Private Equity Value Creation Through Focus, Culture, and Tenacity

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[00:00:05] 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 a fantastic conversation with Eliot Kerlin, founder and managing partner with Broadwing Capital. Enjoy.
[00:00:39] I am super excited to be here
[00:00:40] with Eliot Kerlin. Eliot, great to see you.
[00:00:43] Eliot Kerlin: Great to see you. Thanks for having me.
[00:00:45] Sean Mooney: I've been looking forward to having Eliot on for a while here. He's got an amazing story, kind of the serendipitous journey. That's not what everyone would think, at least in the beginning of the story, the traditional path.
[00:00:57] But I do think it's just highlights how many different entryways there are into. The business of PE and he is also got a lot of great perspectives and insights that I think are gonna make everyone better for it. So Eliot, let's kick it off as we typically do. I would love to start off with the story of you.
[00:01:14] Can you talk about where you grew up, formative experiences, college, first job outta college, how you got into pe, all that kind of fun stuff.
[00:01:24] Eliot Kerlin: Sure. Grew up in Fort Worth, Texas. I'm a multi-generation Texan. When I was living in Fort Worth and growing up, it felt like a small town. We called it the biggest small town in in the country, and you could get across it quickly.
[00:01:37] We had a pretty small family, one brother, and not a lot of cousins or nephews. We spent a lot of time at Fort Worth and at my grandma's house in Orlando, Drive back and forth a lot of road trips together, doing that and being creative, coming up with games or singing together, and as I thought about what I wanted to do, my mom was a music teacher.
[00:01:57] And I was musical, but didn't wanna do that for my whole life. And my dad was an engineer, a nuclear engineer at a firm in town and had that same job for 43 years. And I did not know really what he did because I couldn't go to work with him and security clearance. And then we did aerospace as well. And so I knew I didn't wanna be an engineer because I didn't know what they did.
[00:02:19] So when I went to college, I was thinking medicine. I wanna be a doctor who knows how to manage money, raise money for clinics or whatnot. So I went to Texas a and m as a pre-med finance student, and first two and a half years was microbiology and organic chemistry. And as I got into my upper level business classes, really was intrigued by those thought maybe I, I could do a little business program for a couple years before applying to med school.
[00:02:47] And that summer after my junior year, I worked for an HMO in Fort Worth and the HMO had a lot of doctors that were not practicing anymore. They were running the HMO as well as the guy in charge who was an MBA. And I was wondering, well, as I'm shadowing doctors, talking to them, maybe more business experience would be helpful.
[00:03:06] So through A&M, one of the largest undergraduate college of businesses in the nation, I got involved in the Fellows program, honors, went to New York City for the first time. My junior year thought, wow, this is interesting. May, maybe this is something I could do that. My fourth year, I found out what an investment banker was, what management consulting was.
[00:03:25] I thought those sounded like great challenges and started to try and move in that direction. So I, I did a program in New York. Through that, I was able to get an unpaid internship working in New York City, came home and, uh, painted dumpsters for the month of August so that I could raise money since my internship was unpaid.
[00:03:44] And I'd always had, like, lawn care businesses during high school and mow some lawns as well. As I got into my fifth year, when you go to a big state school, you can afford a fifth year sometimes, and because of all my extra medicine classes, I was there for five. And so I started interviewing with investment banks, consulting firms a and m back in the late nineties.
[00:04:04] Was not a traditionally recruited school for New York City bulge bracket firms or even the big three consulting firms. Sue. I providentially came across an opportunity in investment banking and kept reaching out and networking, picking up the phone and calling. We don't have to do that much anymore, but back then couldn't email or text as easily so called and just really networked into a lot of different opportunities in New York, Houston, and Dallas.
[00:04:32] And I thought if I was gonna do Wall Street, if I was gonna do high finance, let's do it in New York City. Let's take on that challenge. So. That year I was the only Aggie to go to New York City to work in investment banking that I know of. And I only knew one other Aggie up there who was hedge fund trader.
[00:04:51] Slept on his couch for the first six weeks in my analyst program at Merrill Lynch. Figured I'd meet some people I, I could room with, and that's what I did. And so ended up rooming down on Wall Street with two other analysts for a while, and I had a wonderful experience at Merrill in telecom investment banking.
[00:05:09] It was intense. It was what I was hoping for. It was what I was expecting, kind of thought of it as bootcamp for finance for two years, and I loved it, but afterwards wanted to work with some smaller companies. We were working with very large public companies, startups that were putting satellites in the sky or DSL companies, fiber companies.
[00:05:29] And so it was either like a business plan, we could raise a couple hundred million around or at and t. And I wonder what's in the middle where I can really feel like I'm working with the heart and soul of the business. So I went to a middle market private equity firm in New York. I, I didn't know that was the middle market back then.
[00:05:45] It was just a, a smaller cap private equity firm where we were investing in services and manufacturing companies in the lower middle market. And that's really where I spent the rest of my career ever since 2000, is working closely with management teams to understand what they do well. To emphasize that part of the business and to grow from there.
[00:06:05] Sean Mooney: I love that story and in some way it's atypical, but in other ways. One of the things I've learned from this podcast here is there's actually a lot of commonality to it as well. And so one, there's a lot of people that come from Texas and it's just kind of this like pull yourself up by your boots and figure stuff out kind of mentality and you can't tell me no.
[00:06:24] And so like grit I think is ingrained in the culture of that state. And I grew up in Texas. But I grew up in Austin, so I don't get full Texas credit, at least from other Texans. And so,
[00:06:36] Eliot Kerlin: Hey, it's still hot. Yeah, right? Yeah. Yeah. It's still a hundred degrees during two days. Yeah,
[00:06:39] Sean Mooney: yeah, exactly. I, I lost 20 pounds in August every year, just like everyone else, but, uh, exactly.
[00:06:46] But it's, there's this kind of mentality, there's this kind of like this western ranch culture that I think pervades kind of the industry. The other thing that really struck me is like you had an engineer father. Recently it was interesting with all these great AI tools, I put all of the transcripts from a hundred plus episodes into one of our AI engines and to get through the big themes of like where are people from, where they come from, what are the stories, what are the past?
[00:07:10] And one of the biggest one is having a parent who's an engineer. Is that right? That's interesting. So you have a lot of people who have this kind of, this mindset. There's like this innate kind of builder sense that you're raised with people who like figure out puzzles and like erector sets and those kind of things.
[00:07:26] Eliot Kerlin: Absolutely. We changed our own oil right in the driveway. He loved cars. Even though he was an aerospace engineer, nuclear engineer, we'd changed the spark. Plus we'd work on a cars, fix 'em up. He helped me fix up a car in high school. But it is a lot of problem solving, right? It's very hands-on. When I kind of layered on a lot of the science background, which is very hypothesis driven.
[00:07:47] We test and experiment and we have an hypothesis, but we have to be able to look at the data. And restructure based upon kind of the scientific method. I think it's actually highly applicable to investing, particularly with the thesis driven, hypothesis driven work plans to help focus our efforts. A lot of private equity firms, we're pretty lean.
[00:08:07] We're processing a lot of information quickly to try and get to the right answer. We're not always gonna be right, but it's helpful to have that hypothesis upfront to help direct it, right, and and to be problem solvers, you gotta be curious. And engineers are always asking questions about how can we make this more efficient, make this happen easier or better or faster.
[00:08:28] Sean Mooney: I think that's a hundred percent right. You're dealing with open problems that have solutions, but never perfect. Right? So to your point is like so much of what many firms do that are really good is. Forming these hypotheses and testing it and using the scientific method, and I, I think you're a thousand percent spot on there.
[00:08:47] Hey, as a quick interlude, this is Sean here. Wanted to address one quick question that we regularly get. We often get people to show up at our website, call our account executives that 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.
[00:09:06] 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. 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.
[00:09:28] Visit our website@BluWave.net. Thanks. Back to the episode.
[00:09:36] What is also really interesting, your story is you, you came from a school that wasn't traditionally recruited at the time. I think that's definitely changed by now, but you still found your way to this industry and I'm curious like, how'd you even know to, to look at it as a kid? You're gonna go to med school maybe, and then suddenly you're like, oh, I'm gonna go to Merrill Lynch, and which I always thought was a stockbroker when I was a kid.
[00:09:59] Eliot Kerlin: I've always enjoyed a challenge and I like increasing the, the pool of competition. I went from a small private school where I grew up to a public high school, five, a high school from a five, a high school to a 45,000 student college. And then after Texas, the third largest college in the nation at the time.
[00:10:16] And you're thinking, what's the next challenge? Right? And New York was a very level playing field with a lot of great competition on it. So that was, that was exciting. But A and MI credit for really broadening my horizons and opening up possibilities that you had to pursue. You had to be interested in.
[00:10:34] But through the Fellows program, my first trip to it was a three day trip. We visited a lot of different types of firms and it helped kind of introduce me to New York City and demystify the big Apple a little bit. Texas Boy could survive up there type of thing. At least if you had a, a group of 30 students with you.
[00:10:51] And then that next summer when I went up, I actually went with a program called Aggies on Wall Street, and that was three weeks. Stay in the NYU dorms in the village and visit high finance firms mostly. That group. I don't know, remember how many students, 15, 20 folks? I don't think any of them ended up working in New York City except for me, and I was kind of a late ad because I'd just heard of the program and frankly needed a scholarship to go and got the scholarship lined up and went and then turned it into this, this summer internship where I stayed for another six, seven weeks working in the city for free in the same dorms, sharing a room with a guy I didn't know in the NYU dorms, but loving the city.
[00:11:32] And really building relationships and as we talk about business, I don't think you can avoid talking about people and relationships, investing in people, valuing people, being willing to talk to anyone, being willing to listen and take their advice. Being humble enough to say, I don't know. I need your help.
[00:11:50] What you recommend, anyone else for me to talk to? That was kind of my approach. It was a lot of phone calls, right? Picking up the phone and dialing, but making connections. And then trying to run with the ball there.
[00:12:03] Sean Mooney: And it's an impressive feat because A, and just knowing, even back then, that was a really hard job to get.
[00:12:10] I went to a college that was heavily recruited by Wall Street 'cause a lot of the kids were from New York, New Jersey, Connecticut. So their parents had jobs there. So you'd go and be like parents. I had no clue what investment banking was. And the only reason I applied was 'cause most of my senior year roommates.
[00:12:27] We're from Northern New Jersey and all their dads worked on Wall Street. And so what are you guys gonna do? Like investment banking? What's investment banking? Okay, I guess I'll do that. But we were pretty heavily recruited, but I, I didn't get an offer from Merrill Lynch, like, and so that, I mean, it's a really, it's a, a, a tough feat even to get in places that are, you know, heavily recruited.
[00:12:47] But then b, to have the audacity to say, here's what I want to do, and just go get it, is really impressive. And I think just a great lesson that. Where there's a will, there's a way. You just have to have the audacity to just say, I'm gonna go do it.
[00:13:00] Eliot Kerlin: Yeah. In retrospect, it, it seems a little farfetched. God opened a lot of doors and then, and then you kind of gotta be willing to run through 'em.
[00:13:08] And, and I think humility's a big part of that 'cause it's good to be able to say, I don't know what I don't know. Why shouldn't I ask? Right. Why can't I reach out and, and ask that person? And I've also found that a lot of folks are willing to help students in one of the most underutilized roles in life.
[00:13:24] For opening doors. It's when you're a student and whether it's grad school, undergrad, being able to say, I'm working on a project, I'm exploring a field. Someone's referred me to you. It's very rare that somebody won't at least take the call and try and be helpful, and I was the beneficiary of that for sure.
[00:13:40] Sean Mooney: A hundred percent. We'll turn the page here in a second period. Last thing I really like is you mentioned like your job was painting dumpsters, right? It's a hard job in Texas. Heat. It builds character. And that was like my summers. I worked in the back of manufacturing plants with hard helmets and steel toe boots, and that was actually something that later in life we were recruiting as a private equity firm from a lot of the Ivys.
[00:14:03] And as I said, the only way we're gonna recruit anyone from the Ivys is they had to have a manufacturing job or a restaurant job or something where they got their hands dirty and they had to sweat in the heat of some sort of rough and tumble plant.
[00:14:16] Eliot Kerlin: Absolutely. Yeah. I was a bus boy. I tried. Waiting tables is pretty tough.
[00:14:22] I ed cars. I mean, anything where you're in service one, it helps you appreciate what millions of people do right when they serve us. And I mean, I always tip, I always try and appreciate the folks that are doing what I used to do because it can be a hard job, but it also teaches you a lot about people. It teaches you a lot about customer service and about work ethic.
[00:14:44] Sean Mooney: So Eliot, we've learned a lot, I think about you here. Maybe what's one more thing if we were peel back the onion that we'd know you better if we knew this about you?
[00:14:51] Eliot Kerlin: Well, I'm fairly musical would be one. It's part of how I grew up having a, a music teacher mom who directed choirs and taught string programs.
[00:15:01] It was a substitute organist at different churches around town and it was just part of our house. We had a small organ in the house. We had pianos, we had instruments everywhere. So she started me playing violin when I was three. And I'm a classically trained violinist, and I did that all the way through the end of high school.
[00:15:18] I still play for fun. I love hearing a piece and saying, can I play that? And there's a lot of pieces I can't. Part of that was violin, and part of that was voice. I was actually in the Texas Boys Choir, which is an internationally known touring choir. We toured as well. I was in it for about six years. Got to sing in a couple of operas.
[00:15:41] Which was fun. We were the kids chorus, part of the operas performed with Van C cln had some really great experiences there before my voice changed because it is a boys choir.
[00:15:53] Sean Mooney: I mean, what a gift to have music. And that was, by the way, the other thread that came out of my kind of analysis of our episodes was that it's a lot of people had parents who were teachers.
[00:16:02] You got the, the double theme of engineering teacher in your household. Hi, karma School of Business listeners, Sean here wanted to shine another quick spotlight on one of the most important ways PE firms preserve and create value. The private equity industry is one of the most regular users of interim executives.
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[00:17:05] When you need it, give us a call or visit our website@BluWave.net and we can give you excellence in Alpha with ease back to the show.
[00:17:16] One of the things I always love, selfishly when I get the chance to have conversations with people like you, is to get mini MBA classes on business. And so I'm curious, you're looking at tons of companies each year, no doubt. You've developed kind of a mindset of here are the elements and drivers of value in a company.
[00:17:36] What are some of the traits that you look for in a company when you think about this business? Is a good business, or probably more importantly, can and will be a good business with application of resource.
[00:17:47] Eliot Kerlin: There's a lot we look at to understand strategic positioning, competitive positioning, the strategic dynamics of the market.
[00:17:54] We spend a lot of time understanding the industry, industry dynamics, degree of fragmentation, what the customers value. As we think about what the company does well, what do they value, what do customers value, and what will they pay for. We see a lot of companies where what they've always done or what they think they're good at may not actually be driving their margins, might not be driving their cash flow.
[00:18:19] And so it could be an important cultural artifact of the business important to the legacy or, or the folks who had been there and help develop that business line or product. But it may actually be a drag on the financials. And a lot of times what we talk to business managers about is let's do what we're good at.
[00:18:36] 'cause that's what we can get paid for. And if we get paid, then we have employees and we can grow and invest in the company and, and that blesses all our employees and makes a stronger business for folks to be at. So it can be hard to let go of the legacy items, but as a result, it's also important to have multiple skills that you get paid for multiple products, right?
[00:18:56] Customer diversification. So that's important to us. On the strategic positioning side of things, we also like to think a lot about. What's this business gonna generate in cash flow going forward? And private equity as, as an industry has grown and I feel like there's more and more participants. Obviously there's a lot of equity capital that's been raised in a capital overhang, but at our end of the market, there's a lot of folks pursuing this as well.
[00:19:23] And sellers. Now intermediaries and investors all know the multiple math of an LBO. How do you value a company that's very simple. You take two numbers and you multiply 'em together. Take LTM ebitda and you take a multiple. Well, of course there's actually shorthand for an LBO model of what will this company actually do over time based on growth rates and margin assumptions and cash uses.
[00:19:48] Right? And so as you look at it over time, one of the things we spend a lot of time investigating ourselves and trying to educate sellers when we talk to them is we don't. Care as much about LTM as we do about NTM. And so we spend a lot of time trying to forecast in a granular basis what will this company do?
[00:20:07] And some industries are inherently hard to forecast and that can be an issue. But I like to tell our team we can't eat LTM EBITDA that goes to the sellers. I'm glad they had LTM EBITDA that went to somebody else. We care about NTM and there's this. Follow on phenomenon now because of this, I think in multiple math where people are like, well, last month we had this good thing happen, or two months ago we had this.
[00:20:33] And so we add a little bit more ebitda, I call it last 10 minutes. It's not last 12 months, latest 12 months, it's last 10 minutes ebitda, where they want to get paid for literally everything good that might have happened. And the question is, well, will that endure? Will that continue? Because if we can't benefit from that, then we can't pay for that.
[00:20:52] So we spend a lot of time on projections. How accurate can we get over the next 12 months?
[00:20:58] Sean Mooney: That's the art of it, right? It is like trying to predict the future is so important because I think that's what a lot of people lose sight of. I think a lot of companies, to your point, are valued based upon these trailing 12 month multiples of earnings.
[00:21:12] But really what you're buying is the future. That's right. And what is that worth to you versus what as a person. And that's the art of pe, right? Is like, what does that future look like? That's exactly
[00:21:22] Eliot Kerlin: right.
[00:21:23] Sean Mooney: The other thing I think that you talked about that was a really good point that I think is lost on a lot of people, particularly in lower and middle market companies, is a lot of companies do a lot of stuff, but they're really only making money in a few areas.
[00:21:37] I used to invest in companies that were scientists, engineer driven businesses, and scientists and engineers like to create, right? And so we say they're building products in search of markets. And so they, they had all these things that they do were the most beautifully over-engineered products you'd ever seen in your life, but none of 'em made money.
[00:21:56] And so part of like our big trick was we'd come in and just say, we're gonna stop doing like 80% of this other stuff and go all in on this 20 and bring focus and resource and just own it. And it was really kind of unsettling to some of the founders because like these were their babies that they were nurturing for the next generation, but they just had no market for 'em.
[00:22:17] But once we're able to show them the math, to your point, it's like, listen, you make all your money here. And they're like, then they get it real quick. Like, oh, if I don't need that baby, let's, let's go with the kids we've already like raised and take them forward. So I think that's another really, really important point that so many business builders lose track of that.
[00:22:35] It's like, do the things you're good at, less is more, and then double down. Be a hedgehog, not a fox.
[00:22:40] Eliot Kerlin: Right? We like to differentiate along a similar line between a good business and a good investment. Just because it's a great company, just because we love their products and their positioning and everything about it doesn't necessarily mean it's going to provide great investment returns for us, and that applies inside of a company as well.
[00:22:56] Just because we've come up with a new whizzbang technology or product or twist on what we've been doing. If there's not a market for it, it won't be a good investment of our time and resources internally at a portfolio company. To pursue that, we have to invest for growth. We have to be thinking forward about where does our growth come from?
[00:23:15] And we're big fans of organic growth, right? We want to see a platform for new products, new customers, selling old products to new customers, new products to old customers, and how do we continue to grow? But we also have to be honest with ourselves. What are we really good at? And is this ever gonna pan out or are we just.
[00:23:35] Creating science fair projects. Which are fun. Which are fun, but you don't get paid for.
[00:23:39] Sean Mooney: Yeah. That's not what business is, is for. So, and the one other thing I think you said that I think should really resonate with our listeners and Will is you mentioned this underused word called cash flow. At the end of the day, does the business generate cash over time?
[00:23:55] That can be used to reinvest in further growth that can be used to support other avenues. Growth can be used to, you know, pay down debt can be used to just fuel the company for all sorts of things. And a lot of people, I think will say EBITDA is, is cash flow. And I think you pick the right word, right outta the gates.
[00:24:11] It's like it's cash flow. And it's not only yesterday's cash flow, it's tomorrow's cash flow,
[00:24:16] Eliot Kerlin: right? EBITDA is, we all love our acronyms. It can sound a little esoteric. It's obviously not that complicated. It's also not gap, but it is a handy shorthand for cashflow if you have relatively stable working capital needs, if you have relatively low fixed asset needs, right?
[00:24:37] If you don't have big debt payments, so EBITDA is an important kind of proxy. It's a shorthand for cash flow. But it's not a substitute. It still pays, I've found in investing to be very granular about how do we get to cashflow and how does that sustain itself. There's quite a few industries, I would say, where EBITDA's not a good proxy.
[00:24:59] You should be looking at it as a EBITDA less type of multiple, or you have to be really smart about the multiple being paid, and you can't just go with headline. My friend at the country club sold his business for X multiple. Well, your multiple has to be lower because you're inherently a lower cash generating or lower growth or lower margin business.
[00:25:21] Sean Mooney: My first job outta college, I was in a financial restructuring group at one of the investment banks, and it was such a great education. One of the things they taught me very early on was, we're gonna spend about. Two minutes on the income statement and then very quickly go to the balance sheet and cash flow statement to get the real story.
[00:25:37] Yes. And it's just such a great lesson. It's like EBITDA can be, but so often you gotta get the whole story and, and you're gonna see that through, like what happens as the cash flows through the balance sheet and the cash flow statement.
[00:25:50] Eliot Kerlin: Absolutely.
[00:25:51] Sean Mooney: So don't sleep on that. Listeners, as Eliot shared, like put a pin in that as you think about your future endeavors.
[00:25:59] We talked about some of the common themes that we see in private equity, and it's kind of parents who are teachers, parents who are engineers. This whole concept also I think often leads to not only curiosity, but people who have tenacity and grit is, I think one of the other big things that index and pe.
[00:26:17] It's just almost off the charts, tenacity and grid. With that in mind, I'm curious maybe what's the story of one of the things that you've encountered in business or life that's been challenging and how did you kind of address it?
[00:26:27] Eliot Kerlin: Well, first of all, I completely agree. Tenacity is so important that it's one of our five core values.
[00:26:32] We started Broadwing three years ago, and I've been entrepreneurial with some lawn care or this or that, but I'd never started a company, a real company, right, let's say like this, and it took tenacity to do that. It was also important to us to start it right. By laying a foundation and we talk a lot about foundation building, foundation setting what we call fortify the foundation.
[00:26:55] It's actually part of our playbook at Broadwing. But early on it was important to me and to my partner Andrew Boso, who, who founded Broadwing with me, to really align our team. At that point, it was a small team, an initial team around what are our core values, and we came up with stewardship, which you would expect not just a capital, but of.
[00:27:17] Careers and companies that we're trying to build and, and help. Tenacity, to your point, not gonna let go. Integrity, candor, open, honest communication. I believe communication is key to preventing mishaps and aligning expectations. And a lot of issues with management. Internal team strive can be prevented with that.
[00:27:39] So, stewardship, tenacity, integrity, candor, and humility, which I've talked about as well, which is important to us. We came around those as we were starting the firm. But when you're starting a private equity firm, you're doing a few things. Some of which you know, some of which you assume won't be that hard, like forming an entity, forming a team, setting up payroll, figuring out the website, getting stuff trademarked, building a pipeline.
[00:28:03] Again, getting your name out, managing firm growth, putting in benefits plan, like there's so many granular things, and it's not just like first month or first six months. We're still doing things. As we grow that now, well now we have to register with this. Now we have to have a compliance manual, now, an employment manual.
[00:28:20] Now we have online training for this stuff. It continues, it kind of compounds. And so that was challenging to me professionally. It was personally as well. I knew it would be different and I was looking forward to a, a new challenge to a new phase of my career. Family was, was aligned with that, so they were ready for it.
[00:28:40] But professionally it really stressed us because. We were doing what we knew with private equity, but then we had a whole new set of responsibilities as entrepreneurs that we hadn't ever practiced before or been trained on. Right. It's one thing to do your job for 22 years before you start a firm that did make the private equity probably more seamless than if we hadn't invested before, but starting a firm was his own journey.
[00:29:04] Sean Mooney: So I'm curious, how did you approach that? Because I remember nine years ago when I started this thing, I was really maybe. Kicked off 10 years ago with the, I gave six months to spin outta the firm. All these kind of things beforehand, I always say it was like, it was entrepreneurial inspiration fueled by hubris and naivete.
[00:29:20] And so I was like terrifying at the beginning because I was like, oh, you know, all these things I just didn't know and you had to figure out. So. You jumped off the cliff into entrepreneurialism, you're starting your own firm. Like how did you just start that when inevitably you ran into all these kind of roadblocks that said like, I've never done this before.
[00:29:38] I don't know how to do this. I don't even know what to do. How did you approach that? 'cause a lot of people, you talk about tenacity and grit, they sit down and stop or turn around and go the other way. They don't go above it, around it below it and just keep on finding a way forward. How did you kind of approach those moments?
[00:29:54] Eliot Kerlin: That's a good question. Thinking back, I think there were a few things that were helpful. One, we had a clear vision of what we wanted to create. Wasn't always clear how we were gonna get there, but we had a sense for at least what an interim destination would be. I don't wanna say the final destination 'cause of we're still evolving and growing and we're excited to see where we go as well.
[00:30:15] But we had clear vision. I think the second thing was I was working with partners who I knew and trusted, had an aligned vision. And align goals on how to get there. What we wanted to build, not just where we were going, but what we wanted to build and how we were gonna build it. It helped to start with a partner I'd worked with for 17 years.
[00:30:35] It helped to start with another partner I'd known for 15 years and invested with, helped to have a, a junior team that was fully bought in and excited about a startup, right? Even though they'd come from much larger firms. I think that was helpful. And then we very much had a commitment to tenacity. We knew it'd be hard.
[00:30:51] I mean, we actually. Started in probably the, the worst fundraising environment and recent memory in 2022, and we also had a transition period out and and left the right way and spent time forming mission, vision, values and strategy and articulating that, picking the name together. But it was a tough capital raising environment.
[00:31:14] The one thing we knew would be critical for us is making great investments. And we needed to source them and build a pipeline. We needed to do the diligence and analyze them like, like we were used to. And then we had to form the capital around it. We weren't exactly sure what the capital formation would look like, dedicated fund, deal by deal warehouse, right, et cetera.
[00:31:34] But we knew if we had great investments that would attract the capital. That was kind of our, our guiding principle is let's build a pipeline of great potential investments in our theme, in our sandbox, and then we'll just run through all the other obstacles.
[00:31:48] Sean Mooney: I really like that. And as I, I'm thinking through kind of like the storyboard of your firm.
[00:31:52] You, you had the who, the where, the when and, and the why. You just didn't have necessarily the what, figure it out in some of the details. But if you have all those other things, you're gonna find a way. And the other thing I really like about the way you approached it, which is becoming more normal, but it's still reasonably not, is you approach the business of private equity like a business.
[00:32:16] You did the mission, the vision, the values, the culture, all those things that are really important to any kind of company, and you apply that to your firm just as you would a portfolio company. And so often when I would commiserate with my friends in private equity, we'd always, always talk about like, yeah, we're all cobblers and our kids don't really have shoes.
[00:32:35] And like we're in the do as we say, not as we do business kind of a thing. Not to say that like the firms I work for were really well run, but I think we would just kind of say like, oh, we could be so much better kind of a thing. But you're doing it right out of the gates, which is so important.
[00:32:51] Eliot Kerlin: That was one lesson from our careers is we have great ideas for how to improve companies, grow companies, build culture at companies.
[00:32:57] Let's practice the same thing. We have the same type of meeting cadence, maybe even more frequent. Of course, we have the same type of incentives. We. Have internal communications that look a lot like what we ask our companies to do. So yeah, you're exactly right. Let's take our own medicine.
[00:33:13] Sean Mooney: Well, and, and let's think about, this is your roll it forward into Boradwing.
[00:33:18] You've built the business of PE into a business. So how does Broadwing, how does your firm approach value creation? What support and resources are you bring into your companies as part of kind of this mission, vision, value of
[00:33:31] Eliot Kerlin: even starting with the name? We pick the name to convey an aspirational idea of helping middle market companies broaden their wingspans and get more lift.
[00:33:42] We talk about broadwing hawks flying high far fast. Together we can achieve new heights, and we do that by bringing resources to bear. So we have a playbook approach based upon the last 20 years of investing, what's worked for us, what's worked for our partners, our resource partners in different situations and in different industries across different cycles.
[00:34:05] We also have a group of people, can't, can't do it without people. It's great to have plans. We have to be able to implement and assist, and so we have what we call our resource group. Some folks have operating partners. We call 'em resource partners because we want them to help equip and implement management ideas.
[00:34:23] And so we have our own ideas, management has our ideas. Let's let the best ones bubble up to the top and then we'll, we'll track and implement those. So what we centered around as a firm, as a mantra is building companies, cultures and communities. We felt like in our careers we've done a good job of helping companies grow and sometimes also improved employee lives.
[00:34:45] And in the communities where they operated, we wanted to be intentional about that. So that's part of our approach now that we track and that we work with management on. And, and of course we take our own medicine, we do the same thing at Broadwing. So with that approach, we source. Looking for opportunities where we can make an impact.
[00:35:04] We tend to be both thematic and opportunistic. Two thirds of what we see is based upon our own themes that we develop and we pursue, and we go deep on industries. We have our own funnel and an internal process to get there, and then we're proactive about mining those for opportunity and finding folks that we can partner with.
[00:35:22] We'll also look at opportunistic investment ideas that come across the transom from a variety of sources. And then once we get through sourcing, we're looking for stable to growing companies. They don't have to be 20% annual cagr. We're looking for stability, non-discretionary, with a successful business model where we can work with the sellers and the management team to fortify the foundation we call it, and then to scale for growth.
[00:35:47] And a lot of times that means the sellers are, are sticking around afterwards, their investors with us going forward. They're excited about the future. They may not be there on the org chart at the next exit. But they understand the vision and they want this for themselves and for the company and for their legacy.
[00:36:05] So we have our resource group, Broadwing Resource Group, comprised of operators that we've worked with before, as well as other specialists who can help companies implement fortify. The foundation is, is our 120 day plan. There's a lot of initiatives and diagnostics on there that we'll work with management.
[00:36:23] Some of 'em take longer than 120 days, but it's running start. Which we start even before close to really prepare for. And then we have our playbook where we're looking at growth, acceleration, operations optimization, and how do we create an integrated, unified business that still has organic growth, greenfield growth, m and a growth for an exit 3, 5, 6 years down the road.
[00:36:48] Sean Mooney: I like so much of that. You're starting at the very beginning with looking for the businesses that you want to own. And things that you believe you're gonna have a differential impact during that ownership journey versus kind of being a receiver of fate and destiny, just kind of showing up to one sim at a time.
[00:37:08] And not to say that there's not a strong path to doing that, and serendipity doesn't play a role in pe, but at the core, having like, this is where we wanna play and we're gonna go get it and seek it out as much as letting fake come to us. Then you're attaching resources against the areas that you really want to do in a purposeful way that's gonna create things and create value by giving assistance to these companies that are really the art of PE these days.
[00:37:34] It used to be optimization. Now it's transformation. So you're giving them kind of tried and true folks on your team that can help them transform the companies, and very often with the same founders involved. Let's double tap down also on kind of like the whole topic of culture and people that you've talked a lot during our conversation.
[00:37:53] So how do you build that maybe in a more detailed way, into the art of what you're doing In business building,
[00:37:59] Eliot Kerlin: we have a five part playbook, and one of those is called the stakeholder impact plan. And this is something we create upfront. It's based upon our observations of the company and what's important, and then after closing, we work with management to fill out some different categories on that.
[00:38:18] A core component of that is people, employees, and their lived experience. It really starts at the top. It starts with a team and a lot of times we're, we're walking into and investing in companies that are pretty lean and they may be owner or family driven or dependent even, and so we're helping transfer some of that knowledge.
[00:38:42] Processes and relationships over time to the rest of the team. So it's lower, what you might call key risk, right? Lower dependency on one or a few individuals, but a little more standardized and systematized. And as you're bringing new faces in, while you're also asking the incumbent team to take on some new business practices or do other things in addition to their day job, we need a high degree of trust cohesion.
[00:39:12] Relational capital, and we work very hard right from the beginning to build that. One of the ways we do that is we're in person. A great benefit, as you know, maybe not of Austin, but of Dallas, is we can get to Dallas-Fort Worth airport and arrive in non-stop flights to many places in the US or at least one connection.
[00:39:29] And so we talk about being on onsite early and onsite often. We want to build those relationships in person, and that's why we have a fairly broad team to help us do that. The second is a little more data driven and diagnostic, and so we work to every company implement a culture survey throughout all of the organization, so it's not just CEO or C-level exec team.
[00:39:52] Tell us how we're doing. This is a third party administered survey that goes into multiple facets of culture and that we can then segment by mid-management line level, plant level executive team, senior team. Different locations. And the reason is we want to measure improvement over time. It can differ based upon the messaging and the kind of inclusive management approach by location, by division, by plant.
[00:40:24] And so this is a way to say, Hey, we're doing really well here at communicating what we're about or what makes us different, but maybe the sales team doesn't understand it, or maybe this plant doesn't. And by the way, they may not have great productivity either. If we can communicate the vision, communicate where we're going, then we might see that improve.
[00:40:41] Same thing with internal team dynamics. We use a a tool to really try and understand what drives and motivates individuals that we use that for hiring and understanding. Do we have the good to great idea? Do we have the right people and do we have 'em in the right organizational roles? And if we don't, let's change that up.
[00:41:00] And then when we do, let's use that to understand the differences between us in communication. How we receive feedback, how we give feedback, how we understand goals and pursue them. We try and use some objective diagnostic tools and then have training around that with our teams. And then finally, stakeholder impact plan.
[00:41:21] We spend a lot of time upfront on culture building and understanding, as well as understanding behavioral motivations of individuals. And then we also try and get people together in person. Just like we wanna be there. We want to connect these regional, national, sometimes companies in person together to outline this strategy.
[00:41:41] Let them present as a way for professional development and to engage and build relationships within that team. We'll have outside speakers come, we'll have certain topics. Sometimes we'll do some team building fun events as well to get folks out of the work environment and to really get to know each other because those relationships we found after.
[00:42:01] And these don't have to be complex. They don't have to be expensive offsites. The importance is they're intentional and they're together in person. And after those, we found a lot of cross discipline, cross position pollination between folks in the organization. Long after we've left, we help kind of set it up.
[00:42:20] We help give management the idea. Sometimes management wants to run with it more. Sometimes we organize it for the first few years. We always try and be involved. We found that that really can strengthen the core of an organization.
[00:42:31] Sean Mooney: I like so much about what you've said there, Eliot, and one of the like big themes we always try to reinforce at our company here is like we use the word and not, or so often people are like, we're in this binary world, we can do this or that.
[00:42:43] And what I'm hearing from you is like a lot of people think it's art or science and you're integrating both. And I think part of the artistry of humanity is in person. We've been a tribal species for tens of thousands of years. Up until maybe, uh, depending on where you live, six to three year period, we all got broken into digital boxes.
[00:43:04] I don't know about you, but I could just feel our culture while we were in kind of like purely virtual mode, just degrading and degrading and degrading, and we made a call real early. As soon as kind of vaccines were out, we're like, we're all coming back. And as soon as we did that. You could feel the whole engine, the business lifting, you know, like coming up and right back.
[00:43:23] And so I think the point that you are so rightfully pointing out is like in-person matters. And I always love when I hear like, I hope that every one of my competitors aspires to be a virtual company. And so like, because it's just such a competitive advantage to be in person.
[00:43:40] Eliot Kerlin: Absolutely. I couldn't agree more.
[00:43:43] It's energizing, it's instructional, certainly at Broadwing, in an industry like this, there's so much that is looking at the same piece of paper, sketching something out on the whiteboard together, coming back five minutes later and saying, I had another idea. We talk about it being an apprenticeship business.
[00:44:01] It's a great model to think of because so much more happens when we're together than when we're apart. And by the way, if we know each other and we know how to communicate with each other and we trust each other, we can do so much more as a team as well.
[00:44:14] Sean Mooney: It's just those subtle cues, but it's also the laps that you're able to get in person versus are you gonna hit a team button, wondering if the person's there will pick up so you just don't hit it.
[00:44:24] Versus walking by their office like, Hey, two seconds. It's just so many more faster laps in iteration that happens. The other thing that you said that really resonated with me is like to channel John Dore, right? If you measure what matters, right? People matter. If you're gonna do it, measure it. And so. If culture matters, let's survey it.
[00:44:42] Let's understand it. So let's see if we can improve it. It's not, this is the science of the art of culture. It's like, well, you can measure these things and then you can see it improve or degrade. And that's something we do here as a quarterly kind of check-in, survey with everyone across the team. And you can see things when they start sliding.
[00:45:00] And anytime there's rotation fortune in an organization, it wants to lose calibration, particularly around culture. Particularly if you're growing fast and you're bringing in new people all the time, and so you, I think made such a great point, like measure this stuff and similarly use these tools to help you assess the right people.
[00:45:18] It's like interviews are the least predictive form of employee assessment out there. You're clearly channeling some of the foundational research. Like no, you're like, you're gonna do a whole host of series of things to assess them, of which one is, I'm sure an interview and, but then it's also these traits and cognitive and behavioral and simulation work studies, like all these things you do 'em in concert, you use the word and it makes such a huge difference.
[00:45:40] So I, I think you just made huge, huge points that every business builder should put a sticky tab on.
[00:45:46] Eliot Kerlin: We have a very robust interview process. At Broadwing and also for portfolio companies. But you're right, you, you can't learn everything from one interview, even from multiple interviews. We try and go very deep on those and we still inform it with other tools.
[00:46:00] Right? Let's try and be a little more objective. Let's try and measure against other successful markers for this role, for this industry. You get as much information as you can. Right? And then you make a decision and pray it goes well. Yeah, exactly. Because at the end of the day, that's probably one of the hardest things I think there is to do.
[00:46:18] In private equity and, and probably in companies is hiring people and setting them up for success. Hiring 'em the right role.
[00:46:26] Sean Mooney: It's the hardest and the most important thing. And as you know, we work with a, a very large cohort of the PE industry and we get calls off the hook these days for ai, but we still get at least two to one calls for people.
[00:46:39] And so I don't, I don't think that we're all going away anytime soon. Ai, just like for those who are around and or remember the nineties. This is a lot like then, whereas Buzzword, buzzword, buzzword very quickly figuring out it's a tactic and service of the people and strategies. It's used pretty well in some places, not in others.
[00:46:57] And so people are the still ones driving the bus.
[00:47:00] Eliot Kerlin: You hit on it earlier too, which is we're created for community, for relationship, for fellowship, and that's core to who we are as humans. And you've seen with technology that go online, some telephones helped. When we were growing up, and then internet helps and online forums and then videos.
[00:47:19] Now, I think AI is the most obviously lifelike at this point. It's the most responsive. The voices are are very confusing to me because they can sound so lifelike, so much like a friend, but it's still not the same thing as direct human interaction. And I think we're generally, most people are healthier for that direct human interaction.
[00:47:40] Ideally with people that will encourage 'em, that are on a good team, that are excited about what they're doing together and can share a sense of accomplishment that goes beyond just the task at hand, just the job, a thousand percent.
[00:47:53] Sean Mooney: Maybe as we bring our conversation full circle here, one of the things that I think is common in every top business builder that I know and you know, and we know, is that we're generally pretty well read.
[00:48:06] We trade books with each other. And the reason I do it, I'll say is because if life and understanding were up to me, I'd be in a lot of trouble. And so I try to like Walmart form of innovation. Me anytime I can by Frankensteining. Everyone else is hard-earned wisdom 'cause I can't figure it out on my own for sure.
[00:48:23] Or I don't have the time. So with that in mind, I'm curious, are there some books that you've read that have had an impact on you that you think would be good to, to share with our listeners here?
[00:48:35] Eliot Kerlin: So many. I keep a bookshelf in my office here and have multiple copies of books to give away to managers, to new employees.
[00:48:44] Once a quarter, I, I try and put books out for the team and just kind of send a note and it could be a referral from one of our, our team members. It could be something one of us wants to read or that I've read, just to encourage that because there's so much wisdom out there. I think two of the books that have been most impactful to me.
[00:49:02] As a professional and as a private equity investor are probably ironically out of print at this point. I've tried to look for them over the years and it can be hard to get, but they're worth finding. One is called right away and All At Once by Greg Breneman, and Greg is obviously a storied, very successful and well-known business leader as well as a private equity investor and Texan now too.
[00:49:30] He led the Continental Airlines turnaround and for TPG in, in the nineties and Burger King and a bunch of companies, and then went on to lead a large private equity firm in his book. One of the reasons I like it is it conveys chaos that can come with investing where there's so many things you want to do and there's so many ideas you have for this investment in this company, but you can only do so much.
[00:49:53] And so on the one hand, you're attacking it all the way right now with a sense of urgency. But on the other hand, you may have to sequence things in, learn to prioritize and help folks. The other reason I like it is it blends professional and personal advice, and he's very much a man of faith. He talks about the importance of being grounded outside of work, of whether you call it balance or the personal life, family, being able to manage both of those and when you're as busy and travel as much as he did, that's a real challenge.
[00:50:25] And so I found that to be highly encouraging. The second book I'd recommend is called The Pyramid Principle by Barbara Minto, and I read that 25 years ago. It was given to me by one of my partners, my first private equity fund. He had been a strategic consultant and said, this is good for an investment banker.
[00:50:42] This can give you kind of a view into how we think about things in order. It's really insightful about clarifying how you think. Yourself and then being able to present that clearly to an audience. So thinking about the storyline, about building up your points, about answer first and, and how you pull forward the messaging, the difference between inductive and deductive reasoning and how what we tend to do in presentations and why sometimes that might not be as effective.
[00:51:13] And so it's a lot about presentations, but it's really about, in my mind. How writing can help force clarity and clarify our thinking so that if we can't articulate it crisply on one page, then we probably still don't quite understand all the thoughts jumbling around in our mind about that topic.
[00:51:31] Sean Mooney: I think those are great.
[00:51:32] I'm familiar with Barbara Mento's Pyramid Principle. Sure. Right away and all at once. I'm not, and I, I can't wait to read it. It really speaks to me in, in so many ways, not only when I was an investor. I think particularly when I was an investor, I would have this intuition that our portfolio companies should be able to do 50 things at once and just work and find more time.
[00:51:53] Eventually, I kind of learned that that's not smart. 'cause then everything fails demonstrably, and so you only have so much energy to apply and you gotta use it wisely where you have the highest expected values and do fewer things better. But I didn't really fully appreciate that until I started a company.
[00:52:09] And it's hard to say we're only gonna do like a few things, and so I don't know if that's the gist of it, but that was kind of what I got from that.
[00:52:17] Eliot Kerlin: He walked into a lot of situations where companies were in trouble, like Continental Airlines, like Burger King. There's so much to be done that if you can't crystallize what's most important, it's hard for the team to rally behind it.
[00:52:30] In my past, I've done turnaround investing underperforming companies, right? Which kinda like your restructuring background. You have to have a sense of urgency. You have to have a clear goal, but especially in a turnaround situation or if you're, you're looking at all of the opportunity ahead of you, there is a sense of what you want to do.
[00:52:48] Those things that are most important, well fully now, and then still keep track of all those other great ideas. We'll do those later. So right away and all at once for what's really most important.
[00:53:01] Sean Mooney: I love it. I can't wait to read that. And if it has. Also a section of like how to have balance in life. I'll read that too if he's figured it out.
[00:53:09] Um, it's like, I'm still trying to figure that one out.
[00:53:14] Eliot Kerlin: Yeah. I like to joke there's no such thing as balance. Like it's, it's all one big thing and you just have to kind of figure out what, when your priorities are shifting between inside of work or outside or working from home at night. He talks about some very tactical stuff like building a fortress balance sheet about leadership and finding servant leaders and equipping others to lead.
[00:53:34] He does a very good job, and it's a very readable book. There's others on my shelf. There's one I I recommend to younger folks when we're in the grip of a new idea or when we've been well trained through undergrad or business school or great institutions that we've worked for. It's easy to have a lot to say and to have a lot of ideas to communicate that are good as opposed to listening.
[00:53:56] And there's a compilation of articles from Harvard Business Review called Mindful Listening. It's an easy read. That I think crystallizes a lot of good techniques. It's a helpful reminder. You can read it on an airplane. I probably should read it on every airplane ride I'm on because it's just good stuff that's easy to forget, but important to do.
[00:54:16] Sean Mooney: I love it. That's another one. I'm gonna one click and buy immediately. And we too, we do the same thing. I don't know who I borrowed this from, but it was just, we have a bookshelf out front and everyone, when they join, they get five books. Two are pretty compulsory to read. Others they can read at their leisure and one's a children's book and so oh and so.
[00:54:36] But it's interesting to do that, to pass it on. And also just double tap before we wrap up here on the pyramid principle. I think that is such a great concept that is lost on people, not only in terms of written communication, but verbal communication. It was something that I had a really hard time growing as I was coming up, and I think someone at some point put that in front of me as well.
[00:55:00] Your intuition as a person is you want to build to a conclusion in whatever narrative, whether it's spoken or written, and you want to like build to it and then do the big unveiling and thus this is what happens. That might work well in a movie, but in real life you get the opportunity to get a few minutes of Eliot's time or someone else's, your experience's time.
[00:55:22] They wanna hear the conclusion first and then the why. Then you're able to actually process what the person's trying to communicate so much easier. 'cause you're already starting with the conclusion versus like you're really listening if you build to get to a conclusion the whole time, at least when I would do it, I'm listening like, where are they going?
[00:55:39] And I'm not really paying attention to what they're trying to communicate. I'm trying to guess to where they're going.
[00:55:44] Eliot Kerlin: That's exactly right. It's like building a structure. You've got a brick and you've got a hammer, you've got some nails and some plywood and you're watching it go up and you're wondering what are we building?
[00:55:53] Are we building a house? Are we building a hospital or are we building a tree house? If you know, here's what we're building, I know where to fit in all the other points, I can slide in these ideas and I have categories now to place them in as opposed to wondering exactly what you're saying. Where are we going here?
[00:56:10] Yeah. And when are we gonna get, just tell me what, what are you saying? Right? If you say it upfront, then it's a lot easier to support it as opposed to try and build it from the ground up as an argument.
[00:56:23] Sean Mooney: Eliot, this has been a tremendous conversation. I've learned all sorts of things that I wish I knew before and, and that really is a, a tremendous gift 'cause I know your time is scarce and valuable.
[00:56:33] So thank you so much for taking a moment outta your time to pull back the curtain and, and share, you know, a lot of the lessons that you've learned over time. I
[00:56:41] Eliot Kerlin: thoroughly enjoyed it. Thanks for having me on. It's, it's actually really fun to talk to somebody who knows private equity industry so well. And can empathize and really suss out some of what we're talking about here and apply it to what we do.
[00:56:53] Thanks for having me on.
[00:57:05] Sean Mooney: That's all we have for today. Special thanks to Eliot for joining. If you'd like to learn more about Eliot Kerlin and Broadwing Capital, 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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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.