Kim Bigg
Hello, again, and welcome to episode number seven of the Show Me the Perks podast. This is a first video podcast, and I’m excited to have Jake Haines from PEP Capital Solutions with us today. Welcome, Jake.
Jake Haines
Great to be here, Kim. Thanks for having me.
Kim Bigg
No problems at all. So we’ll jump straight into it. This is a little bit of a different episode and different run sheet. So pleased to have Jake with us. Jake, can you please provide a brief background on yourself, your career background before we jump into it?
Jake Haines
Yep. Jake Haines, I’m one of the partners here at Pacific Equity Partners.
I joined the firm about twenty two years ago. I started my career as a consultant with Bain and Company in Toronto, but majority of my time has been spent investing, structuring new investments, principally on the equity side of things. And so, I know we’ll come to it, but our sort of evolution as a business into into credit, is something that I’ve now been leading for the last five years and really keen to fill yourself in.
Kim Bigg
Excellent. Thanks, Jake.
And just to clarify, you’re the Managing Director of Capital Solutions at Pacific Equity Partners?
Jake Haines
I run our Capital Solutions program, which as I mentioned is the credit initiative within Pacific Equity Partners.
Kim Bigg
Excellent. Great to hear from you. And it sounds like you have a very wide and varied career overseas and otherwise. I believe you also had a role setting up private equity in New York. Was that right? With that was the role with Bain and Cap?
Jake Haines
Yeah.
I spent a few years in New York actually setting up the US principal investing business for Babcock and Brown.
And then transitioned back, did that for three years, transitioned back into Pacific Equity Partners.
My direct relevance in credit over my years has been being really involved in all of our structurings and restructurings on the equity side of the business in addition to an operational role as well. And so, when we, as a firm, decided that credit investing was something we thought we were really keen to explore, it was something sort of near and dear to my skill set and also my interest level as well.
Kim Bigg
Fantastic. No. Very good. That is a good summary of where you’ve been and where you’re heading.
So I’ll jump straight into the the general questions that I’ve got for you today. So I’d just like you to give a bit of a summary for the listeners on Pep Capital Solutions product. So this is a product that’s been developed over a number of years. I’m gonna say ten or a bit longer than that, Jake.
Jake Haines
Well, the initial idea started probably about ten years ago.
And the genesis really of it, Kim, was, as I mentioned, Pacific Equity Partners, traditionally a mid market private equity investor. Yep. That means we’re looking to take a control position in the companies that we’re investing in.
Take a lead role in governance, really help shape the strategy, and then ultimately look to exit that investment at a point in time. So that’s sort of been the core of the business. What we realized over the years was along the way, we were getting introduced to a lot of different businesses where that idea of selling equity at this particular point in time wasn’t particularly interesting to them. And oftentimes, it was for good reasons.
You know? They felt like there was real growth ahead of them, but they needed capital to help express that growth. And probably most importantly, they needed a little bit of help alongside that.
And what we thought was, you know, isn’t that great? We’ve got a business that’s been built on assessing good businesses, figuring out ways to get capital into them to help them grow materially, is there a way that we can get comfortable not being in control in those situations and delivering the benefits of nondilutive capital to those businesses while still bringing to bear some of that value add the toolkit that we’ve developed from the equity side of the business. Yep. And that really was the genesis of Capital Solutions.
What we’re looking to do, because we’re not in control, is use a senior secured credit instrument to get capital into good growing businesses and then support them alongside with our operational toolkit.
Kim Bigg
Excellent. And just provide a breakdown of the industry sectors that you’re commonly providing capital into in that mid market area?
Jake Haines
We’re generalist investors. It’s part of what we’ve always been. We like the industry makeup in Australia and New Zealand relative to the US and Europe is really quite attractive.
Scale businesses in particularly advantaged competitive positions, high sustainable margins, opportunities to grow accretively and a balanced competitive landscape.
So, we really like that kinda mid market space. We want to invest as broadly across that as we can.
But where our particular focus is to look at nondiscretionary, very stable industries where there’s a lack of uncontrollable or exogenous risk.
So think about consumer staples, industrials, financials, health care, education.
Kim Bigg
Food, agribusiness.
Jake Haines
Exactly right. Boring and stable, we love that. We love that.
Kim Bigg
That plays to our strength as well as accountants. So we love that stable workflow as well. So you’re pitching to the converted there. Yeah. And just to give our listeners a bit of a guide, in your world at least, what do you classify as mid market focus? So in terms of EBITDA and size? What sort of size are these businesses that you’re providing funding for?
Jake Haines
Typical size would be above ten million of profit up to about fifty or so. Yep. We’ve got some exceptions that are larger than that situationally, but mid market for us, that is about the sweet spot.
And where what we’re looking to do, Kim, is typically deploy between fifty and about a hundred and fifty million dollars into those situations. And where we can be the primary source of debt capital. So, it is really forming a proper partnership.
Kim Bigg
And that’s definitely how you see this role as well. It’s a partnership between Pep Capital Solutions and the business themselves. I’m probably jumping ahead to a question later, but in terms of timing and how long do these relationships tend to extend into? Are these five year, ten year, or beyond, or all of those options in between potentially?
Jake Haines
The initial term of the loan is about three to five years is the typical range. Yep. We would love if circumstances are right, the business is performing to find more ways to keep that capital deployed. Yep. I think on balance, we’ll see in our portfolio, a third of our companies find alternative capital, probably bank financing, which is is significantly cheaper and suits their stage of evolution at that point in time.
I would say a third of the businesses will find a home with different shareholders. There’ll be a liquidity event Yep. And a refinancing that results there. And then the hope would be a third we continue to find different ways to have our capital exposed to them Yep. And help them continue to grow.
Kim Bigg
Yep. Yeah. Excellent. Yeah. And that’s a good summary. So in other words, you’re not necessarily looking for an exit per se.
And if the long you look at it as being a relationship with these SME businesses or mid market with the focus being you’re looking for solutions for their growth profile, but that may come, you know, your role, your funding role may take many forms. It could be to help them get through to an exit. It could be to get to the point where they can have senior secured funding from a major bank or otherwise. Yeah.
You’ve got many exits if you like down the track.
Jake Haines
Exactly right.
Kim Bigg
So I’ll jump onto the next question here. So these are more indicative questions that are just around the product itself. Probably got a this question’s in two tranches.
Why did you choose mid market, and is there a reason why you focus not on other areas as in know, companies that have got EBITDAS well north of, you know, fifty or a hundred million or things like that because that market’s saturated with other competitors? You You know, what is it that you think Pep Capital Solutions, what sets you apart from others if we’re thinking through what businesses and clients of Perks may be thinking? What is it that Pep Capital Solutions offers that, you know, sets you apart from your competitors? Yeah.
Jake Haines
Yeah. I mean, I’ll start with why did we choose the mid market? I think the short answer around that is it’s what we know. It’s where as a firm across all of our strategies, it’s where we invest. Yep. And I think over time, what we’ve seen, Kim, is the ability with the benefit of capital, appropriate support, and a really focused agenda as to where you’re directing those resources.
It can have such a dramatic impact on that scale of business. You know, we internally always think about validating, you know, can we, within a three-to-five-year period, double the profits of our investee companies across the firm? And when you’re dealing in that mid market space, what we’ve seen over the years is that you really are able to get that level of change going in that period. And for us, you know, that is a real part of our value proposition as we talk to companies both on the equity and on the debt side is that track record of being able to drive that doubling in profit. Yep. And within that space, we find that, you know, there just are tons of opportunities to actually affect that magnitude of change.
Kim Bigg
So to some extent, your value proposition is better within the mid market, which is why you’ve concentrated there.
Jake Haines
For sure. And, you know, I think taking the other side of your question, which is we know we work really well in that space, it also happens to be a space on the credit side of things that is relatively underserved by other forms of credit capital. Yep. You know, you’ve got folks at the smaller end doing tickets up to twenty five or thirty million, and then you’ve got the big globals who might be doing the large really large end of town, and they’re looking to deploy two, three hundred million per transaction.
So competitively, we find it’s a nice, quite protected moat.
Kim Bigg
Yep. And you raised a few good points in there around what you look for in business. And this ties to my next question. What typically do you look for in a growth business?
And perhaps discuss a little bit around your value proposition, which you already have, around what are you looking for in a business? You mentioned a bit how you sit alongside business, and you see it as a relationship. What does that mean in practical terms? What could business owners be they’re thinking of, you know, PEP Capital Solutions as a funding model for themselves.
What should they be expecting that to look like?
Jake Haines
Yeah. Our business across all of our strategies is built on backing good what we call good business. Pretty generic. What do we mean by good business?
Stable and sustainable.
Kim Bigg
Sustainable but still with a growth profile ahead of them.
Is that Exactly.
And so we think about the gates of diligence as we progress in opportunity is definitely through, is this business going to continue to exist in at least the form that we can see today five, ten, twenty, thirty years down the road?
And once you get past that point, then it’s the second lever is, okay. And are there real tangible controllable levers to grow from that base? Yep. But paramount importance to us and particularly on the credit side, given our position in the capital structure, is to ensure that that stable base is there because we can underwrite against that stable base. We ultimately want the growth to be achieved, but we’re not underwriting the success of that growth in terms of our risk proposition. Yep. So we really spend our time focused on, you know, where does the business sit within its market, its competitive position, its track record of growth, the quality of the management team, the robustness of its policies and procedures and controls, all of those things that go to, you know, is it a stable ship that we’re backing here?
Kim Bigg
Yeah. Absolutely. You’ve touched on a few things there and it’s around this business plan and how high quality the management personnel is within those businesses, which I’m sure probably becomes a factor in terms of your risk profile that you attach to any funding and, ultimately, probably the interest rate that you apply.
Jake Haines
It’s critical. I mean, our basic strategy, Kim, is to underwrite a consistent level of risk. So we wanna find the same level of good risk, and then we wanna focus on those situations where those companies are willing to bring us in as a partner and value the skills and toolkits that we can bring alongside to help them grow.
And you mentioned, you know, how does that actually practically work? In a lot of instances, it’s relatively light touch in that we’ve got really deep networks across you know, you can imagine all of those areas of strategic interest for folks. You know, if it’s around supply chain management, if it’s around, you know, up skilling their and institutionalizing their management team, if it’s about, you know, shaping the business for a public market’s exit or whatever it might be. You know, we’ve got twenty six years of deep experience executing all of those playbooks.
We can introduce them to folks who we know have been battle tested in each of those areas. We can help them ourselves with our own resources, but it’s situational. We’re not telling them what to do. We’re just providing resource if and when they they want that.
And that’s sort of the proposition. And for that, what we’re trying to do is differentiate our capital from the capital of the banks and other funds on the basis that we can credibly get them to where they wanna go to.
And if they get to where they wanna go, the fact that maybe they had to pay us a hundred or two hundred basis points more is irrelevant in the scheme of the value that’s been created. Yep.
Kim Bigg
Exactly right. But is there any perhaps for some of the business owners out there who are listening, is there, you know, do you take a look at all comers? When I say all comers, someone may have these steady, stable, strong businesses that you talk of. They may have what in their minds may appear very modest growth targets.
They may just wanna expand into a slight tangent product or might be a new market in a new city, but overall, the growth profile is not gonna change wildly. You know, is that something that bothers you or you, you know, you take on board all comers and say, what what’s the profile here? What are they looking for? And if there’s a solution to be had, then that’s still works for you.
Jake Haines
Yeah. I would say it’s situational. So it definitely is not there needs to be big bang growth, and that’s all we’re backing. Yep. Primarily because our capital’s going in as a senior secured instrument.
We don’t have to believe that. And so it’s much more about is the business active in looking to continue to grow andbetter itself, whatever that looks like. Because what we found is if you have a backward leaning management team and shareholder base, the business is much more vulnerable.
Yep. So, in whatever shape or form, we wanna have that team leaning forward, whatever that looks like for them. And it may be ten percent growth is what they’re interested in. Or they want to, you know, focus on building a new line in the back of the plant because it’s going to add operational efficiencies.
All we wanna see is that the capital that goes in is going to help increase the value of the business.
And in those situations, if they’re also willing then to invite us in along on that journeyand recognize that our capital will attract a premium for that, that is a great sort of situation for us.
Kim Bigg
And just quickly, you mentioned a couple of examples there. Typically, what is the funding used for? You know, things like an expansion into new state, new product lines,tangential industries, things like that. Is that typically what it’s used for?
Jake Haines
It’s a wide range. So I would start at the shareholder side. Sometimes it’s shareholders transitioning. So one partner buying out another partner and then looking to have some capacity for growth funding in the business.
It might be m&a driven initially. Yep. So there’s a target that they’ve got. They wanna do that, and then there may be some investment to integrate and grow from that combined base. Yep. And maybe more specific growth initiatives like you mentioned, which is geographic expansion, product expansion and all manner of things sort of in between. In between.
Kim Bigg
Yeah. Yeah. Excellent.
Now I’m gonna throw two questions to you on a case study side of things. So one is, I’ll read them both out now so that then you can come at this answer whichever way you like. So one is I’d love to hear an example from yourself of an example of where you’ve had a really profound impact on a business through providing your funding and just led to a really great outcome. If you can if there’s examples that you can provide and provide names, great. If not, without names is okay as well. I mean, the other one is just if you can imagine that there’s listeners to this podcast, and I’m hoping that there are given we’re only seven episodes in. If there’s businesses who are listening and thinking, I would fit the bill here or if they’re just trying to imagine and hypothesize what this funding might look like for them, you know, what does an approach to Pep Capital Solutions look like in terms of what should they be thinking about in preparation for reaching out to you?
Jake Haines
Yeah. For sure. Well, I mean, let me start with maybe an example from within the portfolio.
I won’t mention names just for discretion on that front, but this was and there are several examples, but the one I’ll use that sort of touched more of our toolkit than some of the others is a deal we did probably about three years ago. So we’ve been on the journey with them for quite some time. It was a a business in the the non bank space.
They’d been around for twenty five years, still owned a hundred percent by the founding shareholder.
What we really liked about them was they’d seen all manner of cycles, and they built a business that was truly resilient to all of those impacts that they’d seen.
They also had a what we viewed as a modest ambition, which was they weren’t looking to take over the world. They knew the lanes that they played well within, and they were keen to grow from that base. Yep. They also had a view that there was a component of technology that could be applied to their business in a again, not a flashy blow your brains out development project, but actually something that had real tangible value from a process perspective that was gonna drive real efficiency.
And so they had an existing relationship with one of the big four banks, and we’re looking to refinance them out on the basis that the bank had simply said, listen. We’re not interested in continuing to support you. You’re a little bit small and you’re not core.
And and that was sort of it, which was disappointing to them. But we spent a lot of time getting to know them. And, ultimately, we could see that there was a really clear path ahead of them.
And so, we structured a committed facility. It was a fifty million dollar facility that they could progressively draw, and we allowed them flexibility to draw over a period of time that was sort of longer than what most banks would provide for certainly, and allowed them to go off and and get on with that and at the same time, use some of that funding for working capital and technology investment. And so the first year of that relationship was really about them continuing to grow their book and get their system up and running to where they wanted it to be.
The second year was continued growth and then adapting to the interest rate environment. Yep. As interest rates started to rise and they looked inward in terms of how they were growing their business and managing a compression in spreads that were resulting from all of that. And for us, it was sort of a a textbook case of a business that had the comfort of funding and the confidence in a partner that you were on the journey together could actually navigate that environment really quite well.
And what they ended up doing was building out into a couple of adjacent businesseswhere they saw competitors because of that NIM squeeze that was happening, retreating from, and they opportunistically moved into them. We supported them with our capital. They grew quite strongly through that and had drawn our facility almost fully, but we’re realizing a lot of cash inflows back. And we realized they could go and refinance us tomorrow off the back of this, but I think we both were really enjoying the journey together.
And so we said, listen. Pay us down with the cash you’ve got on balance sheet, and let’s reload for the next step of this journey. Yep. And the next step of the journey wasfor us to then look at an acquisition together.
Yep. And so we’re actually just mid step on that currently.
But, you know, it’s sort of just an an interesting view of the businesses change and evolve, and particularly in that mid market space.
What you look at one year may look very different two and three years down the line.
Kim Bigg
Yeah. And increasingly, the the bank’s, appetite changes at the same time as well, which is probably what happened there.
Jake Haines
Yeah. It does. And I think just having someone with capital, but also who’s happy to sit next to you Yeah. Understand the landscape and work with that capital to shape it for what you need, I think, increasingly is something that’s differentiated in a world which is is much more driven by cookie cutter solutions and fairly inflexible approaches.
Kim Bigg
Well, your interests are aligned because you’re both benefiting from a success of the business moving forward. So when you treat it like a relationship in that way, it works really well opposed to the bank who probably treats some of these things a little bit too transactionally rather than as a relationship.
Jake Haines
So Yeah. Absolutely.
Absolutely.
And so to the second part of your question, Kim, you know, what what do we look for,and how might that translate to folks in their particular circumstances, good solid base, you know, the extent to which, you know, they are experienced, have track record, and can evidence that they are well positioned to sustain themselves going forward. We really look as we go through businesses, we look for those hallmarks of what we think are successful management like. You know, we get you have to invest in a cost base early in the development of a business. But seeing that cost base continueto grow over time and sometimes outpace revenue for us is a feels like some folks are getting ahead of themselves a little bit.
So we look at simple markers like fixed cost leverage. Are you able to get margin expansion as you’re growing top line while keeping those basic fixed cost stable? Reporting and processes, it’s a great signal for us.
We get into a business. We wanna see what does a management report look like? What’s the span of control?
Who’s responsible for what decisions? Delegated authority.
Simple blocking and tackling, which for us is just a real reflection of professionalism and so on.
Yeah. Exactly. Exactly.
Kim Bigg
Them, you know, three weeks to come up with a set of management reports that probably gives you a bit of an insight into how long it’s gonna take to request information down the track.
Jake Haines
Exact and it’s a big flag because if it takes them that long, you know, what are they making decisions on within the business? You know, if they don’t have that information to hand yeah. All of those types of things. Pretty basic stuff.
But it really does differentiate, you know, good solid well managed businesses from others, which might get there. But typically, we’re not looking to back those companies at that stage if they aren’t quite there yet. Yeah. We’re happy to help them get there, but we know the limitations of where our capital sits and how it best works.
Kim Bigg
So you almost have a checklist if you like, where people who may be thinking about this either now or within the next twelve months should probably take a look at these things and go, I actually need to reflect on my own business and work out. Am I actually as well placed as I think I am, or do I need to tidy a few things up so that I’m actually ready for that ready for this journey?
Jake Haines
So We do.
And we actually do have a checklist. Yeah. I would call it more of an appraisal framework, but every new deal that comes in the door gets pushed through that framework, and we assess it on that basis.
Kim Bigg
Appraisal framework sounds like a much better term than a checklist, so let’s go with that.
Very good. That’s probably bringing us close to the end of today’s podcast. So we’re coming up on, twenty nine minutes. So I think that’s gonna work very well.
We send a round out at around about the twenty to thirty minute mark, but that’s been really insightful and really give me a great understanding of how that works. And I’m sure there are sort of small and medium businesses out there or mid market businesses as you refer to who you know, this has probably given them some food for thought to wonder whether, you know, is a line on length bank actually giving them what they need to move forward in their business? Or is this giving them something else to think about partnering up with someone like Pep Capital Solutions? So yeah.
Jake Haines
For sure, I’d say, you know, more and more, there are alternatives out there. So Yeah. Do some research, dig around. But, you know, as you say, I think really focus inwards as well and understand, the state of your own business, where it is, and what are those things that you can do to make it more attractive for incoming capital of all kinds.
Kim Bigg
Yeah. Absolutely. Excellent. Alright. Well, thank you again for coming on a Show Me the Perks podcast.
Today is also a video cast. So depending on our ability to pull off the technology, we will try to get that posted on a few social media sites as well. So, yeah, really appreciate you coming on board and agreeing to to speak with me, and, yeah, look forward to speaking with you again soon. We might have to get you back on again in a year or so’s time to see how you’re tracking.
Jake Haines
I’d welcome it, Kim. Thanks for the time.
Excellent. Thanks a lot.
