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Behind the Buyouts: HCI's McCormick on Consolidating Fragmented Markets · The Deal by S&P Global

• 0:00
  Nikitha Sattiraju: Hello, and welcome to Behind the Buyout, The Deal's podcast, where we speak to private equity and venture capital practitioners about their deals and dealmaking.
• 0:08
  Nikitha Sattiraju: I'm your guest host, Nikita Sattiraju, senior reporter at The Deal.
• 0:12
  Nikitha Sattiraju: We have with us today, Doug McCormick, co-founder and managing partner at private equity firm HCI Equity.
• 0:18
  Nikitha Sattiraju: He's here to talk to us about the firm's investment strategy, its portfolio companies, and the state of M&A in 2025.
• 0:25
  Nikitha Sattiraju: Doug, thanks for joining us.
• 0:27
  Doug McCormick: Well, thanks for having me.
• 0:28
  Doug McCormick: Look forward to the discussion.
• 0:29
  Nikitha Sattiraju: Great.
• 0:29
  Nikitha Sattiraju: So let's jump right into it.
• 0:31
  Nikitha Sattiraju: I want to start with talking about your career and how you got to starting HCI.
• 0:35
  Doug McCormick: Great.
• 0:36
  Doug McCormick: So it's been kind of long, dating myself here a little bit, but a rather non-traditional start.
• 0:40
  Doug McCormick: So I went to undergrad school at the United States Military Academy.
• 0:44
  Doug McCormick: And so right after graduation, I had a five-year stint in active duty, concluded that was a great experience for me and really foundational to, I think, some of my leadership styles today, but ultimately decided it was an adventure, not a career for me, and I was going to do something else.
• 1:00
  Doug McCormick: So I got out, went back to business school at Harvard, studied undergrad as an econ major, and so wanted to get back into something closer to that.
• 1:08
  Doug McCormick: Studied finance, spent some time at Morgan Stanley, and then ultimately migrated down to DC in 1999 to join a mentor of mine, Fred Malek, at Thayer Capital.
• 1:18
  Doug McCormick: And after several years of being in the business, decided to co-found my own firm with two other partners.
• 1:24
  Doug McCormick: We did that in the early 2000s.
• 1:26
  Doug McCormick: And so I've been at it for almost two decades now and often say I've had the luxury of being an investor, but also an entrepreneur and a business builder.
• 1:36
  Doug McCormick: And so I've found it tremendously rewarding and always growing, sometimes nerve wracking, but a lot of fun along the way.
• 1:44
  Nikitha Sattiraju: That's great.
• 1:44
  Nikitha Sattiraju: And I want to know more about how your time in the Army defines your leadership and management style, because I imagine that seeps into HCI's philosophy as well.
• 1:54
  Nikitha Sattiraju: Maybe if you could talk a little bit more about that.
• 1:56
  Doug McCormick: Yeah, I think it does.
• 1:57
  Doug McCormick: And people often thank me for my service.
• 1:59
  Doug McCormick: And I always say I got so much more out of the experience than I had the opportunity to give.
• 2:04
  Doug McCormick: But I think the Army and the services in general, they act as a great laboratory for practicing leadership, especially for young folks.
• 2:11
  Doug McCormick: You get a fair amount of responsibility, an opportunity to lead.
• 2:15
  Doug McCormick: You know, when I was 24, I was leading a platoon of 30 individuals.
• 2:19
  Doug McCormick: And so it's a real great kind of testing ground.
• 2:22
  Doug McCormick: And I think a lot of the leadership principles I learned then, even the very different circumstances, apply today in how I run the business.
• 2:30
  Doug McCormick: But candidly, I think in many cases, the leadership challenges at the portfolio companies are greater than the leadership challenges at the firm.
• 2:38
  Doug McCormick: And so a lot of this applies to portfolio companies.
• 2:40
  Doug McCormick: But it's really kind of three key themes.
• 2:42
  Doug McCormick: The first is the concept of servant leadership.
• 2:45
  Doug McCormick: And I think that's an approach where As a leader, you're trying to create the environment with the resources and the clarity of mandate that allow people to maximize their potential.
• 2:54
  Doug McCormick: The second is this whole concept of clarity of mission or clarity of mandate.
• 2:59
  Doug McCormick: And I think that the services do a great job of that.
• 3:02
  Doug McCormick: And the last thing I'd say is a concept of this called principled leadership.
• 3:06
  Doug McCormick: Essentially, that's how you think about your values and how they influence the way you run the business.
• 3:11
  Doug McCormick: So anyways, I've enjoyed practicing my leadership style in a very different environment here for the last 25 years.
• 3:17
  Nikitha Sattiraju: That's really great.
• 3:18
  Nikitha Sattiraju: So tell us about HCI's investment strategy and what it looks like.
• 3:22
  Nikitha Sattiraju: Obviously, we talked about how it's evolved over the past two decades, and we'll get back to that.
• 3:27
  Nikitha Sattiraju: But I want to start with what it looks like today.
• 3:30
  Doug McCormick: Sure.
• 3:30
  Doug McCormick: So just a real quick snapshot of HCI.
• 3:32
  Doug McCormick: We're based in Washington, D.C.
• 3:34
  Doug McCormick: We've got a little more than 20 investment professionals.
• 3:36
  Doug McCormick: And I would say that's a pretty large and it's a very tenured team.
• 3:40
  Doug McCormick: Given the size of the firm, we manage about a billion three in assets.
• 3:44
  Doug McCormick: And that's also reflective of our strategy, which is very hands-on in the very lower part of the middle market.
• 3:50
  Doug McCormick: And I think that's a strategy that requires more kind of human capital per dollar of asset managed.
• 3:55
  Doug McCormick: And very simplistically, our strategy is to create exceptional return by targeting or driving what we call transformational growth in these very large fragmented and stable markets.
• 4:09
  Doug McCormick: And so when I say transformational growth, if we execute a strategy that's got M&A as the foundation of growth, well, we would expect to be able to grow a business by 10 times its original size.
• 4:19
  Doug McCormick: And so essentially, we're getting these very small entry points in these very large markets.
• 4:24
  Doug McCormick: And then we're helping the team grow rapidly through M&A.
• 4:27
  Doug McCormick: And then we're also trying to scale the team at the same time so that they have the organizational capabilities required to run a business of greater complexity and greater scale.
• 4:38
  Doug McCormick: And I think we apply that strategy around a couple different key criteria.
• 4:43
  Doug McCormick: The first is, I mentioned, really large fragmented market that's very stable.
• 4:47
  Doug McCormick: For us, the ability to underwrite follow-on M&A is every bit as important as the growth prospects of the business.
• 4:54
  Doug McCormick: We apply that strategy around three different types of business models.
• 4:59
  Doug McCormick: One is technician-based services, which we'll talk more about today.
• 5:02
  Doug McCormick: The other is distribution businesses.
• 5:05
  Doug McCormick: And the third is what we call kind of basic manufacturing.
• 5:08
  Doug McCormick: And our general belief is Business models are durable.
• 5:12
  Doug McCormick: So if you can underwrite effectively and understand deeply the value drivers of a business model, that's a recipe for success.
• 5:20
  Doug McCormick: And on the contrary, it's very hard to predict growth rates of certain markets five and 10 years out.
• 5:25
  Doug McCormick: So we have more conviction in our ability to underwrite a durable business model and then try to drive growth through M&A and other things.
• 5:32
  Doug McCormick: And then the last thing I would highlight is this strategy forces us into thinking the lower part of the middle market where often we are first institutional capital in and we're partnering with families and founders to provide them liquidity, but also help them realize their ambitions of growing through M&A.
• 5:50
  Doug McCormick: So that was a mouthful, but that's the strategy and the firm overview in a nutshell.
• 5:56
  Nikitha Sattiraju: Sounds great.
• 5:56
  Nikitha Sattiraju: And I know we'll talk about this more, but just being like one of the first mover in these markets is it just applies so well to Tech 24, which is one of my favorite investments to talk about.
• 6:05
  Nikitha Sattiraju: But I do want to know how this strategy as it stands today evolved.
• 6:10
  Nikitha Sattiraju: Has it always been the case when you started the firm or have things changed as you went about investing?
• 6:15
  Doug McCormick: So, yeah, I mentioned earlier on one of my approaches to leadership is principal leadership.
• 6:21
  Doug McCormick: So we have a couple of different values that we focus on internally.
• 6:24
  Doug McCormick: And there are two that are interesting to me in this context.
• 6:27
  Doug McCormick: One is insatiable curiosity and the other is a commitment to continuous improvement.
• 6:31
  Doug McCormick: And so as a general matter of my belief, especially in this market, because it's had tremendous success.
• 6:37
  Doug McCormick: Tremendous success has resulted in tremendous growth, which means increased competition, right?
• 6:42
  Doug McCormick: So in the last 25 years that I've been involved, you've seen a dynamic where prices of assets have gone up.
• 6:48
  Doug McCormick: And for the most part, leverage has stayed the same or gone down.
• 6:51
  Doug McCormick: And so the only way to replicate those really attractive returns that the industry's experienced is to do a better job of adding value during your ownership period.
• 7:01
  Doug McCormick: And so I think a couple of things that have evolved for us is, number one, we continue to get better as the market does.
• 7:07
  Doug McCormick: Number two, we've seen that M&A can be really a great value driver and help us achieve those growth ambitions that we're trying to accomplish.
• 7:16
  Doug McCormick: And as we've executed those strategies, I think we've realized the importance of having a really capable operations team to help these businesses keep up with the change that's resulting from the M&A.
• 7:28
  Doug McCormick: And so we've invested heavily in our ops team, and I think have gotten better at finding the points of engagement that provide real leverage to the management teams.
• 7:37
  Nikitha Sattiraju: That's really interesting.
• 7:38
  Nikitha Sattiraju: And the operations team, is that sector-specific?
• 7:41
  Nikitha Sattiraju: Do you have people who are experts in, say, services or manufacturing?
• 7:45
  Nikitha Sattiraju: How does that work?
• 7:46
  Doug McCormick: Yeah, I think we think about it a little bit differently.
• 7:49
  Doug McCormick: If my investment teams have expertise in underwriting business models, and in some cases, end markets, I think the operations teams define their capabilities by functional expertise.
• 7:59
  Doug McCormick: And so we have some folks that are great at human capital, great at marketing, great at supply chain and logistics, great at kind of Lean Six Sigma.
• 8:09
  Doug McCormick: And so I think it's more around that functional expertise than it is the end market application.
• 8:14
  Nikitha Sattiraju: Got it.
• 8:15
  Nikitha Sattiraju: So since you do focus on the lower middle market for your starting platforms, at least, what is the usual business size over there?
• 8:23
  Nikitha Sattiraju: Like, is there a certain EBITDA or revenue range that you prefer to invest in?
• 8:28
  Doug McCormick: Yeah, so in general, we're trying to essentially serve as a packager of subscale assets.
• 8:33
  Doug McCormick: So we can create this scale and then ultimately sell that into a much broader, more liquid, deeper market, generally other private equity firms.
• 8:41
  Doug McCormick: And so we find that most of the value that we see is in assets that are less than 10 million of EBITDA.
• 8:48
  Doug McCormick: And in many cases, a couple.
• 8:50
  Doug McCormick: So two, three, four is very comfortable for us.
• 8:54
  Nikitha Sattiraju: Absolutely.
• 8:54
  Nikitha Sattiraju: I mean, for some markets, two, three, four million of EBITDA is like one of the largest.
• 8:59
  Nikitha Sattiraju: So I want to talk about some of the portfolio companies that HCI is currently invested in or has invested in in the past and maybe starting with Tech24, like I said, one of my favorite assets to talk about.
• 9:12
  Nikitha Sattiraju: Maybe you could walk us through how that partnership came about and how it's grown over the years under HCI's leadership.
• 9:19
  Doug McCormick: rst of all, I'm going to bring you back to the strategy for a second and just highlight Tech24 is basically a food service equipment repair business.
• 9:27
  Doug McCormick: So think about all of the installed refrigerators, fryers, and ovens across the country in some kind of retail format, whether it be restaurant, grocery store, or convenience store, or sometimes institutions like army depots or universities, et cetera.
• 9:42
  Doug McCormick: And so once again, if you get back to our strategy, really large market, food service equipment repairs, about a $10 billion plus market, very fragmented.
• 9:53
  Doug McCormick: and also a very nice, long-term stable demand profile.
• 9:57
  Doug McCormick: This market generally grows slightly more than GDP, but the install base is so large and so vast that in any given MSA or region, things will break pretty predictably.
• 10:08
  Doug McCormick: And so it creates a nice, stable market, which we can then use to go as an attractive backdrop to scale through M&A.
• 10:15
  Doug McCormick: So that was the premise that initially attracted us to this.
• 10:19
  Doug McCormick: I say we don't necessarily try to underrate end markets.
• 10:22
  Doug McCormick: In this particular case, we felt like we had a couple angles.
• 10:25
  Doug McCormick: We also own a big business called Amercare Royal whic does food service consumables to many of the same customers that Tech24 would sell to.
• 10:34
  Doug McCormick: So we had perspective on that customer set.
• 10:37
  Doug McCormick: And then our operating partner, Bob Hund, used to be president of Manitowoc, which is a food service equipment business.
• 10:45
  Doug McCormick: So he also had some perspective.
• 10:47
  Doug McCormick: So And I think as we looked at this opportunity, we said we had the market backdrop that was very nice for us.
• 10:53
  Doug McCormick: We had some perspective from ACR and then we had our operating capabilities.
• 10:57
  Doug McCormick: Ultimately, we trafficked in this space for probably almost 24 months before we found a platform and finally found Tech24.
• 11:05
  Doug McCormick: They were initially looking to do a refinancing.
• 11:08
  Doug McCormick: But as the deal played out, this transaction happened right in the front end of COVID and So we ultimately just bought a majority interest in the business, knowing that we were going to have to navigate the volatility of COVID.
• 11:22
  Doug McCormick: So that's a snapshot of how we got in.
• 11:24
  Doug McCormick: I
• 11:25
  Nikitha Sattiraju: I love the bit about kind of doing it even when it was at the beginning of COVID, because this is a business that's focused heavily on restaurants.
• 11:33
  Nikitha Sattiraju: So I'd love to know more about your thinking and what gave you the conviction that you will be able to get through that volatility and come out of the other side and continue to grow?
• 11:42
  Doug McCormick: Yeah.
• 11:43
  Doug McCormick: So lots of hand-wringing.
• 11:44
  Doug McCormick: an investment committee talking about the positives and challenges of the investment.
• 11:49
  Doug McCormick: We love the business model.
• 11:50
  Doug McCormick: We loved the market backdrop that I talked about.
• 11:52
  Doug McCormick: Yet we were facing significant unknown in the context of what were the implications of COVID.
• 11:58
  Doug McCormick: So we did a bunch of scenario analysis and ultimately convinced ourselves of a couple of things.
• 12:03
  Doug McCormick: One, that if we capitalize the business with very low debt or almost no debt initially, we would have the flexibility to kind of manage through it.
• 12:11
  Doug McCormick: And the second is, while we didn't know how long COVID was going to last, and the implications to this end market, we did feel like ultimately this business model would remain intact.
• 12:22
  Doug McCormick: At some point, people are going to go back to restaurants.
• 12:24
  Doug McCormick: At some point, this equipment will break with usage.
• 12:26
  Doug McCormick: And so it was really about navigating that period of uncertainty.
• 12:30
  Doug McCormick: So relative to our investment case, I think we were surprised on the upside to a couple things.
• 12:35
  Doug McCormick: We assumed demand for the services would decrease dramatically.
• 12:40
  Doug McCormick: And some of that did happen.
• 12:41
  Doug McCormick: But two things surprised us.
• 12:43
  Doug McCormick: One was When you shut down a kitchen, the demand for this kind of service stops.
• 12:47
  Doug McCormick: But when you start it back up, you often break things.
• 12:50
  Doug McCormick: And so there are often incremental services associated with a startup.
• 12:54
  Doug McCormick: The second is many restaurants quickly figured out that takeout packaging away from home food was the way to service the customer set.
• 13:01
  Doug McCormick: And so takeout grew exponentially.
• 13:04
  Doug McCormick: And that still created the demand for these kind of services.
• 13:08
  Doug McCormick: And the last thing that I kind of find is almost amusing.
• 13:11
  Doug McCormick: We didn't appreciate how reduced traffic patterns would impact the efficiency of our technicians.
• 13:19
  Doug McCormick: And so we had fewer technicians doing more work because they could get to the job location more efficiently.
• 13:25
  Doug McCormick: So ultimately, we were able to navigate the most challenging parts of COVID pretty well.
• 13:30
  Doug McCormick: And at the same time, I think we had a landscape where a number of entrepreneurs felt like it made more sense to join a larger, well-capitalized business to navigate this uncertainty than go it alone.
• 13:41
  Doug McCormick: And so we were on a really successful run in the course of 30 months.
• 13:46
  Doug McCormick: I think we did 24 acquisitions.
• 13:48
  Doug McCormick: And so we're really able to scale the business in this period as well.
• 13:52
  Nikitha Sattiraju: That's really great.
• 13:53
  Nikitha Sattiraju: And Tech24, over the next few years, I'm curious to know, is that acquisition piece going to continue?
• 14:00
  Nikitha Sattiraju: Are there any geographies where the portfolio company is kind of more focused on to build density, build scale?
• 14:06
  Doug McCormick: Yeah, I would say one of the things that I love about the consolidation or buy and build strategy in the lower part of the middle market is, there is so much white space, right?
• 14:14
  Doug McCormick: So since we've been involved in the business, we've grown it probably over 10 times and we're still a very small percentage of the market.
• 14:22
  Doug McCormick: The game plan go forward is pretty much do what we've been doing, just continue to do it faster.
• 14:27
  Doug McCormick: And in terms of parts of the market that are really interesting, I think grocery store is a pretty interesting market and we're relatively under penetrated there.
• 14:35
  Doug McCormick: Convenience stores are growing exponentially.
• 14:38
  Doug McCormick: relatively rapidly compared to other restaurant options.
• 14:42
  Doug McCormick: And so I think that's a place that is also interesting to us.
• 14:45
  Doug McCormick: But I think, you know, our continued focus will be really driving growth through M&A.
• 14:50
  Doug McCormick: We have a national footprint, but it's focused on the major MSAs.
• 14:55
  Doug McCormick: There's still lots of areas that we think we could have greater concentration.
• 14:59
  Nikitha Sattiraju: I want to switch industries for a second and talk about distribution and auto aftermarket distribution in particular, which is another really interesting space to be in, I imagine, now more than ever.
• 15:09
  Nikitha Sattiraju: So I would love to talk about Driven Distribution Group and how that investment came about.
• 15:14
  Doug McCormick: Sure thing.
• 15:15
  Doug McCormick: So first of all, we did this deal in November of 23.
• 15:18
  Doug McCormick: Driven Distribution is an automotive aftermarket parts distribution business, and we do hard parts and we also do accessory products for vehicles.
• 15:27
  Doug McCormick: We thought this was interesting.
• 15:30
  Doug McCormick: Again, you go back to some common themes that you'll hear similarities to Tech24.
• 15:34
  Doug McCormick: The automotive aftermarket business is huge.
• 15:37
  Doug McCormick: It's probably a market in excess of $100 billion.
• 15:39
  Doug McCormick: Very recession resistant because demand profile is a combination of miles driven and age of the installed vehicles across the country.
• 15:49
  Doug McCormick: So really predictable demand profile.
• 15:52
  Doug McCormick: And we also like...
• 15:53
  Doug McCormick: the complexity of the supply chain.
• 15:56
  Doug McCormick: And in this case, complexity manifests itself in two different ways.
• 15:59
  Doug McCormick: One is you've got parts complexity.
• 16:01
  Doug McCormick: Parts don't fit on different vehicles or different models.
• 16:05
  Doug McCormick: And then you also have channel complexity, where you can get a part through the place you bought it.
• 16:10
  Doug McCormick: You can get your part through a commercial repair shop.
• 16:12
  Doug McCormick: You can get your part online potentially.
• 16:14
  Doug McCormick: And so the disparate channels also create complexity.
• 16:17
  Doug McCormick: And in our mind, a distribution business is most effective when the industry presents what we kind of look at as an hourglass structure, where you've got a lot of fragmented supply base, and you've got a lot of fragmented buyers, and the distribution business is serving as that critical choke point to aggregate the basket of goods and then distribute it or fulfill it efficiently.
• 16:39
  Doug McCormick: So we felt like it had all the interesting market attributes.
• 16:43
  Doug McCormick: I would tell you, we got a lot of, I don't know if pushback's the right word, but a lot of feedback from investors.
• 16:49
  Doug McCormick: And we thought about this deal that Everybody was kind of fixated on the rapid displacement of combustion engine from EV.
• 16:56
  Doug McCormick: And so it's a little bit of contrarian play that I think has actually worked well for us on the following fronts.
• 17:01
  Doug McCormick: While EV continues to grow rapidly, since we did the deal in '23, the expectations for EV penetration have come down dramatically.
• 17:09
  Doug McCormick: So for this business, that has positive implications.
• 17:12
  Doug McCormick: But also, we got really comfortable with this install-based concept.
• 17:15
  Doug McCormick: Even as the EV market grows rapidly, the install base here is...
• 17:20
  Doug McCormick: going to be around for a long time and require servicing and as it ages, require more service.
• 17:24
  Doug McCormick: And then lastly, our core assets are in kind of the Texas market and in the penetration game.
• 17:32
  Doug McCormick: Those are relatively lower penetration areas.
• 17:35
  Doug McCormick: So for a bunch of reasons, we thought it was pretty interesting and a little bit of a contrarian play.
• 17:41
  Nikitha Sattiraju: That's really interesting.
• 17:42
  Nikitha Sattiraju: And for Driven Distribution too, I imagine there's an M&A piece to that because it's also a fragmented market.
• 17:48
  Nikitha Sattiraju: I'd love to know more about what that strategy looks like there.
• 17:51
  Doug McCormick: Sure is.
• 17:51
  Doug McCormick: And so earlier days in the consolidation, but we've consummated one acquisition.
• 17:56
  Doug McCormick: So that's one add-on acquisition.
• 17:58
  Doug McCormick: So the platform and add-on, and we have a couple more in the pipeline.
• 18:02
  Doug McCormick: You'll notice the velocity and distribution and manufacturing is slower than services.
• 18:08
  Doug McCormick: So at Tech24, I told you we did 24 deals in 30 months.
• 18:11
  Doug McCormick: But the integration lift for a technician-based service business is a lot lighter.
• 18:15
  Doug McCormick: And in distribution businesses, to get the real value of the acquisition, you've got to be able to integrate.
• 18:21
  Doug McCormick: You've got to be able to consolidate purchases.
• 18:24
  Doug McCormick: And the IT integration, I think, is a heavier lift.
• 18:27
  Doug McCormick: So the deals are chunkier, i.e.
• 18:29
  Doug McCormick: bigger, and we do them less frequently.
• 18:31
  Doug McCormick: But I think you'll see this business doing one or two deals a year during our course of ownership period.
• 18:37
  Doug McCormick: And I think that should give us...
• 18:39
  Doug McCormick: shot on some pretty explosive growth here as well.
• 18:42
  Nikitha Sattiraju: Absolutely.
• 18:43
  Nikitha Sattiraju: And I did touch upon current environment we're in and how that affects the auto market.
• 18:49
  Nikitha Sattiraju: But curious to know if tariffs are a concern or something that you're looking at because it's distribution and not manufacturing.
• 18:56
  Nikitha Sattiraju: I imagine it's like a better place to be in.
• 18:58
  Nikitha Sattiraju: So I'd love to hear your thoughts there.
• 19:00
  Doug McCormick: Yeah, I think honestly, I think it's all degrees of better variations, but nobody is fully insulated, I would tell you.
• 19:07
  Doug McCormick: And so I think for every market, one of the implications of the tariffs, I think, is consumer fatigue, consumer sentiment, overall economy.
• 19:15
  Doug McCormick: And so I think we'll see user demand be slower because of that in and of itself.
• 19:20
  Doug McCormick: And then the other thing I think is really interesting.
• 19:22
  Doug McCormick: I do think we're relatively well positioned, especially compared to new vehicles.
• 19:28
  Doug McCormick: So if you think about new vehicle sales slowing down, average age of the install base increasing, require more service.
• 19:34
  Doug McCormick: I think that all kind of hangs together.
• 19:35
  Doug McCormick: But as a distributor, Some of our suppliers have China exposure.
• 19:41
  Doug McCormick: And so I would expect our input prices to go up as well.
• 19:44
  Doug McCormick: And in a distribution business, we generally feel like that's okay because we can pass those prices along to our end customer so long as we're cost competitive with the market and so long as it doesn't dramatically decrease demand.
• 19:58
  Doug McCormick: And I think these kinds of purchases are generally, they're not really discretionary.
• 20:02
  Doug McCormick: You got to fix your vehicle.
• 20:02
  Doug McCormick: And so I think we will navigate tariffs pretty effectively here, I think.
• 20:07
  Nikitha Sattiraju: Switching back to services, LawnPro is another really interesting investment that you have.
• 20:12
  Nikitha Sattiraju: I imagine similar dynamics in terms of facility services, residential services, Tech24, but would love to know more about that investment as well.
• 20:21
  Doug McCormick: Yeah, so you're absolutely right.
• 20:22
  Doug McCormick: We're a simple crew.
• 20:23
  Doug McCormick: And so we try to learn from our successes and do more of the things that worked.
• 20:27
  Doug McCormick: And so we had a great outcome at Tech24.
• 20:29
  Doug McCormick: As we thought about how we could apply that experience and those skill sets to other markets, we landed on LawnPro.
• 20:35
  Doug McCormick: So Lawn Pro is essentially residential lawn care, more, not so much mowing, but fertilization, kind of taking care of the lawn.
• 20:43
  Doug McCormick: And so we'll talk market and then migrate down.
• 20:46
  Doug McCormick: Very attractive market like Tech 24.
• 20:48
  Doug McCormick: It's a $10 billion market.
• 20:50
  Doug McCormick: It's super fragmented and it is consumer facing.
• 20:54
  Doug McCormick: And so it does have some recession element to it.
• 20:58
  Doug McCormick: But what we find is the return on investment for the homeowner is pretty high.
• 21:03
  Doug McCormick: You have your yard fertilized, you see how green it is, your neighbor's is, and if yours not, you know, you feel competition.
• 21:08
  Doug McCormick: So we have a really good retention rate with our customer set.
• 21:11
  Doug McCormick: And I think I would say the two things that make this a really attractive opportunity for us.
• 21:16
  Doug McCormick: The first is quality of business model.
• 21:19
  Doug McCormick: This is a highly recurring, relatively high margin subscription-based model.
• 21:24
  Doug McCormick: So our customers sign up in the beginning of the year and they'll sign up for a year subscription.
• 21:29
  Doug McCormick: And we find that as long as we execute well and service them well, Nine times plus out of 10, they're going to renew the next year.
• 21:35
  Doug McCormick: And so it's back to this predictability concept, very predictable business with nice margin attributes.
• 21:40
  Doug McCormick: I think the other thing we were excited about was the immaturity of the consolidation.
• 21:45
  Doug McCormick: And so we often say internally, HVAC is a great market.
• 21:49
  Doug McCormick: Everybody loves that market to consolidate it.
• 21:52
  Doug McCormick: But there are 65 consolidators in that space.
• 21:54
  Doug McCormick: I'm high spotting on that number, but it's a lot.
• 21:57
  Doug McCormick: And so that creates competition, which makes, I think, successful execution of the play hard.
• 22:02
  Doug McCormick: And so as we think about opportunities to run that play, a very important part of our analysis is how many consolidators are in the space?
• 22:10
  Doug McCormick: What's our conviction that we can get acquisitions done at a reasonable velocity to kind of get to our end state?
• 22:16
  Doug McCormick: So we've been fortunate that the long-term space kind of fits that dynamic.
• 22:20
  Doug McCormick: So we've been in this one since June of 23, and we've consummated 14 acquisitions so far.
• 22:27
  Doug McCormick: I think we have three more under letter of intent.
• 22:30
  Doug McCormick: So you should see continued good traction there over the next several months.
• 22:34
  Doug McCormick: And I think one of the best validations for us as we see the progress in these businesses is the quality of teams we can attract.
• 22:41
  Doug McCormick: And so we've attracted a great team here that we're really excited about as we execute this strategy.
• 22:47
  Nikitha Sattiraju: That's pretty great.
• 22:47
  Nikitha Sattiraju: And LawnPro, is there a certain region in the country that it's more heavily focused on?
• 22:53
  Doug McCormick: It's a great question.
• 22:54
  Doug McCormick: We're more focused on the northeast today.
• 22:57
  Doug McCormick: So we started in Pennsylvania, Ohio, up into the New England area, down towards Virginia.
• 23:04
  Doug McCormick: And we like that space because there is some consolidation activity.
• 23:08
  Doug McCormick: We saw less in that region.
• 23:09
  Doug McCormick: And we kind of convinced ourselves it's a pretty attractive market in terms of customer demographics.
• 23:15
  Doug McCormick: And it's still far enough south that you still have a pretty significant growing season.
• 23:19
  Doug McCormick: And so the amount of care per yard required is still pretty good.
• 23:24
  Doug McCormick: And so we've had a Great opportunity to create a pretty strong regional player here.
• 23:30
  Doug McCormick: And then we're pushing the boundaries on what the size of that region is.
• 23:34
  Nikitha Sattiraju: And you had a pretty great exit recently as well with MSI Express.
• 23:38
  Nikitha Sattiraju: So I want to talk about that.
• 23:40
  Nikitha Sattiraju: Just the lifecycle of that investment leading up to the exit earlier this year.
• 23:45
  Doug McCormick: Yeah, thanks.
• 23:45
  Doug McCormick: So MSI Express, we got involved in 2018.
• 23:48
  Doug McCormick: So that's a longer dated asset for us.
• 23:51
  Doug McCormick: So this is a manufacturing business.
• 23:53
  Doug McCormick: And MSI Express...
• 23:54
  Doug McCormick: is a co-manufacturer and co-packager of various food products for CPGs.
• 24:00
  Doug McCormick: And so that's a very large market, call it $30 billion.
• 24:04
  Doug McCormick: Food consumption is generally pretty correlated with GDP growth.
• 24:09
  Doug McCormick: What we found, and by the way, super stable, what we liked about this market is because of new product introduction from the consumer companies and outsourcing, a lot of the large branded companies are outsourcing some of the manufacturing.
• 24:24
  Doug McCormick: we felt like this market was consistently growing at two to three times the end market demand.
• 24:30
  Doug McCormick: So really nice, big market, fragmented, stable, and some predictable growth.
• 24:35
  Doug McCormick: And so it's kind of the same playbook that I articulated for Driven.
• 24:40
  Doug McCormick: We did less acquisitions, but they were more substantive.
• 24:43
  Doug McCormick: So the platform plus three really nice acquisitions.
• 24:47
  Doug McCormick: And this business also had opportunities for a lot of organic growth.
• 24:51
  Doug McCormick: And so we were able to really supercharge some investments in new equipment and new facilities to complement the acquisition growth.
• 24:59
  Doug McCormick: So ultimately, I think we grew this business more than 10 times revenue.
• 25:03
  Doug McCormick: We started with a regional player with less than 500,000 square feet of manufacturing space and exited with a national footprint and I think two and a half million square feet of warehouse and manufacturing space.
• 25:16
  Doug McCormick: So a really good opportunity to scale the business.
• 25:20
  Doug McCormick: And it's still a relatively small player in that market with a lot of white space.
• 25:24
  Doug McCormick: And so we exited that this spring.
• 25:26
  Doug McCormick: And the management team's intact.
• 25:29
  Doug McCormick: They're working for another sponsor now.
• 25:31
  Doug McCormick: And I think it's going to be a great run for them too.
• 25:33
  Nikitha Sattiraju: Absolutely.
• 25:34
  Nikitha Sattiraju: I feel like food has been one of those markets that's just been so active, relatively active, given everyone's sentiments towards M&A right now.
• 25:43
  Nikitha Sattiraju: I do want to talk about that broadly, what M&A has been like in the first few months of this year?
• 25:51
  Doug McCormick: Yeah.
• 25:51
  Doug McCormick: Well, I almost think you can't even begin to talk about the first few months as if it's in any way correlated with the current environment.
• 25:58
  Doug McCormick: So I think the first couple months of 25 came out pretty strong.
• 26:02
  Doug McCormick: I think there's a lot of pent up supply.
• 26:05
  Doug McCormick: I think there's a lot of pressure on sponsors to deliver liquidity to investors.
• 26:10
  Doug McCormick: And so there's a lot of really nice assets that I think are waiting for the right time.
• 26:14
  Doug McCormick: And it felt like we were getting some momentum in Q1.
• 26:17
  Doug McCormick: And obviously, with the introduction of tariffs, I think that creates a whole bunch of variables that make the M&A environment challenging to navigate.
• 26:27
  Doug McCormick: I would say I think it's dangerous to apply a one size fits all assessment of the market, though, because I think in some cases, investors still have to get money deployed.
• 26:38
  Doug McCormick: And so they migrate to the markets that are least affected, most insulated and very few that actually could benefit substantially.
• 26:46
  Doug McCormick: And so I think it's a little bit of the world of haves and have-nots where markets like food and healthcare, I think, are going to be in high demand because people can convince themselves the demand profile is intact and the supply chain volatility is navigable.
• 27:02
  Doug McCormick: I think other businesses that have meaningful impact to the consumer or the supply chain dislocation, those are going to be, I think, on hold for a while is my take.
• 27:13
  Nikitha Sattiraju: Would you put services in that category of food and healthcare as well, like facility services in particular?
• 27:18
  Nikitha Sattiraju: I
• 27:19
  Doug McCormick: I would.
• 27:19
  Doug McCormick: With an acknowledgement, there's still some recession element associated with it.
• 27:24
  Doug McCormick: But I would say a lot of those industries, it's like when the recession happens, they're down 2% or 3%, not 10% or 15%.
• 27:31
  Doug McCormick: So it's an amount of volatility that I think is pretty manageable.
• 27:36
  Nikitha Sattiraju: Given your long history of investing in distribution and manufacturing, I'm curious to know if anything's changed while you're evaluating businesses now from the tariff perspective, if you're looking at things a little bit differently or if there are certain metrics that you're paying more attention to than you did before.
• 27:51
  Doug McCormick: Yeah, I think I guess I would say two things.
• 27:55
  Doug McCormick: The first is I think once there is clarity on the policy, I think investors will be able to make assessments of the implications for various segments and sectors pretty effectively.
• 28:05
  Doug McCormick: And I think capital can flow pretty quickly to those areas.
• 28:08
  Doug McCormick: I think in the current environment where there is no clarity on policy because there are ongoing negotiations, I'm not sure you're well compensated to jump into the deep end of the pool right now, if you will.
• 28:19
  Doug McCormick: But I think clarity, I'm hopeful, is a couple months away.
• 28:23
  Doug McCormick: And that gives people the backdrop to make longer term decisions.
• 28:26
  Doug McCormick: And I would say you can look at this as a half glass empty, half glass full.
• 28:31
  Doug McCormick: I think any time a market is dislocated, it creates tremendous risk and also tremendous opportunity.
• 28:38
  Doug McCormick: And I think it's a little bit of an art of trying to find that opportunity in the chaos.
• 28:44
  Nikitha Sattiraju: Absolutely.
• 28:44
  Nikitha Sattiraju: What have I not asked you about HCI or the market in general that you think we should talk about?
• 28:50
  Nikitha Sattiraju: I
• 28:51
  Doug McCormick: I think we've run through it.
• 28:52
  Doug McCormick: Yeah, I think it's a pretty dynamic market.
• 28:54
  Doug McCormick: All we know is it'll be a different one tomorrow.
• 28:56
  Nikitha Sattiraju: Absolutely.
• 28:57
  Nikitha Sattiraju: Well, Doug, thank you so much for such a great conversation.
• 28:59
  Doug McCormick: Yeah, no, super fun.
• 29:00
  Doug McCormick: Thank you.
• 29:01
  Nikitha Sattiraju: This is Nikita Sattiraju, senior reporter with The Deal.
• 29:04
  Nikitha Sattiraju: Thanks for tuning in to Behind the Buyouts.