Episode 6:
Russ Roenick, Transom Capital

Video Transcript

Troy Pospisil (00:03):

I’m here in beautiful Marina del Rey, California with my dog, Lola. We’re about to meet up with my friend Russ, the founder of Transom Capital. We’re going to talk a little bit about how he built Transom, the types of transactions they work on, and what’s going on in the private equity industry today. Come join us.

Troy Pospisil (00:29):

Hey, Russ. Great to see you.

Russ Roenick (00:31):

Good to see you. How’re you doing?

Troy Pospisil (00:32):

Good.

Russ Roenick (00:33):

Good. I’m good.

Troy Pospisi (00:34)l:

How’s your summer been?

Russ Roenick (00:35):

Grinding.

Troy Pospisil (00:36):

That’s good.

Russ Roenick (00:37):

Grinding, no rest for the weary.

Troy Pospisil (00:38):

Busy is good.

Russ Roenick (00:39):

Can be. It is, fortunately. But, we’re good, yeah. Who’s this?

Troy Pospisil (00:44):

Russ, this is Lola.

Russ Roenick (00:45):

Hey, Lola.

Troy Pospisil (00:46):

Lola, come say hi to Russ.

Russ Roenick (00:47):

Come over here. Wow. What an animal. Yeah, big girl. Very cool.

Troy Pospisil (00:53):

You want to join us for a walk?

Russ Roenick (00:55):

Why not? Let’s do it.

Troy Pospisil (00:58):

Perfect. Well, Russ, tell me about the start of Transom.

Russ Roenick (01:02):

Oh, geez. So I was at McKinsey and like many of us at a big, great, successful corporate institution I thought I could do it better than my clients, and I was working with a lot of private equity firms at the time. It’s the beginning of 2008. No one can do any wrong. I jumped out, partnered up with a few folks, got the team going, and started raising money from high-net-worth individuals, family offices. And next thing you know, we made our first investment in April 2008. I think it was the same week that Bear Stearns exploded.

Troy Pospisil (01:46):

That’s the week you closed?

Russ Roenick (01:47):

That was the week we closed our first deal.

Troy Pospisil (01:48):

Oh, wow!

Russ Roenick (01:50):

Ironically, the second deal we closed, I think it was the week before Lehman exploded in 2008. That was the beginning, right? And we made our first investment in a company, it’s actually fairly close by here in West Lake Village, California called Blue Microphones, a pro audio business. And it was a small business, lot of potential, but it needed every form of operational transformation you could literally shake a stick at. Sales transformation, product differentiation, supply chain needed a lot of help. Operating costs were, on one hand, there’s a lot of under-investment and a lot, on another hand there was way too many costs being thrown at other things. It was a pretty amazing opportunity to cut our teeth in. Fun, painful. A lot of sleepless nights, a lot of nights sleeping on the couch inside the office. But that’s the entrepreneurial story.

Troy Pospisil (02:47):

Those are the best stories.

When you started the firm, what was the investment thesis? And did that first deal fit into that thesis or did that come out of left field a little bit?

Russ Roenick (02:57):

Yeah, it was always around operational transformation. At the time, I had done a lot of transformations for private equity firms, obviously much larger ones when I was at McKinsey. And I had a little bit of a specialization in consumer products as well. This first investment that we made, Blue, was a great combination of all those things. It was always about transformation. It’s just a matter of what the nature of that transformation is. Is it top line? Is it the supply chain? Could be a variety of different things. So it’s always been about that for the last 15 years.

Troy Pospisil (03:36):

That’s great. And as a first time fund, with no real track record to speak of, other than obviously being a partner at McKinsey, how did you go about sourcing that first deal?

Russ Roenick (03:47):

Wow. I think it was a call from a lawyer that we’d built a relationship with and they were representing this company. They were their corporate counsel. They knew that the company needed some help, and it was a one-off call. So it wasn’t a banked process. It wasn’t heavily marketed. It was the elusive proprietary deal, basically. But yeah, that’s how we got going. Random phone call.

Troy Pospisil (04:13):

That’s what everyone’s looking for.

Russ Roenick (04:14):

Exactly.

Troy Pospisil (04:15):

I’m hearing that’s a rare breed these days.
Fast-forward 15 years from 2008 to today, what fund are you guys on?

Russ Roenick (04:26):

Fund four.

Troy Pospisil (04:27):

Fund four. Congratulations.

Russ Roenick (04:28):

Yeah, yeah. Come a long way.

Troy Pospisil (04:31):

And obviously you’ve had time to refine the strategy. Walk me through, what is a typical Transom deal today?

Russ Roenick (04:39):

So a typical Transom deal, we do a lot of corporate carve-outs. So we’re separating a division of a much larger corporate parent, standing it up, giving it its own life. We do a lot of transactions like that. We invest in a lot of businesses where we’re buying from a lender at some other form of special situation. So we’re looking for complexity, transactional complexity, on the front end, and then operational opportunity or complexity thereafter. In theory, at least, you’re looking for EBITDA multiple expansion and you’re looking for EBITDA growth during your whole period.
We thrive in that sort of complexity. We have a large operations team. It’s about half of the folks at our management company.

Troy Pospisil (05:25):

Oh, wow.

Russ Roenick (05:26):

Yeah, it’s pretty unique, especially for our size in the lower end of the middle market. So about half of our folks on the operations team, and they all have some degree of functional expertise or best in class expertise, meaning sales transformation or supply chain, cost restructuring, project management, corporate carve-outs, cultural transformation. Those are the elements of a deal that we’re looking for where some of those things are, on one extreme, they’re broken, and they need fundamental transformation. On the other extreme, they need some more upkeep, some sort of TLC to get things on track. And so that’s from a big-picture perspective, like a typical Transom deal.

Troy Pospisil (06:13):

And what’s a great recent example of a Transom deal that really emulates what you guys do?

Russ Roenick (06:18):

Yeah. So a couple of months ago we carved out a division of Bose Corporation. Everybody knows Bose, they make great audio products, but they had a division of their business that was focused on B2B customers. So they’re selling large installed packages of audio video speaker systems to houses of worship, retailers, restaurants, places where audio is absolutely critical for the infrastructure. So we basically bought that division and carved it out of Bose. It was the only, what I’ll call, non-consumer facing piece of the Bose business, and now it’s ours.

Troy Pospisil (07:04):

And what are you guys looking to do with the newly formed company?

Russ Roenick (07:09):

Well, there’s a lot. One of the first things that we did is a cost reduction. So we just right-sized the overall operational UPX footprint of the business. Right now, we’re spending a lot of time in Asia inside the supply chain, looking at new suppliers, doing a lot of value engineering against existing products, trying to take cost out, make them more efficient. And at the same time, there’s been lots and lots and lots of conversation over the last several years over in the consumer electronic supply chain, not enough semiconductors, shortages. This company is suffering from that as well. And so we’ve been very fortunate that we’ve had some relationships we could use to leverage getting more semiconductors and fulfilling a lot of unmet demand. And so we’ve owned the business for four or five months. We’ve seen material sales growth, we’ve seen gross margin improvement. Off to a good start.

Troy Pospisil (08:09):

Not wasting any time.

Russ Roenick (08:10):

No, no. That’s one of the big benefits of having that in-sourced operations team is the accountability, the urgency. It’s unparalleled, having it all part of your business as opposed to outsourcing it using 1099-ers or consultants or otherwise.

Troy Pospisil (08:27):

Nice. Congrats.
Sounds like a great new platform.

Russ Roenick (08:30):

God willing.

Troy Pospisil (08:38):

Well, congrats on the Bose transaction.

Russ Roenick (08:42):

Thank you.

Troy Pospisil (08:43):

So we’re in a really interesting time in the history of the industry. The last few years have been up and down, to say the least. We had a huge run-up in valuation during COVID. Then a real pause to M&A activity over the last year and change. What’s going on now in the industry and what’s interesting?

Russ Roenick (09:01):

Yeah, I would say the last year there’s definitely been a return to value, which for us, we love, given that we’re a value investor. The preceding decade, I would say, prices during COVID were insane. And I don’t know that anybody can really put their finger on why there was such a run-up. But really that had persisted for the prior 10 years. And so for us, fortunately we built a business model where we could still source value-oriented transactions, transactions that needed operational opportunity in spite of this market.

That was always moving up into the right from a pricing perspective. But what I would say is, over the last year, it has absolutely come back down to what I think people would consider to be reasonable. And as a function of that, we’ve been exceedingly busy. Exceedingly busy. We closed several platforms over the first half of 2023, which not a lot of private equity firms can say, because obviously the mainstream private equity investor, they’re dependent on how much leverage they can get, the price of that debt, which hasn’t been so much of an issue for us since we’re a fairly low leverage GP.

That’s been good. That’s created a lot of opportunity for us.

I would say, the other thing, especially over the last year or two, obviously people want to talk about, there’s lots of talk about technology and how it’s affecting the private equity space. Everybody wants to talk about how AI is affecting their portfolio companies. Obviously, efficiency and automation, working with firms like yours, which has been awesome, has created a lot of opportunity for us to just speed up the way that we work, be more efficient. Frankly, outsource more, but get a better overall product or service or impact for doing so. I think that’s been a phenomenon inside of our business, and I think the industry at large over the last several years. That’s made a really transformative effect on our team and the way it spends its time. And obviously our business is no different than any other business, right? Time is our most precious commodity. So those are some of the things we’ve seen that have made a big difference for us.

Troy Pospisil (11:26):

That’s interesting. Nice. Well, Russ, this has been really fun.
Thanks for taking the time to come walk with me and Lola.

Russ Roenick (11:32):

Appreciate it. Good to talk to you. Lola, love her.

Troy Pospisi (11:35):

Lola, you want to say bye to Russ.

Russ Roenick (11:38):

See you later, buddy. Good seeing you. Have fun with dad. All right. My pleasure.

Troy Pospisil (11:46):

Russ, great to see you.

Russ Roenick (11:47):

All right. Yeah, you too.

Troy Pospisil (11:48):

All right man, later.

Russ Roenick (11:49):

See you.