In the second segment of our interview with Scott Estill, Managing Partner at Lancor, we discuss the firm’s executive search and advisory business framework from seven key questions!
Scott, tell us about Lancor and what it does for PE firms?
We’re an executive search and advisory firm that works with PE firms to find C-suite executives for their portfolio companies. Lancor’s Advisory Business, or LAB for short, helps these same firms connect with executives to develop deal angles and target companies.
How did you come to offer this mix of services?
Our partners share two fundamental beliefs. One is that operational insights trump financial engineering all day long. The other is that executive search on its own is not all that innovative a business. To be sure, half of the business that we work on is traditional search. We conduct some 120 C-suite executive searches for PE firms every year. Does a PE firm need a CEO or CFO to join a portfolio company? We’re there to fill the spot, although I would call that part of our business reactive. We’re reacting to an immediate need. The other part of our business is much more innovative and more proactive. It stems from my career as an investment banker, when I would often wonder why two companies of the same size operating in the same industry would perform so differently. Why was one a five bagger and the other a zero?
And what was the answer to that?
If you do the math, it almost always comes down to the quality of the operations and the ability of the executives to pivot and transition during their ownership period. So recognizing that, we introduced an advisory business to help PE firms find unique angles on the opportunities presented to them. From our search business we’ve built a large network of executives that know us and like us. We can go to them on behalf of a PE client and ask, What would you do with this business? How would you rate the two or three pillars in this investment thesis? We leverage their ability, based on historic muscle memory and scar tissue, to understand what to do with the business.
How does the advisory business work in practice?
Typically, a PE investor calls us and says, hey, we’re thinking about buying this company. Scott, help me find an angle so that we can be confident that even if we have to pay the last eighth of a turn of EBITDA to win an auction, we know exactly what we’re going to do to hit our benchmark return. We then tap executives in our network to provide the answer. The executives like doing so because they can do it in their spare time while keeping their day jobs. But the rewards are meaningful. They often get to co-invest in the company and join its board. It all adds up to a very different sort of business model than the traditional search business. PE firms are pushing ideas to us, and we’re getting at the specifics of what makes a deal exciting for them.
What kind of private equity firms do you typically work with there?
We work with a wide variety of firms. We work with lower-middle-market, middle-market, upper-middle- market and even bulge-bracket firms operating in the United States and Europe. They span such a wide variety of sizes because they have the same issues whether they’re buying a company generating $5 million of EBITDA or $500 million. How do they find an angle that will let them buy the company? Our specialty is understanding the mystery and intrigue that is private equity––both what’s needed in a private equity c-suite executive and what the PE firm needs to learn when evaluating an investment opportunity. And we operate everywhere they do. We have offices in a variety of places––in Dubai, Brussels, London, New York, as well as in the Midwest and on the West Coast.
Scott, tell us about a recent example of how you helped a PE firm find a deal.
All told we probably work on 3,000 to 4,000 advisory opportunities a year. Here’s a typical one. Recently a private equity called up and said, hey, we’re thinking about buying this fire and life safety business, Scott. Should we? So, we introduced him to three or four people that grew up in that subsector and who also understand private equity. And the advice that the PE firm got in this particular case, as it often is in mergers and acquisitions, was no, the juice is not worth the squeeze. In particular, the owners of the asset that they were looking to buy was asking 17 times EBITDA. And the executives we introduced them to were able to say, I know that company. There’s no recurring revenue. It’s only fairly re-occurring. So no, you shouldn’t buy this one. That doesn’t mean the industry’s not good but stay away from this particular company at this price. We’re providing a great service to PE firms, because they end up saving themselves hundreds of thousands, if not more dollars in broken deal costs. Then we asked those same executives “what would you do?”. It’s a way of beginning with operational expertise. One of the executives developed a roll up thesis in the space. We then partnered with him and Abry Partners to develop Better Protection. This deal won M&A Advisor’s Industrials Deal of the year last year.
Tell us about the role that technology plays in your business
We use lots of third-party resources to help us evaluate prospective portfolio companies. In particularly the database provided by SPS help us think through the add-ons and the tuck-ins available for any given platform. What are the PE firm’s options? Are there 10 add-on opportunities? Are there 20 to 30? Or are there 300? Having only a few add-on opportunities isn’t necessarily a deal-killer. But obviously the bigger the opportunity set for the PE firm to deploy capital, the more likely it will be excited about the deal. That’s just one example of how SPS has been super helpful for us.
––Edited for clarity by David M. Toll
