The Banyan Tree Model of Private Equity
A new brand of investors begin takes a new outlook on private equity ventures
—By Zain Arfi
Have you ever seen a Banyan tree? Native to the Indian subcontinent, Banyan trees are the world’s largest tree in terms of area covered. From this trunk, the tree branches grow, until they get too heavy, fall to the ground lay more roots, and then grow back up. This process repeats itself, creating an optical illusion of a forest made up of hundreds of small trees, spanning acres, yet all connected. It is this image, that my father, founder, and Chairman of Banyan Technologies Group, Tanvir Arfi, has based his business on.
As a private equity firm, Banyan hopes to emulate the pattern of one of nature’s most wonderful feats, growing his holding company to support all the businesses around it, lay down new roots within those businesses, and then do it all again.
New investors on the block
When describing Banyan, Arfi began by stating that his firm is unlike most other private equity firms. Unlike most private equity guys, he comes from a background in the automotive industry, beginning with a degree in engineering, not finance. After immigrating from India to get his master’s in mechanical engineering from Wichita State University, Arfi began a long career in the automotive industry. Early on in his career, while working at SPX Corporation, Arfi had his eyes set on a President role. “I looked at the types of people getting put into the president roles. Most of them did not come via the engineering department. I knew my end goal, so my strategy to get there was to find the path of least resistance through the company.”
During his first few years, Arfi took a pay cut and made a lateral shift to a more operations-focused role, a decision which panned out exactly how he envisioned as, after many years at SPX, he found himself as the President of the Aftermarket Solutions division. The SPX Auto division was eventually carved out and acquired by Auto Parts giant Robert Bosch GmbH. Post-transaction, Arfi was obligated to spend two years with Bosch in an earn-out arrangement to ensure a good transition and then was free to move wherever he wanted. With so much experience under his belt, especially with leading the transition of his division of publicly-traded SPX going private during the sale to Robert Bosch, Arfi was brought on by Solera Holdings and tasked with taking the publicly traded holdings firm private.
Arfi did well for himself in the acquisition of upwards of $6.5 billion and took a moment to reflect on where he was in his career. “I didn’t want to retire, I was way too young (48 years old), but I also knew I didn’t want to work for anyone.” From his earn-out on the Solera Holdings deal, as well as, his knowledge in mergers and acquisitions and operational business gained over his storied career, Arfi was able to open up his own private equity shop out of Dallas, in 2017, and has grown today with a portfolio of six companies.
When founding Banyan, he set his sight on only investing in companies within the automotive landscape in which he had deep expertise and years of key customer relationships. Banyan looks to provide value through growth opportunities for each company it buys and provide the capital and guidance needed to take companies to the next level. “Most private equity guys come into industries they know little about and end up leveraging their financial acumen to make decisions and engineer outcomes. At Banyan we only invest in companies where we can leverage our deep end-market knowledge and customer relationships. This gives us a competitive advantage over all potential suitors/bidders during the acquisition process. Post-acquisition, we make excellent partners for the management teams to leverage our competitive advantage for driving growth and profitability.”
A different type of investment
Arfi contributes a large amount of his success to his personal relationships with people in the automotive industry during his long career. In the first three years of launching Banyan, Arfi bought five companies and continues to run them day to day. The pitfall of general private equity investment is that buyers simply input capital into the company and then check in on various financial statements and key performance indicators. If a company is not performing in the manner that it projected, many outside investors do not truly know what the issue is since they invested purely from a financial standpoint rather than a strategic standpoint.
What sets Banyan apart is that Arfi and his team are well versed in the automotive industry and use their knowledge of the end markets to strategically grow the companies and understand where they are falling short. The Banyan team takes on a sort of consultancy role after a deal closes and takes time to understand and manage each business at the operational level. When I asked Arfi what Banyan’s plans are for expansion he commented, “I spend all my energy focusing on running my current portfolio companies. To look for a new transaction while not focusing on what I already have makes no sense to me.” Through coming at investment from an operational perspective, Banyan is banking their payout far more on the actual livelihood of the companies they have, as opposed to quickly moving on to the next investment if one does not work out.
This strategy of investing in companies is being used more and more in the finance world today through what is called “Growth Equity.” While typical private equity ventures revolve around scooping up a company for a low valuation, then letting the previous management team do its work and eventually sell for a higher valuation, growth funds enlist industry experts to come into the company and focus on taking it to the next level. Arfi, however, does not truly consider Banyan’s contributions to be growth equity. He says, “We don’t really need a fancy name for the type of ventures we take on, or our investment methodology. It’s just the way private equity should work.”
The business world seems to agree with him. Valuation multiples (the multiple applied to a company’s revenue or profit to arrive at the total valuation) have skyrocketed since the height of the pandemic across industries. It seems more and more private equity investors have been focusing on paying a high price for valuable companies they see true potential in, departing from the old strategy of simply buying low and selling high.
What sets Banyan apart
Due to this trend, however, I was interested in how Banyan is able to compete with the private equity giants of the world. In the finance world, transactions begin largely with a company looking to be sold reaching out to an investment bank, the middle man, or essentially realtors for private companies. From there on, the investment bank, specializing in mergers and acquisitions activity, helps prepare the company to be sold and then runs a sales process reaching out to multiple investors. One of the reasons many ventures like Banyan tend to fail is due to the fact that the finance world is largely a “who knows know” sort of game. Most investment banks only interact with a niche group of private equity firms with whom they have solidified relationships, so when a new kid comes to the block, they often do not get to participate in the process. With over 20 years of experience within the automotive industry each, Banyan leverages its entire acquisition strategy on the Rolodex of its management team. Instead of the typical private equity firm that waits to be called upon by an investment bank, Banyan prides itself on maintaining close relationships with contacts in the field, so when inevitably someone in the automotive aftermarket is looking to sell, Banyan will know before anyone else. Once engaged in the process, however, it is often still an uphill battle since the investment banks try to serve as the sole intermediary between the potential bidders and the seller themselves.
This shift in dynamic throws a bit of a wrench within Banyan’s plan of leveraging its relationship with the seller. One of the ways Arfi compensates for this is by requesting face-time with the sellers early on in the acquisition process. The Banyan team begins due diligence early, asking questions only those with an acute understanding of the automotive industry would know to ask. The Banyan difference early on is that Arfi approaches the deal with a view that he is as much “selling the sellers” Banyan’s unique ability to create value post-close more than his ability to bring the highest value at close. So, unlike a traditional PE deal where the “seller ends up working for the PE group post-close,” the Banyan deal is one where post-close “the seller gains a qualified, deeply linked in the industry team – that works for them!”
Image is key
Arfi seems to be quite certain of the image he portrays to a potential seller. On his Zoom calls, directly behind his chair is a wall full of automotive memorabilia, from a model of his 1965 Ford Mustang, or a Dodge Demon hat, to his collection of model car parts, all indicating he is not your average private equity guy who is only interested in the numbers. A huge part of his success is realizing the reputation that most people in finance have.“I try to make it clear that I am the good guy. I cut through the facade that the investment banks put up and try to connect directly with the seller. Providing my background story and showing that I’m not just another finance guy goes a long way in these processes.” While most investors attempt to develop a relationship with the investment banks that specialize directly in the financials, Arfi often connects with the seller directly by impressing them with his knowledge of the automotive industry.
On most deals he has worked on, Arfi either has a personal relationship with one of the sellers or one of their main customers signaling to target companies he truly knows what he is doing. “The investment banks usually hate me, but the sellers hate the investment banks most of the time so it all works out. I have been in transactions in which the sellers liked me so much they dropped the investment bank so they could interact directly with me.” This theme of cutting out the middle man is the core of the business Arfi has built today. Through his long career in the automotive industry, he has developed a long list of contacts. While most investors wait for an email from an investment bank with a potential deal, Arfi calls up old friends, goes out to dinner, and hears first hand about any new deals emerging. By operating without a middleman Arfi gets all the information about the company straight from the source and is able to deliver the entire purchase price straight to the seller without having to deal with a fee given to an investment bank. This expedited process delivers value for everyone involved and is what has helped grow Banyan to the private equity fund it is today.
Tracking Arfi’s journey from a corporate engineer to the founder of a private equity group gives a unique perspective into the world of finance. Arfi is not alone in his attempt to bring change to the way mergers and acquisitions activity is conducted. Many professional investment funds, including Arfi’s main capital partners, Greyrock Capital, are looking specifically for unicorn private equity firms like Banyan, which offer specialized knowledge of an industry and actually run the day-to-day operations of their portfolio companies. This new spin on the finance world has a proven track record and a large amount of money behind it, so do not be surprised to see a new type of investment, one that is more strategic, calculated, and modern. With an approach based on operational expertise, private equity groups are more ready than ever to hunker down with portfolio companies for the long haul and spread their knowledge for true growth, following the pattern of the banyan tree.
Feature photo credit: Fallon Michael via Unsplash