New Acquisitions Bolster Tide Rock’s Unique B2B Investment Strategy

Precision machined components, like this one produced by Precision Waterjet & Laser, are the central capabilities represented by the acquisitions Tide Rock has announced today.

Image courtesy Tide Rock, LLC

Tide Rock, a California-based investment and holding company focused on lower middle-market industrial B2B companies, announced today that it has acquired Precision Waterjet & Laser in Anaheim, California, and Made in America Manufacturing in Buda, Texas. The two acquisitions will establish complementary capabilities in advanced machining and fabrication of mission-critical aerospace and defense components.

The announcement itself isn’t earth-shattering, reflecting a modest addition to the company’s portfolio of similar holdings. But Tide Rock’s investment strategy itself is groundbreaking.

I’ve previously covered the growing problems with the standard private equity approach to investment in manufacturing. Tide Rock tackles those problems head-on.

“I grew up as an operator and ran several businesses, and when I switched over to the investor side, a lot of my biases were having sat in that seat as a founder and as an operator,” Tide Rock’s CEO Ryan Peddycord told me in an interview. “So I wanted to do it very differently.”

The company’s typical acquisition target is an SME manufacturer whose owner is looking for a departure, whether retirement or a separation for other reasons. “Within manufacturing, we look for companies that are highly reoccurring, companies that have been around for decades, not years, that are really sticky,” said Peddycord. “They have great relationships. They build a really high-quality product and service. They do something different and unique. We’re not attracted to the commoditized stuff. We want something that’s differentiated, something that they’ve done that’s unique. We look for those attributes, and that it’s a founder’s business. What you find a lot of time is you have a founder who’s more of a tradesman. They’re really good at building a super high-quality product or service, but they either didn’t know how or they didn’t have the ambition to then go build a sales organization and go build that next layer of infrastructure to support its growth.”

Tide Rock’s departure from the PE model is reflected in its philosophy of avoiding both the debt and the short time horizons that have become an albatross for so many such acquisitions.

“We’ve never used any bank debt for any purchase we’ve ever made,” Peddycord explained. “What we did to be able to capture value and give us a lot of the different levers and control flexibility we have is we started by day one just making distributions out to investors… That’s how they’re able to still make money—they need to make money too. It gives us the flexibility to go really long term on businesses—the right way, at least from an operator’s perspective what the right way is.”

Another departure from the stereotypical model that Tide Rock makes is to avoid the staffing and capital cuts that often hamper newly acquired companies, instead bolstering the existing team while making strategic investments. That includes adding a CEO to lead the transition, then using Tide Rock’s internal team of functional experts to augment the company’s existing know-how. As the company grows, it may include additional permanent staffing as well.

“It’s a slow drip of, okay, maybe let’s clean up accounting,” said Peddycord. “Okay, here’s some marketing best practices. We do it based on the stage the business is ready to go tackle, that next thing, because there’s 500 things you could do to check boxes and make improvements to founder-run businesses, but that’s just going to distract from what they do that matters the most, which is the quality product or service. We want to focus on that and then just kind of do the little things as we go, to get them ready to be bigger.”

One big believer in the Tide Rock approach is serial entrepreneur Mike Hagan, who helped found various businesses such as ARS Inc. and Vision Systems Intelligence. He’s been a mentor for Peddycord from early in his career and is now an investor in Tide Rock. “His model—no timeline, regular payments to stakeholders—really works,” he told me when we chatted. “Any time you’re going to buy a company and juice it to get it to the next level, you have to treat the people involved well. With his model there’s no debt and therefore fewer bankers and lawyers involved. That makes it easier to do. Also, he has proven resources, people with needed skills, backing each company. And part of the model is keeping the key players involved, people who will keep the company going.”

Another unique aspect is the ability of the exiting founder to reinvest in the new entity. “One of the things that we’ve created that helps us do that is the sellers are able to contribute a portion of the proceeds directly into our investment entity, which is Tide Yieldco,” Peddycord said. “It’s the holding entity, and we make it an option for them. Almost every single one of the founders does that because they love that they can tell their employees that they’re still an owner in the business, albeit indirectly… They don’t want to feel like they’re abandoning everybody. They love the idea of our distributions as they’re moving to this next stage of life, but from a much more diversified portfolio, and they get really beneficial tax treatment on that.”

That represents a big part of the value for Peddycord. “One of my favorite parts is being able to still communicate with the founders after they leave, and hearing their pride in the growth and how the company evolves, and the happiness of now becoming kind of a an investor and how they love it. It’s fun to see that you’re building legacies. It’s not just about making money.”