[REPLAY] Ironclad Environmental Services – Chris and Rob Michalik (Kinderhook Industries), (PE Deals, S3E8)

On episode eight of season three of Private Equity Deals, Chris and Rob Michalik discuss Kinderhook Industries' investment in Ironclad Environmental Services. Chris and Rob are twin brothers and co-founders of Kinderhook, a twenty-year-old private equity firm that manages $5 billion specializing in middle-market businesses across healthcare services, environmental services, and automotive/light manufacturing. Ironclad Environmental Services is a leading provider of logistics-based solutions focused on the containment of industrial waste. It has 50 branches and a fleet of 29,000 specialized rental assets that store, separate, and transport liquid and solid industrial waste. Our conversation covers Kinderhook's identification, due diligence, and negotiation of the deal. We discuss a significant early add-on acquisition, progress-to-date, and the future of Ironclad. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

  Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe

• 0:46Ted Seides?

  so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you.

• 1:24Ted Seides?

  Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together

• 2:06Ted Seides?

  the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square,

• 2:47Ted Seides?

  the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Private Equity Deals. Middle market businesses are where the real action takes place. Around 200,000 businesses in the United States fall into the middle market size range, generally defined as generating revenue between $25 million and $1 billion. These businesses collectively employ 50 million people, or almost a third of the US workforce, and represent 2/3 of total US private equity deal value. Big deals may grab the big headlines, but a lot of action in the economy and private equity industry takes place in the universe of middle market businesses. Season one of Private Equity Deals shared deals from eight well-known GPs.

• 4:17Ted Seides?

  In season two, we discussed eight well-known companies bought by private equity firms. We can't begin to cover the massive middle market in just eight deals, but in season three, you'll get a tiny sliver of what the middle market is all about.

• 4:33Speaker 01

  All opinions expressed by TED and podcast guests are solely their own opinion and do not reflect the opinions of capital allocators or their respective firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Past performance is not indicative of future results. Clients of capital allocators or guests may maintain positions in securities or managers discussed on this podcast.

• 4:56Ted Seides?

  On episode eight of season three of Private Equity Deals, Chris and Rob Maholli discuss Kinderhook Industries' investment in Ironclad Environmental Services. Chris and Rob are twin brothers and co-founders of Kinderhook, a 20-year-old private equity firm that manages $5 billion specializing in middle-market businesses across healthcare services, environmental services, and automotive and light manufacturing. Ironclad is a leading provider of logistics-based solutions focused on the containment of industrial waste. It has 50 branches and a fleet of 29,000 specialized rental assets that store, separate,

• 5:39Ted Seides?

  and transport liquid and solid industrial waste. Our conversation covers Kinderhook's identification, due diligence, and negotiation of the deal. We discuss a significant early add-on acquisition, progress to date, and the future of Ironclad. Please enjoy my conversation with Chris and Rob Maholli.

• 6:01Speaker 02

  Chris, Rob, great to see you guys. Great to see you, Ted. Why don't we start with a little background on Kinderhook? Kinderhook Industries is a private equity firm like the thousands of middle-market private equity firms are out there. When we started our firm 20 years ago, Tom, Rob, and I decided in a competitive private equity space that we needed to really show the long-term commitment to the business. So that started with being investors. We've now built an investment team of over 20 that has been with us for a very long time. Average tenure of our investment team is 14 years. We think we have a great culture, but frankly, I think most of that tenure is because we've aligned their interests with long-term value creation and Stability from a strategy standpoint,

• 6:45Speaker 02

  it's about the detail in the three legs of a stool that make private equity. It's our team. Everyone has to deal with deal flow. For us is industry expertise. We've developed strong, deep industry expertise in three distinct verticals, which we believe are non-correlated. Healthcare services, environmental services and industrial. My partners, Rob and Corb, have been doing that for over 20 years. And this is probably our strongest franchise and one that shows real consistency. And I'm not going to steal Rob's thunder, but a lot of good things going on in the environmental industrial space. And then the third is the automotive services and aftermarket. It's not always the sexiest place to be, but it's an opportunity to continue to service the car park in the United States. Cars are still an extension of people's personality.

• 7:30Speaker 02

  And aftermarket accessories, aftermarket service, support for those vehicles to stay on the road longer so that people can get to work is an important component of what we're looking at.

• 7:40Ted Seides?

  So Chris, within those three verticals, what are the types of companies or your particular style of investing that you like to find?

• 7:47Speaker 02

  What we're looking for is businesses that are a little bit off the beaten path, businesses that we and our operating partners know well, but maybe are pre-auction and really driven by our operating teams and our teams. I think this is an important component. Probably 70% of the businesses we buy, we are buying control, 100%, we're buying control, but we're probably only buying 51 to 80% of the business and the entrepreneur family is rolling the balance. So for them, it's much more important who their partner is and what the second bite of the apple is than it is, quote, "the highest price." And I was going to comment, we're looking for businesses that have a growth orientation. Our strategy is about taking lower middle market businesses and getting them to the next level.

• 8:31Speaker 02

  So we're often partnering with family-owned businesses or taking a controlling interest in businesses that are in transition, divestitures from larger entities where they're non-core. But we're invigorating those companies with a growth orientation and bringing the capital and the strategic advice to help get them to the next level. And often The situations an entrepreneur, a family owned business will be started by a young person who's taking risk and they create value and over 15 or 20 years, they build a nice company. And they get to a point where to take the next step, they now need to take risk when they're at a point in their careers where they're now protecting wealth and preserving wealth.

• 9:12Speaker 02

  Perhaps they have a family or other consideration that they need to be mindful of that doesn't allow them to go to the bank and say, I'll take an additional personal guarantee and I'll try to buy my competitor. We step in, we offer that entrepreneur an opportunity to take meaningful money off the table, ensure that the family's taking care of the kids, education, the retirement for the family. And then they can now be entrepreneurs again and really go after the market opportunity, just like they did when they were the young startup. So that's where we play. I would say the vast majority of businesses have that profile when we get involved.

• 9:49Ted Seides?

  So before we dive into Ironclad, I feel obliged to ask, what's it like working together as twin brothers?

• 9:56Speaker 02

  So it's second nature when you're an identical twin and my brother and I have been doing the same things for our entire lives. We went to college together, we went to graduate school together and we've been in the same industry our entire careers. It was really always our thought and our plan to be in business together. So I would say it's just second nature. I would say for the rest of the people that work at Kinderhook, I think it's entertaining.

• 10:26Speaker 02

  Because being brothers, it's hard to turn it off. So there's brotherly debates, there's brotherly arguments, and then there's firm dynamics. But overall, I think the stability of our relationship, the consistency, they know each other forever. I think it helps provide a sense of comfort to the firm that frankly, they know what they're getting when they're working at Kinderhook and being part of this organization. And I think the consistency that knowing that the partnership is stable is something that's over time created a lot of value for all of us.

• 10:56Ted Seides?

  Rob, we're going to dive into Ironclad. So why don't we start with a description of what this company is?

• 11:02Speaker 02

  Ironclad Environmental Services is a industrial and liquid waste containment solution, primarily servicing industry petrochemical, refiners, large construction sites where you're managing primarily liquid waste for removal and disposal. And environmental services is a sector that I've been investing in for over 25 years. There are some core characteristics of the industry that make it very attractive from an investment perspective, and really the most important one of those is that it's necessary. Environmental services means removing the trash, whether it's liquid waste, household waste, industrial waste. People expect garbage to be managed, they expect it to disappear.

• 11:46Speaker 02

  It's a necessary tenet to having a functioning society. So I always like to say, when you think about that, you need running water, maybe you need electricity, you need waste services. So when you think about a stable business model, waste really fits the bill. And it's in some measure like a utility, yet there's not a rate cap on the returns. So good service, good assets, being in the marketplace and having a strong presence allows you to build reliable service models. In the last 24 or 36 months, as we've entered into what has been a very rapid inflationary environment, waste services have been able to maintain margin by passing price to their customers. Why?

• 12:30Speaker 02

  Because it's necessary. And when you think about what happens if you don't have your waste removed, it piles up in front of your house, behind your business, and that's not a tenable situation. So as long as you're able to provide that service, the customer is prepared to and willing to pay for it. And on that basis, we've always loved this industry. We've really taken the approach to find and back managers that have a good business. It is a capital intensive business, so you need to invest in new equipment, that's trucks, that's transfer stations, that's roll-off boxes and tanks. So our 20 years here at Kinderhook, we've built and owned

• 13:11Speaker 02

  13 different environmental services business, seven on the municipal solid waste side, six in the industrial and hazardous waste side. And it's an opportunity, we continue to have great relationships across the industry. My brother mentioned it's one of our strongest franchises by virtue of the fact that many folks in private equity have stayed away from environmental services in the past. In the last three years, it's become pretty sexy. All of a sudden, everyone wants to own a garbage company. I've dubbed it the golden era of garbage. And he plays the Homer Simpson garbage man song. You can look it up on YouTube.

• 13:47Speaker 02

  The garbage man can. Anyways, and because of the ability to pass price and the stability, a whole bunch of new entrants have come to the environmental service business and looked at that as core infrastructure. So you think about some of the large pools of capital that have been raised in the last 36 months around infrastructure, environmental has come to fit their target. And that's brought a whole new level of interest in the industry. Ironclad Environmental is a business that we were introduced to about 36 months ago. One of our operating partners was previously involved with the company, had a inkling

• 14:30Speaker 02

  that the public parent, Will Scott, was interested in divesting their mobile mini tank and pump division. We reached out to the CFO at the time, expressed our interest in the business. He indicated that they were considering their alternatives, but weren't necessarily looking to sell at that time. They approached us a few months later and said they are going to look to divest. We quickly got our team together to evaluate the opportunity and get our work done. And we're able to negotiate an attractive purchase of the business from Will Scott. And that gave us one of the top five players in the marketplace for the liquid waste containment. Their primary presence was along the Gulf Coast, servicing the refiners

• 15:14Speaker 02

  and the petrochemical companies. You're essentially providing industrial roll-off services. So you're putting a tank in A facility, you're collecting waste. That waste is sometimes processed in the tank. Either way, you're going to pull that tank and take that volume to a treatment plant, a landfill or other end disposal market. It's recurring. If the waste isn't removed from the plant, they got to stop the processes. So our customers are very focused on service. And when they have turnarounds in their facilities or they have a storm event along the Gulf Coast in their facilities, they need our equipment. They need it real time. We led with service.

• 15:58Speaker 02

  We rebranded the company from Mobile Mini Tank to Ironclad Environmental for that reason.

• 16:04Ted Seides?

  So let's go back into the process of your owning this. So you mentioned this came to you from one of your operating partners. What was that initial conversation like?

• 16:15Speaker 02

  Got a phone call. He sits on the board of our Mucino Industrial Pump Division. He has pretty good knowledge of the industrial equipment as a service business. He had been involved with Mobile Mini Tank before. I think it was pretty well known that this was the orphan division of Mobile Mini. Mobile Mini is industrial storage. They lease shipping containers for storage purposes. It's a great business, very high margin, very high cash flow business for Will Scott. The Tank and Pump Division was a much more service oriented, requires more people and more fleet as opposed to dropping a box, collecting rent and picking up a box, which was their core business. So this resided under that umbrella. It was the runt of the family, if you will.

• 17:00Speaker 02

  So it didn't get its share of the capital allocation from budget. So they decided that it would be better owned by another party.

• 17:07Ted Seides?

  When you first started looking at it, how did you dive into the due diligence?

• 17:12Speaker 02

  Part of being an industry expert is we have the players in our operating partner network who live and breathe these spaces and these industries all the time. I mentioned the gentleman that introduced us to the company. We also have a number of executives that operated the disposal side of the house with these types of industrial waste streams. We've owned a company called Cercon Environmental. Their team was instrumental in helping us understand these assets and their customers' uses. We used to own the environmental quality company, which is a large hazardous waste treatment disposal business. They utilized this asset and this service for their business for many years. So having those industry players that literally use the service,

• 17:57Speaker 02

  use the assets that an ironclad environmental provides on an everyday basis, gives us great insight into the pricing, the value proposition, what the customers look for when they go to market and sign a master service agreement with the provider in this category.

• 18:12Ted Seides?

  What were your key due diligence points as you went through the process?

• 18:16Speaker 02

  We looked at the business and very quickly came to the conclusion that they had a great fleet of assets. They had great geography. They had great customers. They had relatively low utilization, and they were unambitious in their pricing. When we went into diligence, we spent a lot of time with management about how they drive utilization and why they haven't been more aggressive in driving price. This was in 2021 and 2022, as we're looking at the historical results. They've been targeting 2% price increases in what at that point was starting to become a 9% inflationary environment. And we very quickly had an aha moment with the team where they said, you're right.

• 19:01Speaker 02

  We have a lot of opportunity here. The cost of replacing the equipment was up double digits. We're talking 20 and 30% increases in the price to build a new frac tank or a new dewatering box, and that cost needs to be borne by the marketplace. And so we were able to work with the management team at Mobile Mini Tank as we went through diligence to really get a sense of which part of their asset base was most highly utilized and how we priced those, which ones were less well utilized and how we priced those, and to really come up with a good go-to-market strategy post-close to drive utilization and to drive incremental price.

• 19:45Speaker 02

  And that was the key to our underwriting in the diligence process.

• 19:49Ted Seides?

  What did you see as the biggest issues or risks in the deal at the time?

• 19:52Speaker 02

  These assets were used heavily in the shale boom and the fracking boom and really 2012, 2013. There was almost no price that a shale driller wouldn't pay for an asset. That led to a large overinvestment in fleet in the 2012, the 2016 time period when the shale boom became a bit of a shale bust and the assets flooded into the market and you saw a large drop off in demand. That sense of cyclicality presented a concern to us as you go, well geez, when you look at these assets, did you have this boom bust cycle? And what we did to get comfortable,

• 20:35Speaker 02

  that was really a one-time phenomenon as we looked at 20 years of industrial waste tank demand. And over that 20-year cycle, you really had one bust and you could see the bust coming by the overinvestment in the preceding three years, 2012 to 2015, 16, and then the bust in 2017, 18. Other than that, you had an up and to the right curve for utilization and growth of units in fleet, et cetera. So we were able to look at this business and really get comfortable that it provided the type of stable, predictable demand curve that we're used to and we expect from our environmental services businesses.

• 21:18Ted Seides?

  So what happened when you went in to try to buy the deal? Talk me through the actual process.

• 21:24Speaker 02

  So the seller had a view of value. Naturally, that view of value was higher than our view. They contacted other parties to try to gin up a better price and a better opportunity for themselves as sellers of this asset. Fortunately for us, we had the team and the resources to be in a position to speak for our price. When push came to shove, the seller took the bird in the hand of certainty with us versus the incremental price that they may have been able to get by pushing and giving time to other parties in the market. So the dynamic of having the intellectual capital in our team as well as having completed our diligence process early allowed us to get

• 22:09Speaker 02

  the deal done at the price that we were prepared to underwrite. There's always that uncomfortable conversation and the seller went pencils down on us a couple of different times because they weren't going to move forward at the price that we were at.

• 22:23Ted Seides?

  In a situation like this, where it's clearly in your sweet spot, it's in one of your three verticals, you understand the business well, you understand the assets, how do you think about negotiating just that incremental price when you're close to the finish line, knowing that you want to get the asset?

• 22:39Speaker 02

  That is the secret sauce. It's not always easy. To your point, when you really have a deep knowledge and appreciation for the beauty of the asset, and I would argue that our view of the beauty was far greater than the seller's view of the beauty, there is a propensity to want to cave and just pay and get it done. We had as good of intelligence as we could gather on the alternative buyers and we felt good holding our cards. But no question about it, Ted, that is where the rubber meets the road in these types of situations. We were very happy with the price that we paid. Was there more on the table from us? Yes, but we were able to get it done.

• 23:20Speaker 02

  And I think part of the value proposition we have in our diligence processes, it's not just understanding what we're buying, it's trying to come up with the thesis for growth. And I mentioned that earlier. We were looking at the mobile mini-tank division. We had gotten pretty close to getting a deal. We had in our back pocket the opportunity to acquire the Adler tank business, which was their largest competitor. We knew that at the point at which we finally agreed to terms and that made us pretty pleased with the outcome that we were able to drive.

• 23:55Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 24:32Speaker 04

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 24:38Ted Seides?

  And now, back to the show.

• 24:42Ted Seides?

  Where'd you come out in terms of pricing?

• 24:44Speaker 02

  We bought the business for less than seven times EBITDA. It was a very attractive price for a business that was really starting to get its legs under it from a driving price. We've been able to create a tremendous amount of value in our short ownership period by changing the expectations with our customers.

• 25:03Ted Seides?

  So you mentioned the Adler acquisition, taking price and increasing utilization. I'd love to hear, once you own the asset, how you mapped out your game plan.

• 25:12Speaker 02

  So I think we closed on the Mobile Mini Tanks, October 1st of 22, February 1st of 23, we closed on the Adler add-on acquisition. That made us the largest player by assets in the industrial waste tank business in North America. We looked at the overlapping geographies and we were able to take cost out of the system from a facilities perspective, leasing of yards and redeploying equipment to the greatest geography of demand and to create incremental utilization in that regard. And then we really looked at how we're going to go after price. So many of our large customer relationships are operated under master service agreements.

• 25:53Speaker 02

  So we'll go to Dow Chemical and we'll negotiate a master service agreement. They'll have pricing for our services and assets in that contract. It's usually a five-year MSA. And historically, for 15 years prior, there hasn't been a heck of a lot of inflation. So the notion of consistent pricing increases and new conversations on price on a regular basis wasn't part of the historical MSAs that Mobile Mini had, or Adler for that matter. Given the environment we're in, we're in a position to go back to these same customers and say, look, price is coming. We can work with you now under your existing MSA, or we're going to work with you later when the MSA comes up for renewal.

• 26:36Speaker 02

  But either way, we're going to have to get a price that's going to cover the overall cost of service and the expectations of what we're providing. And really, one of the benefits in the marketplace today is that new equipment is very expensive. Interest rates are a lot higher. So the notion of someone just going to the market, buying a few hundred boxes in some roll up trucks and starting their own business isn't that easy. Seven years ago, you could get new trucks from the manufacturers at 0% financing. You could walk out the door and pay nothing. They were giving you the truck. Please just take it and pay me back later. Today, that environment's completely flipped. Access to

• 27:18Speaker 02

  equipment is much longer lead times, the price of the equipment's much higher, and therefore, the alternatives for the customer are fewer. And ultimately, it's about service. It's environmental services. One of my mentors in the industry always told me, the most important asset in the waste industry, it's not garbage trucks, it's not landfills, it's not processing facilities, it's waste. The most important asset in the waste industry is waste, and you have to control the waste to drive value through your operation. And how do you control the waste? By providing great service at a fair price. And that's really what this is about. The mantra that we lead with is service. Our salespeople, our management teams make sure that our customers

• 28:01Speaker 02

  are getting the highest level of service. And when you're providing great service, they're going to be prepared to pay the better prices that we demand. Our competitors are not in a position to drop 300 boxes in 24 hours' notice when they have an event. We are, and that's meaningful. And I think one of the things on top of all this is, our environmental services team did a great job of not just understanding the assets, because understanding the asset utilization price, that's all operational. I think the real value is the repositioning of the company. We bought two non-core subsidiaries of public companies in a six-month timeframe and put them under the leadership of an exceptionally young and talented CEO and board. And then we, as a team, created Ironclad Environmental Solutions.

• 28:47Speaker 02

  Not Adler Tank or Mini Mobile Storage. We're not another leasing company. We're an environmental solutions business. And being an environmental solutions business means that our competitors, Green for Life, Republic, Sprint Waste, who owns these assets today? But why is United Rental? It's garbage company, just the largest environmental services business in the United States. And we understand these large strategic buyers because Kinder excels to strategic buyers. That's what we do. We've sold 44 of our 50 exits over 20 years have been to strategic buyers. And understanding what strategic buyers are looking for helps guide our investment thesis going into opportunities. As the guy who's not the garbage guy and doesn't really care about the color of the trucks,

• 29:30Speaker 02

  these guys, they got pictures on their phones of garbage trucks and incinerators and all this stuff. But what I see is MOIC and IRR. And this is this unbelievable asset that we've created for under seven times EBITDA. That's going to sell at a significant premium, both on growing EBITDA as well as strong multiple expansion.

• 29:50Ted Seides?

  When you have the importance and the focus on service, how do you think about creating efficiencies on the cost side?

• 29:58Speaker 02

  What we think about is getting paid for the service. So we don't look to manage cost. We look to manage price. So quite frankly, I'd rather pay drivers better rates that are going to show up on time. They're not going to have accidents. They're not going to ruin my equipment. And I'm going to make sure the customer rewards me for that quality service that that individual provides. That's how we think about it. So of course, there are cost savings when you're doing acquisitions. There are synergies. I mentioned earlier, the notion of we had overlapping leases between Adler and Mobile Mini. We took out some of those leases. Of course, there was overlapping people in some situations.

• 30:43Speaker 02

  But honestly, we did more to redeploy our combined staff than to cut our combined staff. And the biggest value proposition is making sure that we communicate how we're going to provide that service so that we can get that price.

• 30:57Ted Seides?

  How'd you go about increasing utilization rates?

• 31:00Speaker 02

  I would say there's a couple of key points there. The most important one is providing transportation solutions to some of our core services. So turning tanks ultimately allows the customer to get more space in their yards. It allows them to keep their equipment moving a little bit more efficiently. So providing transportation services allows us to turn tanks, which drives utilization. Cause the more tanks you put in the yard, the more you pull them, the better turns you get. The other factor was looking at geographies. So we would have 300 dewatering boxes sitting in a yard in Arizona that Adler had there. Underutilized for years. Well, in Houston, those dewatering boxes are pretty valuable. And we'd be short dewatering boxes.

• 31:45Speaker 02

  Let's redeploy the fleet into the geographies where the demand was for certain assets. And when you put two companies like these together, you can find those opportunities to drive utilization. The mobile mini division was running in the mid 60s. The utilization, we bought it. The Adler division was running just about 50% utilization. Today we're at combined 67, 68%. We'd like to get in the low 70s over time.

• 32:11Ted Seides?

  What have been some of the challenges you faced since you bought the company?

• 32:15Speaker 02

  Culturally, it was a very smooth transaction. Both divisions were orphans. The teams, the people in the field really embraced the new ownership. They really were excited about the new name, the new brand. And now all of a sudden you're the key player in the company. So culturally, it was incredibly positive and powerful combination. These were subsidiaries, so they were running on the parent company software for financial reporting. They were running on the parent company software for asset utilization and benefit management. And we had to extract and put in place our own platforms. We did that well, but it wasn't always without hiccups.

• 32:57Speaker 02

  You're transitioning a bunch of accounts onto a new platform and you miss a billing cycle. And then there were new bank accounts, new names. Customers don't recognize the ironclad bill the first time they get it. Or they send the payment to the wrong account. So we had to redirect the payments and things of that nature. It's a lot of the mechanics blocking and tackling when you're deploying new systems and standing up companies as independent entities. So those have been the challenges operationally as we've integrated these companies. Fortunately, we have good teams, we have good people, and we've been working through those transitions. But that's really where the biggest challenges were.

• 33:38Ted Seides?

  With a business with high recurring revenues, good economics, buying at less than seven times of the tuck in, curious how you finance it?

• 33:47Speaker 02

  So we have never been big users of financial leverage, given the orientation we have with our management teams. We want them focused on growth as opposed to myopically focused on quarterly interest and amortization. So our partners at Twinbrook helped us finance this deal. We financed it inside of four turns of debt to EBITDA. We have a very flexible balance sheet. We are well capitalized at almost 50% equity capitalization across the combined platform. And it's worked out really well for us as we've looked to build the business and take advantage of new acquisition opportunities. We have a lot of dry powder in our financing.

• 34:30Ted Seides?

  So as you've made these changes, bought these two businesses, how have the economics of the resulting business shaken up?

• 34:37Speaker 02

  So we've been driving double-digit top line growth every month, month over month since our ownership. We're at 40% combined EBITDA on the business today. We're into our first budget cycle for the combined business going into 2024, and management is pretty confident we'll be able to continue with double-digit organic revenue growth, price and volume, and drive our EBITDA into the low 40s. It's a very strong cash generative business. It's also asset intensive, so you have to purchase new equipment over time. But again, given the utilization metrics that we were talking about, we have incremental

• 35:19Speaker 02

  assets that allow us to grow without a meaningful investment in new capital. So we are generating a lot of free cash flow in this business.

• 35:28Ted Seides?

  So you have this early success, some great growth, economic performance is great. You've gotten through some of that initial pulling these two carve outs out of public companies. How do you think about the next couple of years under your ownership?

• 35:41Speaker 02

  So we're very excited about the business. The rebranding and the positioning in the marketplace has garnered attention of the strategic bio universe as well as some of the infrastructure players in the market that are looking for assets of this scale. We have north of $100 million of EBITDA already on the combined platform. We like to drive that into the 120, 130 range organically over the next 12 to 18 months. We're going to work on a couple of tuck in acquisitions. And I'd imagine if someone does it knock on our door in the next 24 months, we will be going to market with the asset after that time.

• 36:23Speaker 02

  So I'd imagine this one will end up being a three year hold as opposed to a five year hold. And we're very bullish on the overall industrial demand cycle that we're in. The federal government, between the Inflation Reduction Act, the CHIPS Act, and some of the other energy transition spending is creating a tremendous amount of demand for the services that Ironclad provides. We don't think that's going to change the higher interest rate environment. While it makes our interest a little bit more expensive, it also dampens new entrants and new competition to the space. So we're really excited about the prospects of this business over the medium and even

• 37:05Speaker 02

  longer term as you think about some of the overall growth dynamics in the US economy and where money is being spent.

• 37:11Ted Seides?

  When you've done that initial heavy lifting to put it together and you see that profile over the next few years, how do you think about a three year window compared to, you said a more typical five year window or longer, holding such a valuable asset?

• 37:25Speaker 02

  I always think about the private equity business as being, we are relay runners. So this is the four by 400 versus the 1600. Private equity guys run their lap and hand it on to the next guy, who then has the next lap to really drive value. And so the pace of play is just greater in the private equity ownership cycle. It's one of the reasons I believe private equity has been able to deliver consistent outperformance relative to the broader equity markets for 30 years. Because under private equity ownership, we sprint. And after that sprint, you want to hand it off to the next guy so that they can then take their lap with the asset. You could try to run it two laps, but you might as well hand it off to the next guy and get your value.

• 38:10Ted Seides?

  I'd love to ask, what have been your biggest lessons learned from this deal?

• 38:15Speaker 02

  It's always great to be an industry expert. And I think this reinforces that. We're able to take advantage of this opportunity precisely because we had the requisite knowledge of the markets to act quickly. We've been able to create value precisely because we understand what the customers want so well. So that really reinforces it. I would say the other thing, no integration is without challenges. And I think this one's gone pretty well. But when you move down the path of integrating two businesses, you don't know what you don't know. And you don't know what hiccups you're going to have. And I think it behooves us with relatively low leverage

• 38:58Speaker 02

  that if you don't string the drum too tight, you don't have to worry about it breaking when things don't go perfect. And then the last thing I would say is that it's always about management. And we are a management-centric organization. We partner with management teams and we take partnership very seriously. Great partnerships are about mutual respect, trust, communication. And when you have a great partnership with your management team, you're able to solve problems together. And they share their challenges because they trust you. And we're able to then work together to address them. And so we really value our partnership with our teams. Our operating partners really are our most valuable asset. We always say our references and you should talk to the other people.

• 39:43Speaker 02

  We've partnership to understand what that means when you partnership with Kinderhook.

• 39:48Ted Seides?

  In a business like this, you mentioned it was a young management team. It sounds like the kind of business that's just an execution business, very embedded products. How do you decide what makes for a great management team in the business?

• 40:01Speaker 02

  Passion, hard work, great communicators. I always think about what's the role of the CEO? The role of the CEO is to set the culture, make the big sale, solve the big problem. That's what CEOs do. And setting the culture is really, really important. So having someone that has their passion about their business, understands their business, and communicate the opportunity brings everybody else up to their level.

• 40:29Ted Seides?

  I have one last question for both of you, which is, what's your favorite aspect of private equity?

• 40:35Speaker 02

  I think the excitement of private equity, what makes my job or our job in this organization every day exciting. If you think about coming out of school and being a trader, you get instant gratification. And private equity is not about instant gratification, but the wins are really to be rewarded. And when we win in this industry, our CEOs and manager teams win, our LPs win, our employees win. And that excitement and enthusiasm about dealing with and building something over time and then having the win, it's no different than a season. You play a season in any sport, football or basketball, and when you can get to the end and win the championship despite having a few losses or a few injuries and all those

• 41:17Speaker 02

  things that everybody talks about in sports, I think private equity is the same way. It's that investment and preparation and then getting to the success. And when you experience it, you want to keep doing it. And so it's a great place to be and a great industry to work in.

• 41:32Ted Seides?

  Rob?

• 41:33Speaker 02

  Working with people, interpersonal relationships in our organization, with our operating partners, with our limited partners, it's a people business. It's not a financial metrics business. It's not an analytics business. It's a people business. And when you work with good people, it makes your job fun.

• 41:52Ted Seides?

  Rob, Chris, thanks for sharing the story of how you're cleaning up with waste.

• 41:57Speaker 02

  Thank you, Ted.

• 41:59Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.