PE Q&A: D Cubed’s Kaufman Discusses Firm’s Investment Model
September 26, 2013
Glenn Kaufman, D Cubed Group managing director
Not everyone gets excited talking about the private equity world, but we at PitchBook do. So when we recently had the opportunity to talk with Glenn Kaufman, managing director at D Cubed Group, we jumped at it. In the excerpts from our interview below, Kaufman discusses his firm’s investment model, what makes a successful exit strategy, as well as his perspectives on the private equity industry.
PB: What is the approach behind your investment model?
Kaufman: The thesis behind our business is that we are investing capital for those with a long-term operating mindset – frequently high net worth-oriented executives, individuals and families – in a highly-disciplined, fundamental manner. And we are then maximizing the resourcing of those companies. It’s a hard thing to appreciate the difference between being on top of a company and resourcing a company from below. Our view of the world is that we are a resourcing center for our companies and our entire effort is built around helping companies create value by helping make them better.
It seems fairly intuitive. How did you develop the strategy?
What’s intuitive to most folks is not necessarily intuitive on Wall Street. We are students of great operating company executives and how they build great companies. When we deliver value to companies it comes from many places and in many ways, but a portion is from our deep and passionate experiences working with great operating company executives. We believe that we (in what we refer to as the private market investing community) can learn from how the best-run operating companies execute to create the most value.
We do not make money on the “deal”. Rather, we capitalize our companies here using only senior debt, and only first lien senior debt. It means: go to a bank, borrow some money, and invest equity alongside that – just like any business owner would do. People talk about that now, in the wake of 2008, as being thoughtful from a downside protection perspective, and we think it is. But at the same time you frequently do not actually give anything up on the upside because the value of the leverage you give up is offset by the flexibility that the business gains. We like to say that we capitalize businesses so the CEO has the ability to run the company instead of the CFO. That gives executives the ability to make decisions about the future of their businesses without being constrained by financial limitations or other artificial constraints, and that has enormous value.
It almost looks like the high-net-worth investors who were initially big backers of your firm also help advise your companies.
We don’t have operating partners. We have resources who are experts deep in the few sectors in which we participate. We think they are the absolute best-in-class executives within their sectors. They generally are exclusive to us in what we do. They work with us on evaluating, creating opportunities and being resources to companies when desired by executives at the companies.
Does your holding period go beyond the typical five to seven year timeline?
Yes, possibly. The way I’d say it, our holding period is not driven by an artificial timeline. We believe holding periods should not determine operating strategies and plans. We simply believe that every day you go to work, you put in effort to make a company better, and eventually over time that company becomes incredibly valuable to someone. Maybe it is in the public markets, or perhaps to someone who is a financial buyer, or perhaps to a strategic buyer. Whoever it is, if you build a company toward an exit strategy, you will generally sub-optimize your outcome. Very few people have a crystal ball and know exactly what the right exit strategy will be at the right point in time, and who it will be that will be seeking it then. If you help build something truly great or greater, and that’s what you focus on, you will have something special. And while we cannot predict the precise timeframe, we know those businesses command a price consistent with the special enterprises they are.
Alex Lykken contributed to this article.
Glenn Kaufman is a managing director at D Cubed, a firm he founded to be the private-market investor of choice for companies, owners and executives in select sectors seeking a partner with the most focus, alignment and commitment to resourcing their success. In addition to helping build the firm, Kaufman heads D Cubed’s investment efforts in the food service, franchising, direct/multi-channel marketing and marketing services sectors, each of which he has been actively engaged in for more than a decade.