The interview below is part of a series from The McGuireWoods Emerging Manager Program featuring impressive emerging managers. The McGuireWoods Emerging Manager Program supports emerging managers throughout the most critical stages of a fund’s evolution. It offers a differentiated and proprietary approach to connecting emerging managers with limited partners, providing intelligence on market terms and preferences, and advising emerging managers on all components of building a durable brand as an investor. To recommend an emerging manager for a future interview, please email the team at MWEMC@mcguirewoods.com.
Q: What led to the decision to raise your initial fund? What were the indicators that you were ready?
Dean Emmerton (DE): We’ve always wanted to build an investment firm that could scale. We were previously independent sponsors, doing transactions on a deal-by-deal basis. As an independent sponsor, it is difficult to invest, scale a firm and build a team as the economics are volatile. We have always believed in the value of building infrastructure, processes, institutional knowledge and a reliable source of capital. We also felt that having a fund would make us better investors, both by increasing the likelihood of sellers choosing us to buy their businesses and by helping us make sound investment decisions when facing the possibility of broken deal expenses.
As far as indicators go, in our experience, there’s no perfect time to raise a first fund. It was always going to be an uphill battle. If you are a sponsor with an early track record, everyone will tell you it’s difficult and advise you to wait a few years and do a few more deals before raising a fund. Our decision was made on a combination of timing and luck. We had indicators that our strategy was working, but ultimately launched when one of our larger family office relationships from our early deals indicated they were willing to back us. We’ve always relied on our ability to figure things out combined with a hard work ethos, and we approached Emko Industrial Fund I with this same mindset.
Q: How did you think about assembling your team?
Josh Kowitt (JK): We start with industry experience. All we do is invest in lower middle market manufacturing companies, particularly family-owned manufacturing companies. To achieve success here, you need to know industrials and manufacturing.
Beyond the expertise, we’re looking for people who are entrepreneurial. We tell our team we’re as much a startup as an investment firm, and the lower middle market is the Wild West, complete with all kinds of nuances that don’t exist in larger businesses. We want team members who have an entrepreneurial drive, are comfortable with ambiguity and limited information, and who roll up their sleeves.
The last piece we’re looking for is good people — people you want to hang out with and people who respect others. We frequently invest in family-owned businesses, with eccentric owners, family dynamics and a proud legacy. You need to be able to connect with these owners and build a real relationship. It’s not all about the numbers.
Q: What did you consider and prioritize when developing an investment strategy for your initial fund?
DE: Our strategy continues to evolve but increasingly is about focus and implementing a repeatable playbook. When we initially started, we would consider any deal of a certain size that came across our plates. We quickly realized that we were wasting a lot of time looking at deals that didn’t go anywhere. We have narrowed our focus to screen out more deals and concentrate on where we have an edge.
Our edge became the intersection of sector focus, specific business models and target size, but equally important are the specific transaction dynamics and seller objectives. We look for companies that need some work — perhaps an owner is retiring or the company isn’t growing. Whatever the situation may be, we want to work with companies that require more of a hands-on approach where we can fix a limited set of known problems to create a more attractive business for a future buyer. That approach dovetails with our experience as entrepreneurs and operators.
For a repeatable playbook, we try to apply our “Emko” approach to each stage of the investment life cycle. This goes from sourcing, negotiations and transaction structuring, to post-closing management, hiring and strategy implementation. We bring to bear our McKinsey experience in improving companies, with procurement, pricing and lean operations as examples.
We’ve developed our own style at each stage and approach that individually. In totality, we believe this approach will consistently deliver attractive returns. We view strategy as an integrated set of choices that, when completed together, will lead to a sustainable competitive advantage. That Emko investment strategy was codified in our first fund.
Q: What is the best piece of advice you were given when raising your first fund?
JK: I’ll share a piece of advice we followed and a piece of advice we did not.
The piece of advice we took is that achieving great investment results makes fundraising a lot easier. At Emko, we have tried to over-index in ensuring investments are performing well. We spend a tremendous amount of time with our companies focused on hiring a team, growing organically, doing the necessary add-ons, building boards of directors and completing the other key steps for success. This work is critical. When you’re sitting across from a prospective investor and can share with them both great results and why it’s repeatable, it makes the conversation a lot easier. Focus on achieving great investment results is an obvious piece of advice, but it’s one we certainly take to heart every single day.
The piece of advice we did not take was to wait. We made the decision to raise our first fund against the general advice we received at the time. We viewed raising a fund not unlike doing your first deal. If you’ve never done a deal, you can’t appreciate the learning until you jump in and do it for the first time.
Similarly, raising and managing a first fund has its own learning curve. Some LPs won’t invest in a first-time fund purely for this reason, just like they won’t invest in a sponsor’s first deal. In the end, we are happy we bit the bullet on our fund I despite the heavy lift. It’s been a wonderful experience, and we’ve learned so much. Furthermore, a lot of the investors we met during our fund I raise who did not invest at that time have tracked our progress since then and are now great prospects for a fund II raise.
Like anything in life, if you want to do it, you’ve just got to do it.
With emerging manager programs on the rise, what do you foresee with respect to LPs’ willingness to invest with emerging managers?
DE: Generally, there’s a lot of willingness from LPs to consider emerging managers. Though the fundraising environment is tough right now, we are hearing from a lot of groups that have dedicated resources to emerging managers and specific mandates to invest in emerging managers. Investors are holding off on commitments or making smaller commitments given the limited liquidity coming back from prior funds, but there is still an appetite for emerging managers. This is a better part of the market to be in right now.
McGuireWoods has done a nice job with its Emerging Manager Conference in creating a forum to bring us together. The support for emerging managers is strong when you consider the meeting’s impressive attendance.
About Dean Emmerton
Dean Emmerton is a founder and managing partner of Emko Capital since 2017. Prior to Emko, Emmerton was an associate partner at McKinsey & Co., where he served industrial manufacturing clients on strategy and operations. Previously, he was a project engineer at Celgard and a manufacturing engineer at the chemical division of Milliken & Co. Emmerton received his B.S. in chemical engineering with honors from University of South Carolina and his MBA from Harvard Business School, with distinction.
About Joshua Kowitt
Joshua Kowitt is a founder and managing partner of Emko Capital since 2017. Prior to Emko, Kowitt was an associate partner at McKinsey & Co., where he co-founded and led the firm’s North America airport practice. Kowitt previously served as CEO of Collegeboxes, a provider of shipping and storage services to college students. Collegeboxes was sold in 2008 and is now owned by U-Haul. Kowitt received his B.A. in political science from Washington University in St. Louis and his MBA from The Wharton School.
