'The Biggest Hurdle is Being Let in the Room:' How This Entrepreneur Defied the Odds to Become a Private Equity Success Story
The article below is from our BRIEFINGS newsletter of 10 February 2022
What does it take to be an entrepreneurial success story? In the case of Tracy Graham, founding partner and managing principal of private equity firm Graham Allen Partners, quite a lot. Graham’s life story involved an upward struggle out of poverty in Chicago; being recruited by famed coach Lou Holtz to play football at the University of Notre Dame; and launching a successful career in the private equity industry. At a recent Goldman Sachs Asset Management Forum event, he sat down with Goldman Sachs’ Katie Koch, CIO of the Asset Management Division’s Public Equity business, and Sean Legister, managing director in Alternatives Capital Markets & Strategy, to talk about his journey.
Katie Koch: At Goldman Sachs Asset Management, we’re big believers that the diversity of one’s life experiences can bring valuable lessons to their workplace as well as to the investing process. You grew up in the Englewood neighborhood of Chicago. Can you tell us what that was like?
Tracy Graham: When I was growing up, the Englewood neighborhood was known as the murder capital of Chicago. It still is today. Getting out of that community is a very difficult thing. Of approximately 100 young men who grew up with me in that neighborhood at the time, not one graduated from college. Today, the overwhelming majority have either a police record or are serving time. Many don't make it past high school.
Katie Koch: What impact did this have on you and how did you succeed?
Tracy Graham: Growing up in this environment was central to helping me use intuition to read people — to know what’s right and wrong. If you were unable to do that in our community, you would end up in trouble. I was extremely lucky. Part of my story is a bit of luck, a lot of hard work and in my case, a great mom. It seems like nothing to most people but she gave me $20 to take an entrance exam to go to a private school in Chicago, St. Rita High School, and it changed my life forever. The most important thing she ever did was just to instill in me the idea that I could be successful and that I was put on earth to do something special. It makes me grateful and thankful for being in the position that I’m in, which is why I’ve focused my business and personal life around doing great things for others.
Katie Koch: The power of having someone believe in you is obviously extraordinary — and it’s certainly important for raising our own kids and leading our teams. There’s certainly a narrative in the U.S. that you can do anything if you put your mind to it. But there’s also a strong counternarrative that speaks to the tremendous odds stacked against people, such as your stat that only 1 in 100 people typically make it out of your neighborhood. How do you reconcile those views?
Tracy Graham: While the American dream is true, you are going to have to persevere, and things are going to be tough. The biggest hurdle is being let in the room, and I still deal with that today. I am 48 years old. I have sold four or five companies. Some of my mentors are some of the best business people in the world. For me, Notre Dame got me into the room. But many of the things we talk about — about being able to pull yourself up — aren’t true for 99.9% of the people who look like me. We have to be able to take very talented people and let them into the room. It’s a challenge and it’s hard to solve, but I do believe one little thing that we can do as mentors and sponsors is to tell people they can do it. I know it sounds simple but many of them doubt it’s possible for them. I believe I’m in a unique position because I look like a lot of those people who are not in the room and I can let them in and I have an obligation to do that. We have to give people an opportunity.
Sean Legister: You mentioned Notre Dame as a catalyst for opening doors for you and credited coach Lou Holtz with being able to recruit you and get you there. Can you tell us how that went?
Tracy Graham: There were two key moments I remembered from that time. The first was that when Lou Holtz came to our house and our community, he sent the signal that he was at home. Almost every other person who came to our neighborhood would have felt out of place. But he did not. He connected with me and my mom. The second thing he did was that he didn’t promise me a career in the NFL. In fact, he told me it was likely I would never get to play in the NFL. Instead, he told me: ‘If you give Notre Dame four years of your life, Notre Dame will give you 40 years back.’ And that became true. I also played with Jerome Bettis [former running back who played in the NFL] and he was literally the first investor in my first business, and we have a very tight relationship.
Sean Legister: Can you tell us a little about the creation of Graham Allen Partners and how you found success investing in data analytics and tech?
Tracy Graham: When I graduated from Notre Dame in 1995, I knew I wanted to be an entrepreneur. I started this internet company in 1996 with an $80,000 investment from Jerome Bettis. I was 22 years old with no business experience. I wanted to connect people and their homes to the internet. We built that company over a two-year period to be the second-largest privately held company in the country. We then acquired 23 other companies, merged them all together and sold them in 1999, just before the dot-com bust.
What I learned from that period is that the Midwest was way behind in technology, and there was a window of time between when a truly disruptive technology is created and when it reaches the heartland, if you will. That was true of traditional internet service. It’s been true of the cloud, SaaS and data. And so we started to think about how we could take advantage of that gap.
My next business was the data center business. We started building data centers with the same playbook. We focused mainly in the Midwest. Our thesis was that companies were going to move their servers and systems to a centralized data center environment. That innovation was already happening on the West Coast and to some extent on the East Coast. And we saw an opportunity to take advantage of it in the heartland. And we’re seeing this today in data sciences. You go into most middle America companies with $250 million in revenue or less, it’s unlikely they’ll have a data scientist or someone focusing on data there.
After that, I had built up enough of my own capital to start Graham Allen Partners and started investing off my own balance sheet. Our strategy is to buy mature companies at eight to 10 times multiples of cash flow and to improve the growth and margins of those businesses using data and analytics. In addition, we try to buy companies that will ultimately become the platforms for a fragmented industry.
And finally, if any of the companies’ data sets — which we don’t pay for — becomes valuable, that creates an upside revenue opportunity for us. And as for the name, Allen is Kenneth Allen, who is a childhood friend. Up through 8th grade, we went to school together. Both Kenneth and I wanted to go to St. Rita High School together. We both needed money to take the entrance exam. He asked his mom; she said no. I asked my mom; she said yes. Kenneth went to the local school and he got involved in things. But long story short, Kenneth was killed in my senior year. So Graham is for me and the Allen is in memory of Kenneth Allen.
Katie Koch: Lastly, let’s pivot to the manufacturing sector. Are you investing in any manufacturing companies in the Midwest? How do you view the space and its future, especially around the concept of reshoring, job creation and technological innovation?
Tracy Graham: We’re bullish on manufacturing. We haven’t made a direct investment yet but we have a couple we expect to close soon. Having been in the data center business for a long time, I look at a manufacturing plant and see a big data-center. Labor is a big issue and we think data and automation is a big part of that. Of course, timing is important and we think over the next couple of years — given the labor shortages and the high costs of labor — technology will be the answer to driving down costs and getting margins back in line. We think there will be a huge opportunity to make investments in data and automation in the manufacturing space, especially in the Midwest.