This private equity shop is buying Houston’s Main Street
Mike Vellano only had one job on his resume leading up to his 30th birthday: his family’s pipe supply business in New York. He was the fourth generation to work for the business. Now, he runs his own trenchless pipe company in Houston.
Vellano founded Vortex Companies, a water, sewer and industrial infrastructure firm, in 2016. Soon, he need capital to make acquisitions and enter new markets, but he was wary to turn to private equity.
“We bootstrapped everything on the heels of some industry guys,” Vellano said. “We heard all kinds of stories about how private equity groups come in and hinder the ability to grow.” A local private equity firm convinced him that they were different.
Fred Lummis, Fred Brazelton and Brad Morgan, equal parts of Platform Partners, say they invest in the long-term success of a company. Their mid-size private equity firm is off of I-610 and San Felipe near River Oaks in a sleek office filled with floor-to-ceiling windows and gray furniture. It looks like Wall Street. They insist otherwise. They don’t want oil and gas, and they don’t want to flip your business. They want to be your partner for life. Or, more accurately, the profitable life of your company.
Since founding in 2006, Platform has acquired 16 companies. Thirteen are headquartered in Texas and nine of those are in Houston. They want to go where the opportunity is, but they say the opportunity is here.
“We like to be able to get in our car and sit down with the companies,” Brazelton said.
Most private equity firms hold businesses for just a few years. They hold onto their investments for as many as 12. If you act like you will own a company forever, they say, the success of both the company and the business relationship becomes front and center.
Most private equity firms specialize in one industry. They call themselves generalists. Most private equity firms have a minimum stake. They take a stake as small as 20 percent.
Platform has built a strategy around minority investments. Today, the firm invests in control buyouts and recapitalizations, minority equity and mezzanine capital.
“We structured Platform to be a one-stop shop for entrepreneurs,” Brazelton said.
Since Platform invested in Vortex, the company has grown from 40 employees in 2016 to 300 in 2018, Vellano said. The company’s annual year-over-year growth has been hitting above 25 percent since the capital commitment, and Vellano plans to close two more acquisition deals in the first quarter of 2019.
“We run the way we ran before, except we have a whole resource of experience to leverage on top of that,” Vellano said.
A majority of Platform’s businesses are financial services companies, but the partners reject the notion that they have a specific interest in one industry. For their firm, which manages about $450 million, they get into business with glass makers, aviation, vodka and of course, sewer pipes. Platform avoids oil and gas companies. In this town, there’s a lot of capital being thrown at that already.
But they really like Texas — for its wildcatter entrepreneurial spirit, for its business-friendly policies and for all of its rich people looking to get richer. Houston is a private equity utopia.
Lummis, Brazelton and Morgan were all born in Houston and grew their careers in the town. Brazelton and Morgan went to University of Texas at Austin and Lummis went to Vanderbilt University. Platform has only raised capital once, last January when they took commitments of $129 million. They say they won’t raise capital again for at least another few years.
“We were born here, we spent our careers here, our investors are here and we recycle capital here,” said Lummis.
The three have been together for 20 years. They describe their relationship to each other - and their companies - as marriage: trusting, compromising and in it for the long haul.
Their investors are personal friends and former business associates, CEOs of banks and energy companies. They see them at dinner. Many are successful executives looking to diversify a heavy oil and gas portfolio. The average investment in Platform is about $5 million.
Most of Platform’s investors are conservative with their money and want generational wealth creation for their families, the partners said. The average return on the company’s portfolio of 16 investments has been approximately 30 percent per year.
The companies they invest in are oftentimes spurred by a longtime connection. They say they’ll spend years chasing a company they like. They’ve been wooing a current muse for five years. As Morgan put it, in that amount of time they can teach themselves a new industry. Their toughest competitor is the entrepreneur deciding to wait, and that’s okay — they don’t want to rush the engagement.
Vellano said he speaks with one of the founders at Platform almost every day. Another business owner said he spoke on the phone with Fred Brazelton every week for years.
“For individuals to go out and grow as fast as we did, you have to have a huge amount of resources or you have to have the resources of an equity firm,” said Dan Bucaro, the founder of Landmark Aviation, a start-up that Platform backed.
Landmark eventually sold in 2015 for a little over $2 billion to Signature Flight Support. The deal was the largest acquisition ever in the general aviation service industry at the time, according to AIN, a trade publication.
“Whether it was operations or financial, he was a constant sounding board,” Bucaro said.
There’s no formula for when Platform will invest, the partners said. Some years they don’t make any new investments. One month they made three. But, they know what they’re looking for: Most of their businesses grow between 20 percent and 30 percent per year and are valued between $10 million and $100 million. All of their businesses must be proven and profitable, meaning they steer clear of distressed companies.
The partners admit they haven’t seen everything coming. Right before the financial crisis in 2008, they took on too much debt. Brazelton said it was a scary time, and they had to support the firm primarily with equity. Since the crisis, they act more conservatively.
“When things are going well, you don’t think about what can go wrong,” Morgan said. “The financial crisis and when oil dropped here in Houston are two examples of that.”
The market changed in an important way since Platform was founded pre-2008 recession: People actually know what private equity is. Entrepreneurs are suspicious that they’ll get bought and stripped. When Platform first started, the first question was: “What is private equity?” Today, they instead have to answer questions about vulture capital.
“Private equity has a bad reputation,” said Brazelton. “A lot of that comes from the flipping of businesses. You do things that are not in the long-term interest of a healthy company in order to make quick profits.”
Entrepreneurs want capital, but are less willing to give up a controlling interest than in the past, they said. Today, Vellano says selling a 52 percent stake in his company was a winning decision.
“You hear that you’ll lose control, that you won’t be able to make decisions, but it’s been the opposite of that,” Vellano said. “To me it’s a partnership, a friendship, that is tremendously helpful for us.”