S2 E88 - UNCAGED With Ted Clark

Well, I'm doing great, man. Thank you. Thanks for having me.

Sure. I've had a kind of unusual career. Some people call it a likely career path. I started as a high school educated shipping clerk at 19 years old at a small, public company up in California called Products Research Corporation, or PRC, manufacturers of adhesives and sealants and coatings for the aerospace industry. I started there again as a shipping clerk and worked my way up, without the benefit of a college degree, to become CEO 22 years later. I was CEO there for six years and really had record sales and profits, and then eventually was sold off to PPG Industries. After that, I tried to use my relevant skills as a CEO and did a bankruptcy turnaround assignment for a small private equity group for about two and a half years. I learned a lot about managing and running a business in distress. From there, I came up with a thesis and a vision to build a global adhesives and sealants business and partnered with a private equity firm. I built that up from an idea to a $700 million business with $140 million of EBITDA over about a 14-year period, which I then sold off to HB Fuller Company. I stayed on there as a Chief Operating Officer until I left to become a partner at Iron Path Capital.

Sure. One of the things is I think private equity capital is sort of misunderstood. I started this over 20 years ago. I had no idea what private equity was. I read some articles in Business Week, and they called them LBOs at the time, partnering up with people that would provide equity. Initially, I wanted to try and buy PRC, the company I was CEO of, and actually partnered with the Carlyle Group, one of the largest private equity companies in the world, and took a pretty hard run at it, but lost out in the bidding process to PPG. It really opened up something for me that maybe there's an opportunity with private equity to create wealth for myself and my family and others. So then I tried this. I got a call from one of the private equity companies I'd met and said they had this bankruptcy turnaround, and I thought, well, maybe I'll try that and take me out of my comfort zone a little bit. It was a completely different situation managing a distressed business. I went through the process and preserved a major part of the business that eventually came out of bankruptcy. I left there with enough confidence to go to a group of private equity companies and present a pitch to them about consolidating the adhesive and sealants industry globally. I asked for $100 million of equity without having a company or anything. I pitched the idea and found a really great private equity group called Quad-C Management that was willing to back my play. I used everything I'd learned over my 26 years at PRC, the networking, the other companies in the market. I went out and found a platform company in 2003. The book kind of takes you through the whole process—how do you develop a pitch, how do you know you've got the right vision and strategy. Once you have that, every step gets harder. It's a high-risk sort of game because everything's time-bound. If you can't find a platform company in a certain period of time, then boom, it's all over. If you get a platform company and you can't find the right add-ons and build something that mirrors your vision, then boom, it's over. It's a really interesting, practical look at private equity and how you can use it to actualize the vision you have, rather than just being a CEO of one company after another. This was an opportunity for me to have a more creative insight into what I wanted to achieve and drive it into a successful business.

I think the private equity industry doesn't do the greatest job in promoting itself. I guess because if 'private' is in your name, maybe that's the way they feel about it. The stories in the business press and the media tend to focus on 'asset strippers' and people that come in and just cut costs and do a quick flip. But really, the opposite is true. Private equity is an opportunity to put equity to work in good businesses. The majority of private equity companies are looking for good, well-run companies to invest in that have a story and a thesis they can build on. If you take a public company private and reduce some of the overheads due to public reporting, that's fair game, but it's not really the thesis that drives growth. The thesis has got to be built around how you take a company doing $100 million in EBITDA or $200 million in EBITDA and get it to $300 or $400 million. The only way you can do that is with a sound vision and strategy and a growth mindset to create value for yourself and your investors. Another thing people misunderstand is that all your next-door neighbors are invested in private equity through their pension funds or 401(k)s. It's one of the asset classes that has higher returns, so a mix of private equity with bonds and public equities is an important part of how we create value in the United States to support pension funds and endowments to universities.

In my case, I had the goal of building a $300 million company, stated in my thesis of $300 to $400 million. To get there, I was looking to find a platform company doing about $100 million in sales, and then do add-ons. In a highly fragmented industry like adhesives, there are a lot of companies of $20, $30, $40 million in sales that you can acquire. The reality is always different than the thesis. We had five or six things in the thesis: a good management team, some technology, a position in two or three important market segments, a good cash flow history. When you design your platform company, you end up with about 50 or 60% of what you started with. That's part of working with private equity. If you wait around for the perfect platform, you may never get started. If you get a weak platform, you may never get to your vision. Finding that balance was really important. We found a company called Royal Adhesives. It had a great factory, great R&D lab, good management team, good technology, a leading position in a couple of markets, but one huge problem: customer concentration. One customer was 65% of its sales. That put pressure on us. Through diligence, we got comfortable that over a five-year period we could maintain most of that business, but it put pressure on us to do additional organic growth outside that customer and smart acquisitions to reduce that concentration before a planned exit.

Yeah, well, during the pandemic, I was running the three global businesses at HB Fuller with 72 factories throughout the globe, 32 R&D centers. We went overnight from being on overnight flights to New Delhi and Shenzhen visiting factories, working with management teams, to no travel at all and a lot of uncertainty. One thing that really helped is that over the previous couple of years, we had reorganized our company from five business units to three. The CEO and I made a decision that we wanted to get closer to our customers, so we wanted decision-making closer to the markets we were serving. Globally, we were serving 30 different markets. Culturally, we worked with our leaders and gave them the authority to make decisions at a level closer to the customer. Coincidentally, we went live with these three new business units in December 2019. We managed them without issues for four months, and then the whole world was on fire with COVID. We had to accelerate trust within the company. Our team in China was early affected. We said, do whatever you need, we'll support you, but you have to tell us the best way to keep our factories open. Our goal was to keep all our factories open globally and do it safely. We were able to do that in China, Southeast Asia, India, Egypt, Europe, and the Americas. Each team stepped up. We learned a lot about hiring people and paying them well but not letting them make decisions. Our goal was to let them make decisions and report back. It helped us coach and advise other leaders throughout our global system.

Yeah, that was it. We had things like Zoom and Teams to talk to people. We wanted to allow decisions to be made and we wanted connectivity. We wanted to be seen as coaches, not decision-makers. Even in the United States, all states have different rules. Our people in Illinois had to deal with different problems than our people in California. I personally was leading the whole COVID compliance globally, reading governor orders and such, so I could advise people and they didn't have to spend their time doing that. It was a time where if we had not had the trust in those local leaders by the employees, we would have had a real problem. Most of them wanted to come to work. We were a central industry. They wanted to know we were being thoughtful about protecting them and their families. Sometimes we forget that factories have to stay open to make things. The idea that everyone can work virtually doesn't work if you're running a factory.

We're feeling pretty positive. Obviously, inflation is the real challenge now. At least from my perspective, it all began being driven out of the January 2021 freeze in Texas. For my industry, specialty chemicals, people don't realize how critical chemicals are for the entire supply chain. Any non-metallic material is made from some kind of chemical. That started a whole problem. We saw a real dislocation in how the supply chain was working, and then prices started to increase. We're coming off with a very high Consumer Price Index. Pricing has been going through the system. We took the view that we are an essential company and an important part of the supply chain, so we have to go above and beyond to support our customers. We were leasing 747s to move polymer materials from China to the US for a product line used in commercial construction for roofing. Our customers said, 'We can't stop these projects; tell us what it's going to cost, but we need to have it.' They ended up paying for this additional service. It required thinking out of the box. Initially, we thought raw materials would go up and come back down, but we took the view early that this would be something we'd deal with for a number of years. While it's getting better, we're still dealing with it in 2022. You still have underlying inflationary pressure, but you are starting to see things slow. Hopefully, we'll miss stagflation, which we last saw in the 1980s.

Yes, September 13th. It's been a great experience to write. Although it sounds like it's about me, it's really about the private equity industry from an operator's point of view. I didn't want to be from an investor's point of view. I wanted to look at it from an operator, someone who had a dream to build a business but not the equity to support it. If you're going to build a company that turned out to be a $700 million company, you need quite a bit of equity to get it kicked off. It's been a fun story to tell.

You can go to my website, tedclarkauthor.com. That has a lot of information on the books, my background, and features articles I've written for different magazines and publications. You can also look me up on LinkedIn. Just type in Theodore or Theodore Clark or Ted Clark, and it should connect to my LinkedIn site.

Great, thanks. Thank you. Cheers.