Gemini Interview
Evans Network valuation
$1,000M: 12.5x LTM EBITDA or 10.5x NTM EBITDA
Moon Active valuation
$1,250M: >2x LTM Revenue, 8x LTM EBITDA, <2x NTM Revenue, 6x LTM EBITDA
FattMerchant Valuation
$200M: 10x LTM Revenue or 6.5x NTM Revenue
How was the Evan's deal structured?
- 6.5x net leverage - Management owned 20% of the equity pre acquisiton, 15% post - Performance option for additional 2.5% equity at 20% and 25% IRR hurdles
What does HarbourVest do?
- 60% co-investments alongside a lead private equity sponsor, even in these deals, we do our own due diligence and underwrite the deals ourselves, we meet with management, have site visits, run our own models, and have Bain consulting on retainer for 3rd-party market due diligence - 40% lead role, take on entire diligence process, from origination through close, including 3rd-party diligence expenses, developing a relationship with management, forming a view on valuation and navigating the bid process, enjoyed these more, highlighted a few on my resume, hoping to focus on taking a leading role more often
What levers did you sensitize in the Evans model?
- Brokerage profit margin compression due to rival technologies (i.e. Uber Freight) driving efficiencies - Took out M&A and flexed in a recession mid-hold, 1.0-1.5x downside case
Discuss the Evans diligence process
- Cohort data for new agent recruitment, agent retention, and same agent growth for both the organic business and acquired businesses - Spoke with management about each of the top 20 agents - AT Kearney agent survey - Engaged Bain for commercial diligence on market size, competitive positioning and differentiation, current penetration on a port-by-port basis and runway for growth, and M&A landscape - Hired an operating partner consultant, Phil Shook, who was at CH Robinson for 20 years - Engaged KPMG for financial diligence and hired a Aon to diligence their insurance coverage - Discussed exit opps with Harris Williams
What questions would you have for supply chain solutions opportunities?
- Define the target market and assess its size - What is demonstratable ROI? What is the average payback period? - How long is the implementation period? How much does it cost to implement? Who pays for it? - Who do they sell to? How do they go-to-market / what are the sales channels? - Who are the current and potential future players in this space? How fragmented or concentrated is the landscape? Are providers typically point solutions or part of a broader offering?
Why MBA?
- Expand network - Platform to pivot from a generalist role, to a leading growth equity platform focused on tech and software (my main interest)
How was the FattMerchant Model built?
- SMB: starts with # of customers, which is driven by marketing spend (cost per MQL), conversion from MQL to SQL to Sale, and customer churn based on historical cohort rates - SMB Transaction revenue: card volume per customer, take rates Less interchange fees - SMB Subscription revenue: new MRR per customer, less MRR per churned customer, plus upsell, less downsell - ISV Revenue: # of ISV partners, # of sub-merchants per partner, partner churn, card volume per sub-merchant, take rates less interchange fees - Costs: processing costs, hosting fees, personnel (management, product and engineering, sales), digital advertising and lead generation
What's a Portco you find interesting?
Connecta (retailer and distributor of mobile satellite solutions) Industry tailwinds Value-added retailer / distributor Specialized knowledge / Technical sale --> stickier customer base and less pricing pressure so higher margins Opportunity to get incremental support revenue Wolfgang's Cooling & Heating (residential HVAC maintenance, repair, and installation services) Like businesses with an MRO component Recurring revenue, sticky customer base Higher margin and higher quality revenue Mission critical, can't deferred maintenance Somewhat a-cyclical
What levers did you sanitize in the FattMerchant model?
- SMB churn, card volume, cost per MQL - SG&A
Why Gemini
- Have liked being a generalist, get exposure to so many sectors, great place to be as a mid-level professional especially if your focus is learning and growing as an investor, developing that investor lens - Business services is a sub-vertical that I'm particularly interested in, opportunity to find highly embedded services that provide significant value prop to their customers so they can focus on key business activities, leverage scale, business needs outpacing scale (Evans, Stax) - Opportunistic: flexible capital structure (sub debt, pref equity, common equity), control and minority, allows you to be opportunistic when you find the right business model and management team that you want to back - Lower middle market focus, demonstrated an attractive financial profile with key some processes in place and ideally a management team in place that you feel comfortable entrusting to grow the business, but still opportunities to professionalize and often consolidation opportunities, often founder owned and first institutional capital, opportunity to build a stronger relationship with management, partner with them on M&A, operations, professionalization, and strategy, real opportunity to add value at this stage, Eagle Leasing so understand what it's like from the perspective of a family like Saval Foods - Smaller deal teams, opportunity to take on more responsibility up and down ladder, junior level team members are expected and encouraged to have a voice in IC discussions. environment that lends itself well to self-starters who drive things forward - History of success, built up acquired knowledge and relationships over the last decade and reputation for being a great partner to management and a great owner to the next buyer on exit, continue to raise $200M funds, not many people doing that on their 7th fund, great place to continue learning and growing as an investor
How did you think about Evans valuation?
- Initially bid $1.1-$1.2B and reduced to $1.0B, representing 12.5x LTM EBITDA, following some negative commercial diligence findings on the truckload and brokerage side of the business - Relevant non-asset based public comps in the 3PL space were trading at a 15x LTM EBITDA - Landstar, closest agent-based public comp, was trading at 18x LTM EBITDA - Base Case 2.7x MoIC/ 22% IRR
What is the Evans Network investment thesis?
- Market leader in intermodal drayage, with is 2/3rds of their revenue, large and highly highly fragment market benefitting from secular tailwinds including trade globalization and a shift to railroad transportation driven by environmental benefits - Strong value proposition of agents outsourcing, resulting in strong retention: mission-critical services, provides value to both agents and drivers, allows agents to focus on core business activities, provides access to cheaper insurance programs & a wider array of coverage due to scale, allowing agents to work with more sophisticated shippers - Agents get access to broad network of other agents to balance capacity, share leads, and jointly pursue national accounts: national shippers prefer to work with Evans agents because more reliable - Drivers get access discounts on fuel, a lease-to-buy truck program, in addition to access to insurance programs: agents use these benefits, along with the promise of predictable volumes, as a recruiting tool to bring on and retain owner-operator drivers - Large M&A opportunity in highly fragmented space, have a history acquiring companies at attractive valuations (7 since 2017 at ~3.5x PF EBITDA, 6x at close), have used to acquire agents and expand into new ports
What does Evans Network do?
- Non-asset based logistics platform providing a variety of outsourced back office services, including billing, collections, compliance, insurance & IT, to a network of over 600 agent partner entrepreneurs - These agent partners connect and dispatch individual owner-operator drivers or fleets of drivers to shippers of cargo
What does FattMerchant do?
- Provider of omnichannel payment processing solutions to SMBs and ISVs - Cross-sell add-on business services including proprietary business management applications - Allows SMBs to accept payments across any channel, and then flow all of the purchase data through a single API into a user-friendly portal, allowing merchants to use analytics - Provide a white-labeled PayFac enablement service to ISVs, plugs into verticalized ISVs through a single API and allow them to operate as payment facilitators without becoming a register PayFac themselves - For example, Service Fusion is a fleet-management focused ISV, which is essentially a business management operating system with a full suite of SaaS offerings for everything you'd need to run your fleet-based business, all accessible through one easy to use portal, including GPS tracking, dispatch software, accounting and financial reporting, and the ability to invoice and process payments, and then Stax partners with Service Fusion and white-labels their payment facilitator tool to allow Service Fusion to offer payment processing within their environment without becoming a registered payment facilitator themselves - ISVs like Service Fusion love because to become a standalone payment facilitator, they would need to develop a bank partnership, develop enrollment, risk management, settlement, and payment processing capabilities which could cost millions of dollars and take multiple years to develop - Stax makes money by charging a SaaS fee ($230) for their SMB products and also takes 15 to 30 bps on transaction volume
Q's for them
- Quick overview of your background and how you ended up at Gemini? What did you find compelling about Gemini? - Could you give me a quick overview of Gemini's investment strategy? Has this strategy changed and evolved over time or been fairly consistent? - Mostly equity? Split of majority / minority deals? - How are deals typically originated? How does Gemini position itself to win in competitive processes? - How are deals typically staffed? - How does Gemini think about integrating operations expertise into pre and post investment? What does your typical Value Creation Playbook look like? Use operating exec's or an executive network? - Is there anything Gemini would be looking for in particular in a new investment team member? - What fund are they investing out of? How much of it is deployed? Are they currently fundraising?
What were some of the risks with FattMerchant?
- SMB churn (net retention just above 100%, logo retention in the 70's), got comfortable because customer retention consistent across cohorts and as of July 2020, nearly 50% of their inaugural cohort remained customers of the Company, had also seen revenue per client grow consistently with inaugural cohort increasing their ARR by 85% and their average products from 2 to 5 since onboarding - Some exposure to transactional volume (30% of revenue), but mostly SaaS - Competition from Square or Stripe or large legacy processors like Chase, but the value proposition of Stax to SMBs is being a one-stop-shop; the status quo is needing multiple providers that offer various pieces of what Stax brings together, i.e. QuickBooks for reporting, Square for mobile payments, Shopify for ecommerc, Stax brings all of these under one roof, in addition, Square is less flexible, it's a closed system so you can't integrate your Square eCommerce merchant ID with a traditional Verifone card terminal (no omnichannel purchase data)
What are the Evans Network risks?
- Same-agent growth stalled, continued growth dependent on adding new agents, however top 20 producing agents have grown their total revenue at a 5% CAGR over the past 5 years, has also consistently recruited new agents every year, still ample penetration opportunity, which is something we looked at on a port by port basis with Bain - Retaining existing agents given no long-term contracts and limited switching costs to cheaper competitors, however Evans has industry-leading 99% agent revenue retention, most churned agents were "fired" with minimal instances of agents being poached, quitting, or going out of business. They've retained all but one of their top 20 producing agents from the last 10 years. In addition, 3rd-Party survey conducted by AT Kearney showed nearly all agents are satisfied with the value proposition, with 98% of agents seeing themselves as staying in the network long-term - Evan's Truckload and Brokerage (combined ~40% of revenue) operations have a less-clear value proposition given they have own capacity and not reliant on Evans for carrier relationships, just BPO. While these businesses have organically grown over the past couple of years, it's unclear if Evan's has a "right to win" in the medium/long term at above market rates. Least defensible part of Evan's business and the one subject to the largest disruption risk from technology. These businesses are also more cyclical than its drayage business. However, the Truckload and Brokerage end markets are massive ($300B) and there are many small M&A targets
How did you think about FattMerchant valuation?
- Started at $165M, ended up around $200M, represented 6x 2021 revenue, other payments comps were trading around 10x NTM revenue at the time, underwriting to a 3.0x / 28%
How was the Evans model built?
- Started with revenue from existing agent base, determined by drayage market growth w/ Evan's agents outperformance layered on top and agent historical churn - New agent cohorts added based on historical rates, average revenue per agent by cohort - Assumed historical commission rate going forward (13%) - Opex (light) Insurance expense based on current contracts, historical price increases upon renew - Capex light (1% of revenue), limited WC requirements
What's an area you're interested in?
- Started working on a market study in supply chain - Idea was that consumers are demanding shorter lead times while products are increasingly being sources from across the globe, often relying on just-in-time sourcing, which is magnifying the problem - Companies are looking to improve efficiency or procurement, visibility in their manufacturing, management of their warehouse. and tracking of their inventory and shipments - First solution I looked at was upstream focused supply chain visibility software to help predict shortages, track raw materials levels, predict shipping delays, using various data sources. However, found they're prone to several challenges, including integrating data collection across disparate sources, competitive concerns around sharing data, and concerns around who pays for / who shares in ROI from integrating solutions across chain - Second solution was focusing on internal efficiencies of own production process and flow of materials and inventory within own 4 walls - Focused on solutions that use a combination IoT hardware with orchestration software layered on top - IoT data generated is not currently being fully utilized, large volume of data generated from sensors but difficult to generate insights and get buy-in from operations personnel to implement - Interviewed a number of investors, operators, and consultants, from large Growth Equity funds to VC funds, to CEO of Stop and Shop, to IoT engineers, to systems integration consultants - Found that winning solutions are user-friendly, easily customizable, demonstrated ROI and seamless integration across existing enterprise systems, and generate actionable insights - Vertical-focused solutions or solutions built around a niche use case must solve a large enough problem and sell into a large enough market - Kinexon, IoT orchestration software compatible with a wide array of sensors to capture, optimize, and automate processes in manufacturing, raised $130M in April led by THL Automation - Tulip, platform to integrate IoT devices with legacy factory machines, raised $100M led by Insight last year - Phizzle, software platform to remotely operate multi-vendor and multi-device lab sciences equipment, highly regulated environment
What is the FattMerchant investment thesis?
- Unmet need of SMBs that have yet to transition to omni-channel payments or integrate simple data collection and analytics, 70% are not equipped to handle omni-channel, still at the beginning of the penetration curve - ISV and Payment Facilitation side of the business is exciting, where Stax provides a huge value add - Horizontal and vertical M&A , FattMerchant could acquire legacy payment processors (ISOs) and then integrate and cross-sell their business management software solutions, could go out and acquire ISVs, build their payment facilitator right in, and then also offer their business management software solutions to clients of that ISV, could continue acquiring additional business management software solutions, executed add-on of Fusebill, which is focused on account management for subscription services
Walk me through FattMerchant diligence process
- historical take-rate trends, cohort analysis, unit economics like LTV and CAC - Walked through the sales funnel with the management team of how they generate MQL, cost of MQLs over time, conversion trends - Historical success with cross-sell and up-sell - Size of sales and support team, large relative to # of leads generated, so some runway for growth but we still modeled in a substantial increase - 3rd-party work from Bain on TAM, industry trends, competitive positioning and differentiation, and size of the M&A opportunity - Customer calls with merchants and ISVs to gauge awareness of the platform, sentiment from customers and determine why they did or did not choose Stax
How was the FattMerchant deal structured?
- management rolled 40% of proceeds, no debt, new equity was senior to management w/ 1.5x liq pref and 8% PIK
Moon Active LTM EBITDA
2019: $150M (30% margins)
Moon Active LTM revenue
2019: $500M (400% YoY)
Evans Network LTM net revenue
2020: $185M (20% YoY)
Moon Active NTM EBITDA
2020: $200M (30% margins)
FattMerchant LTM net revenue?
2020: $20M (55% YoY)
Moon Active NTM revenue
2020: $700M (40% YoY)
Evans Network LTM EBITDA
2020: $80M (40% margins)
FattMerchant LTM EBITDA
2020: Negative $6M (-35% margins)
Evans Network NTM net revenue
2021: $215M (5% YoY)
FattMerchant NTM net revenue
2021: $30M (50% YoY)
Evans Network NTM EBITDA
2021: $95M (45% margins)
FattMerchant NTM EBITDA
2021: Negative $4M (-15% margins)
Walk me through your resume
N/A
