Episode 210: Raghav Nandagopal on conducting acquisitions at scale

HIGHLIGHTS

Will: Hello, Raghav. Welcome to the show.

Raghav: Thank you, Will. Nice to speak with you this afternoon.

Will: Raghav, let’s get to your background in a little bit, but first, let’s start with your current role. Tell us about your current employer.

Raghav: I head the corporate development and mergers and acquisitions for Ascensus. I sit on the executive leadership team reporting to the chairman and CEO. Ascensus is one of the largest private tech-enabled services company, serving the retirement, education, and health marketplace.

We service approximately 10 million Americans to save for some very important aspects of their lives, which includes saving for retirement, savings for college savings, for their kids and their grandkids, and of course savings for healthcare, which is really saving for consumer directed healthcare like HSA, FSA, HRA, and commuter benefits like Cobra and other benefit continuation services.

I joined Ascensus in 2016. Before that, I was the head of strategy, business development, M&A and product strategy for Broadridge, over all of their GTO division. Prior to joining Broadridge in 2012, I spent over 13 years in private equity. I was a co-CEU for a U.S. Trust private equity group which became part of Bank of America, and I was a general partner at a fairly large family office.

My McKinsey tenure was between 1998 and 2000. I was out of the Stanford office, and clearly, you know, great relationships there, and look forward to getting into more details on this topic. Delighted to be here.

Will: Great. You were telling me before that you’ve been active, doing an active series of deals. I think you said you’ve done 30 deals in the last 31 months. That is a busy, busy head of M&A. Could you tell us a little bit about what you have going on and the kinds of acquisitions you’ve been doing?

Raghav: Yeah, absolutely. To do that, let me kind of outline a little bit of a strategy. We are really a tech-enabled services company, and if you look at the retirement marketplace, there are over 1,500 TPAs in the United States. These are companies, small companies, midsize companies that are providing retirement, compliance, plan design, administration, all the back office functions.

Our thesis is that the market is ripe for consolidation and we’re acquiring a lot of those companies. On the health side, there are over 300 TPAs providing consumer directed healthcare and benefit continuation services. Again, very similar thesis, so we’re acquiring platform companies, as well as we’re doing a lot of tuck-in acquisitions.

Given that we are a LBO backed by some very large PE shops, our owners are Jenstar Capital out of San Francisco, Aquiline Capital out of New York, and Atlas Merchant Capital out of New York. The thesis there is that, in this, behind this roll up strategy, since my joining in August of 2016, my charter was to establish a programmatic, institutionalized MA program from ground up.

We put that in place and I did our first acquisition in 2016, November timeframe, so if we’ve done 30 acquisitions in the past, call it 31 months, or so. Our paces were acquiring one company a month, so this is what I call a very accelerated acquisition journey.

Will: And for folks who don’t really understand this or know this space well, and I’ll include myself in that, could you give us just a little bit more? Like, what is a TPA, and what are these kinds of companies that you’re acquiring?

Raghav: If you look at the record keeping what we do very simplistically is we do all of the back office record keeping functions for a 401k plan, meaning if you’re working for a company, you may have a 401k plan, some of the activities include account opening, contributions, distributions, and year end reporting, taxes, et cetera, that we all get.

That’s what we do. These are the classic back office functions. Some of the large companies who play in this space are Fidelity does it, Elite does it, Conduit, Wells Fargo’s retirement business, and some of the bundle service providers like John Hancock, Voya, Valic, Mass Mutual, but our market leadership and sweet spot is in the S&B business.

Right? We are the market leader in the small and micro space. This is really companies that are, call it between 500 and below lives, so if you are a private company with 100 employees, you want to start a 401k plan per the retirement benefit of your employees. Somebody has to set that up, and that’s what we do through the advisors who serve those clients.

That’s kind of the ecosystem there. Does that help?

Will: It does, it does. For the smaller companies and would it be … are all of your people, is it always working under the Ascensus brand, or might a lot of people actually being serviced by Ascensus and not know it because you’re sort of the white label, back office kind of solution?

Raghav: Yeah. No, that’s great. On the retirement side, we have a combination of both, right? Our business model is we are serving the advisors, meaning our distribution is a leveraged distribution model. We sell through the institutional distribution models like the wire houses, independent broker dealers, RAA channels, and benefit brokers on the health side.

They go to what we call plan sponsors. Plan sponsors are basically companies who want to set up something, and a retirement advisor might go and say, “Hey, you should set up a 401k plan. Let me bring in somebody like an Ascensus.” And we would be responsible for doing the designing and doing the record keeping activities.

We’re not the advisor per se. We don’t want to be in the advisory business, nor are we an asset manager. We don’t want to be in the business because we’re a tech-enabled services company. On the college savings side or government savings side, we are the largest service provider in the country for servicing 529 accounts.

If you have a child and if you open a 529 account, and if you live in New York, in all probability, you’re using our portal, our technology, and our servicing capabilities. We have 20 states plus the District of Columbia. From a market share perspective, you can assume that we have around a 30 to 35 percent market share in the United States.

Some of the other players are TIA, BNY, et cetera. On the health side, if you’re a company and if you provide, let’s say, a high deductible health plan, and you have an HSA contribution, somebody needs to be responsible for opening the account, managing the contributions, distributions, call center, servicing, et cetera, et cetera; we do that.

Across HSA, FSA, HRA, Cobra commuter benefits, so in that space, folks like Wex, HealthEquity, WageWorks, which is acquired by HealthEquity, those are some of the folks who play in that ecosystem. Hopefully that makes sense.

Will: Yeah, no, that really helps a lot. Now, you said that when you came in you were tasked with the responsibility of building a programmatic M&A operation or machine. Could you talk about what that entails and maybe the steps that you went through to get that in place? And it sounds like it is now in place, cranking out the acquisitions.

Raghav: Yep, yep, absolutely. In all fairness, Ascensus did do acquisitions before, but it was very opportunistic. They might do one every two years, or something like that. Under the new ownership in 2015, the strategic thesis was that the industry’s fragmented. We want to take advantage of that. To do that, they brought me in and said, “Look, let’s put together an end to end M&A strategy starting with what exactly is our business strategy across retirement, college savings, and health.”

“What are some of the market drivers?” Once we defined a business strategy we said, “We’re going to create an M&A strategy, right from sourcing diligence and execution, closing, and post-acquisition integration.” We completely mapped that process out, and then we effectively built a proprietary database using a lot of third party data, plan source data, et cetera, to really look at the total number of TPAs in the United States.

And we used a number of metrics to qualify them, similar to how, if you’re a sales person who’s got a sales quota, you go through the prospect analysis and the qualification analysis, which is what we did. We have completely automated the process, so we have certain metrics.

For example, we look for certain geographies, which has a strategic fit for us. We’re looking for companies that are growing between five to 10 percent top line, 20 percent EBITDA margin, so we have a set of financial metrics, and we also have a filter around the kind of returns that we expect.

For example, our hurdle rate is 20 percent from our PE owners, so we programmatically put all that stuff into a, call it a complicated M&A model, we created that, and the next step was to do an outreach, so we have a very active outreach program through our relationships, through the banker relationships, through the PE relationships, as well as through I built a little bit of an advisory network where people would get some referral fee when they bring in deals.

We’ve started this flywheel effect where now we have a tremendous amount of inbound interest and we’re able to look at a number of highly qualified deals. On the execution side, as well, when I say programmatic M&A, we have completely templatized the entire process.

For example, we basically ran a couple workshops early on after I started, pulling all the different functional leaders from technology operations, HR, servicing, call centers, et cetera, business, and we said, “Look, assume that we want to acquire a company between up to 50 employees, 50 to 100 employees, 100 to 200 employees. With that profile, what is the cost that is needed to service that many number of employees?”

We backed into a cost model and we templatized that, and then we added on a return analysis on top of that, so this way, if I know that here’s a company that is serving a hundred employee customer base, I know exactly what’s the margin profile, and if you tell me it’s a 20 percent EBITDA margin, call it a 10 million dollar business, and I’ll tell you exactly what multiple I want to pay.

We have completely templatized and related to that is we’ve also identified potential synergies, what we need. We have owners. Comp is a nice synergy, because the owners want to sell in Malan. We have corporate functions that we can synergize. We have technology synergies. We have facility synergies, so we have the ability to tweak a number of those levers, and all those things are built into our model, that way we know exactly what’s the amount of money we’re willing to pay in terms of valuation, as well as what is a synergized multiple.

And to finish the story, we also said, “Look, post-acquisition, what we’re going to do is we’re going to templatize the integration plan, which means we know exactly what is going to get integrated from corporate functions, technology, operations, facilities, and business systems over a period of 18 months, and we built a governance mechanism around that where the M&A team, the business, and the integration teams review this on a biweekly basis.

And then we have a monthly governance meeting where we know how the businesses are performing post-acquisition. That’s what I call the programmatic way of sourcing, diligencing, and execution and close. Does that help?

Will: It does. Tell me a little bit about the kind of organization or the people that you have on the, let’s say, on the integration piece. You say you have kind of a governance structure on that. I imagine the 30 acquisitions that you’ve done, some might have gone all the way through that 18 months and they’re just totally integrated now, but there’s probably a number of them that are currently at some stage, so tell us about building the team to kind of manage that, run that, check into the status of things, and just drive it.

How does that organization work, that integration organization?

Raghav: Yep, that’s a very good question. You know, in a prior life, I had kind of a vertically integrated theme right from strategy, M&A, and integration, but that model worked very nicely and it works very nicely when you’re doing four to five deals a year. In this scenario, very quickly, the conclusion that we came to is that the fact that we have to do one to one and a half deals every month, that pace is pretty hefty.

And we said, “We are going to create a separate dedicated integration team.” We have a between 10 the 12 people integration team. All they’re focused on is to integrate these companies post-acquisition, but we also made sure that these integration team members participate in the diligence process, as well, some parts of the diligence process, so there’s no throwing over the wall.

They’re involved in all our weekly calls, they’re also involved in a formal handoff mechanism that we have in place, so this way we know, for example, the facilities integration needs to happen in month 12 because the lease is coming to an end. The integration team in the facility is doing exactly what needs to be done, and they have the output that’s coming out of the due diligence.

The other thing that we did is that, early on, we came to the conclusion, “We’re going to get a tool that is going to help us to do not only the due diligence, but also the diligence handoffs.” We’ve standardized on a product called Midaxo. It’s actually started by an alum, McKenzie alum, I think he’s out of the Boston office.

Ari Solonian. Great guy. This product is fantastic. It’s in the cloud. We have uploaded all of our diligence questions, functional diligence questions, onto it. Integration teams have access to it, diligence teams have access to it, this way there’s one repository where all the diligence details, all the analysis, all the to-do items, all the assessment of the diligence different functional teams are there.

The integration teams have access to it. They know exactly what to do at different points in time, so dedicated integration team, an integrated tool, a proper governance mechanism where we know what needs to get done, and then we measure progress around that.

Will: If I was a fly on the wall sitting in through one of your governance sessions, number one, you’d probably kick me out because you wouldn’t want me in there, but if I was sitting in, talk me through what one of those governance discussions look like. I imagine you’re looking at multiple of the different deals that are inflight somewhere in the integration process.

How do you run those meetings?

Raghav: Basically, what we did is we did a little bit of a bottom up analysis, so given that we’re a private equity backed company, I have biweekly board calls with our private equity backers, our chairman and CEO, the president and myself, we get on the call, and M&A is a key topic. In fact, we review where the deals are, how things are going, et cetera, et cetera.

In fact, today was a call that I had at 2:00 o’clock. In the integration, what we said is that, look, private equity when we are underwriting these deals, there’s ab business case, so there is a business case on the growth top line, revenue growth. There’s a business case on the EBITDA margin. Right? Two components.

Third component is the synergy component. In our situation, there are seven or eight synergies that we have identified. As I said earlier, it could be technology, it could be operations, it could be facilities, it could be HR, it could be legal and other administrative services. Somebody might have an outsourced services; that’s a synergy.

Owners compensation’s a synergy. Non-owner FTEs is a synergy, so we have those standardized levers that we have, and for each of the levers during the initial valuation and the modeling exercises, we know exactly what we need to od.

For example, you might say, “Well, there are five corporate FTEs. Those people need to be taken out at month seven, because that’s a synergy, and that synergy’s around, let’s say, a million dollars.” What we do in the integration governance meting is that we go deal by deal basis, and say, “Okay, deal X we said we’re going to take out FTE synergies and non-FTE synergies.”

FTE synergies, we said, we’re going to take out five people. Are we on target? Yes? Good. If we’re not on target, what’s the reasoning? What’s the delay? What does it impact in terms of the business case? On the non-FTE side, the same analysis that we go through. Okay, we were supposed to terminate the lease costs. Are we supposed to consolidate two different offices?

Where are we with that? Are we on track in terms of the cost of the transition? Yes? No? If not, why not? And then we consolidate all of this into a simple dashboard at the executive level, where we know, using different charts, how many of the deals are on track, how many of the deals are on the fence, and how many deals are not on track, so that’s how we kind of run it.

It’s kind of fairly detailed. We go through every deal at a time, so that’s the process.

Will: And in terms of, to manage all that dashboards, is it the Midaxo system, or have you built something separate to manage the dashboard for all the different instances?

Raghav: That’s a separate system. It’s using Microsoft, we have Microsoft SQL standard. I don’t remember the name of the product now, but we’re using Microsoft products, so we have connectivity into that, because the reason for that is we also want to connect to the financial system, right?

Many of these businesses are not necessarily gap businesses, gap accounting businesses. For example, there might be a 20 million dollar revenue business that’s started by an entrepreneur. Typically, it’s managed as a cash basis business there, because they’re trying to minimize the taxes.

Now, we would need to convert that into gaps. We have different metrics to look at, so it’s a proprietary PMO system that they have built. I don’t remember the name of that, but it’s a PMO system and it’s part of the integration team that they give read out to me and the business unit leaders.

Will: Going back a few steps to all the outreach that you do; you had this kind of screening process where you gathered information from the universe on the complete set of these businesses, and then the outreach; how do you manage all of that? Do you have some kind of CRM type system, but instead of potential customers it’s your tracking?

What stage are they at? Did they say no? Did they say maybe a year from now? How are you tracking all of the status of the different deals of the outreach? Not the deals, but just the outreach and discussions?

Raghav: Yeah, no, that’s a great question. We do have a proprietary CRM that we built out, so early on when I started, when they had Excel spreadsheets et cetera, then we quickly realized I want to look at the dashboard in a variety of different ways, so we do have a CRM.

We do track it by different stages. We track it in terms of how many of them are … five or six stages are critical for us, from our perspective, based on discussions with the board. Right? What I highlight are how many new prospects have we been added, that’s one, so we can slice and dice.

Second is pre-LOI discussions. How many of them are in the initial calls, if there’s interest they sign an NDA, and then we get in to call the preliminary pre-LOI discussion. We quickly want to have a call with them, understand the profile, if it fits our profile then we want to go to the next step.

If somebody says, “Look, it’s a 20 percent EBITDA margin, and five million EBITDA, but I want 15 times,” we say, “Nope, not interested. That’s not our profile. Move on.” The next stage is LOI, signed LOI and diligence. The next stage is post-LOI, closed, so there are four or five different stages that we track, so we have created a proprietary database.

We have our weekly M&A staff meeting where we review every deal it is that we are looking at, in different stages. We give updates. The CRM gets updated. It’s a Microsoft CRM product, so it’s a proprietary product that we have.

Will: Yeah. I mean, it’s pretty similar to a sales process if you’re doing business development. Let’s say the person who said, “Hey, I want 15 times EBITDA,” and you say no thanks. For that kind of person, what would your process be to follow up with them over time to say, “Hey, you know, how are you feeling now about eight times,” or something?

Raghav: Yep, yep, yep. No, exactly; that’s a great question. We do have ticklers and reminders, et cetera, into the system itself, so those are the deals where we call either monitor or on hold, so we track the deals. Somebody might’ve said no. We know exactly how many of them are, but we also have ticklers that’ll come back and say, Okay, we’re going to have this company to remember. You need to reach out to this company on this date.”

So, all of us, and I have a team of five people. I have a VP of M&A, then I have two managers of M&A, and then I have a senior associate, and then I have a dedicated M&A attorney for our team, so we all have, during our weekly meeting, we know exactly what to do in terms of how many needs to be outreached.

It’s really the senior associate who does the bulk of outreach, but an important piece of the strategy that I put place when I joined is I said, “Look, we’re not going to go by any company that we want. In order to do this high paced roll up strategy, we need to create what I call the flywheel effect.”

The flywheel effect comes in from a couple of different angles. One is you have to acquire the high quality companies, market leading companies, highly reputed, who are thought leaders in the business.

We bought those companies in 2017. That really created a momentum in the marketplace where they said, “My goodness, Ascensus has acquired Kravitz, which is the market leader in the cash balance technology and servicing. If Kravitz is sold to Ascensus, maybe we should think about having a dialogue.”

We acquired top quality companies, and now we have a tremendous amount of inflow because these owners are the ambassadors for us, right? They’re basically going and saying, “Look, Ascensus strategy’s great. Here’s what I went through and here’s the process that they’re going to put you through.” And we’re able to close these deals in four to six weeks timeline because of this network effect and the flywheel effect.

Will: It was really about starting with the right ones to establish the reputation.

Raghav: Exactly, exactly.

Will: Interesting. For consultants out there, what are some things that consultants should now about trying to reach or trying to serve someone in a position like yours? Either kind of the pressures that you’re under, or the pain points that someone like you has.

Raghav: That’s a very, very good question, because typically what I see is that first you’ve got to have some domain expertise. That’s incredibly important at the end of the day. All right? Either you have to come from the retirement industry or the asset management industry, or you know the distribution industry in terms of the advisors. You have to come from some of those, so we started there.

But if you don’t have it, then you need to have a horizontal expertise in terms of managing a quality, in the case of post-acquisition integration, how do you manage a PMO process? How do you drive a set of initiatives in order to understand what are the different inefficiencies? What are the different efficiencies? How do we track that? How do we put a PMO in place?

Those are some of the stuff that are very, very critical. Now, on the deal execution side, obviously you would need to have some kind of a deal background. Some of the areas where, for us, would be help in terms of some of the modeling, external modeling, and if the deal is very large, obviously, a lot of help in terms of understanding the market dynamics, what are the market characteristics, what are some of the competitive characteristics, how do you build an analysis around what are the different business models of the target?

I mean, these are, I’m talking about anything going north of a hundred million dollar type of revenue business. I like to bring in advisors, and this could be with some backers or consultants. We have hired Deloit to come in and help with us a lot. We’ve hired A&M that I had on in a very large deal, so they’ll come in and effectively help us to run that process.

Because internally I don’t have the bandwidth to haul it, if we were to acquire a few hundred million dollar business which we were in the middle of, we can’t do it ourself. Not that we can’t; we don’t have the bandwidth, because we’re focused on the tuck-in acquisitions, so we would need help there.

Strategy, deal, due diligence support, PMO management, and on the integration side those are some of the skills that are very highly valued.

Will: And you know, if you are looking for external support on those, what’s the places that you go to ask, to find support?

Raghav: Traditional consulting firms mostly around some folks who are like the PWCs, or the Deloits. Alvarez and Marcel, they’re a very good firm. They do have a lot of experience in that.

Typically I’ve not gone … I hate to say this, but typically I’ve not gone to the McKenzie side of it, primarily given that we don’t need help on the strategy side. It’s really more on the execution side where we need, so we would need folks who are practitioners in the M&A side, or the integration side, and I don’t, at least I’ve not looked at McKenzie with that lens.

Maybe I’m wrong; I have no idea. The firm, I’m sure, has changed quite a bit, but in your network, if there are folks who have done post-acquisition integration, especially in the S&B market, with the kind of company size I’m talking about.

You know, our bite sizes, on the tuck-in side, on the lower end, it could be between five to 10 million dollars, upper end it could be up to 200 million dollars. It’s a very different skill set. We’re not buying billion dollar companies, right? That’s not what we’re doing.

It’s a different skillset and experience and track record you have to bring to bear.

Will: Sure. And when you end up calling the folks at, like you just talked about, PWC, or Deloit, or A&M, are you typically calling on folks that have been reaching out to you over time? And what do you think are good strategies for consultants to just kind of do that reminder advertising and stay top of mind?

Raghav: I think it’s both, to be honest with you. Networking and obviously just like this conversation we’re having, right? Which, now you know the kind of things that we’re looking for, and the kind of deals that we’re looking for. The easiest avenue to get into a company and have some dialog with somebody like me is to bring in a deal, right? I look for deals.

If you have some proprietary deal to basically say, “Hey, I know this TPA, it’s from like a 10 or 12 million dollar company, I know the owner. Maybe this is of interest.” And that establishes a very quick relationship. Obviously we can put some structure in place for that, but once you establish that credibility, I think it’s a little bit more easier to say, “Okay, now I know you have a connection in the ecosystem. How about you come and help me with maybe the due diligence, or maybe the deal execution, maybe the valuation of the business?”

That could go in a couple of different angles.

Will: All right, so listeners out there who have a potential deal: reach out to Raghav.

Raghav: Yes.

Will: Fantastic. Well, Raghav, this has been incredibly insightful for me to kind of get this view of what it looks like to build a programmatic M&A program, and you know, I’d love to just thank you for being on the show.

Raghav: Oh, absolutely. Will, I really appreciate what you’re doing, and you’re doing a great job, especially with the alums, and you got a nice network of folks, and if there’s an opportunity to be of help mutually, you know, I look forward to that, so thank you for having me on.

Will: All right. Thank you very much.