Transcript | PULSE Episode 01
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R. Adam Smith:
We're here today with Robert Brown, managing director and head of Americas for Lincoln International, a leading investment bank around the world that he's been at for around 20 years. An old friend of mine and expert dealing with middle market, private companies and a range of company matters across M&A capital raising. We're kicking off the first series of the PULSE podcast series for Wisdom Board. Wisdom Board is a community-centric services firm that we formed recently to bring thoughtful leadership to boards and also their CEOs and stakeholders and empowering those owners and directors to optimize and modernize their governance. Rob, it's great to have you today and to see how great you and your firm are doing. It's very strong day in the market. How are things looking for you and your firm this year?
Robert Brown:
They're actually looking quite well right now. I think if I go back to my crystal ball in the spring in April or May, it was wrong and it was wrong on two fronts. I think given the uncertainty with the pandemic and the economic volatility, I think we really felt two things. One that regular way or healthier return driven M&A was going to really, really slow materially. And we thought that there'd be a real spike in stressed and distressed activity, and we were wrong in both of those fronts. And I think what's happened as this year has played out that any business that has a 'good COVID story' and you can define that very broadly. That can be businesses that perform well during COVID. That could be businesses that were hard hit, but bounced back very quickly. It can be businesses that are just in a sector that are going to be viewed as more favorable as a result of some fundamental shifts as a result of the pandemic.
Robert Brown:
Those businesses, if there's a good COVID story to tell, there's lots of capital that wants to be put to work into those businesses. And I think that's a result of, if you look at the amount of money raised over the last five years in private equity, but also sitting on the balance sheets of corporate America, they're the number one goal. We have a growth conference every year. And at the end of 2019, we surveyed all our private equity groups at that conference. Their number one goal coming into the year was to put capital to work at a better clip. Well, they had four months where they couldn't put it to work. Now, these businesses are coming to market that have very good stories to tell in the face of a lot of economic uncertainty. And as a result, values are as high as they were for those businesses prior to the downturn.
Robert Brown:
The flip side of it is the lenders have been incredibly patient. There's a lot of businesses that were treading water prior to the downturn that you're now you would have thought the lenders would have forced something to happen, they were overlevered. There's two things that have happened. The sponsors that really supported their companies. And I think the lenders given what's going on with the stimulus, we've had a lot of stimulus that may have masked some issues. There may be more coming. The lenders have been very, very patient. So we've seen much less stress and stress work than we thought. And not just us. You could see it in the market.
Robert Brown:
So as we head into next year and our backlog continues to build, next year could be that strange year where you have a very good M&A market in certain sectors of the economy, and you have a very good restructuring or distressed market in other sectors. Normally that's not the case. You usually have one or the other. So we're going to finish this year, both in the US and globally materially better than we anticipated. And I think globally, I think we'll be down less than 10% from last year, which was a record year up 31% over 2018.
R. Adam Smith:
Sounds great. It sounds like you might need to have a bunch of smart resumes to keep hiring and bringing talent to the firm in a competitive marketplace. And you guys have over 600 people in the firm. It's quite a scale and success story having formed the firm just in 1996. I think you've been there for most of that time and joined in '98. So tell us a bit about your journey coming into banking from PWC, which is quite an interesting path and how you and your partners are going to form seems like there's also a great deal of loyalty at Lincoln. So I'd love to hear more about the formation of the firm culture there.
Robert Brown:
Yeah. A bunch of good questions to unpack there. My personal journey was I came out of the University of Illinois, which at the time had the number one accounting program in the country. And never had any real love to be an accountant, but figured that was the best degree I could get. So I came out and like everybody else down there worked for what was one of the big six. It was actually the big eight when I was interviewing. And then they all merged. They merged to become the big six now the big four. So I started my career at Price Waterhouse in audit. I then moved to New York to work in their transaction services group at a time when private equity was really emerging from a cottage industry in the late '80s and early '90s, to a little more organized industry. So what I was doing was mostly financial due diligence and transaction structuring. That actually gave me exposure to investment banking in M&A because every deal we worked on, there was an investment banker who was the lead advisor.
Robert Brown:
And so I then went back to business school at Columbia, which Adam, you were also a proud alumnus of. And the firm paid for that. I then came out to work in to Price Waterhouse as credit. What they did was they formed a wholly owned broker dealer that was going to do middle-market M&A. They went on Wall Street and hired real bankers. They were trying to replicate the investment banking share in the US that a lot of these firms have in Europe. In Europe, the big four accounting firms have large shares of the middle market investment banking fee pool. It turned out the regulatory environment in the US was going to make it a lot harder to do that. I was doing middle market M&A at Price Waterhouse and we were building a great practice. The firm announced the merger with Coopers, which changed the people, changed the strategy.
Robert Brown:
I had moved back to Chicago to help start up the group there. And I really liked what I was doing. It was clear Price Waterhouse was not going to be the right platform to do it on. So I started interviewing. And as you pointed out, this was '98 and the market was pretty hot at that point. And so I overnight got offers from bulge bracket firms, some regional firms that are now competitors today. And was deciding, do I want to do a bulge bracket firm or a middle-market firm? And then I met these guys that were just getting this investment bank off the ground. There was six guys and really connected with the guys and actually was the best decision I ever made for totally flawed logic because the logic was, I got these other jobs overnight. This is an opportunity to really start something, help build something, get it off the ground.
Robert Brown:
And if it doesn't work, which most startups don't, I can always go back to those other places. So what's my downside? Other than I had two kids and a pregnant wife at the time. Joined at the time what was Lincoln Partners and I was the seventh employee and it was clear we had something unique. We had a unique culture. We always were looking five years out. And so I won't take you through all of it, but it ended up being totally flawed logic because we started growing this firm. Initially we focused only on corporate divestitures. We ended up selling all these corporate orphans because all our relationships were with large corporates and largely industrial. We ended up selling all these corporate orphans to the private equity world, which at the time, as I said before, was moving from kind of a cottage industry to a much more organized high growth industry.
Robert Brown:
Well then, so a lot of household names today, they formed when we formed. We grew up with Audax. We grew up with the Riverside Company and we grew up with [inaudible 00:07:37], they were starting when we started. So it wasn't rocket science to say, "Oh, we sold these businesses to private equity. They're going to have to sell them. We should stay in front of these businesses." So we got lucky that we formed our firm when private equity was forming. We got lucky that we really focused on the right sectors of the economy. And so we started getting momentum. And then when we hit the downturn of '01, we had a decision to make that I think, put us on a real path for success. And everybody talks about the Great Recession. People forget how deep and quick the downturn of '01 was, it didn't last as long as the '09 recession.
Robert Brown:
But for us, we were growing this firm and we were getting some traction, but we didn't really have a brand name. It was really hard to recruit talent sometimes. So what happened in '01 is the investment banks cut really deep. Merrill Lynch, Chicago went from 65 bankers to 16. William Blair let go 40% of their non-partner staff. And so for us, for the first time, people in a normal economy wouldn't be available. Really good people are available. There was no deals to do. We actually took a contrarian view and say, "Let's bet this is going to be a short and hire a bunch of these people." And we did that and it was a bit of a white knuckle ride. Several of us took no money out of the firm and we were right.
Robert Brown:
And so when that economy came back quicker than people thought, it was really the first time where people said, "Wow, not only did Lincoln not lay anybody off, they actually went in and hired some really good people." So we came out of that with momentum. We then determined we wanted to be the most international from the middle market. There was really no global firms in the middle market. And so we had a real focus spearheaded by our chairman, Jim Lawson and myself. We spent months in Europe looking for the right partner-
R. Adam Smith:
Jim Lawson is still at the firm. And it seems like in 2006 you guys merged with a boutique called Peters Associates that most people wouldn't know, just like the partners that were from PaineWebber. A lot of people may not recall that name. And how tricky was that merger in terms of integration and where does it bring you guys today in terms of scale?
Robert Brown:
Yeah. And that's interesting. And it wasn't as tricky as we thought, because we were looking for somebody that could really be our partner in Europe. They were looking for somebody that could really be the partner in the US. And Peter's Associates was found by Hans Peter Peters, who was the former head of Morgan Stanley in Germany. And he formed this boutique and we'll get to this in a minute. The secret sauce of Lincoln is our culture, but we had a real cultural bond with Peter. So we thought, what would just be a partnership where we'd refer things back and forth. After less than a year, we realized this would be so much more powerful if we were one firm and one brand. And we merged them into us and we moved from Lincoln Partners to Lincoln International, not because we wanted to change the name.
Robert Brown:
It turns out under German law if you have the word partners in your name, you have to be an unlimited liability flow-through entity. And we were not going to do that. So we had to change the name. But that really was unique and that nobody had really done that in the middle market. So once we announced that almost simultaneously, the KPMG M&A practice went through their own Sarbanes-Oxley type laws. They were now restricted from doing work with private equity. They joined us, they peeled out completely. And today that's still our French office. So overnight we went from two offices in the world, one in New York, one in Chicago to four offices in the world, Chicago, New York, Frankfurt, Paris. And then it really snowballed from there because we then emerged as, "Oh, Lincoln's really global." And then we did a greenfield and in London we hired the right guy and built around him.
Robert Brown:
What we started realizing is the structure didn't matter. You could do a merger, you could do a lift out of another firm. You could hire a leader and build around. What mattered was finding a leader that shared your culture and your vision. And so today, if you fast forward it, we are the most global firm in the middle market. We've got 23 offices in 17 countries, half our people outside of the US, half our transaction is outside of the US. And 40% of what we do globally in some way, shape or form is cross border.
R. Adam Smith:
That's great. Thank you for sharing that and the firm's culture and the steps you've gone through in the merger is dealing with many, many private companies around the world really brings us to the heart of today's matter, which is to bring expertise and empathy and support to private owners and their founders and investors in M&A context which can be quite tricky. I read once that almost half of mergers don't work very well, or they have issues in succession, in transitioning and synergies. And so it really raises the issue of investigating your clients and their needs and their complexities and wanting to do well by them. Tell us about how the firm works with private companies and the leadership and board level of those companies. And what are the critical areas for them to think about it preparing for a sale?
Robert Brown:
Yeah. Great question, Adam. And I think just to frame this out, if you look at our business, 75% of what we do is mergers and acquisitions. 90% of that is working with sellers of businesses where they want to monetize their investment. So if you look at the sell side M&A portion of our business, it's by far the largest portion of what we do. And there's really three distinct groups of clients in there. There's corporate investors, which I mentioned how we started the firm. Today, it's less than 10% of what we do, where you're working with large corporations on selling off a subsidiary, a division assets. Then there's private equity, which has become the real juggernaut of middle market transactions because so many firms have been raised. And Adam you know this, you were in that business for a long time. And there's private companies, and they're all kind of intertwined because the thing that private equity likes more than anything is to be the first institutional investor in a private company.
Robert Brown:
So working with private companies is really, really important, but I think there's something about private companies that segregates the other two, right? If you look at corporate divestitures and you look at private equity, when they're selling a company, there's always other objectives, but by far, the number one objective is get me the best price for this business, right? There's less of an emotional attachment. They're often less complicated ownership structures. So there's always some other considerations. It might be timing. It might be other things, but it's heavily weighted towards just go get me the best price. If I look at private companies and a lot of the private companies we've sold, I think the key to success and something I think Lincoln has been particularly good at. And you alluded to this, Adam is really spend time with them before you go to market and spend time with the owners and management.
Robert Brown:
Sometimes are the same people. Sometimes the owners and management of private companies are the same people. Sometimes they're different people, but understand that in private companies, almost always the non-value objectives can be equally or sometimes more important than the value objectives. You touched on it. What's going to happen with succession? What's going to happen with my employees? We've been in this community for 100 years. We don't want somebody moving this facility out of this community. So I think a really important thing in dealing with private companies is really understand, yes, value is important. Everybody wants to feel like they're selling the business. Like the ultimate buyer, their business is seeing the value that's being provided. So I'm not trying to diminish that with private companies, but you will have a much harder time getting a deal done if you don't address whatever those other objectives are.
Robert Brown:
They can be timing, they can be succession, they can be role, right? Somebody may say, "Listen, I really want to spend my grandfather's company than my father's. I still want to run it. I'll take a lower value in a contract still run, or maybe the opposite. I need to walk away day one. I can never work for somebody else." Whatever it is, understand those objectives in detail. And when you go to the market to talk to investors and you're getting feedback, you have to make sure you're not just getting feedback on price and terms. You have to get feedback on those other issues, roll forward, whatever it is. So I think really listening and understanding what's important to your client and structuring a sale process around that is probably the most important thing. And I think a lot of times people say, "Oh, with private companies, the numbers aren't as good. And you've got to make sure they're positioned for sale because..."
Robert Brown:
Yes, you have to do some of that. But I really view that as blocking and tackling, helping companies get prepared for sale. And we can talk about that if you want to. But I think the most important thing is forcing private sellers to articulate to you what is really important to you in doing this.
R. Adam Smith:
That's a great point and at Wisdom Board we're building a community that goes beyond the traditional leavers and topics of governance and KPIs into their culture, into their philosophy, into ethics, into the balance of the employees and retention and loyalty. And there's a lot of subtleties there that result in companies being more successful, but also having a cultural stickiness that makes it hard for the founders to let go or to agree with also the determinations of the board and their governance. There's often some conflict there, and there's some sticky times when the pride and the emotional commitment to that legacy can be in conflict or tension with the duties of the board if there is a board.
Robert Brown:
There's a much greater emotional attachment to the business and private sellers. And interestingly, you have to understand that it's a singular event. And we, I think every deal we work on, we try to approach as a singular event. But with private sellers, particularly in, if it's a multi-generational family business, you have to understand that this is a singular event in their lives. And you have to approach it with the duty of care that reflects that.
R. Adam Smith:
Singular event sounds quite intimidating. You've had a firm also at Lincoln, perhaps being Midwestern in heart, perhaps being built by four or so, founders that worked together at PaineWebber, and they cared about each other's opinions and wanted to build that culture of continuity. Your firm has been ranked five years in a row, one of the best places to work in investment banking. Clearly you can't make everyone happy, but how do you apply those learnings of culture and employee retention and support, and continuous improvement to the empathy and understanding of the cultures of these private companies within the context of being hired to sell them? Sometimes it isn't a great sale. Sometimes the strategic is difficult to work with exposing a lot of important information. Sometimes they founders don't like the attitudes or the personalities of the scary private equity world. So walk us through what are your three recommendations to the CEO owners at these private companies as they really get to the finish line?
Robert Brown:
The secret of Lincoln has not been that we're smarter than our competition. It's not been because we work on better deals than our competition. I think we're equal on those things. The secret to Lincoln has been since the very beginning, a unique and maniacal focus on a culture that starts with attracting, retaining and engaging people first. If we do that, the clients and the deals and the fees will come. So that's easy to say, it's hard to do. And I think culture is important in any organization, is particularly important to professional services organization because your people are your product. And so from a culture standpoint, if something's going to be important to you, you need to do three things. You need to define it. You need to define it at a pretty granular level. You need to measure against it. Are we living up to our cultural promise? And then you have to manage to it.
Robert Brown:
And so that in and of itself is advice that I think you need to give to leaders of any business, particularly privately held companies. You're going to have a culture you can choose to manage it and define it, or you can let it manage it and define itself. We actually have a 65 page culture document. We actually modeled it after the Netflix culture document, which if a private owner has not seen that document, go download it off the internet. It's by many business school professors considered the best culture doc put together. We then have a third party that comes in. So we have the 65 page document on culture. There's a one page summary of it that's up in every floor and every office globally. But really the meat of the behaviors we think that make us unique are embedded in this document. We then measure against it.
Robert Brown:
We have a third party that comes in every year and does our engagement survey. We view employee engagement as a proxy for, are we living up to our cultural promise or not? And it's like, nirvana, you never get there. You can always improve. And so we get that data back. We slice it by geographic office. We slice it by industry group, by product group, by level. And we've say, okay, where are we falling below an acceptable level of engagement? And then we go to the leaders of that group. We put focus groups together to get to the issues. And we ask them to put a plan together. And we're doing this every single year. And I will tell you as somebody that sits on our global management committee, as somebody that sits on our US management committee, as CEO of our largest business, that engagement survey is our most important management tool. Tells us what's going on with our employees. And it gives us measureables to react to.
Robert Brown:
So as a general thing to any business owner, I think particularly for private companies, you should think about your culture. You should think about because in today's market, the war for talent is real. And if you have a culture where people want to be there, you're going to win on the business side. So I think that would be one thing I would, one recommendation I would have to business owners. And culture comes through when a buyer looks at your business, right? They're going to know, do you have a culture where it's likely people are going to stay there? Or do you have a culture where it's likely people are going to leave this transaction? And that's a risk item that's going to get factored into deals. The second piece of advice I would give to private business owners that if you know you've got some shareholder issues, you've got family member shareholder issues, you've got shareholders who don't trust each other. They don't agree with each other, some in the business, some outside of the business.
R. Adam Smith:
They need to talk beforehand a lot more.
Robert Brown:
Yes. You have to find a way to deal with that. If you say, "Well, we'll go out to the market, we'll get a bunch of good values in, and then everyone will be happy and it'll kind of take care of itself." That never ever happens. And so I do think Adam, you really need... And part of this is governance. You can pay for some of this, but part of it is really taking time to understand what's important to all the stakeholders and shareholders and trying to get some alignment before you go talk to investors. You can hire an investment bank. You can get ready to go to market. You can put the book together. You can start doing all that in the background, but don't pull the trigger on engaging investors till you've got absolute clarity on what's important to all the shareholders. And if you need to do some things to align them, align them.
Robert Brown:
Because that's where we've seen private deals fall apart is that they kind of felt, "Well, a great value and the right alley, everybody will be on board. I'll be able to convince everybody, the CEO." And then they can't. And then the deal can't get done. And emotions get in the way of what's the right decision. I would say the third one is a little more blocking and tackling and we're seeing less and less of this. If you want and maybe I'll do three and four. I think three is make sure the quality of your financial results is good, right? If your private company's never had an audit, go get an audit. It's not that expensive. And if you think you're going to sell in the next 12 to 18 months, go get an audit.
Robert Brown:
And you'd be surprised at how many companies, Adam, we still run into that don't have an audit. And so the business will be easier to finance. The other thing I would say for private companies that they don't always think about this, and it creates a risk item that can result in lower values is, think about succession. Really think about succession and think about it at the top three, four or five levels. It's one thing private equity tends to do very, very well. If they're going to go to market with a business where they have a CEO that wants to do something else or an aging management team, they give lots of comfort around succession. And I think sometimes private sellers say, "Well, the new buyer can figure that out." And they can, but if there's risk around that, it's just going to result in a lower value for your business.
R. Adam Smith:
Well, fortunately 13 years ago, I worked with you across the table and the company that we were able to buy from you and your client. We had a built in succession plan with a operating partner, and that did a great job from your Chicago friends that found that partners, which is a great firm. So we'll wrap up this podcast today, but share us a bit, lastly of your thoughts on what is your favorite part of your day at Lincoln? What really stands out, you [inaudible 00:23:56] door every day and what do you feel makes you happy there?
Robert Brown:
Obviously you can't survive in this business if you don't love serving clients. So helping clients achieve their objectives, helping them around problems, that's incredibly rewarding. But I think the number one thing, and it gets a little to culture. I look at the amount of people I call partners today that I helped recruit when they were analysts or associates. And so being at a firm that has such a relentless focus on culture and seeing these young men and women develop into being partners and current and future leaders of the firm for myself personally, that's been the most rewarding thing of my career.
R. Adam Smith:
That's great. Well, that's very encouraging and often view cutthroat business of investment banking. You guys are doing a great job and Wisdom Board appreciates your time and sharing your own wisdom with our community. Thanks for joining today as our [inaudible 00:24:49] guest for our PULSE podcast series. And we're pleased to bring you this wisdom in 20 minutes. Thank you Rob.
Robert Brown:
Great. Always good to talk with you Adam.
R. Adam Smith:
Have a great day.