New family office targets professional services groups

Dallas-based entrepreneur Greg Alexander has opened a family office which plans to invest in a wide range of professional services boutiques.  

The family office is called Capital 54,  taking its cue from a federal classification known as Code 54 which defines US professional, scientific and technical services. 

Professional services generated combined revenues of $2 trillion in 2018, according to federal statistics, equivalent to 10% of US GDP.

We know all this is going to create a pipeline of prospective investments

But Greg Alexander warns smaller firms are failing to reach their potential: “We know there are 1.28 million professional services firms in the US and over 91% of owners want to grow, scale and exit their firm.  But less than 3% ever reach scale.”

He says they spend $560 billion a year on professional advice, but see little return from it. They need practical advice, detailed know-how and growth capital.

Capital 54 wants to invest in firms employing as few as five people, ranging up to 250, including family businesses. It believes 410,000 firms can benefit from its brand of advice, as well as capital, to achieve a successful exit.

The challenge facing professional boutiques has become greater, as a result of the Covid-19 pandemic which is easily capable of throwing sales targets out of whack. 

Greg Alexander started his career at technology firm EMC, later bought by Dell, the computing giant. In 2006, he co-founded Sales Benchmarking Index which helps companies set, and meet their targets. 

He sold his stake in SBI to Alaris Royalty in 2017 through a $85 million partnership deal and set up a consulting business called Andersen Enterprise with his brother Doug and nephew Matt, who are set to work with Capital 54.

Sean Magennis is their chief executive, in charge of growing a portfolio of businesses and providing support to CEOs.  

He is strong on positivity: “We’re naturally bullish people.” 

He is former global president and chief operating officer of Young Presidents Organisation (YPO) a community of 30,000 chief executives in 138 countries, whose businesses generate combined annual revenues of $9 trillion.

Capital 54 has also bought into a network of owners of professional services boutiques called Collective 54,  started by Alexander: “We know all this is going to create a pipeline of prospective investments,” says Magennis.

Talks are in due diligence with four boutiques operating in sectors like executive coaching and advertising services. Magennis says several people from YPO have been in touch.

Sectors which interest him include investment banking, research, civil engineering and environmental services. Technology can play an important role in boosting prospects for professional firms. Global platforms employing workforces at a competitive rate particularly appeal.

Magennis says Capital 54 does not see itself as a seed investor. It will invest in firms whose founders have displayed sufficient talent to take their business forward but need further help. Capital 54 likes to take a majority stake in businesses in search of a new direction but Magennis stresses every deal is negotiable. 

It is up to each firm to opt for a lifestyle approach or move to the next level, bearing in mind that their firm can represent their only chance to become seriously wealthy.

“We have a methodology to unlock value when you get to a certain point, when you have your revenue and your employee bases and you’re basically at breakeven. We want to help companies who have gone through phase one, but now they are stuck in phase two.” 

Magennis recalls advising a firm involved in psychometric testing: “At the time the model to service companies was based on a unit price per test, plus ancillary services and an hourly rate if a psychologist was needed.”

The company had become accustomed to using an approach which was time and labour intensive. Magennis worked with the founder, took him up to speed with industry practice and worked with him to develop a new plan for a customised streaming model with built-in questions for participants and a ranking system. The company benefited by adopting a determined approach to hit a new set of targets.

“Pushing the owner to focus on objectives, the strength of his business, the positioning of the business for exit on day one and a relentless focus on market conditions allowed for 21 consecutive quarters of growth and a successful sale to a strategic investor.”

Magennis believes Capital 54 can act as a trusted adviser, with skin in the game. A corporate exit can be stressful for his clients: “The failure to prepare in detail for a transaction can result in millions of dollars in lost value.” 

Magennis would not rule out starting a venture capital or private equity fund: “Maybe a hybrid.”  

But these are early days: “We need to live with being patient.”