willingness, and desire to be more acquisitive. I have asked for many years to hire a VP M&A to focus on that, to help drive that inorganic growth, and our current PE sponsor has stepped up and agreed that that’s the right decision, and has agreed to fund that position going forward. We’ve recently hired somebody into that role and I look forward to growing that inorganic side of the business, whether it’s through adjacent geographies or adjacent products, but that hasn’t necessarily been a lever that we’ve pulled to date.
Steven Haug: The relationship between a portfolio company and a private equity firm can come in a lot of different flavors. Mike, I think you’re in a particularly good seat to tell us about that relationship because it’s the CFO who’s going to get the most questions from the private equity firm. Tell us about what that relationship is usually like, and if it’s different from one private equity owner to another.
Mike Fritts: Over the three private equity owners that we’ve had, there are a lot of similarities and a few differences. Between the three, the first, most notable difference has been the board composition or board structure. The first board that we had had more outsiders than people from the partners from the private equity firm. The second board had predominantly private equity individuals, and then later, towards the end we added one outside director. With our third PE sponsor, it’s a nice mix of both. We’ve got almost equal numbers of outsiders and insiders. That relationship and reporting structure, based upon the board’s structure, varies, depending upon their knowledge and day-to-day interaction with the company and with management.
The next thing that changed when working between the three different private equity companies was predominantly the cadence, timing, and frequency of reporting results. At the end of the day, it’s my job, the CEO’s job, to deliver results for our shareholders of the LP and the GP, but each of those companies had different reporting packages, different structures, different timing of when and how we met to discuss results. Then, there were different levels of interaction, from a weekly phone call at the start…pretty much all three of the private equity companies upon purchase of the company had weekly touch points to discuss orders, backlog, revenue, margins, and how are things looking this week…then, as the comfort level increases with the private equity sponsor and the management team, those become less frequent, I would say, as long as the company is achieving its objectives and hitting those results. Then that manifested into monthly or quarterly touch points along the way. Those would be some of the differences between the three private equity companies.
Another thing that was also different, as I look back and think about it, the first private equity company was from December of 2016 to March of 2019. Then, from March of 2019 to December of 2021, and then to current, we’ve had three vastly different macroeconomic periods. Most recently we’ve had inflation and rising interest rates, which changes the narrative and the interaction with the board versus the period with our second private equity ownership which kicked off roughly about a year before COVID, and most of that ownership was in the COVID period, versus a more typical period that occurred in the years prior. Each of those macroeconomic cycles, or periods, necessitated different interactions with each of the private equity companies based upon what was going on in the environment at that time.
Steven Haug: I often hear about different private equity firms and portfolio companies or CEO’s of private equity-backed businesses talking about a private equity firm either being hands-on or hands-off. What do you think people mean whenever they use that terminology?
Mike Fritts: I think it’s the level at which decision-making authority is delegated or allowed to occur at the portfolio company level. We’ve tried to manage that through an approval matrix. One of the very first meetings and discussions that we have with our board after acquisition is sitting down discussing and going over the approval matrix: What do we have? What can we do and commit ourselves to without their approval and which things do they want to sit on where we would need to get their approval? The second part of that too, about being hands-on, is how much detail does the private equity sponsor want to review or get into, specifically as it relates to variance analysis, whether it’s on volumes, revenue, margin, customer churn, etc. What type of detail level are they comfortable with reviewing and answering questions, and that varies. That’s varied by each of the firms.
Steven Haug: Those variations in firms, do you think that any of those differences are a result of just the size of Paragon? It’s a very small company, perhaps a private equity firm has fewer resources and are leaning more on the resources inside the portfolio company. As Paragon grows, the private equity firms that are investing in the business are larger, more sophisticated, and have more stake, so they want to spend more time reviewing, they expect more details… Is that right or does it not matter at all?
Mike Fritts: I think it’s fair. I think the larger the size of the check potentially, the more likely they are to dig into some of those details, but I also think it’s a function of the number of portfolio companies that the private equity firm has invested in at that time. I think to the extent that there are fewer companies under management or ownership, I think you’re probably more likely to get detailed questions. I also think that is also driven directly by a company’s performance. I think to the extent that a company is achieving or exceeding its financial and other goals, I think one is less likely to receive some of those detailed questions.
Steven Haug: As a portfolio company, are you thinking about some of the major concerns that your private equity firm has? For example, right now we’re hearing that deal volume has slowed, so we’re seeing fewer transactions. Does that matter at all for the portfolio companies that are already owned by the private equity firm?
Mike Fritts: It matters to the extent that we want to be acquisitive. We want to go out and bolt on other acquisitions, whether in adjacent geographies or adjacent products. The fact that that deal volume is down, interest rates are up, and that the cost of capital is higher definitely impacts us. While we may not be involved in as many day-to-day discussions about that, it definitely impacts us and is a discussion that we have with our board.
Steven Haug: That’s a good point, Mike. We’ve been talking about Paragon Films as a portfolio company, but of course, right now in Paragon’s history, you’ve become a bit of a private equity firm yourself, in the sense that you’re now a platform and looking to bolt on additional acquisitions. Now you’re going through some of the similar thought processes that the folks that are invested in Paragon itself are. When you joined Paragon Films, were you hoping that they would eventually become private equity backed?
Mike Fritts: I had no idea when I started that that was going to be the trajectory and the path that we would end up on. The company itself, Paragon Films, is based in Northeastern Oklahoma. The entrepreneur founder here, had, at the time, no plans of retirement or to do anything with the business, and was local to the area. At the point when he said that he was ready to sell, it did catch us a little off guard because that was not something that was on our radar at the time. It’s definitely ended up being a fantastic thing, not only for the founder, but for the management team as well, and for the continued growth of our company. One of the things that I’ve noticed that is different between Paragon now and when I started almost ten years ago is that we have a lot more resources to grow the company and that’s fantastic. We’re not constrained from a capital perspective if we can prove or justify through a business case that we want to grow or expand, or invest in a capital project that we think is the right thing for the company. We’ve had access to do capital on pretty much every project we’ve wanted to do under private equity ownership, which has been fantastic.
Steven Haug: Folks who are, maybe a CFO in a public company or perhaps they’re in a private company, and maybe they’re thinking about becoming a CFO inside of a private equity backed organization. What would you tell them?
Mike Fritts: I’d tell them a few things. At first, the idea of being owned by a private equity company, if you’re not in the business or if you haven’t come up through the business, can seem daunting or scary, but it’s not. I would tell them to truly understand the investment thesis which the private equity company gave to their investment committee by which they purchased you. Understand those drivers or those levers of value. Understand what you can do to help accelerate that, and if you align your job and your responsibilities to that value-creation plan that helps drive the creation of value for the private equity company, the GP, and the LP, then you will be very successful in the role.
Steven Haug: I know that private equity firms are very good at aligning incentives of the portfolio company management team with their own incentives, but I’m curious, do you look forward to the next transaction?
Mike Fritts: Yes and no. I look forward to the next transaction because it means, hopefully, that we’ve been successful in accomplishing the goals that we put forth when we were purchased. I am not necessarily as excited from the standpoint or perspective that a sales process is a lot of work on the CFO. It’s a Sprint. It’s a short period of time, but it’s also a lot of work and a lot of responsibility that feels like a majority of it falls onto the CFO and GC or legal team if that’s available as well.
Steven Haug: How do you manage that time? As you mentioned, a lot of that work falls to the CFO. Do you delegate more during that time or do you find that you’re just in the office more?
Mike Fritts: It’s a matter of both. During those processes, depending upon the PE company and the management team at the time, the fact that the company is going through sales process may not be public knowledge to other people in the company. The amount of work that gets delegated is not as much as if it were a project that didn’t deal with the sale of the company. Ultimately, I create a small team to help me with some of those requests, but it’s not as broad as I would particularly think of if it was just a typical project that we might do in the accounting finance team. For example, in this last process when we were sold in December of 2021, we had, throughout the process, a tracker used to accumulate and respond to diligence requests. That tracker ended up, throughout the process, having over 1,000 items that we ended up having to respond to. As a result of having a small team, you do end up spending nights and weekends working, and answering those, to be responsive to the needs of the people that are doing diligence on the company.
Steven Haug: Let’s dive into detail around a transaction. Tell us a little about what happens before, during, and then perhaps immediately after a transaction.
Mike Fritts: Prior to the transaction, the items that we perform or due typically include interviewing investment bankers and preparing marketing materials. During that process of interviewing investment bankers, I sat in on three to five, four to six different banking presentations where they gave their assessment of Paragon’s strengths, their weaknesses, how the company would be positioned if it were to be sold, what that marketing strategy would be, who they would reach out to, the timeline of that transaction, and what they expect the enterprise value to be at the time of closing. So we sit through those presentations, we choose a banker, then after choosing the banker, we start working on the marketing materials. The marketing materials in the first stages represent a teaser or a couple page overview of the company. It may include a description of the industry with the high level revenue and EBITDA numbers. While those teasers are going out to a broader audience to gauge whether or not there is interest in receiving a confidential information memorandum, or a CIM, we start putting that document together. And for us, it could be anywhere from a 60 to 80 page slide deck. While we’re preparing that, the legal team is working on the confidentiality agreements for individuals that have shown interest from the teaser to receive that confidential information memorandum. In that CIM, a lot of that data is an industry background, an overview of the management team, an overview of the products, an overview of the customers and then financial data. A lot of that, the products, the customers, the financial data, all come from the ERP or the BI tools that we use. That becomes a large driver at the time. While that’s also going on, in the three processes that I’ve been part of, there’s typically an industry study as well as a sell-side quality of earnings, or a QofE, that help both the private equity or strategic buyer better understand, especially if they’re not in your vertical or making your product, better understand your industry as well as the financial basis by which the financials are presented. That’s what occurs prior to fully kicking off a process.
Once the process is kicked off, after the CIM is released, the various interested parties will submit offers or indications of interest. From that we’ve had somewhere between six and ten different management presentations. I, in that process, sit down and do a four hour overview of the company to go through a management presentation, meet the potential private equity or strategic buyers, and then have dinner with them either the night before, the night after, or the night of the presentation. From that perspective, I do get to meet those potential individuals that might be the owners of the company down the road.
After that management presentation is done, typically a data room, or VDR, a virtual data room, is open to them to allow them additional information to the company. In all the time that the CIM and the management presentation was being put together, the team is putting information into the VDR that could help provide another layer or two deeper of information about the company that they wouldn’t get through those initial marketing materials. From that VDR, the interested parties will then send management questions into the banker, that then show up on this tracker that I mentioned where we had over 1,000 items on the last sales process. Then the team, largely quarterbacked by myself and the General Counsel, divvy up those questions, respond to those, and that takes up a significant amount of time during that sales process. Once you get to closing or a contract signing, immediately after, then work is shifted to, what are those post-closing deliverables? What is needed to finalize the transaction? Those things typically occur 60, 90, 120 days after, because certain estimates were made at the time of closing specifically around the amount of working capital, the amount of debt, the amount of cash on hand that the company has at the time of sale. Post-closing, the work circles back to turning those estimates into reality, and then working with the private equity company specifically on corporate governance, and what that structure is going to look like, what the board is going to look like, and what’s the reporting cadence will be. Those would be the steps immediately after closing the transaction.
Steven Haug: I appreciate you walking us through that, Mike. That is really helpful insight and uncovers a lot of what folks think happens. They think that it’s like going in to buy the car or something, but of course, it’s very involved, and there’s good reason why there’s lots of sophisticated people in this type of business when it comes to the sale and acquisition of a company. Mike, I’m curious, you were working for Paragon, of course, before private equity ownership. Were there any notions you had about private equity that you found were either true or not true?
Mike Fritts: In the six, seven years that I’ve been owned by a private equity company, I think I had some negative connotations prior to coming in. I’m not exactly sure if I truly recall what those were, it just had a stigma or an aura about it that wasn’t necessarily positive. I can honestly say that my experience through all three private equity owners has been fantastic. The people are engaged. I’ve truly felt through all three owners that they want to help the company succeed. They want to help it grow. We’ve been very aligned on our objectives and their objectives. From that perspective it’s been a very good partnership or relationship with all three, and I’ve been very excited to be owned by each of them.
Steven Haug: Thanks for that, Mike. I really appreciate your perspective on private equity in general, especially from the perspective of the office of the CFO inside of a private equity backed company. Mike, thanks so much for joining us on Not So Private Equity.
Mike Fritts: Thanks. It was a pleasure.