On this week’s episode of the M&A Masters Podcast, we are joined by Brien Davis, Founder of Altacrest Capital. Altacrest is a private investment firm focused on consumer brands with enthusiast customer bases and centered mainly on e-commerce.
Giving clients the experience of an institutional sized team at the boutique level, Altacrest Capital’s focus on e-commerce has been even more fine-tuned in the virtual world of COVID.
We chat with Brien about his journey from big companies to lower middle markets, as well as:
- Building an investment thesis around e-commerce
- Flexibility and strengths of being an independent sponsor
- Growth in the e-commerce industry
- Risk and cost in transactions
- The e-commerce markets that will continue to grow post-COVID
- And more
MENTIONED IN THIS EPISODE:
Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Brien Davis, founder of Altacrest Capital. Altacrest is a Dallas based private investment firm focused on investing in consumer brands with enthusiast customer bases, largely through e-commerce. Brien it’s a pleasure to have you. Welcome to the show.
Brien Davis: Thank you for having me, it’s a joy to be on.
Patrick: Now, we’re going to get into Altacrest and where you’re dealing with all the cool kids with the enthusiast customer, right, all that stuff. But before we get into that, let’s start with you. What brought you to this point in your career?
Brien: Sure, no, it’s been a bit of an entrepreneurial journey for myself, you know, which has been fun, because we get to work with a lot of founders of these young brands that are kind of going to the next level. But I have a similar background to my two partners, we both came, or all three of us came from large financial institutions. And, you know, I worked at Prudential Private Capital for about 15 years. Wonderful group, wonderful, people really enjoyed it. However, you know, the transaction sizes were getting bigger and bigger.
And I frankly, wanted to do something where I could be a little more hands on and have a bigger impact on helping to grow, you know, smaller, middle market companies. And so, for me, it was a great fit to make the transition and make the leap from the big firm. And then, you know, head up into Altacrest Capital, which we did about three years ago. And my two partners were in a similar state of mind. One of them is Tim Laczkowski. He and I has worked together at Prudential for about 15 years. And then Rick Sukkar, who was at JP Morgan for for quite a while as well. So it’s been a good fit for all of us.
Patrick: Well, now you didn’t name it after after the founders, which is what, you know, your I would say, the less creative law firms and insurance firms are, they just named things after their founders? And I like I like getting an insight for a company, their culture and their background, a lot of it comes down to how they were named. So we’ll start with Altacrest, and how would you name and it, then we’ll talk about Altacrest.
Brien: Sure. It’s actually the ancient Roman god of no, I’m just kidding. Nothing to do with that. We actually do have a little bit of a family connection to it. So Tim, who I mentioned earlier, was actually the first one to leave the big institution. And he went out on his own, and originally came up with the name Altacrest. And it’s an acronym of his family’s name. It goes wife, Amy, and his sons, Luke, Tate, and Andrew and that’s the alta.
And then they loved to vacation and Crested Butte. And I’ve done it for years and years. And it’s a beautiful place. When Rick and I joined, it was interesting is like, well, that’s a pretty personal sounding name for for Tim. And we were all coming in as equal partners. But we liked the vibe, you know, frankly, because we’re three of us all been married long time, we’ve all got multiple kids, and, you know, very family oriented. And so it just, it seemed like a great fit. And so we stuck with it.
Patrick: Well, I think and Tim’s last name, pronounced it again for me.
Patrick: Okay, if you see the spelling of it, that’s a real tricky way. If you started using that same formula, put everybody’s name in there, I think it would have been even more duck soup. So, I think you took the path of least resistance. And you did that. One of the things you mentioned is how you had been in in the larger institutional capital.
And we’ll find out in a future episode, actually about your firm Prudential capital where they are not as institutional as you might think. But you were up there in the deals were getting bigger and bigger. And that’s been the trend for a lot of private equity firms, as things get bigger and bigger over time. But you’re committed to the lower middle market like we are. Talk about that a little bit. Why there? Why do you want to get your hands dirty?
Brien: I love it, you know, we’re dealing with mainly companies from about 2 million of EBITDA up to call it 10. And quite frankly, at that point, you oftentimes it’s a founder, who had a wonderful idea, and is great at getting the company launched, and gets to a certain point where, you know, he or she wants a little help, you know, taking it to the next level. And it’s, it’s a situation where, you know, they’ve got really good management teams, and they’re, they’re beginning to build those out. But there’s still a lot of room for, for growth.
And the nice thing about, you know, coming from a place like Prudential where we provide capital from larger companies, we’ve seen the roadmap, you know, so we know what those companies look like at that size, and we’ve got a good sense for how to help these businesses get there. And it’s great. I mean, there’s a lot of them at the lower middle market just in terms of the volume of types of companies that are there.
But it’s also just, you know, there’s just more help that they need and more kind of value add they can do you get into the consumer products side, there’s been some unique things with ecommerce and things like that, that have even driven even more need for and more development of some of these younger companies that are growing rapidly and have really taken advantage of the changing and consumer behavior.
Patrick: Yeah, I think what’s exciting about this is, first of all, there’s a large marketplace out there, when you look at the lower middle market. So there’s, I would almost say, idyllically, there’s plenty for everybody. But this segment of the market is really underserved. And what’s fantastic is, you know, you get these owner founders, and you’re right, they can take from nothing and create something, but they can’t scale it and get to a point of inflection where, okay, we’re, you know, we’re not really small, but we’re not big, what do we do.
And a lot of times, if they’re not informed, they may default to a strategic that may or may not have their best interests at heart. And so if they don’t do that, they go to an institution that maybe can’t meet all of their needs, but we’ll charge them a lot more money. And and that’s not serve them better. So it’s great that we can go ahead and put Altacrest capital out there and really highlight you as a destination, particularly for consumer brands. In ecommerce, that’s a nice niche, where, hey, here’s a place to turn because, you know, they’re getting the benefits of experience from an institutional sized team, but at the boutique level.
And so I think that’s fantastic. So I was thrilled to be able to have you there and spotlight a firm like Altacrest Capital. When you’re looking at this class of business, why this this line of business, the consumer products and the e-commerce? Why not just consumer products or whatever? Tell me about that.
Brien: Yeah, it’s been fun. So one of my partners, Rick Sukkar, he’s been in consumer products for 20 plus years. Yeah, he did the big JPMorgan, institutional M&A, investment banking thing. And then about, you know, 10 years ago or more now, he went out on the operating side. And so he’s been an operations on some of these smaller consumer brands that are growing. And in his instance, it was more omni channel. And by that we mean brick and mortar, ecommerce, any type of channel you can think of to sell your your widgets, and, but where he saw a lot of growth, and where they had a lot of success was was on the the e-commerce side.
You know, Tim, and I come from a more of a background with a strong focus on free cash flow, generation, margin, etc, etc, a lot of the great things that we learned through our investing time at Prudential. And when you took the experiences that the three of us had had, and this was early in our formation, like I said, we’ve been together for about three years, we fine tuned around this investment thesis around ecommerce. And the reason for that is a couple things. One, you’ve got a massive tailwind behind you.
And this year, we obviously came up with this thesis before COVID. But obviously, that’s helped it as well. But you’ve got the shift of people going from brick and mortar to e-commerce. And so that’s a nice tailwind. The other aspect of it is the ability to grow a young brand can be very cash efficient. You can outsource the manufacturing, you can do the product design in house. So you can keep from a capital expenditure standpoint, from a working capital standpoint, you can keep it relatively manageable, too.
And so it’s a great little free cash flow generation model. And so you take some of the industry aspects, some of the business model aspects of it were like this, this makes a lot of sense. Yeah, we really want to focus on this. And so we bought our first company, Barton Watch Bands, in November of 2018. And it’s been a great ride. I mean, we’re seeing just a lot of those things. play out now, we did not anticipate, you know, a global pandemic. That wasn’t part of the investment thesis.
Patrick: Neither do the the people from Zoom. But they’re doing ok.
Brien: Exactly, exactly. So, um, but, but now, we’ve been fine tuning that since then. And the other part of it that that made sense for us to focus on this niche is really our network. And we call it our Altacrest ecosystem, if you will. But it’s, we’re pretty hands on. Yeah, we we help out a lot if with anything from operations, whether it’s, you know, bringing in a consultant we’ve worked with for a long period of time to help refine things to hiring COOs.
On the marketing side, we get, you know, involved in terms of helping out on digital marketing strategies, different agencies to work with different particular people to work with. PR, etc, there’s a lot of different ways that we try to bring resources to bear to these small companies that that didn’t have them before, in an effort to accelerate growth. And so that’s, you know, sort of our experience level coupled with what’s going on in the industry seemed like a good fit for us. And so and it’s been fun. We’ve done three acquisitions now and hoping to do do more as we keep going.
Patrick: And with this, what you’re bringing to the table is, now you’ve got the experience in that particular space. So you’re not just doing financial engineering, you’ve got hands on operations, and we’ll talk about a layer but you’re also dealing with a human element, that gets, you know, can be vexing, quite frankly, for owners and founders. Particularly in e-commerce and consumer brands. Because their, their their focus is elsewhere.
And that’s a big blind spot, or can be a tragic blind spot for them. With your structure, okay, as an investment firm, you’re not a you know, big fund, private equity firm. Let’s talk about your setup. Why did you structure as otherwise known as an independent sponsor? What flexibility, or what strengths does it derive from that, as opposed to, you know, having a big fund behind you?
Brien: We like it for a number of reasons. You know, one, you know, capital availability hasn’t been the biggest hindrance to doing deals for for a while, and that does ebb and flow depending on what’s going on the the economy and things like that. But for attractive investments, capital’s generally generally available. You know, it’s been harder to find is,you know, attractive deals and in sectors that are in something that we wanted to be in. And so, you know, two things led to, you know, doing the independent sponsor model.
One, frankly, just being honest, is a lack of history of the three of us investing together within this investment strategy. And so that’s something that is typically desirable in terms of pulling together a committed fund is a track record of investing in the same strategy with the same people for over a period of time. You know, the, the other part of it is the fact that we just like it, we like the flexibility, we have a lot of relationships, both institutional and high net worth, if you look at the capital that we’ve put into our acquisitions, it’s it’s some of our own capital, in addition to a mixture of high net worth individuals and institutions.
Most of those high net worth individuals, frankly, are our former private equity guys and women of some ilk. And so we like that, too, because it’s a nice value added base that, frankly, we use to, you know, bounce questions off from time to time, as well, in some of our portfolio companies.
Patrick: And I would think, for sustainability, long term, you’re having this experience with these investors, and you’re, you know, having a track record of success. Should something change in the future, and you need to pivot, you can turn to them with a real great track record, if you did have to make a fund set up a fund, well, then you’ve got that source, I think that you’re keeping all of your options open. And you’re looking out for, obviously, what’s best for the companies that you’re investing you’re partnering with. And so why don’t we talk about that? What’s your profile of a target? What’s your ideal profile?
Brien: Sure, I mean, I think the best way to answer that might be just giving you an example of a recent transaction that we did. So in September of last year, so you know, right in the middle of COVID, we closed on a transaction with a company called Big Dot of Happiness. Big Dot of Happiness, makes party supplies. So think of things that you’re going to hand out at a bridal shower, or a birthday party or a 50th, you know, celebration of whatever graduation celebration. And right there, you may think we’re absolutely insane that we’re buying a company that is built around the gathering of people in the middle of a pandemic, when you can’t gather people.
But that’s a we, you know, the process started before COVID began in terms of us having conversations and it got it admittedly got stalled for a while as we all digested what was going on in the world. But but this is a great example of a of a management team and a founder, who were just really impressive and they successfully pivoted from doing, you know, a paper invitation that says come to my party to uninvitations. Hey, you’re not invited to my party because I can’t have one. And the beauty of that business and this is part of the beauty of e commerce is you know, they have in house creative. They have in house manufacturing. And they have the logistics to get the product out the door very quickly.
So they can go from idea to in a customer’s you know, home in about 48 hours. Which is what allowed them to pivot as quickly as they did. And so it’s a really nice business. We think that they’ve done a great job pivoting through the transition that we had, we think, obviously, as gathering start to come back together, and, you know, vaccinations, increase, etc, that it’s a great business to be in. But the rationale for the transaction was this is the founder that built the business over 20 years.
She wanted a partner to help her take it to the to the next level, you know, she is, you know, incredibly talented at what she does, but she’s been doing that particular work for for 20 years. We’ve got some other experiences, obviously, that we’ve had in our careers. And I’ve tried to bring some of those experiences to bear. You know, one of the things right now we’re working on is the operation side, you know, we recently hired a new CEO, we’re super excited to have him on board. And we think that we can create even more of these wonderful little products and even more efficient way with with somebody like that.
And so they wanted to partner help in growing and things like that. But they also saw upside of the business going forward. So that’s another common thing that we see in our transaction is a degree of rollover equity. So the founder typically owns call it 15 to 30%, post deal, and kind of gets that proverbial second bite of the apple. And so we don’t we don’t require that. But it seems to be all three deals that we’ve done, have had that element, which has been been interesting.
Patrick: Yeah, I don’t imagine your type of target looking for an exit at closing right now. They want to bring it to the next level.
Brien: Most do. I mean, like I said, there’s there’s pretty good tailwind in the industry. You know, and COVID has done nothing but accelerate that. I mean, there’s some interesting trends that we could talk about in consumer products, where, you know, not all things are created equal depends on what product categories you’re in as to how COVID has impacted you and how you’re likely to perform coming out of it. But yes, we we believe that there’s still a lot of runway to go and a lot of great growth, and we’re excited to partner with them and help them achieve that.
Patrick: Well, I think this is a great opportunity for this particular organization. Because I’d say just from personal experience, if you’re planning parties for a nine or 10 year old girl is amazing how quickly their tastes change, may have one theme one week, and then a week later, and quite frankly, this happened. I’m dating myself, but the movie, Peabody and Sherman came out. And my daughter automatically went from a princess type theme party to she wanted Peabody and Sherman in a week.
Brien: Right. Right.
Patrick: And as you know, scramble for my wife who wants to please her and everything and be you know, good mom.
Brien: Absolutely. Really competitive moms. That’s a good thing.
Patrick: I think that’s, I think that’s outstanding. One of the things that, you know, what I mentioned earlier on this is that, you know, the target your your, you’re coming for our new owners and founders, because you’re, you’re the lower middle market, these these organizations are just getting up off the ground. And you cannot remove the human element from these deals. And as fun and exciting as these deals are, they don’t happen in a vacuum, there’s risk. And what’s dangerous is where you have an experienced buyer, like you and your team that is working with an inexperienced, they’re not, you know, any lack of anything else, they just don’t do M&A every day.
And so for a lot of things that are familiar routine for you through the process, and they’re not familiar with the process, which can, you know, cause some stress. And, you know, going through the diligence process is one example. And once they’ve gone through that, they have the talk with their attorney about indemnification and how, what they hear in this and they’re not experienced, but you know, they hear the buyers essentially telling them, look, I know, we just went through this whole due diligence, but hey, in case we missed anything, we’re going to leave you on the hook to pay any of our losses for X number of years down the road.
But you know what, this is routine, there’s probably nothing out there. But you know what, you’re on the hook. And then the sellers looking, again, not experienced thinking. Wait a minute, I just told you everything I know. You can’t hold me responsible, financially responsible for something that I didn’t know about. And the buyer who’s experienced is going to have the immediate responses is wait a minute, I’m betting maybe 10s of millions of dollars that your memory is perfect. And I’m sorry, we just can’t do that. And so you have this, what started as a collaborative process through all this wear and tear, you’re at risk of it descending to an acrimonious, almost adversarial situation.
And you know, all of a sudden you’ve injected distrust into this and is part of the process and you know, the the seller eventually win the deal closes, the dust settles, they may forgive the process. But they don’t forget it. And the tragedy about that is all that can be avoided. And what’s very exciting with us in the insurance industry is, you know, we just come in, and we’re going to insure these deals. And so we will take through this product called rep and warranty insurance. We take the indemnity obligation away from the seller, and we take it to the insurance company.
So we just look at what the buyers diligence was on the seller reps, if they checked them out, hey, if those reps later get breached, come to us buyer, we will pay you. You don’t have to go ahead and clawback anything from the seller. So buyer has certainty of return if anything happens. Seller, well, the insurance replaces some or all of the escrow. So they get more cash at closing, so don’t have as much withheld. But even better, they get the peace of mind knowing that, hey, if something does blow up, you know what they get to keep all their money because the insurance company’s gonna take care of. And the tragedy is that if that isn’t brought in, then you risk this kind of acrimony happening.
And if it’s done, right, for the buyer, all they do is offer this coverage to the seller, the cost is so low, the seller will gladly pay the premium on this. So it’s cost free to the buyer to the buyer, arguably, a lot of times they split the cost, but it’s out there. And you know, it’s just a nice elegant solution, it was not available, this insurance was not available for, for deals under 100 million a couple years ago. It has now fallen down where companies that are transactional value of 10 million, as low as $10 million are now eligible. And so, you know, that’s a great thing that we can now bring to the lower middle market that wasn’t there. Now, but you know, don’t take my word for it. You know, Brien, good, bad or indifferent, what experience have you and your team had with with rep and warranty insurance?
Brien: Now, I’m a fan. I mean, I’ve I’ve been doing, you know, transactions long enough to have been on both sides of it back when there wasn’t insurance that was offered. I remember back when we you had to be really big transactions for our RWI insurance to to be in play. And I think it’s great to see it come down. It is for the reasons you talk about it, because, you know, you go through these transactions, and everybody does a ton of diligence, and you think that you’ve uncovered everything.
And I’ve especially in situations where where we are where we’re typically buying it from a founder, and, you know, they typically are still owning a chunk of the company going forward. And so, in, and I’ve had situations where, you know, unknowingly there’s a breach of the rep, you know, there was something out there that they didn’t realize, and you know, there’s either litigation coming in, or it’s a problem in it. And I’ve been in a situation where it’s material. And so it’s enough to where you’re gonna have to, you know, discuss and negotiate, you know, a reasonable outcome.
And that is, it’s a really hard place to be, it’s a hard place to be if they’re your partner, and they own part of the business, it’s an extremely hard place to be, if they’re still running that business. So that’s a, that’s a part of it, as well, that that occurs. And so we prefer to use rep and warranty insurance in our transactions for those reasons. You know, there is a little bit more diligence on the upside, but frankly, on the front side, that’s that’s a good thing. You know, I think figuring out more things before the deal happens, as opposed to after is always a good thing.
And and I would say I mean, you know, the cost is, you know, is fine. I mean, there’s these transactions are not, you know, we’re super cheap in terms of transaction expenses, and we all too are tied to our part to keep them keep them down and that sort of thing. But, you know, in my mind, it’s not an area to skimp in and it can really improve the relationship, you know, post deal.
Patrick: Yeah, I’m almost borderline on the part. Let’s, rep and warranty isn’t for every deal, there are some deals that just aren’t going to, you know, be eligible for. Where’s available, particularly if the seller number one and buy a lot of sellers and seller advisors and the investment bankers to get the pricing upfront. But, you know, if they’re willing to pay for it, I would almost think it’s just an act of good faith on the part of the buyer to say look, if you’re if you’re gonna pay for fine, let’s let’s move forward.
Where we see situations which are unfortunate or where you’ve got some buyer that, you know, 400 times the size of the target company, and they’re just gonna use leverage because they can’t, and and that that’s tragic, but you know, then again, hey, another reason why a firm like Altacrest Capital would be a lot more desirable because they’re gonna have good faith and work with you.
Brien: Yeah, yeah. No, and I think it’s a I mean, it’s a selling point, as buyer, if you say, yeah, we’re happy to do a rep and warranty policy as opposed to a big escrow, you know, it’s generally very advantageous to the seller. And so that’s a good thing. And I would say when it when, when rep and warranty insurance first came out, I would say there’s a little bit of trepidation of, you know, if you go, if you have a breach, and you’re going against the policy to get, you know, made a hole, what’s the likelihood of getting the claim, you know, relative to getting it out of an escrow for the seller.
And there was no concern when this was a more nascent industry. I, I personally have not had a claim. So I have to give that caveat. Right, I guess, insurance provider for reps and warranties. But I have been counseled by people that are very involved in including legal counsel and others that, frankly, they’re seeing it every bit as good, if not even better recoveries from an insurance provider, as opposed to trying to get it out of escrow.
Patrick: We just like, you know faster, cheaper, happier, is how we go on those. So no, but great, great response there, Brien. Now, as we’re coming coming through this year, now, we’re, I think, confidently looking at the beginning of the end of the pandemic. And you had referenced earlier that you’re aware of trends in the consumer products area. So COVID, no, COVID. Give us give us your perspective on what do you see down the road?
Brien: Yeah, I think it’s fascinating. I mean, I think M&A activity is, definitely picking up. You know, the second and third quarter of last year was pretty, you know, dead. And fourth quarter, first quarter, second quarter of you know, the last three quarters have definitely been picking up. Just in general, within the consumer space. I would say it’s been picking up more as well. But it’s interesting to see which companies are coming to market. And so within consumer world, you’ve got to think about okay, and in a COVID world, what has worked really well, anything tied to the home.
You know, we’re because people are spending more time at home, and then they ever have and home furnishings all that type of thing that’s been an interesting area of of growth. Yeah, how sustainable is that, you know, you could argue that everybody’s gonna go back to work, and that, you know, that, you know, ride is over. But but most people and I’m one of them, I think there’s some legs to, to some, you know, ongoing, you know, growth within the home industry, because I don’t know that people are going to go to the back to the office five days a week, you know, there’s going to be more home offices, there’s going to be more people working from home than than ever, ever before.
So that’s an interesting category to think about. And almost on the flip side of that would be apparel, especially apparel we use for work. You know, I mean, if you’re, you know, belts or something like that, where, you know, if you’re Lulu Lemon, I’m sure they’re killing it. Or, you know, anything like that sweat pants, anything, we’re outside of being on a Zoom call, you’re not not being seen day to day, those those categories are so well, but but apparel in general is definitely down. And so it’s part of the fun part of our job.
And part of the difficult part is figuring out, okay, we’re coming out of COVID I agree with you seemed like we’re starting to come out of COVID. And more and more people are getting active and doing things. But what is it going to mean for the next 2, 3, 5 years? And we don’t underwrite to, you know, six months or 12 months, or trying to think about 5, 7, 10 years down the road. But it’s, it’s gonna be a fun ride, as we figure this out. And there’s, you know, stimulus checks coming in that influence things. And, you know, there’s all sorts of factors going on.
Patrick: Yeah, I just found and again, I hate to, you know, make this about me, but I just from a personal experience, we’re seeing that, you know, what, we may not be getting home furnishings yet, but because of all the wear and tear on everybody being home, you know, last year, day in and day out, I have a feeling we’ve got a lot of worn out furniture. So those upgrades. And then definitely the wardrobe, at least maybe temporarily, because a few of us might might have added a little bit of weight during this time. So some of those office wear may not fit today. We may need a bridge.
Brien: Exactly, exactly. Yeah. No, it all kinds of, you know, unintended consequences. You’re not sure exactly how it’s gonna play out. But, but it’ll be fun to watch.
Patrick: Yeah, it’ll be it’ll be a great seeing a comeback, which, which is always a lot more fun than then a shutdown or a slowdown. So Brien Davis of Altacrest Capital. How can our audience members find you?
Brien: Sure. There’s a couple ways to reach us. Our website. Feel free to take a look at us there. It’s altacrestcapital.com. That’s a l t a c r e s t c a p i t a l.com. If you want to reach out to me directly you can always find me at LinkedIn there Brien Davis and I spell it funny b r i e n Davis or feel free to reach out and shoot me an email at Brien, b r i e n @altacrestcapital.com
Patrick: Yeah in our last conversation where you remember Brien’s name in the spelling is just think of the the Irish last name O’Brien. Drop off the O apostrophe br i e n. So I I’ve never forgotten that. Brien, absolute pleasure speaking with you fascinating with with the e commerce and consumer products because we’re usually seeing a lot of, you know, business to business stuff but real pleasure to meet you and I look forward to talking to you again soon.
Brien: Thank you. It’s been great talking to you as well. I enjoyed it.