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26 Jan An Interview with B12 Capital Partners

The following is an interview with B12 Capital Partners. The views expressed here are those of the interviewee. 

Can you please provide a brief history of your firm? Its founders?
B12 Capital Partners was started in late 2006 by myself (Greg Gaeddert) and Mike Wedel. Leaving my former private equity partners and a well-established firm, I wanted to establish a partnership with a better blend of financial and operating experience to serve the lower end of the market. To that end, Mike’s background was entirely from the operating perspective. Between us we have struck a pretty good balance over the years, slanted towards the operating side of the table, which was the intent. Mike and I added a third partner about a year ago to both increase our capacity and our firms’ capabilities, Dan had been an investor with us for the past 7-8 years, and has been a welcome addition to our day-to-day business efforts. Our model remains unchanged, yet as you will note in reading Dan’s bio, we have indeed successfully increased not only our capacity, but our capabilities with his impressive list of career experiences.

Tell us about your typical deal? Size? Industry? Geographic locale? Can you please provide an example?
Most of this you can get from our website, but we tend to do buyout transactions ranging in value from $3 million (if local), up to around $20 million. Our focus is on the Midwest, on branded product companies, generally serving the industrial product sectors or business-to-business distribution strategies. We will, however, vary from this for the right story, with the right operating partners, in the right geography. As we vary from our business-to-business, industrial product focus, we will tend to look more towards mezzanine and minority equity investments, still focusing on growth opportunities (as opposed to turnarounds). Even as we look outside of our primary focus industries, we tend to invest in businesses which we understand, have had some experience or association with, with an emphasis on businesses which we can grow through dealer-based distribution, manufacturer rep sales structures, or with operating structures based on building teams of in-house sales, engineering and manufacturing talent, all models which we have been successful with in the past.

How are your deals typically structured? Are you most often a majority investor or a minority investor? Do you prefer to keep existing management in place or do you simply take over the existing business with your own management?
As mentioned above, we do mostly buyouts, but are builders of businesses, or “growth guys”, and can’t resist a good minority investment with the right operating partners. As to the forward operation of the business, even though we may know the industries in which we participate, I have never seen a business perform well without the right operating team driving it, regardless of the board and/or investor background and investment structure. Without access to the right management talent (hopefully mostly already internal to the business), we will not make the investment.

What makes you different than other private equity firms? How does your differentiation make you a better buyer in a crowded market?
We are more operator than investor, and are often more comfortable on the operating side of the table which tends to resonate well with sellers. Our conversations and investment considerations align well with what selling shareholders are interested in (brand and/or family legacy, jobs for long-time employees and the community, and growth plans for the business). Our knowledge of the industry, manufacturing and distribution strategies, and potential new go-to-market strategies are what differentiate us. If this is not the case, we generally jointly agree that the opportunity is not a good fit for us, and move on.

What do you look for when you are courting target companies? What separates a good company from a great company? What are mistakes you have seen from targets that, if remedied, could make the process smoother for all involved?
Since we generally don’t get many opportunities to buy or invest in “great companies”, I’ll focus on the good. First and foremost the company must be positioned in an industry which will allow us to make institutionally attractive profit margin. From there, it’s all about the brand and/or reputation, as this generally reflects a good internal culture, excellent product quality, good customer service, etc. From there, we focus on what we can bring to the table to support the next phase of the company’s growth. Access to additional talent, product lines, distribution partners, supply chain enhancements, etc. all enter into our investment thesis.

What added value do you bring to the process? How can you further assist sellers in preparing them to be ready for exit?
Since we are not an investment banker, we generally don’t bring much assistance to the sellers in terms of preparation. What we offer them is a desirable solution for the transition of their business to new ownership. Letting go of “your baby” is not an easy thing and finding the right buyer fit should be the most important consideration on their mind. If the most important consideration is price, it generally means that there are cultural issues which will not align well with what we are looking for. Not that we won’t pay the highest price in a competitive situation, but if it’s all about price, then it’s probably not right for us, even if we are the best fit.

What is your typical investment horizon? How does your mission and goals for the fund impact your investment decisions and how you treat sellers’ businesses both short and long term?
It’s stretching. Although we would generally be viewed as the typical 4-7 year hold investor, we are tending to look more towards longer-term capital opportunities. As I said above, we are builders of businesses with a growth focus. If this is well-founded, sustainable growth which is what we are looking for, and we continue to like the brand and market position which we have helped develop, the longer-term should be as bright as the present which makes it hard to want to sell. We are not looking for short-term growth spurts, but long-term sustainable growth in revenues and profitability. We have been employees, owners and board members of family-held businesses as well as large corporates so we understand both the long-term perspective of the family business and the corporate manager, as well as the background in asset management, risk management and portfolio diversification.

Tell us about your buy-side process including the time it typically takes from initial engagement, through indication of interest, due diligence and through final close.
At B12 we try and make this process as personal as we can. We don’t believe in “blind dating” or “speed dating”. Without the appropriate level of interaction with management and ownership, we are not able to develop relationships, not able to become knowledgeable enough to develop a well-thought out investment thesis and unable to structure the targeted due diligence which needs to be done to prove out our thesis prior to making the investment. The right investment bank and the right seller understands and appreciates this perspective.

Tell us something interesting about your fund, its founders or managers that is typically not widespread knowledge.
Although you can tell from our bio’s that the partners all attended the same college (Bethel College in Kansas) for our undergraduate education, we were not college roommates, close friends, or teammates. We benefit from common experiences, common friends and acquaintances but also benefit from holding different personal interests, religious and political beliefs which leads us to quite different perspectives when triangulating on an investment opportunity, conversation with sellers or interaction with management.