The Derivative - Value Creation Over Financial Engineering: Kinzie Capital’s Suzanne Yoon on Modern Private Equity

Episode Date: May 15, 2025

In this episode of The Derivative, host Jeff Malec sits down with Suzanne Yoon, Founder and Managing Partner of Kinzie Capital Partners, for an in-depth exploration of private equity. Yoon shares her remarkable journey from the daughter of immigrant entrepreneurs in Chicago to leading a lower middle market buyout firm. Drawing from her rich background, Suzanne discusses the evolution of private equity from financial engineering to value creation, revealing how her firm identifies and transforms businesses across manufacturing and service sectors. She provides candid insights into deal sourcing, the challenges of modernizing family-owned companies, and navigating today's complex investment landscape.With perspectives shaped by experiences ranging from the Enron workout to founding her own firm, Yoon offers a compelling narrative about entrepreneurship, strategic investing, and the importance of passion in business. Join us and gain intriguing insights into the inner workings of private equity and the critical role of technology and operational improvements in driving company growth. SEND IT! Chapters:00:00-00:57=Intro00:58-06:58= Entrepreneurial Origins: Uncovering the Roots of Resilience in Suzanne Yoon's Journey06:59-22:50=From Iowa to Wall Street: Lessons for Achieving Success in Finance22:51-38:05=Private Equity's New Playbook: Evolving from Financial Engineering to Value Creation38:06-49:10= The Art of the Deal: Strategies for Sourcing and Selecting Profitable Private Equity Investments49:11-01:07:08=Tariffs, Tech, and Transformation: Navigating the Future of Private Equity Follow along with Suzanne on LinkedIn and Kinzie Capital Partners and be sure to check out their website at kinziecp.com for more information! Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠.Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

We have this mindset of how do you modernize the business so that a business can scale. So fundamentally, is it a good business? Is there an opportunity set for it to continue to grow? How do we do that? Welcome to the derivative by RCM Alternatives. Send it! Hi everyone, this is Suzanne Yoon. I am the founder and managing partner of Kinsey Capital Partners. We're a lower middle market focused buyout private equity firm in Chicago. And we're going to talk private equity on the derivative.

Suzanne, how are you? I'm great, thank you. Good. Where is your office in Chicago? We are located at the corner of Clark and Madison. We're located at the corner of Clark and Madison. We're located at the corner of Clark and Madison. We're located at the corner of Clark and Madison. Good. Where is your office in Chicago? We are located at the corner of Clark and Madison, which is a little counterintuitive

to the fact that the company is called Kinsey County. Kinsey, right. When I named the firm, or when we came to the name on the firm, it was because I wanted something more like dedicated to Chicago. So this is my homage to Chicago. And I actually spent a lot of time on Kinsey Street because of my former office was at the merchandise mart. And also because the East Bay Club is there. Yeah. And also because the East Bay Club is there. Yeah. And I don't even know my Chicago history or if you know what who Kinsey is.

What is Kinsey? So Kinsey, Kinsey Street was actually named after the Kinsey Bridge, which was the first bridge that was built over the Chicago River. It was originally a rail bridge and it was named after John Kinsey, who was credited for bringing international trade to Chicago and he was initially started as a fur trader. Wow. So it's been going back a long time. So lots of history on that on that street and bridge. Love it. And then where is that's no longer right? Kinsey Chop House. There's a couple

Kinsey Steakhouse places. Kinsey Chop House. And there are no private equity firms named after Kinsey Street, unlike every other street in Chicago. Right, there's Madison Partners, LaSalle Partners, Dearborn. There you go. What is it about Chicago? Is New York the same? No, because they'd all be numbered partnerships. Fifth Partners, Third Partners. I think people love Chicago and it's fun. partners, third partners. I think people love Chicago and it's fun. Maybe there's not enough creativity, so.

Right. What do you call yourself? The name of the street that you are. How have you seen that downtown area? Do you think it's coming back? There's still a lot of empty offices. I think there's still a lot of empty offices. There's definitely a lot more foot traffic than the previous years, but I think the biggest, probably the most obvious for me is like the parking garages. We started coming back private equity is a very tough business to do remote. And particularly when you have a young team and you know we were really deep into our businesses and when we're closing a deal the team kind of has to be together

and so we came back into the office because we were closing a deal very carefully, but in July and August of 2020. And when we would come in then and maybe we came in a couple days a week, masks on, like, you know, fully separated from each other, but still able to sit in a conference room together. Back then the parking garages were completely empty and and then gradually as times gone on I've noticed if you got in at 630 still tons of parking spots and the parking spots are disappearing like you know earlier and earlier and you have to go up further and further in

the parking garage. Higher and earlier. And you have to go up further and further in the parking garage. Higher and higher. Yeah, Monday through, Monday through Thursday, now the garage I park in is completely packed. So they're coming back. Friday has a little bit more room. So I do think it's coming back. But it's tough because there's a lot of, I think there was an article just this past week about zombie buildings in downtown. Yeah are you for the mayor's plan to turn that all into low-income housing like LaSalle Street basically? I think they abandoned that but that was floated out there. I think

you have to get business back. Yeah. No, it's not about residents. Business is what drives all the other, right? Business is what drives economy and the vibrancy of any city. And so if we lose businesses out of Chicago, it's not going to bring people back. You have to create jobs here. You have to, you know, and then everything else will kind of follow suit. There is a need for additional residential, but I think the conversion of the idea of converting old, you know, zombie office buildings into residential, I think seems like a great idea until you actually talk to developers who will tell you that converting office space

into housing is really challenging because of the plumbing and all the other things that you would have to rehab, the cost would be exorbitant. Yeah, it's like, hey, everyone, you gotta go to the corner of your floor to use the restroom with the rest of the people. With the hard work.

No. You essentially have to rebuild the restroom. Yeah. With the rest of the people. You have to essentially have to rebuild the buildings inside out and that actually costs more than building a new building. Although I had a friend who lived in that AIG conversion in New York that was pretty cool. But anyway, my brain just went to we're talking parking garages of like, what are we doing all this hard derivatives and private equity stuff for? Just own a parking garage. It seems like such a nice, easy business, right?

You're sitting there like, oh, I should have just done that. So give us a little background how you got started. You were Iowa grad, right? Midwestern through and through. So grew up in Chicago. My parents were immigrants. My father was a biomedical engineer

and my mother was a nurse. They came to the United States to study and work here. My father, because of his, and he came he came to they ended up in Chicago from where? From South Korea. Got it. And my father I think quickly realized that because of his language barrier at the time he would have a difficult time getting promoted and ended up borrowing money from friends and family and bought a deli in Cicero. And I was four years old when that happened. We ended up moving to Cicero from Rogers Park. And that was the first business. I was four years old and that's my first recollection of working was I would go to school, come back and hang

out with my dad at the deli. He was babysitting me. I thought I was working and he would have me stock cigarettes in exchange for twixipars. So I think he was trying to keep me busy and also teach me work ethic. I think then along way, he started to build out more businesses, went into the south and west sides of the city. I grew up going with him on the weekends and owned, built, acquired, and kind of developed a dry cleaning business with multiple drop-offs and two plants. We had a sandwich shop called Charlie's Blade and Spade Sandwiches on the south side. He owned a couple delis and so really built this business and a bunch of paytelephones. So when paytelephones...

I love that, right? For you younger listeners, a paytelephone is something you would put money into to make a call. Right, because we didn't have cell phones, right? Yeah. And I don't know. I didn't even know that. The pay phones were, you leased them to the city or something? No, you actually, people owned them.

And they paid, we paid the phone bill and then you would go and collect them and on the weekends I would go with my dad and he would drive around and take all the quarters out. And back then, you know, this is the 80s, early 80s. immigrants were the ones who went into the south and west sides because they needed businesses to go, you know, I grew up, you know, in the city really exposed to a lot of diversity. And really everywhere we went, I was like the odd man out. Right, if I'm in the South and West sides, whether I was in a black or brown neighborhood, I was the only Asian kid with my parents. We moved then and then living in the city,

we're on the North side at that point, we're in Peterson Park. And then unfortunately, my father was killed in armed robbery when I was 10. And my mother was a nurse. And she had, I was 10, my sister was five, my youngest sister was three. And my brother, my mother was four and a half months pregnant with my brother when my father passed. Oh my goodness. So she, like, you know, every Asian tiger mom that you read about decided that we needed one, she was afraid to be in the city alone.

So she basically called a real estate broker and said, I need, I need to move to a school district with the highest SAT scores within an hour drive to my work. And at the time she was working at Cook County Hospital. And so we ended up in Winnetka, Illinois, or Northfield. It was like kind of on the border of Northfield and Winnetka. And ended up moving to the North Shore because Nutria at the time had the highest SAT scores in the country and that's all she knew about the school. So had a lot of focus on education. I was the oldest of four.

You become sort of the secondary mother? Help raise all those kids? Maybe the my my siblings might tell you I was primary. My mother ended up working, you know, she she worked like double shifts. I mean, she did everything she could to get us through school. I went to Nutria. I was really fortunate to get a scholarship to Iowa and I was a presidential scholar at Iowa and that's how I ended up there. I actually wanted to go to the East Coast. Had early admission somewhere else, but got a great ...

What's a presidential scholar? Presidential scholarship is... There's one scholarship, I think, given at the time. I don't know if it still exists, it's literally you know the president scholarship. You have to go to a public university and there's one per state per year. And so you have to qualify as a presidential scholar and the university also has accept you. So I ended up there it was yeah everything got paid for I was very fortunate I had no no debt you know my housing everything was paid for while I was there the university as a trustee for the alumni and advancement Iowa Center for Advancement. I love how they do the my brother went

to Iowa so I've been to a few football games and that isn't it they the kids in the hospital look out at the fourth quarter or something. Yeah and actually that was an alumni who's on the trustee board with me who donated that entire hospital building. Fantastic. Yeah. It's a, it's a, it's a great place. Um, so I'm, I was really fortunate to have gone there and met Luke. And anyway, while I was there, I originally went to Iowa thinking I was going to go into, um, was there, I originally went to Iowa thinking I was going to go into policy.

And so I was a political science and writing double major, English double major, thought I'd be a presidential speech writer, took an economics class, thinking, oh, I better really understand economics because that's what they all talk about. And then I kind of fell in love with it. And I think also I'm like a product of 80s movies and I knew I wanted to make money. So Wall Street, Pretty Woman, you know, all the movies about the very powerful men. And you were never thinking like that I'm a woman, that I'm a minority, never crossed your mind? You're just like, no I'm gonna do this. Well you know it's interesting because of course, of course it did, but I remember I have a

friend I watched Pretty Woman with in high school and she reminds me that I said to her you know I think it would be we should learn what Richard you know like Richard Gere's character like what he does because he like buys companies and he breaks them up and then he like started rebuilding them right that's the story if you look at what he did I and I said to her I'm like we should learn what he does because like no one's saving me off a street corner yeah I'm like I think should learn what he does because like no one's saving me off a street corner. Yeah, I'm like, I think it'll be easier to figure out like what you know, right?

The rest of the girls watching are like, oh, I want to be her and get swept away. No, no, I want to be him. Yeah, I want to be him because I don't look like Julia Roberts. And that's not probably going to happen to me. Right. So it was, although I think she had a body double in that movie. But we'll leave that. We actually, we had a blog post. We'll put it in the show notes way long ago, the best investing movies. And it's like Wall Street and boiler room and those things. But I put, we put Pretty Woman at the end because I'm like, this was a movie about a private equity guy holed up in his hotel room,

trying to figure out a deal, right? Yes, that's what he's doing. And, you know, and I, I, and I, and I remember thinking, you know, I think back to it now. I'm like, Oh, he just did breakup sales. That's what he did. You know, he would buy companies, break them up, break them up into pieces. And then he turned his life around. To So were you thinking you always wanted to start your own firm? Or no, that was a way out in the future.

I think I've always because I grew up in entrepreneurial home. I was influenced by my mom and dad who really came here with nothing right to build like that. it's very like the spirit is very entrepreneurial my father built businesses i love that he was selling cigarettes out of the deli yeah well that grab your sandwich and make sure you grab your cigs oh it was literally like right next to the counter right that's where you would you would get a deli you would get your i don't know your um your, your toiletries and buy a couple packs of cigarettes and head out.

But smart business man, that was probably his best margins around the cigarettes. At the time, probably. Well, I don't think that was that. I don't think anyone knew how bad cigarettes were. But I do find that ironic because I'm so health conscious too, that that's what I was doing for my first job at POUR. And so at college level, did you know like, okay, I wanted to be that guy, but private equity is this thing that's going to grow and become huge, or you just were thinking

I'm going to get a foot in the door. I knew nothing. I knew nothing about private equity. And I think most people, you know, our generation, if you ask them like, Oh, did you want to get into private equity? They would have told you I had no idea what it was. Because if you go back to the 80s and 90s, private but it was for the ultra elite. It was for people who had access to capital. Private capital was very, very hard to come by unless you were in certain circles, right? What I did know is I came from a single family home and watched my mom work her tail off to put us through college, get us good educations. And, and the one thing I didn't know is I knew I wanted financial stability and I had to make sure I took care of that for myself.

That that was not going to come from, you know, me doing anything else, but like working hard and figuring it out on my own. And I also knew that that was probably my biggest driver was what is going to create financial stability for myself and for my siblings and my family and my future family. And I'm also hyper competitive. So, you know, just those two things. And then I, you know, as I started studying economics, as I started in banking, because I knew I wanted to be in the business of money, whatever that was going to be, I was really fortunate to go through an analyst training program at a bank. I originally started with

ABN Amro, which was at the time the sixth largest bank in the world. I also wanted to do more global learn wherever I could go. I went through different rotations. I ended up in at the time, the special assets group of the bank that it was really interesting. That's where we held all of our off balance sheet private equity portfolio, all the derivatives, just really esoteric assets, you know, were always held, you know, at the special assets group and off balance sheet. And I learned a lot. But I also learned a lot about what goes wrong really early in my career. So that was a time of all the front page Wall Street Journal articles about Enron, WorldCom, Tyco, you know. And I started with lower middle market and middle market businesses and I worked on one of my first deals was

Enron, the workout of Enron. We had the largest unsecured creditor in Enron at the time. It was like a half a billion dollars. And in the late 90s, early 2000s, that was a lot of money. It was a huge position to be in. And I could tell you so many lessons learned from that, just being a fly on the wall. And I was really fortunate to have been the first associate that was hired into that group, because it usually had been the most senior bankers and executives of the bank. But because the volume was so high, like I think they decided they needed a bag carrier and that happened to be me and I was happy to do it because I learned I learned a lot. Yeah. Did you any crazy stories out of it? Like that you in as you were uncovering things or it's all public?

I mean, so many, you know, I, I think one is, you know, Enron was really interesting. Enron was the one I kind of always go back to because it was fraud, right? Fraud is really tough to detect. And because you have really, really smart people who are playing the game of cover up. And that was the ultimate Ponzi scheme. Yeah. And I think what I would go back to is I remember everyone was doing analysis and not just us because there were several other banks and at every major bank in the world was in that deal. And no one could figure out where the cash was going.

But I think the assumption was, well, the Anderson guys are in here, the Enron executives are so smart, they're the smartest guys in the room, right? So like, there was a lot of, I think even for myself at the time, I'm like, I don't know anything. I'm like, Junior, this isn't making sense to me. I can't find it. And I always just thought like, well, and it wasn't just me, everyone thought that everyone thought everyone else was smarter than them. And so we should just go with it.

Yeah. And then it had the allure of like, oh, they're trading power and it's complex and you don't understand that. Yeah. And you just don't understand it. So like, but you don't want to miss out. Right. And so, you know, I, I, I do think it's really important. And it's probably a lesson I learned really early is like, trust your instincts, you know, fact check something doesn't make sense. It probably doesn't make sense. For a reason. Yeah.

For a reason. And then your group. Follow the cash. Always follow the cash. Because I would say every time I've detected or we have found a problem in any of the investments I've done over the last 25 plus years, that's where it shows up first.

Because you can play with a balance sheet. Cash is king. Yeah, but cash is king. So you start Kinsey. Tell us what Kinsey does. You touched on a little bit mid-market. does. You touched on a little bit, mid-market. So I, yeah, and I worked at very large institutions the first, you know, 10 plus years of my career. And then I went, then 2008 happened, 2008, 2009 happened. And at that time, I was with a commercial finance company and realized that the reliance on the public markets and the commercial finance, you know, in the commercial paper market, it's really challenging because you just can't control your own destiny if something like the market crashes, right? So

at that time I decided I really wanted to go somewhere with more long term locked up capital and really enjoyed the middle market companies that were growing, building and where I could actually like have a tangible impact, you know, on those businesses. So I joined a private equity firm on the East Coast. I was in New York at the time, I shouldn't mention that. So I was living in New York, and had decided that I wanted to be somewhere with more long term locked up capital, joined a private equity firm where I, you know, grew into a partner role. I was there for seven years. And during that time period, moved back to Chicago. I am again, a native Chicagoan and so is my husband.

And I wanted my kids to grow up here. And I also really needed access to free babysitting, which was a huge incentive for me because both our parents are here. And as I was commuting back and forth to New York, you know, there are a couple things I that really kind of drove my decision to start Kinsey, I think one, I saw a market opportunity in the Midwest, with, you know, I would say a lack of sophistication in the lower middle market. There are some really, really good firms and funds in Chicago, but a lot of opportunity and not as much competition. Two, the market was changing really dramatically. Value creation and operational improvement has become a really big component of fundamental private equity investing and it used

to not be. It was more financial engineering so that transition was happening and I had an opportunity to partner with a technology consulting firm. So my co-founder is the founder and owner of a 160% tech consulting firm that could really move the needle on value creation in terms of modernizing the companies that we would be investing in. And then third, I really just wanted to control, and probably this comes from my parents and all the influence I've had over my life, but control my own destiny and create a culture that I could be proud of. And so I think that those were my main drivers when I started Kinsey.

And I really would tell you is that one of the hardest decisions I've ever made, I walked away from a very, very lucrative career and had to start with really not like everything I had into the business. It was a huge bet on myself and that doesn't that feel great. Like I've done that twice now, but right. You just feel alive in that moment. You're like, okay, yes, it's like, no, really, I, I equated to jumping off a very tall cliff. Yeah. And you can't see the bottom. Can't see the bottom and you fall

into like water and you're just swimming for your life like from the second you jump off that cliff. So and that was I still feel like that a little bit but it's a sure. Real quick I just thought of, we should have mentioned at the top, our kids are friends in school together on the baseball team. But for your kids, do you ever think, I think my career advice for them is going to be start big, like you just said, and then you can always go do your own thing. I kind of started small and tried to do my own thing from the get go. And I feel like it's been a battle at times.

So my advice would be start big, then you have a Rolodex, you have all these connections, you have the experience of the big firms, and then you can go small. What do you think? You know, I actually don't know if there's a right or wrong answer to that, because I know plenty of people who started small

and did amazing things. You know, like really, but I, there's probably like two, one piece of it, like two pieces of advice that I, you know, I would give them. And one is kind of a loop, I think in, in line with what you're talking about, which is experience always trumps intellect. So it doesn't matter how smart you think you are, the things that you learn from actually doing, working life and listening, you know, and having, making those mistakes, it's like, you know, that's what, that's what teaches you leadership. Yeah. And, you know, and I think the other is,

you really have to have a passion if you're going to do something on your own. Like you have to love what you do, because if you love what you do, it's really easy to be good at it. It's really hard to be great at something that you hate. So, I think you have to find what is your passion and something and passion doesn't mean you have to love it every day. I think passion also means like it's really hard, right? Like our boys play baseball. I mean, baseball, I didn't play baseball but I'm learning is, I

mean, one of the most challenging sports. I have no idea why they play it and they love it so much because it's, it's so heart wrenching. It's a, someone was telling me it's an individual sport masquerading as a team sport, right? So you're there and you either do it or you don't. You either make the play, you make the catch, you get the hit or you don't. So you're like instant results. But the amount of work and effort you have to put into it to be good at it and it's harder than it is fun, you know, but they still

love it, right? So I do think it's more about passion and it's not every day has to be great. You just have to have like really believe in something that you're willing to put the time and effort into it. You said something interesting, value creation versus financial engineering. So in the past, private equity was all about just, hey, we're going to lever up and put some money into this business and watch it grow. Right. It was easy because capital was not easily available. So when you're buying a company for one time, this is going back to the 70s,

right? One times multiple, two times multiple, or even three of cash flow, and that's my business, right? I'm acquiring businesses based on cash flow and fundamentals and growth perspectives, whether it's through M&A or organic growth, but those are my levers. And if you could buy the entire company for debt and just pay down debt, your IRRs will be huge. Well, today it's very competitive. Capital is more readily available. Financial engineering Capital is more readily available. Financial engineering is table stakes. Like, shouldn't even be in private equity if you don't know how to do the basics of financial engineering. Because that also creates value. But the real...

And what do we mean exactly by that? Of like, shoring up the balance sheet and getting cash flows correct and things of that nature. So I think that could mean anything from how are you structuring a deal, right? Are you structuring the deal so that people have skin in the game upfront? So earn out, sell or no. There's so many different structures you can put on a deal to protect your downside, upside. Are you using prep? Are you using how much leverage are you using? Is it senior debt? Is it meds debt? Is it a unitronch? So there's just so many different ways to get things done. And if you're doing a merger, are you, you know, contributing value? What's the, you know, are you

talking about value versus actual dollars in? And, you know, how do you use leverage to juice returns. All of those things are I think what you learn in balance sheet management. But and that's experience. You know you're not going to learn that unless you have actually worked at a firm or at a bank and maybe in your finance class right and a little bit of that in college, but you certainly don't really learn to do it until you've been working on it for a while. But the end result of that is how do I invest in this business with the least downside for the fund or the firm as possible? Yes, of course. Yeah. Yeah. And with the most growth perspectives, right? So biggest position with the most downside.

And every and depending on what asset class you're in, it's going to be different. So, for a lender, that's very different because they just can't lose money, right? Equity, you expect to have some, you know, there's going to be the more risk you take, the more, you know, opportunity obviously there is for return as well. So I think that that's when I say financial engineering, just the understanding of finance, you know, how to use money, you know, to create returns. But there's, if everyone's doing that, and that's the table stakes, how do you get to alpha? And now money is more easily available.

Right. So the alpha then has to be fundamentals. To me, it's like getting back to fundamentals of investing, which is business, the business itself. The management teams, the growth prospects, what are we underwriting, right? Everything from supply chain to customer, you know, are there opportunities for add-on acquisitions? Can you grow, you know, and buy down your multiple or by, you know, does it create, you know, expansion? Do you take out what is a competitive landscape look like and how do you create value faster?

How do you scale businesses faster, especially businesses? And we invest in manufacturing and business services. So I would say old line businesses that are necessary for the economy to grow and move, but they make things. We're making things. So it's not software, it's not, you know, highly, you know, sexy, in any way, they're absolutely necessary for the economy. So a lot of the businesses we're acquiring are from founders, we just acquired a business that was 54 years old. And their server, nothing is on the cloud.

They're still in a server room. You cannot scale. You can only go so far. So then the fundamental is how do we modernize that business? So it's a great business, but there's the scalability of it. We saw it. It's like, oh, it can't scale without investment into the business, which means team, technology, processes, all of those things. So it's a big lift. And then for manufacturing, is there also the piece of modernizing the plant, plant robotics like that all can come into play So it's it's it's a that actually that is definitely a piece of it

But what we find is a lot of the if it's a manufacturing company and there they in its engineering, right? There's engineering involved in that. They're actually really, they've done that really well. Right, if they need the new machinery, you probably don't want the business. Yeah. Right, maybe there's some capex that's going to require, like we will underwrite that too. There are certain businesses that do require cabacks to grow. There are others that have already put the capbacks in. But those all come into play in terms of when we think about valuation of a business. And it's almost, you have to be kind of cocky, right? Be like, hey, we know better than this 50-year-old business how to scale it. Right? To me, I'm not gonna be the guy at the 50 year old business.

Like, hey, we've done everything. We know how this business works. We know the industry we're in. So how do you bridge that to be like, we know, like is it just bringing modern tools and saying this will work better? You have to know what they're doing also. You know, and most of the time,

they know that they have to modernize their businesses, but they didn't do it because they didn't know how. And it was going to be disruptive and it's hard. Putting an ERP system into a business is really challenging. And everyone thinks it's going to take three months and it takes a year plus. You know, it's those types of things. So I have a business that I saw a few like a year ago and they were still on green screens from the 80s. And it was because they were afraid every year they would have the discussion. Yeah, we need to put a new system in. And every year it was like, we

don't know how to do it. Who's going to be the resource? So it's the old how to eat an elephant one bite at a time thing. You're just coming there like, all right, we're going to we're starting. I'm going to help you get through bite one. Then we're going to do bite two. And also we have the resourcing behind us with the technology firm, you know, and all the resources that we have behind us and, and it's, it's experience. I mean, this is where, you know, being a private equity, you know, control investor is, it takes a lot of time to learn what, what we do, uh, because you make a lot of mistakes to learn it. I will tell

you that, you know, along the way, all of us have in the private equity industry and so have executives and managers and so you get the right people who've gone through it before, who know where the pain points are going to be, get everyone prepared. And even with that, it's painful, right? But sometimes new ownership is required to really make big changes.

Let's talk private equity overall. Like there's been a lot of press that distributions have been paused or not happening over the last, what is it, six to 12 months or even more? What are your thoughts in general? Is that part of the process? Is that coming back? Is this a new reality of like, what are your thoughts? Well, I think it started, it definitely started with anytime there's any type of market disruption, people pull back on selling their businesses, or buying businesses. So that happened in early COVID, then it came back, and then the interest rates went up.

And remember, in buyout, most private equity firms use leverage to buy companies. So valuation, so there was a mismatch of valuation expectations on, you know, the bid ask spread was pretty wide. I would say in 23 as the interest rates started going up because there was an expectation that the multiples would hold up even when going from zero to very significant interest rates, right? And so... And where were those multiples?

Were like getting upwards of 15X or depends what industry? Yeah, it depends on the industry, but let's say, you know, anywhere between if a company was going, companies were going from eight to 15X, they're now going for, you know know the expectation from the sellers was oh that's gonna maintain it's that we're still gonna get that 8 X 9 X 10 X and the seller you know it's like you can't afford as much when your interest rates like not like anyone else right you even the consumer could like stopped, we stopped moving houses.

Consumers stopped buying houses because they weren't going to leave their 3% interest rate to buy another house for 7%. I would say, so it's like in the housing market, I would say people can just afford this, whatever it is, $3,000 a month payment. So they don't care if that's on a whatever it is, $3,000 a month payment. So they don't care if that's on a $6 million house with a 0% or 0.10 bips or something or on a 200k house with 18% interest rate. By the way, the cash flow of business is $10 million. It's still $10 million whether or not your interest rate is 5% or 10%. Right. Yeah. Right. And so that changes the dynamic pretty significantly in terms of return parameters, right? Because we're, you're taking the cashflow to buy it down, like how much can you afford in terms of add-on acquisitions?

Like the whole, you know, underwriting changes. So the interest rate, increase in interest rates definitely slowed down the market. We started to see some pick up. I think everyone was anticipating that the new year 25 was going to bring a resurgence of new deals to the market. People who had been holding out from 23, 24, starting to come back, and then the tariffs were announced. And so just more recently, I would say we were pretty optimistic going into 25, that the deal market would open up in 25. And that has been completely turned upside down with the tariff announcements. The magnitude of the tariffs and the potential tariffs, and the widespread nature of them is creating a real jam. I mean, margin compression is going

to be huge even with companies who do not have direct tariff exposure that are manufacturing in the US, like the indirect exposure. I think you have to look at companies on a micro. And everyone's focused on the micro within their individual businesses and portfolios. But the reality is it's going to have a massive macro effect. I think last week was the first time I heard, as of last week, there were 80, I think last week was the first time I heard as of last week, there were 80 full ships completely stopped coming out of China. And the last time that happened, that was COVID.

I was just on with a guy in Long Beach on a Zoom yesterday. He was saying he's a pilot actually, he flies for fun. He's like, come out here, we'll fly over Long Beach. There's two ships in there. Remember in COVID and everything was backed up and there were like 50 ships or 100 waiting to offload. He's like, there's two ships and they're just tankers. They're not even container ships. And the issue is going to be at some point we have to get there's going to be a supply shortage.

Right. So I know with some of our portfolio companies we bought inventory ahead starting in fourth quarter when Trump announced after that he was going to yeah his tariffs and so we have inventory but at some point you run out of inventory and then the manufacturing you have problems when you need like a specialized part or this or that. I want to talk more on tariffs, but let me come back to the, so on the distributions and whatnot, is that, so you're saying there's not another, like you don't have the ability to resell the company, which then you would pay out distributions or not you, but the

industry in general. But then aren't they also getting distributions on the profits of the companies or should be? Yes. So it's both. They're just not at the pace, right? That people had been used to with all this deal activity. And then the sellers want the 8 to 15X in that period you were talking about. What were the buyers offering? Like half of that? Yeah, you're probably at a turn, two turns down at this point. You know, I think people the the turn started to come the multiple started to come down, I would say last year, slightly, especially in the deals that I'm that we've been looking at. But good deals

still are, you know are demanding high multiples. And what are the, and those are greater than public multiples often these days, right? I think it depends, because you use public comps. We do look at public comps. There's usually a discount to public comps to some extent because it's private and the illiquidity, it's like the illiquidity premium, right?

Right, but that's been turned on its head of people are willing to pay, right? Cliff Asness calls it volatility laundering. So they're willing to pay more to not see the volatility in their returns. It's kind of like, so some of those stats were showing a premium, but that's the hard part whenever someone's trying to talk about private equity. Right. Well, and- Large, right?

Cause your Midwest lower middle market is way different than someone doing whatever West Coast. And it used to be too that you could really never sell a private equity position, but you're seeing I'm sure in the news, Harvard just sold a billion dollar portfolio in the secondaries market because they need the liquidity if they're not going to get funding federal. And I think that's the same thing that's happening with Yale. And so all these big, big endowments

that are moving out of private equity, because it is a liquid. Why do people invest in it? Over time, it's been the best performing asset class, really throughout history. And it's because it's long term, it's locked up, it's not as you know, it's not as accessible as it has been, it's starting to go a little more retail than it used to with some of the larger firms like Blackstone and, you know, Apollo, there, a lot of the big firms are, you know, the people are getting access through our RIAs and platforms into private equity, but it just was not like that before. So are those who's buying those big endowment positions? Like other it may be pension funds, other endowments, right? People who are looking at

a very, very seasoned portfolio, and maybe they're able to buy it at a discount or get into funds that they could never get into before because you know an endowment like Harvard or Yale are probably in all the deals and managers that are very hard to get into and so you know I would imagine that those portfolios were were highly sought after if you have liquidity. So this is a great, I think we look at this too in the private equity in our space. If there are deals to be had, I think we also will see a lot of buying opportunity. We had the CIO Baylor on the pod a couple episodes ago,

but he was saying they're kind of getting out of private, not necessarily private equity, but less liquid stuff because they don't want the drawdowns. They don't want to have the capital call because they see kind of a recession and returns lower and they want to put that to work at discount. So that was an interesting little tidbit from him as well. And then, but it does cycle, you know, now it's a great time probably to fundraise for private equity, but it will maybe again in 20, seven or eight, we just don't know. Right. But do you think so, right, some, if you follow some people on Twitter, what, like private equity is broken, it's too crowded, it's too expensive, can't exist with higher rates. Like, that's all bollocks to use a UK term.

I think there's real opportunity for it. I think the good managers are going to win out. You know, that and you know, for you that drums back to like, I'm sitting in the room with this owner of this business and he's, I can see the opportunity, right? Right. And so returns will speak for themselves. So I do think it's, but I think every, I mean, do you look across the entire landscape of money management and it's all crowded?

Right, yeah. All crowded. So to say that private equity is crowded, I'm like, so is real estate, so is credit, so is... Dedicated short selling isn't so crowded, but yeah. Yeah, well, it's not powerful. Yeah, wait a little longer. But right, that lends itself to the question, like, then what do you do? But that's what you're saying, it's all crowded, like, just keep doing what you're doing. So in my view, it's all relative, right? Like, do you really believe you have a differentiated

enough strategy that you're going to outperform your peers? Because if you outperform your peers, then you'll win. And let's talk more about this. We started talking about the value creation piece. So it's putting in general processes or your processes and your team? Like, is what you're saying. Like, in order to win that, it can't just be, hey, we're going to put everyone on Slack

and make sure they're using Google Sheets or whatever, right? Right, right. It's got to be your stuff, your secret sauce. Yeah. I think there is, there is some fundamental, you know, fundamental business practices that need usually to be implemented at the type of companies we're acquiring. Because they're founder-led, sometimes they're anywhere between, not always founder-led, but we're usually the first institutional capital into a deal. So many of them are, you know, the founders are still involved

at a minimum, or we're, you know, we're acquiring after a period of high growth and they've, they've kind of, you know, leveled out because they can't scale. So for us, it's, we have this, you know, mindset of how do you modernize the business so that a business can scale? So fundamentally, is it a good business? Is there an opportunity set for it to continue to grow? How do we, you know, how do we, how do we do that? And there is each portfolio company has its own, you know, certain, to a certain degree, its own value creation thesis that we have. And then executing that, and it could be a lot. But I would say the ones that come up very consistently is technology.

There's a lot of tech debt out in the world. You know, which is surprising. I guess we're on the front lines maybe, but right. Surprising me. Like what are you talking about? Like it's in the news every day and every ad is use this tool, use that tool. But you're saying not debt.

They don't not money debt, just like a technological debt that they haven't upgraded. They haven't modernized. Right. And they may have, they don't have cyber, they don't have security, they don't have, right? Like they're just not thinking about those things. They have, you know, and it varies. You know, they're still on QuickBooks, like you cannot scale a business, you know, past 30 million dollars of revenue if you're on QuickBooks. Like it just, it's like impossible. So, you know, past 30 million dollars of revenue if you're on QuickBooks, like it just, it's like impossible. So, you know, those are some of those things are like fundamental

and then for each business, there's like a unique, right? So how are they using their data? Is there opportunity for, you know, tech enablement first and then AI. You have to have the fundamentals down to be able to use artificial intelligence, but also creating more efficiencies with artificial intelligence now. Technology is moving so quickly. And I think that is one of the challenges that a lot of businesses have is tech moves so fast, how do you keep up with it? And so having a resource group like we do with our partners, Clarity Partners, which is also a Chicago based firm, you have 160 people in varying areas of technology and different functional areas that are in it every single day. So they help us keep up with it, right? So we have the resourcing behind us to be able to put our,

our, you know, value creation theories or these, you know, our thesis to work for each portfolio company. And do you think how long till all of these, your portfolio companies are like AI assisted? Five years, 10 years? Like, do you think that's just going to be table stakes? Oh, I think within the year. Within a year. Okay. And that's everything from helping do bookkeeping to inventory management, whatever.

Yeah. And it could be different for each company. Customer service. Right. Invoicing. Yeah. And it could be different for each company, customer service, right? Invoicing, right? In the general thesis there, it'll save time and cost or it'll help, right? Well, make productivity greater or expenses lower. Yeah. The ultimate goal is productivity, because if you can do twice as much with just the same number of people, or three times as much, that's a productivity gain and then you can scale. And then you continue to grow and you can hire more people. So I don't think about it in that way, like, oh, how many heads you eliminate. It's like how how do you make your heads more? Efficient so you can continue to grow

And then I had another question popped in my head how many founders are left out there It seems like there's a thousand private equity companies buying up all these founder led businesses It seems like we'll eventually run out of founder led businesses, but no way. I don't know what the real numbers are Oh, I mean, I I see them a lot, you know, they're everywhere and they're not all founder led businesses You know, they've transitioned to professional CEOs or family businesses but I I do think like Everywhere in the world and I think particularly The United States, you know, it's, it's an entrepreneurial

country. Yeah. And I think even our think about our kids, you know, they, I think they think because they've seen it, right? People have like made businesses out of nothing. Yeah. And they're used to being their own bosses to some extent. So I do think there's this, there will always be creation and creativity and new ideas. And one thing I have learned in PE and credit and all the things I've done over the last multiple decades is that there are a lot of ways to make money. None of them are easy. Yeah. Right, I love those stories.

You had a party and meet somebody who's like, oh, I ship hospital gloves in from China. That's probably not doing so well now. Right, you're like, yeah. Or we make the airplane, the jacks for airplane wheel replacement, or like weird businesses that are super cool. Yeah. I mean, so many. And so are you agnostic or do you like, do you want that smaller middle

market and but it does it have to be manufacturing? What if it's like a, I don't know, a bakery or something? I don't know. Yeah. So, um, so we say, uh, manufacturer, manufacturing manufactured products and business services. So we like things that are like making something or servicing something. So distribution, we have the largest consumable golf products distributor in the country. What's consumable golf? So think everything from everything you need to run a golf course. Everything you need to play golf. Not your clubs, but everything else. The tees, the pencils, the ball markers, the glove, the like, think

everything that you might need, right? Like we, we supply all the accessories. Um, we actually also are the, uh, own the distribution for Click Gear, which is a push cart. We own a Tentcraft. Connor's got one of those. Oh, a Click Gear? Yeah, I think so, yeah. Really? Okay. I just got one for Osfer. Well, we own that.

Nice. All right. If you want another... Yeah, I'm calling you up when we need a replacement. Well, when we come up with a new model, which is going to come out at the end of the year, which everyone's really excited about because all the pros, that's what they use. They use the click gear cart. And so we own that. We have a steel, a very specialized, highly engineered steel or metal tubing company that we,

you know, just recently acquired. And you know, that's, it's like we say all things tubular. And we, and then we have a lighting distribution and controls company that's more of like, it's distribution and consulting. So it's a tech, you know, lighting technology, consulting and distribution. And- That doesn't even make sense. I'm hearing the words, but what is lighting distribution? So your office, when you go into your office,

all the lighting in your office is most likely controlled by a system. Mm. Okay. Or even in your house, like Control 4 or whatever. So there's Lutron, there's Control 4, and so we do all of... We do all... So it's headquartered in New York City, company's called Chelsea Lighting. It is the largest lighting distributor in New York City, company's called Chelsea Lighting. It is the largest lighting distributor in New York City. And they do all the lighting for major projects. So the Google building, the BlackRock, Blackstone,

I mean, KKR. I'm going to New York in two hours on a flight. So I'm gonna look at the lighting when I get in the building. Maybe we do it at RCM, right? So, but that's a, it's a very complex business because, you know, just to give you an idea, when we built the Google building in New York, it was 30 million of lights, just the lights. 30 million lights themselves or 30 million dollars for the lights 30 million of dollars of lights

12,000 skews 1200 different Companies that we had to source from come on that seems like That seems it was but think of the project management of that. Yeah. Wow. To spec. So that's the kind of stuff they do. And they also know the whole control systems, which is the complex. That's also very complex. So, you know, lots of different types of businesses out there

that are needed to make all of our lives work. Yeah, but that's the cool part to me, right? You didn't, you're not sitting there at home thinking about lighting distribution, right? How did that come across your radar, so to speak? So lots of relationships that were built over 25 years and people knowing what I do, what I know, what our firm does. So we saw that from a regional, I would say investment banker, broker that was looking for a buyer for the company. So a lot of the companies that we're acquiring are either sourced through our network, you know, they're either proprietary through our network and it could be from, you might have a buddy that exit, right?

And or has a sick parent or I mean, like there's so many reasons why, you know, sales have to happen. And sometimes they just want to happen, right? Because it's a good business or someone wants to do more add-on acquisitions and grow their business but they don't have enough capital so they need a capital partner. So it could be your buddy, it could be the actual like sell side network, which is investment banking, all the brokers like nationally that are hired to sell businesses. Like we were really tapped into them as well.

But I see deals everywhere. It's like our you know, we're constantly looking. That's why I'm surprised to everyone. That's the other thing I tell you. Be nice to everyone. You never know. But and that's a weird spot. My experience is like if someone's bringing me a deal, usually I'm like, like, by the time it gets to me, is it is it a good deal? But so you probably how

many do you see? And then how many do you settle on? And by the way, that that is really critical, right? This is why why investors invest with firms like Kinsey and us. Yeah, because we see a lot of deals to close very little. So to give you an idea, we see probably an average of about anywhere between 900 to 1200 deals a year, and we will close one or two. Wow. So that's like, you're on a Zoom 17 times a day?

Well, not me, but that's why we have a whole team. Yeah, yeah. Yes. 1700. Yeah, probably. We're probably doing 20 Zoom calls, in-person meetings. We're flying all over the country. We're at conferences.

We're meeting with people. We're doing whatever we can to source, and then we have to assess them and get down to the finals. So that is one of the reasons why I think the sourcing is really critical in our business. It's not, you know, you have to turn over a lot of stones and get to the fishing pond first, you know, before everybody else gets there. And how do you do that? And look for ways to be resourceful. That's what I think about a lot, actually. I also do about my lighting

distribution business. And once we own them, you think about all the time. But that's where I spend a lot of my time. You know, how do we source better companies and see proprietary deals where there's less competition? Yeah, that seems right. If it's just on pitch book for the rest of the world to see. Yeah. Not as interesting. And then the relationships. Even if it's not proprietary, what's really important is do you have the relationships with the

bankers, the lawyers, the, and then can you establish a relationship with the seller so that they want to sell the business to you? And how do you, you know, make sure that you're being authentic and genuine and the culture fit is there? I mean, all those things matter. So I always, well, even if it's not a proprietary deal, we're always looking for a proprietary angle. Does the founders have a what's their general feeling towards private equity? Like a lot of them, as you said, they're like, oh, it

should be paid 15x. But then there's probably a few that are like, well, you're just going to put debt on this company and run it into the ground. No thanks. So there's various degrees of private capital, right? A fund like ours, we're very transparent. Our goal is to exit a business within five years and triple our money, right? And during that time. That's our goal. Yeah. On a net basis, you know,

like I tell my guys, like if the work and the effort that we're going to put in doesn't look like we have a good shot at that with a real path, like it's not worth it because we're putting a lot of effort and time into these companies. So we need to have at least a shot at really getting to an outcome. And you have investors, they want returns. Right. 100%. And that's how we're going to keep our investors and get new ones.

So I think that's always at the forefront for me is how do we make sure that we're hyper focused on returns? And in order to do that, you've got to have a differentiated strategy. You have to have the right resourcing. You have to be thinking about value creation in the portfolio companies, especially today in a high interest rate environment.

And then again, the good news is it's all relative. So if we outperform the rest of our peers and we'll outperform the rest of our peers, but I still would really like for my own capital sake also to get to, yeah, return. Not that I will, but like, you know, it's like caveated, but that's my, that's my goal. Yeah. That's the old saying goes, you can't eat relative returns. Right.

Awesome, Suzanne, I think we'll leave it there. You got any last thoughts for us? No, it was really fun. It's fun talking to you about this. I know we never really get to talk about the work. The real world. Yeah. We're always talking about our boys.

That's more fun actually. But this was fun as well. Alright, thanks so much. Bye. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmults and visit our website to read our blog or subscribe to our newsletter at rcmults.com.

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