DNS Capital will always side with management talent over industry potential when making investments.
“Three years ago, we co-invested in what's now the second-largest concrete contractor in the country,” says Elizabeth Browne, vice president and head of business development at theinvestment office for the business enterprise of Gigi Pritzker, Michael Pucker and their immediate family.
“We wouldn't normally think of that as an A-plus industry and it's not,” Browne says, pointing to it being an inherently cyclical and largely commodity-driven business. “But in this case, we found what can only be described as an A-plus management team. That is the best embodiment of our investment thesis that I can describe.”
DNS Capital looks for leading middle-market companies with EBITDA between $10 million and $50 million, a permanent capital base focused on long-term capital appreciation — and a strong management team.
“The first filter for us — and frankly the last before we decide to pull the trigger on any investment — is going to be the quality of management,” Browne says.
We spoke with her about the energy she derives from working at DNS Capital and why the firm doesn’t view private equity firms as competition.
Looking for exceptional people
Browne joined DNS Capital in 2015. The husband-and-wife team of CEO Pucker and Pritzker had been in process of setting up their own family office that would provide direct investment opportunities.
“They wanted a private equity-equivalent vehicle, but they had a very different duration and leverage profile that would allow their own investment team to be in-house and make decisions for the long-term benefit of the family,” Browne says.
The firm has made more than 30 investments that span early-stage, Series A-type financing all the way through mature operating companies that have more than $150 million of EBITDA, Browne says.
The firm is based on the ideals of Jay Pritzker, Gigi’s father.
“Jay Pritzker built a variety of entities for which the family ultimately became known,” Browne says. “He did so with a single unifying thesis that if you invest in exceptional people and exceptional management teams on a very long-term basis, it is the best possible way to compound capital over time.”
Industry isn’t a priority, nor is the sector in which the company operates.
“We're constantly learning and getting up to speed on different industries and sectors as a team of generalists by design,” Browne says. “Because we're such people- and relationship-focused investors, we have the complete latitude as an investment team to only invest behind and with people whom we really like and really respect. As you can imagine, that is incredibly motivating.”
Another unique aspect of DNS Capital is the fact that the firm doesn’t need to have a controlling stake in the companies in which it invests.
“We're agnostic as to whether we buy a minority stake in a business or a controlling stake, as long as we can have an active seat at the table,” Browne says. “And I mean that really from a board level of governance perspective, not from an operational day to day because we're betting on management teams. We have no desire or capacity to come in and run businesses day to day.”
PE is not a competitor
One of the challenges for DNS is that good deals are often hard to find, Browne admits.
“I don't mean good deals in the sense of the underlying economic fundamentals or industry being compelling or interesting,” Browne says. “That part is actually easier. We are never seeking to replicate a traditional private equity model. We're holding companies very long term, meaning for us a minimum threshold, typically for a mature operating company, of 10-plus years.”
The challenge comes back to the team at the top of the organization.
“It’s about finding an exceptional management team who we can back on a long-term basis,” Browne says. “That will forever be harder than just finding companies that can make an attractive return.”
There are 30 to 35 families nationally that have built institutionalized family offices with the capacity to compete head-to-head with private equity, Browne says. DNS does not consider itself part of that group.
“The reality is family capital is so distinct from private equity capital in so many fundamental ways,” Browne says. “It really comes down again to that relationship with the management and/or ownership of the business. We inherently look so different from private equity in every respect, notwithstanding our interest in some of the same businesses. Our ability to be flexible, our ability to partner on a long-term basis to really preserve the cultural and qualitative attributes that in our view that have made those businesses successful to date are just so different that the degree of competition doesn't apply.”