Foundations of Leadership: Private Equity Insights with Dave Schnadig

[00:00:00] Sean Mooney: Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. I'm Sean Mooney, BluWave's founder, and CEO. In this episode, we have an amazing conversation with Dave Schnadig. Co-president with Cortec Group join.

[00:00:34] I am super excited to be here today with Dave Schnadig. Dave, thanks for joining. Hey, Sean, really great to

[00:00:40] Dave Schnadig: be here. Thank you for having me.

[00:00:42] Sean Mooney: This is gonna be a really good one. I've been looking forward to it for a long time, for a number of reasons. That are both gonna be kind of, I think, foundational just to the things that we talk about, business and life and all those types of things here, but also some timely things.

[00:00:57] But before we jump into that, Dave, I always love to get for our listeners here, just more of the story of you. So can you give us kind of a bit of your life story where you grew up, kind of formative experiences, college, first job outta college, and then how you got into private equity?

[00:01:14] Dave Schnadig: Sure. I'm not sure you want too much of my life story because I was born very shortly after God was a boy.

[00:01:21] I'm 60, so I'll try to keep it tight, but I grew up in Chicago and I think the most important part of that was I was really fortunate enough to have a grandfather who was an entrepreneur and who brought me his business, Turing.

[00:01:42] Put together back in the early 1950s, actually a form of leveraged buyout. He borrowed a bunch of money from the First National Bank in Chicago and he bought a very, very small furniture manufacturing company that he became the CEO of. And he built it up over time to become the largest family owned furniture manufacturer in the US with five plants in the US and one in Taiwan, which was.

[00:02:11] I actually benefited a ton because I got to go with him to different facilities throughout the US and then he actually brought me over to Taiwan when I was 13 to see how tables were manufactured and the difference of manufacturing in Asia versus the us. So it was sort of way ahead of normal time and foundational for a couple of things for me.

[00:02:31] One is, is understanding a lot about how business, even when I was pretty young, because it was natural curiosity of. Two, I got to see differences between US and Asian manufacturing, even though I didn't have any idea what either of 'em were. I just knew they were making stuff in both of these facilities and that Asian operations were very different than US operations, including back then an awful lot of people relative to machinery.

[00:02:56] And then number three, which happened over time as I, I grew up and eventually sat on my family business. I see how dysfunction foundational. For what eventually became what we do at Core Tech. But I didn't know it at the time. I just knew I was really interested in business and having this real world exposure was pretty cool.

[00:03:17] And I, and I worked there in summers as I went through college and I was exposed to what the sales function was all about in a national sales team and what merchandising meant for furniture business. And I was also exposed.

[00:03:35] Really what happened in the Chinese disintermediation of the US manufacturing industry furniture wise, which was invaluable as well, and again, formative to a lot of what we do at Cortex. So I had that really unusual and incredibly beneficial upbringing dynamic that most people just don't have. And the business ended up actually declining very materially because of the, the aforementioned just domination of China and US furniture very, very quickly.

[00:04:04] And we ended up selling that business for a fraction of what it had been worth six years before to actually our largest supplier who was Chinese. And there'll be a lot more in China later today, I'm sure. But that was my upbringing and that was my, that was sort of my formative years. I went to college in between, at a little school in Connecticut called Trinity, ostensibly to learn.

[00:04:27] And then maybe a close second or not was. And I learned very quickly a couple of things there, that number one, being relatively small and fast is great in high school, but in college, particularly when you're surrounded by guys who play in Connecticut and Massachusetts, there are a lot of guys who were big and fast.

[00:04:47] And so my competitive advantage dissipated very, very quickly to the point that I spent abroad in.

[00:04:58] But it was great at a great time, I met a lot of people, learned a ton, and came back after college and, and went to work at a strategy consulting firm that no longer exists, but was in Chicago again for a couple years, and then went to business school recognizing that I had sort of a part of the business picture.

[00:05:16] I had worked in these various function as a young adult business. Understand in. Got the analytical part that came reasonably well to me. But again, no finance. And so I tried to get a job as a summer associate at this place that used to be an investment bank called Lehman Brothers. And back then it was actually reasonably well respected.

[00:05:41] And I also tried at places like Goldman Sachs and Morgan Stanley coming out of Northwestern's Business School, which I learned very quickly from these folks. Was a marketing school, not a finance school. But unbelievably, two of the folks that I interviewed with at Lehman took a chance on me and brought me back for a super Saturday where I ended up getting a summer internship surrounded by University of Chicago, Wharton, and Harvard guys, which was only intimidating because they all knew how to use Lotus 1, 2 3, which is the precursor to Excel.

[00:06:13] For those listening to this who are old enough to know what the hell I'm talking about, you're laughing. So I think that means you remember Sean, I was a master

[00:06:20] Sean Mooney: of the hotkey on Lotus 1, 2, 3. We switched to Microsoft Excel, like at the end of my analyst term, and I was useless.

[00:06:31] Dave Schnadig: Lost. Lost, lost. Backslash man.

[00:06:33] Backslash. Uh, so yeah, you're bringing back very bad memories and word perfect as well. Oh, word. Perfect. Yeah. And again, backslash, that's the green screens. Yeah. Sean, you're a man. You my generation. Thank you. But in any event, I learned a ton, and I amazingly, again, truly amazingly, got an offer to come back full time.

[00:06:55] And maybe it was just because I had a reasonably good sense of humor and I was tireless in my work ethic because iit. They gave me an offer to come back. I went back and I worked in m and a for three and a half years, and I knew I didn't wanna be a banker. I always had wanted to be someone who would invest in businesses, but I really just didn't have the balls to be an entrepreneur.

[00:07:18] I didn't have the guts to start something up from scratch. So this thing called Leverage Buyouts, which was the precursor brand name of private equity. Was there and, and in fact, a number of the deals that I worked on while I was at Lehman were leveraged buyouts. Some we helped advise on successfully, some we didn't.

[00:07:36] We had a really, really interesting deal that was the cornerstone of my career, which was with Air Canada buying Continental Airlines outta bankruptcy in 1993. And our partners in the US because of a foreign airline, can only own 25% of a US carrier. Our partners were, uh, two guys named Jim Coulter and David Bonderman before they had created TPG.

[00:07:58] So this in, in and of itself is a fascinating story that I won't put the listeners through. They were my partners and they were working for Bob Bass, who at the 23rd hour bailed from the deal, and they went out and raised money in a limited partnership construct led by a Eli Broad. Eli Broad was a self-made deca billionaire based in LA who started Kaufman and Broad Home, which is now called KB Home, and then started, uh, what became a $10 billion life insurance company called Sun America.

[00:08:27] And I, and I worked for Eli. After this, he hired me, which was also fortunate on my part, and I was building an alternative asset program for Sun America because they needed long dated assets to match their long dated liabilities, which an insurance liability, life insurance liability, long dated. They hadn't gone much into either private equity or vc and I was hired to do that as well as m and a and, and so in my first year there, we built about a $350 million portfolio, which meant that people wanted to come see us when they were raising funds.

[00:08:59] 'cause we had money. Again, it didn't matter there was Eli or Dave, it was that we had money and on the same day I.

[00:09:10] George Roberts, they hung off the plane and they're oozing money in their BRI suits and their Hermes ties. The Cortex guys came in the afternoon and the two cats who showed up looked like they slept in their suits. These were businessmen and Cortex's operating model before I got there was basically created by two guys who came out of industry and said, we're business people.

[00:09:34] We can take value and deliver. There's a much longer cortex story not worth going into, but my interest in LBO Land really came from my interest in business. And when I met Scott Schaffler, in particular, cortex Founder, his view of how to actually add value to middle market companies resonated with me immediately.

[00:09:56] I loved my meeting with him, and my meeting with the KKR guys was as expected. They already very successful, already done Barb Gate deal.

[00:10:07] Him a letter and about two.

[00:10:15] 30 years later, haven't had another job.

[00:10:17] Sean Mooney: Hi, this is Sean. Wanted to take a quick moment to tell you a little bit why Blue Wave exists. It's based on this whole notion that assessing opportunities and building business is really hard. We all know third party expert service providers can dramatically help, but at the same time, it's hard to know who's good.

[00:10:36] Usually leaving you, like I would do, and call friends and ask, Do you know someone who does this? Or just go the square peg round hole route. So after nearly 20 years in PE, I decided to solve my own problem and create a blue wave. Today, many hundreds of PE firms, thousands of portcos, leading public companies, private companies, All call bluewave to instantly get connected with the exact third party service provider they want that's pre credentialed by bluewave and perfectly calibrated for their need and really good.

[00:11:07] You too can give us a call or visit our website@bluewave.net. We're free to use and you can benefit the same way other top P firms do act the show.

[00:11:17] I love it. I mean, it is such a great story. These themes, as I hear like the, the really top business builders in the world, it so often starts at such a young age in these kind of foundational, like being exposed to business and wanting to create something more than what was there before. As I was listening to your story, David said, we actually have probably a lot of similar parallels in that I was maybe born in the Midwest.

[00:11:43] I was born in Cleveland, but then we moved down to Texas really as part of a family business in the manufacturing space. And during my weekends it was going to the office with dad every weekend. 'cause he was there. I'm like, all right, I'll go there. And I would play business as a kid and get all the white out I could.

[00:11:58] And like making coffees? Yeah, making coffees and drinking sodas. You know, it was like I could like sneak 'em out of the kitchen and those type of things. And then as soon as I was old enough, like OSHA not listening, we were given jobs in the back of the plant. It was really such a formative experience on many levels, but it.

[00:12:18] A you. You see how things are made and you learn to appreciate the person who pushes the broom as much as the person who's in the corner office

[00:12:27] Dave Schnadig: a hundred percent. And in fact, I skipped some of my earliest jobs at SCH Corporation and one of my earliest jobs was clean ashtrays out of the showroom.

[00:12:44] I was the ashtray cleaner. I was very, very good at ashtray cleaning. I was gonna say

[00:12:48] Sean Mooney: my specialty was painting everything safety yellow and so, Hey, that's good. Go. So it was early OSHA compliance show. Oh, it was great. Like I joke, like to this day you can still see some yellow paint under my fingernails, but it's those kind of experiences where you, maybe you get some of the tenacity and the grit, but also the appreciation that.

[00:13:10] These companies are built from literally the ground up and it's a sequence of everyone doing things that matter.

[00:13:16] Dave Schnadig: Absolutely. Look, when I was 15, 16 years old and the plant I visited that time was in Bryan, Texas, if that name rings a bell. Yeah, of course. We went down in summertime. But talk about formative I, these guys are working.

[00:13:36] Cell manufacturing was becoming a thing, and so I learned a little about that, but I also learned that it was a really good idea to go to college.

[00:13:42] Sean Mooney: Absolutely. My grades started getting a lot better when they put me in a dumpster with a sledgehammer and said, make more room. I was like, I was like, uhoh. I better get into the a's business real quick here.

[00:13:58] Dave Schnadig: Yeah. Right. Perspective.

[00:14:00] Sean Mooney: And then similarly, like I kind of ended up in the New York world. I went to college in the DC area. And the only reason I ended up going to investment banking is 'cause my roommates were all from Northern New Jersey and they go, Hey, what are you guys gonna do? And they go, we're gonna do investment banking.

[00:14:14] Yeah. What's that? What's investment banking? And so I got down to a final round and it was between Lehman Brothers and it was Houlahan Loki's restructuring group.

[00:14:23] Dave Schnadig: Yep.

[00:14:24] Sean Mooney: It's almost like go do the restructuring group 'cause you're gonna learn businesses and it's worth and learn this thing called cash flow.

[00:14:31] And I went to that and then that's a whole nother set of crazy stories. In the nineties when things were just a little wilder and just the world was getting so volatile in many ways. And so it was a great education. And so similarly, I, I really appreciate the background you had because it starts like really at the core of like how stuff is made, how you deliver value, and then the consulting experience I think is also a really good background to understand like how systems works and how strategy impacts execution, which it sounds like you got the execution part.

[00:15:02] Stage 10?

[00:15:04] Dave Schnadig: Well, a little, I think as I'm sure you remember, like there's only so much you can learn when you're a kid because you don't have any perspective, no context. But the familiarity, that was the thing. And particularly going over to Asia, that was early. I mean, I was, my first visit to mainland China was in 1987.

[00:15:22] That's very unusual for an American. Yeah. Pre wt O. Yeah, exactly. And I. And what's really actually fascinating, and I was talking to my wife about this because we went for pleasure. We'd gone to Hong Kong and just after graduating business school and we went over to Canton and there was this area that we were told we must visit, and it was called

[00:15:54] for.

[00:15:59] And truth, Sean. It was a banner on top of two pillars that said, welcome in English with Chinese characters underneath it. Really, really interesting. Welcome to the Shenzhen Economic Development Zone, and it was the first economic development zone that they were building and behind this big sign gate. It was almost like a gate.

[00:16:21] What was, there was nothing. A field, a.

[00:16:28] Sean Mooney: Now it's millions and millions of square feet and people. Oh, just,

[00:16:31] Dave Schnadig: I mean, but all of it was an idea and my wife and I took a picture in front of it and laughed. I have the vision of this photo imprinted in my mind. Not just because of how strange it was at the time. It was surreal, but because they knew exactly what they were doing and they plan 50 years ahead.

[00:16:51] Exactly. The seeds that they were planting in 1987 are kind of growing

[00:16:54] Sean Mooney: today.

[00:16:55] Dave Schnadig: Yeah. And they've delivered. And that's why their industrial revolution was 10 years and ours was 50. I mean, the upside of a centrally planned economy is if they decide they're gonna do something, they do it. Yeah. Just happens. I did one

[00:17:09] Sean Mooney: of the earlier buyouts in China of a heavy duty truck parts, all these SOEs that we put together, and this was 2001, which was real early even then.

[00:17:18] And I learned a couple things. One, in 2001, they had all these brand new airports and brand new planes 'cause they were kind of executing on the plan. And then what we also learned is they had all these brand new pilots.

[00:17:31] Every flight was an adventure. Oh my God. Yeah. But it was just this idea and the CEO we had there who was a real luminary like you is there early. And he goes, everything in China is possible. Nothing's easy, but if you can kind of grit and get it through, like they could make anything happen.

[00:17:48] Dave Schnadig: Yep.

[00:17:48] Sean Mooney: And we'll talk more about what has resulted from that in a moment.

[00:17:52] Sure. But maybe before we get there, the, the other kind of question I ask, and I think I've already like, learned this question in many ways, but if there were another thing where you could say, we'd know you better if we knew this about you. Is there anything else? 'cause we've already learned like all sorts of stuff that I never had any inkling on.

[00:18:08] Dave Schnadig: I think whether it's me with you on this call or, or me with my friends or the core companies, I've been consistently accused of being excessively transparent. So most people know everything there is to know about me. I think a little known fact is that I had a full head of hair until I was 42, and I don't know what the hell happened.

[00:18:29] I am very fortunate to have two kids who are all grown up now and still love me and my wife. We travel a lot with them, which I'll come back to later. So no man, I, I am as straightforward as they come and I'm a workaholic. So, hi, I'm Dave. This is My Life, which is Core Tech Group.

[00:18:48] Sean Mooney: Hey, as a quick interlude, this is Sean here.

[00:18:51] Wanted to address one quick question that we regularly get. We often get people who show up at our website, call our account executives. They say, Hey, I'm not private equity. Can I still use BluWave to get connected with resources? And the short answer is yes. Even though we're mostly and largely used by hundreds of private equity firms, thousands of their portfolio company leaders, every day we get calls from everyday top proactive business leaders at public companies, independent companies, family companies.

[00:19:18] So absolutely you can use this as well if you want to use the exact same resources that are trusted in being deployed. And perfectly calibrated for your business needs. Give us a call. Visit our website@BluWave.net. Thanks. Back to the episode.

[00:19:37] So you mentioned just kind of like what it takes to be in pe and I think it's important for people to appreciate that is it's an all in kind of game. And to be good at it, it requires that level of commitment to be in support of the Portos that create the value for everyone. It's all in. And so like whenever we have people here join here, we have a pretty intensive moment really just trying to explain the job of our customers, the people on your team, the people elsewhere, and just knowing that this is something that, sure, there are great rewards, but it comes with a trade and that's a trade of personal life, scarcity of time, a lot of pressure because at the end of the day, you all have to beat the long-term average of the stock market.

[00:20:23] Over a 10 year period for each fund. And that takes a toll. And not that anyone is looking for sympathy, but it's just the reality.

[00:20:33] Dave Schnadig: A hundred percent. I wish I could say, everybody I know in private equity is this way. I believe everybody in my company's this way. But if you're not, you shouldn't be doing it.

[00:20:42] You should be all in. We preach to ourselves and to our senior leadership teams, you have to be behaving like an owner like own. We do own it. But if that doesn't come naturally to you, if you don't sweat both the details and the losses 10 times more painfully than you celebrate the wins, then you're in the wrong biz because we're not gonna deliver, you have to live this every day, otherwise it gets past you.

[00:21:13] Sean Mooney: You have to have this self almost ingrained level of motivation and almost like it, right? And so I would describe to my wife, she's like, gosh, how do you do that? And I go. It's kind of like a sickness. I don't know why, but I have to and I kind of enjoy it. You know, I start like, what's the difference in PE and you'll appreciate this more than anyone is it's an industry filled with people who are smart enough to really smart, but probably pound for pound, you're gonna find smarter people in the quant hedge fund.

[00:21:42] But what's really different is this, it's the smart enough combined with tenacity, grit, resilience, and like this. Inability to not overcome. Like

[00:21:53] Dave Schnadig: you just cannot accept losing.

[00:21:55] Sean Mooney: Yeah. And so I think that's part of it. And so maybe with that in mind, Dave, one of the things that I'm always curious about is some of these things in business of life that you've encountered that were a true challenge and how you overcame that.

[00:22:08] Because I think there's so many lessons in those moments.

[00:22:11] Dave Schnadig: Absolutely. Right.

[00:22:17] Believe strongly that you learn a lot more from your failures than you do from your victories. And we've tried to minimize the number of failures nonetheless, but the learnings are always seared more deeply in your mind anyway, or at least mine. It's a great question and I've one, I think that is pretty poignant and it's actually a failure wrap within a success, which was then within a different success and cor over the.

[00:22:44] In my humble opinion, a little bit too well known for Yeti. Yeti was without question our most successful investment. And I know it's one of the most in private equity, but we've actually had a really strong track record without Yeti as I remind my prospective investors. And one of the things I often say is if Yeti were only 10 would.

[00:23:14] Plus times return gross. For the SEC listening, why don't you take out my two bad deals over the last 25 years too please? So you can at least be fair while you're cherry picking. But Yeti wasn't a straight lineup to the right success. And I think actually shown the hardest thing I've dealt with in business was for exactly that reason.

[00:23:35] It was because we were doing really, really well and we were growing very, very fast. We, we made our investment in Yeti in. And it was just a hard cooler business back then. Most people don't know that, but it was a one product company that had basically 11 sizes and two colors, so it was 95% of revenue came from 22 SKUs.

[00:23:58] This was a very simple business and a very high risk business because of that. Long story short, we built out a strategic plan with founders before.

[00:24:11] It was a combination of a lot of things, including supplier, deep concentration, diversification, some customer expansion, moving into the internet. This thing called the internet in 2012. Nobody sold direct to consumer. Yeti was about 40 million in revenues in about 10 and EBITDA when we closed the deal, and they didn't have a.

[00:24:36] We also, and I think most importantly felt we had a diversified product. And so we sat down with the two brothers who were the founders, but also really the creative minds. Roy, the younger brother actually was the CEO Roy Cedars. And we sat down and we built out a roadmap and said, listen, you know, we wanna move into soft core super quick because there was no good soft cooler out there that wouldn't leak or break.

[00:24:59] And that two Wes Products company and moving into Cut. And then we wound up create a product that could put the Yeti brand in the brand, acolytes in the enthusiasts hands for a lot less than 400 bucks for a cooler. And Roy came up with this idea, which seemed pretty mediocre at the time, which was for a cup and in fact two cups.

[00:25:27] And he used the slurp cup as an example, and then as an example, and, and long story short, you know. Everybody knows unbelievably that it was beyond a home run, and we didn't even have a top for the cup to begin with. We were competing against insulated water bottles. I estimated it would be a $5 million product line.

[00:25:45] Our first year, Roy said, maybe we can make it 10 or 20, but we said, okay. It's a concept like, let's put the cup in people's hands. It's almost like a hat, right? They'll be walking around with it and within about a year and a half, we were pacing at a hundred million bucks a year. It was almost as big as the.

[00:26:04] Then soft coolers came out almost at the same time, and that was a hundred million dollar business. So we were rocking on every possible measure other than the fact we weren't keeping up with production. We had a tremendous amount of IP that we filed for around each of the cups and the soft coolers, but we knew that cups were more exposed because you can just design it, even though it was a vacuum insulated vessel.

[00:26:25] You can design 'em a lot of ways. Hence that's why they're water bottles, and that's why now there are many, many cups, shapes, and sizes that don't look like yet. But we were under the, uh, Henry Ford model of you can buy our cup in any color you want, as long as it's stainless steel and not colored.

[00:26:43] Initially, that was really smart. And then really quickly it was really dumb. And what happened was, as the cup demand exploded among consumers, the cup demand exploded among our retailers. But rather than selling D two C where demand speaks to you instantly when you're selling through the retail channel, there's a lag.

[00:27:03] And our retailers, let's say their demand forecasting was limited, and let's say that ours was too, just hypothetically. And so we had this confluence of debacle that happened where they were ordering against a concept that everything would keep growing a hundred percent a year. We were manufacturing against that same concept, but we were trailing it, and all of a sudden demand of the consumer slowed down because guess what?

[00:27:27] People started knocking us off. Some of it illegally, and we were prosecuting them. We eventually had very significant seven figure settlements from some cheaters out there, but a lot of people were doing it legitimately, and the product wasn't as good for a lot of different reasons that we had built into our own ip.

[00:27:42] It didn't matter. It was cheaper. And so we at Yeti with our two sizes and no color.

[00:27:57] So I remember very clearly the operations meeting in 2016 where we went through this and, and if there's time, I'll talk more about how Cortec interacts with its companies. But we meet every month and we do a full operations meeting, which means we're going through every functional area, much like I actually learned about my family's business and they don't present, they put together material.

[00:28:18] Sometimes it's a pretty PowerPoint 'cause that's how they individual leading sales or marketing or likes to do it. Sometimes it'll just be a. We meet with the CEO and the CFO, like every other private equity firm does quarterly, but we in instead meet typically with the eight direct reports of the CEO and it's the three senior people from Core Tech and we actually started using Zoom in 2015.

[00:28:38] And so we bring our junior people into these same meetings. So we have the seven person team with every one of our portfolio companies that stays the same from acquisition all the way through exit. And so we came down to Austin and I'd already had a heads up from our new CEO. That was the other thing.

[00:28:54] We had transitioned Roy at his own request because the business was too big to a professional CEO, Matt Wrenches, who is still the CEO of Yeti, and we hired him out of Danaher. And so Matt's learning the business and immediately has this big pile up on I 95 of cops. We sat there all day and the first thing I said was, look, we.

[00:29:17] Because yes, this is a crisis and it's gonna get worse before it gets better. And part of my recommendation to everybody to take a deep breath included myself because this was me thinking to myself somewhere in the back. Obviously my own ego at play, Dave Snot is gonna be remembered as the guy who had the best private equity deal or one of and blew it.

[00:29:41] Totally blew it. And all that. Ego aside, I didn't want the company to fail. I knew we had something really great and it was a matter of how do we innovate from this potential conflagration. And so I basically said, listen, we're gonna just sit in the room and talk about each of these components we, of the challenges that we have, and we're gonna figure out who's gonna take which

[00:30:11] issues. Lots of stainless steel only inventory at our retailers, lots within our warehouses, and then lots more on order. And so what we did was we stopped all of that. That was on order. We went and looked at two fundamental technology changes that would allow us to add color to cups after they'd already been built as opposed to inline powder coating.

[00:30:34] And then secondarily, we looked at inline powder coating. All this was happening over a one month period. Basically, Sean, it was atop event. I remember going back to my hotel at about 10 that first night. I ended up staying there for three days and, and working on planning with these guys in execution. I didn't sleep a minute.

[00:30:51] I was only focused on diving as deep as I could in each one of these vertical areas we were trying to fix, with my knowledge being not nearly as great as expertise that we would find later, but from a construct perspective, helping set it up so that we could execute against it. In the morning after a couple cups of Java, getting together with Matt and talking about who on the SWAT team was gonna go execute against it.

[00:31:14] And long story short, we took back a whole bunch of inventory from the retailers, painted it. And I'll tell you also, I skipped the fact we developed a paint strategy, but painted it and sent it back to them. We took everything that was in our warehouse coating line and before we. We developed was that we would introduce colors somewhere between three and five at a time, and they'd have a limited life.

[00:31:42] We took a little bit of the lesson from Supreme. You create product that would have its own obsolescence and whether or not it was collectible, that wasn't really our point, but we wanted to ensure there'd be long-term innovation by having a variety of colors. Then we talked a lot about over time, matching those colors against some of the plastic products we made, having the exact same colorways across product families, which Yeti still does today very effectively.

[00:32:06] But back then, unbelievably, it took us only a year to work through all of this and resume growth. So we basically were down about 50% that one 12 month period, and then we grew by a hundred percent again off of that. So we were back to where we'd been before. Within about a 12 month period, and we had retailers who were super happy.

[00:32:30] We had consumers going crazy, and we actually used it as a tool to drive dramatic growth in direct to consumer. So we took what was, without question the most challenging intellectually, business-wise and personally just because of who we, and.

[00:32:51] And we turned it around. So huge challenge, lots of stress, no hair, and it worked, which it doesn't always either.

[00:32:59] Sean Mooney: It's an amazing story you hear about and it is very in line with what we were just talking about, right? It's just this breaking things down to understand it in a way that just takes work, but then it's just tenacity and grit.

[00:33:10] Something gets in your way. You don't just curl up into the fetal position and wait it out. You run towards it, you dig below the rock, you go around it, you go above it, you go to the left of it and then there's gonna be another rock. And it's just like, no, we're gonna continue to move forward and run towards the challenge versus like shirk in front of it.

[00:33:28] And so many times people, that's their intuition is like, let's just wait and see if serendipity will lead us through. Lower the sails. There's a storm here, let's just

[00:33:37] Dave Schnadig: right.

[00:33:41] But by the way, there are times you need to just step back. I mean, the tariff situation is one where you, you had to step back because every day was a different kind of hurricane. But yeah, no, you are right. You can never let the magnitude of the challenge overwhelm you. You have to, you, you just nailed it so well, Sean.

[00:33:59] You have to break it into its component parts and knock them down one at a time.

[00:34:04] Sean Mooney: So with that in mind, maybe let, let's dig into that. And so there's some big stuff going on. What are some of the piece of advice you're giving to your colleagues, you and your colleagues are giving to your portfolio company now and around some of the key themes here and what maybe are those?

[00:34:18] Dave Schnadig: Yes, these are interesting times. You were very kind in the way you positioned it and they didn't need to be. That's the crazy thing. But I'm actually glad you asked and it's, it's a good follow on to how we work with our companies. Mentioned this. We have at our shop is actually a really unique construct, which is unique despite private equity firms always saying what they do is unique, but, but this construct is totally unique, and so we basically have three tracks for our executives and none of them start at 60.

[00:34:47] By the way, unlike the operating partner model at lots of PE shops, we start pretty young with most, the youngest is what we call our transaction track. That's the standard private equity model. Really sharp young adults out of investment banking. Probably folks like Sean from Houlahan Loki back in the day.

[00:35:07] Back in the day. Yeah. Two, three years experience. And we really focus though, while we're hiring, um, people who aren't deal junkies and there are deal junkies out there. I love a good deal now and again, but I'm not a deal junkie. I'm.

[00:35:27] They never even go back to business school and they don't need it because of what you get exposed to at Core Tech from the team perspective is is more valuable than that. It's a real life MBA, it's the real deal for sure, but it also comes from the other two groups that we hire. So the second track that we have is called the Business Track.

[00:35:43] It's a really creative name. And what we're doing there is we're hiring folks who are typically call it 35 to 45, right? Around 40 on average, who have run multiple businesses. They've been president or CEO of companies that are typically between a 500 million in revenues, but they don't view being CEO of the $5 billion company as the brass are.

[00:36:08] Are attracted to the idea of guiding, mentoring, building a multitude of businesses, not having all their eggs in one basket, quite frankly. And while they may have heard of private equity as they were moving up the corporate ladder, they weren't working in private equity typically. So they need that education of what this thing called carried interest is all about.

[00:36:26] And we explained to those that are interested that by the time you to be that CEO of a 5 billion company with your.

[00:36:37] At Core Tech. So if the combination of mentorship, guidance, multiple companies, multiple executives, not being CEO, but being their partner for real, their teammate that appeals to you, you'll make plenty of money. Don't worry about it. It's all about the money. We don't want that person anyway, quite frankly.

[00:36:56] So that's group two and then group three, which we started in 2020, those two.

[00:37:04] The last group, which we call our operations excellence group, is actually the one that's most relevant to the tariff situation currently. But we actually, about six years ago, began recruiting a guy named Aaron Hildebrand, who ran Paul Corporations operations. Paul Corporation is a division of Danaher.

[00:37:22] You probably heard of Danaher Widely recognized as Global Best Executive Training Ground. It's one of

[00:37:27] Sean Mooney: the world's best private equity firms with Perpetual Capital,

[00:37:31] Dave Schnadig: and it didn't used to be run very well either by the Rails brothers, but they hired really smart people who know business and Aaron's one of 'em.

[00:37:37] So Aaron was 45 when we hired him, and he was running the operating expense side, so.

[00:37:49] Facilities all over the world that were owned, JV and third party. And he was a Lean Six Sigma black belt in terms of process. But he was the COO of this business. And so he had this incredible training, but when we met him, what we got to know was he was the guy who typically was coming from headquarters to help.

[00:38:10] Right? And most people. What Aaron was able to do is demonstrate to my partner, Jeff and myself as we were interviewing him, is all the change that he was able to make through buy-in at the local level. We love this guy. So long story short, we bring, typically, I mentioned that we have seven person teams.

[00:38:32] It's a cross-functional group that works together on the acquisition. We stay with the business from that due diligence phase. We it all the way through exit. Same team, unless one of the younger kids goes back to business school. So there's tremendous continuity in terms of knowledge. And what it means is that particular challenges we see in diligence, and we almost always see the fact that even though we buy good sized companies, our primary business approach is to buy from families or founders.

[00:39:01] So 90% of the platforms we make, our family are founder owned about 20, 25 million on EBITDA on average. So good size companies, and believe it or not, Sean, they're running off of QuickBooks. Yeah. So got that ERP backbone that you see. One of many fundamental changes we will make. We often see supplier concentration.

[00:39:20] We often see other shortcomings, like we don't have a fully built out HR function. We are going to be investing money in these companies early. They're going to be good performers, or we wouldn't be interested in 'em, but they're gonna need that infrastructure to help 'em take that next growth step. So as part of the supplier diversification process, we're assessing where they make product and who makes it for them and who does well in whatever they make.

[00:39:44] It's typically a multitude of suppliers, but you may not have redundancy through every product category. You may have country specific exposure, and in any event, as you might expect, we have several within our portfolio. We've got 15 companies in our portfolio today across. And three of those have Asia manufacturing exposure.

[00:40:04] That's somewhere between material to a hundred percent. So when the tariff thing hit, what we decided to do was, because I was the chair of the three companies with the most exposure, and if it hadn't have been me, it would've been one of my partners. And we had Aaron Hildebrand, who I mentioned, who now is joined by two.

[00:40:25] So that they can provide help to every one of our portfolio companies for all the operating challenges that we have. Aaron and I were the tariffs, ours because we felt we needed to have a central point of knowledge given A, the complexity of the issue. B, the differences in our portfolio companies and what they bring in and from where.

[00:40:44] And C, because changing about every minute, good news.

[00:40:51] But in any event, that's what we did, and so we became this repository of information. I will tell you today, I know more about tariffs, bonded warehouses, every form of construct of ownership, where you look at when the manufacturer is seeding their ownership to you. When you take ownership of the product, are you importer of record?

[00:41:19] Are you first price paid? There are so much complexity around this and how you calculate it. There are many ways to play the game around tariffs, but at the end of the day, we accept the fact we're gonna have some exposure and we're not gonna do anything to test the law. And so this is about knowledge.

[00:41:38] And back to your point before, break it down. How do you take that knowledge? Specifically apply it to your businesses. And so we basically did a couple different round tables for our CEOs of the most affected companies, did it together, and then we attacked the individual problems of each company, so we know what we've got.

[00:41:55] We've definitely reduced the exposure very materially so far, but for the two businesses that we have that are sourcing a hundred percent of their goods from China, you can't successfully buy and sell when the.

[00:42:10] We're hoping back to that not being a strategy, but it is right now that 145% is temporary. And at the same time, we've been working for two years in the case of both businesses anyway, to move production to different markets, not just in Asia. And by Q1 of next year, one of those two companies will have virtually a hundred percent of its product outside of China, and the other one will have six different markets that it can source from because market.

[00:42:38] And so the mix over time will change very meaningfully going into 26, but 2025, we're just focusing on mitigating the total cost impact.

[00:42:47] Sean Mooney: I love it. In some ways as, as you were saying, this is like some of the lessons learned that I used to take from the Toyota production system, right? It's just exactly what you're saying.

[00:42:55] I love it where it's just like, let's do a Kaizen event. Let's break it down. Let's put, get our Pareto together. Let's attack the biggest opportunities big to small. This is how bizarre I am. I view that kind of way of thinking. It's just like, it's beautiful, it's elegant, it's streamlined. It's like how do you create something faster with less variability?

[00:43:15] And when people will come in and ask us what's what our business is? I go, oh, it's a data factory. And people will go like, what the heck? And they come through and they, and it's, we put it single piece flow. And even our office is a technology and data business really that's providing these matches for business builders.

[00:43:33] It's really, it's one piece flow and you just see dashboards the whole walk down. And so I'll walk the hallways here and in a five minute walk, I see how the whole business is, but it's just what you're articulating, like made my heart sing.

[00:43:45] Dave Schnadig: I'm not very good at blowing smoke, but it's very, very clear that you know, and you're running a business that way.

[00:43:49] That that's exactly right. I learned an awful lot over time about lean and

[00:43:58] expert. And that expert is delivering that expertise to our companies who don't have the expert either because they're too small. You get it, obviously, and you're practicing it.

[00:44:08] Sean Mooney: It's so good, but it's easy to talk about, hard to do. And so what you're articulating is like, we're gonna figure this out. And I think it's a great lesson for really anyone who's listening to this, who's a business builder, and how you solve these big problems that are not only longitudinal, but these really acute things that are gonna pop up.

[00:44:29] So what Dave is talking about, listen carefully. 'cause that's how you do it really, really well, is like, don't hit the panic button and break it down and then just go after it.

[00:44:40] Dave Schnadig: I would say what Dave and Sean are talking about because you really understand this stuff and you practice it. And I think the, the other big thing though too, man, is you surround yourself with talent.

[00:44:50] The most important thing has been hiring these folks commercial.

[00:44:58] And then we wrap it around so that by the time you're a hundred years old, like me and my partners are in their fifties, we've seen it all too. And so experience is really, really important in making you a valuable assist to your CEOs and to your business function leaders. And that's really what we try to be like I was saying before.

[00:45:17] Sean Mooney: Yeah. And you're clearly running the business of private equity or your business of private equity like a business. And from what we get to see and from what we're talking about here, what a tremendous resource for your portfolio companies that partner with you to have not only the decades of experience, but also people who are true practitioners in this and say like, we're pulling this, or with you.

[00:45:38] Let's go.

[00:45:39] Dave Schnadig: Well, and you have Craig, right? I mean, the most important thing is when the head of operations, who's probably had a successful career, him herself at.

[00:45:51] The AA player meeting, babe Ruth or Hank Aaron, right? I mean, he's that good. He's also that mindset, particularly Hank Aaron, very self-effacing, very easy to talk to, and then if you have a question, the answer is immediate and I've never seen it be wrong. So the credibility right of, of an expert.

[00:46:13] Sean Mooney: Not meaning to uncomfortably flatter you, Dave, but it's not too often that you hear the senior partner of one of the most successful private equity firms in the world becoming the tariffs are, oh.

[00:46:25] You know, like, no, but it's, but it's, it's really important. Like we're walking the walk and we're here with you. I'm gonna roll up your sleeves and you don't see it that much.

[00:46:31] Dave Schnadig: Yeah. I'll add that to my resume.

[00:46:41] You do. And for these three companies that I have ultimate responsibility for, could there be any bigger issue right now? Now if I can't help, if I can't dig in alongside of them and share the pain, even if it means learning an awful lot about stuff that hopefully won't matter that much in another five years.

[00:47:00] So what you gotta do, that's what you gotta do.

[00:47:03] Sean Mooney: Yeah. It's the old kind of African proverb in real life. For each of these companies. You might go faster by themselves, but you're gonna go a lot further together and you all are kinda like gang tackling these things with them. So I think that's tremendous.

[00:47:17] Dave, we covered a lot here, I think is really insightful and candidly very helpful given where we are in the world. And I think a good lesson for the most acute wave that's kind of swept the global economy. And maybe to bring it back full circle to something that's near and dear to people who like to kind of tweak things and love processes.

[00:47:39] One of the things I always love are like life hacks or just like gizmos or something that makes things a little bit easier or fun during your kind of day-to-day life. I'm curious if you have anything in that genre of kind of insider perspective.

[00:47:54] Dave Schnadig: I can promise you.

[00:47:58] But what I will tell you is it's super appropriate, given what we were talking about earlier, our own predispositions and our predecessors in life to spend far too much time working and not enough time doing other stuff. And so it's not a hack, but what it is, is a diversion that's sort of a hobby and with big wind.

[00:48:27] My wife and I have been taking what I'll call adventure trips with our children when they were children, up to when they were young adults, and now as they are in their mid twenties and late twenties. And the planning of these trips takes a long time, and typically we're booking something a little less than a year out, and then planning the year before that to be able to do it.

[00:48:51] So we've had in the queue many trips, but I've actually gotten much better. Delving into the details of the planning with my wife who who works full time, has been a professional her entire career and has historically been the cornerstone of this. But in the last five years as I've tried to actually prove to myself that I could do something other than work, thinking about these trips, which are typically two weeks and we take them over Christmas time and they've involved anything from Africa to Antarctica, it is a great diversion for me, Sean.

[00:49:24] It's the reading and it's not chat. GPT isn't where it should be yet in terms of recency and breadth of information. So you really have to scour even going to, you know, page seven, page eight, page nine, in Google searches for expertise, for opinion. And then actually, I don't want to give away one of my wife's great secrets, but we typically find the one or two or three experts in the particular locale that we're going by reading and reach out to.

[00:49:53] Because two weeks is never enough. Only it's like the American mindset of global travel, right? You talk to someone from Europe and you say, yeah, I took a huge trip around Christmas last year. And they say, well, how long were you gone? And you say, oh yeah, it was like 13 days. And they look at you like you're an idiot.

[00:50:13] That's it. A long

[00:50:17] work. S.

[00:50:22] Sometimes when things are just a little heavy, looking at maybe a friend's itinerary. Also, we collect friends' itineraries and just thinking and thinking, and thinking around these various cities that we wanna be sure to see, which you don't know until you read a lot. So it's so highly iterative and you never plan the perfect trip.

[00:50:40] That isn't the point. The point is to have a great deal of information to help you plan that trip. And then the journey itself becomes this amazing outgrowth of all the learning you've done build so far from a life probably ion a great diversion from day.

[00:50:58] Sean Mooney: I love it. And in some ways it's, it's very much the private equity expert way.

[00:51:03] 'cause you're, you're learning everything about the places you're going. You're right. You've got, you're scouring information, you're synthesizing it, you've got hypotheses. Yeah. You're bringing it in. Consultants, you probably have like a deck by the end of it. I never thought of it that way. I love it. Great.

[00:51:20] We're in the point where it's our kids. Were getting older, so we're trying to do better trips. It can't just be Florida every year. 'cause the kids will be leaving the nest relatively shortly and I have not been doing that. I go way too late. And then the airfares a bajillion dollars. And as someone who grew up in private equity, the one thing most of us also really like is a good deal.

[00:51:40] Yeah. And so I'm like, I'm getting all like crazy 'cause the airfares so expensive. Like my wife's

[00:51:46] Dave Schnadig: like, chill out dude. Like let's just have fun. Well.

[00:51:55] My advice, advice if you'll, is to put the money back into those trips. And I'll tell you, Sean, in all seriousness, it doesn't matter where you go, right? It's spending time with your family because those experiences, everybody says it, they're priceless, but they're, and you're not gonna get 'em back. But there's nothing that substitutes for, it's the best.

[00:52:12] Sean Mooney: It's really good advice and, and wise advice. It's the experiences that you remember, not the stuff you get. And I was having almost like a, not almost a, a sentimental moment today. 'cause our, my daughter's graduating high school this year, so it's our last day of school is the day we record this. And so we're putting together her high school graduation party.

[00:52:33] And, and my wife likes to do these wonderful, like, picture books and myself, 'cause I'm a gadget person. I'm gonna like, oh, I'm gonna do like a, a slideshow. And so to your point, the ones that I really stuck at is all the trips we went on. And just like those are the ones where I hit pause and you kind of feel like the emotions well up and like you can feel a little bit of a, the wetness in the eye.

[00:52:53] Okay. A lot. I'll be honest. But your point is like those things matter and you're like willing to take the time to invest 'cause you only get to be along around these kids so much.

[00:53:03] Dave Schnadig: That's right. Well look, we're blessed. I mean our, our guys are.

[00:53:08] Since you're a gadget guy, you probably know the aura frame. Oh yes. A brand that I'm not affiliated with, so there's no plug, but there's nothing better than when they're not around to just see a pick flash from one of your trips together. And yeah, I was looking at a picture this morning of four of us standing actually on what was at the time, a dormant volcano in New Zealand.

[00:53:33] And less than a year after our visit to White Island, the volcano exploded and actually killed a bunch of people.

[00:53:40] Sean Mooney: Oh my goodness.

[00:53:41] Dave Schnadig: And when you're We're there, we're standing there and behind us, the steam's coming up and the sulfur bubbling. But yeah, sure enough. And seeing those picks flash, other than that one which has a little bit of a Mac component to, obviously I always smile and it's so many something different every day, every minute.

[00:54:01] So yeah, you will not ever regret those times together. And if

[00:54:06] Sean Mooney: you look back on all these great adventures, what would be one of the ones where you say, you know what? For me, I always like to do new things, but there's also things that I like, oh, maybe I'll go back to that place. Is there a place where you'd say, you know, this might be one of the places that I'd love to do again?

[00:54:20] Yeah.

[00:54:21] Dave Schnadig: It's crazy that you ask that. Done different, different Africa.

[00:54:29] The most impactful emotionally and experientially for me and my family. Went to Japan. We were just in Japan for the first time. Have you been to Japan?

[00:54:38] Sean Mooney: I have not, but I've, I've heard just unbelievable.

[00:54:42] Dave Schnadig: Heard it on your list, man. We went to go watch the Cubs, play the Dodgers. Don't ask, but I mentioned I was.

[00:54:55] Our kids met us for that portion of it in Tokyo. Never had, I've been to Japan and I've been all over East Asia. Short story, after 10, 12 days, whatever we were total, I can't wait to go back. I found it fascinating. Culturally outstanding. Food wise. The transportation system is absolutely mind blowing and so Envi can't.

[00:55:25] In around Japan and it's so different depending on north, south cities country. I really wanna go explore it. There's not a lot of English in Japan, even today. Tokyo, they're acceptable. Kyoto acceptable. Other places we went were acceptable, but the places I'm thinking of going are a little off the track and yeah, that's on the list.

[00:55:47] Just bring the chat GPT app and it'll translate real time

[00:55:49] Sean Mooney: for.

[00:55:53] Dave Schnadig: Butchered the hell out of that language, no doubt.

[00:55:56] Sean Mooney: So a, I'm gonna add that up to the top of the list.

[00:55:59] Dave Schnadig: Please do. And when you wanna go, hit me, because like I said, that's part of the way you figure out where you wanna go.

[00:56:04] Sean Mooney: I need the Devil Secret, Dave Schneider travel guide. Yeah. Yeah. It's really my word.

[00:56:09] You're gonna get a lot of your friends starting to ping you Now you're like, all right, we get your guidebook on Antarctica. But David, this has been really a fun conversation, but also something where I've learned tons of things that I wish I knew before. So that is really generous of, 'cause I know time is scarce for you and so I want to thank you for joining us today in pulling back the curtain on some of the world that you've spent thousands of hours learning to be so good at.

[00:56:34] So it is appreciative and want to just thank you for taking the time.

[00:56:38] Dave Schnadig: Thank you so much, Sean. I really appreciate your great questions and also your side of the equation. Tons of interesting stuff there and the sharing that you've done. So thank you.

[00:56:58] Sean Mooney: That's all we have for today. Special thanks to Dave for joining. If you'd like to learn more about Dave Schick and Cortec, please see the episode notes for links. Please continue to look for the Karma School of Business Podcast anywhere you find your favorite podcast. We truly appreciate your support.

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[00:57:47] That's B-L-U-W-A-V-E and we'll support your success onward. The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the user positions of any other persons or entities, including those referenced herein. No representations, warranties, financial, legal, tax, or other advice are made herein.

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Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.