For a former global FP&A leader at industrial conglomerate and corporate icon General Electric, a holding company that buys small and midsize companies in multiple industries is not an unusual landing place.
“I was part of many rotational finance programs [at GE] where I saw three to four businesses per year in different capacities. It taught me how to learn and critically assess something very quickly,” said Scott McKinney, the relatively new finance chief of holding company Tiptree.
"I liked the concept of Tiptree where there’s a group of 25 of us at headquarters, and we can see the fruits of our labor immediately."
Tiptree assesses many businesses, and it's looking for the best ones to write equity checks of roughly $10 million to $200 million. The business might best be described as a miniature version of another well-known company — Berkshire Hathaway.
The Greenwich, Conn.-based firm looks for “good strong management teams with cash-flowing businesses and a margin of safety” that it can help grow, according to McKinney. Its recent investments have been in specialty insurance, but the goal is wider — drive long-term shareholder value through buying unique businesses at attractive valuations. And Tiptree, like Berkshire, gives those acquired entities a significant degree of operating independence.
For McKinney, who was promoted from head of FP&A and investor relations to deputy CFO in April 2022, Tiptree’s relatively small size allows him to make a substantial impact — both at the holding company level and in the operating units.
I spoke to him in mid-October about the holding company model and what Tiptree can do for acquisition targets that private equity and strategic buyers can’t.
- First CFO position: March 2023
- Promoted from deputy chief financial officer
- Notable previous companies:
- General Electric
This interview has been edited for brevity and clarity.
VINCENT RYAN: What appeals to you about the CFO position at Tiptree?
SCOTT MCKINNEY: Generally I gravitate toward places where I can make a real impact. At larger corporations, you can do that, but it's harder. I liked the concept of Tiptree where there's a group of 25 of us at headquarters, and we can see the fruits of our labor immediately. I also like the intellectual stimulation from [managing] multiple business lines, even though holding companies aren't always in vogue. I’ve also been able to assist in and lead some of the acquisitions.
During this overall slack period of M&A with targets seeking full valuations, how acquisitive has Tiptree been?
MCKINNEY: We've been less transactional in the last few years, just given multiples are relatively high in the grand scheme of things. And primarily because of the organic growth at our [specialty] insurance company – [Fortegra, which Tiptree announced on Wednesday it is taking public] — has been so robust that we prefer to keep our capital allocated in that sector.
We try to find bespoke deals and avoid banker-led auction processes, which have slowed down. Bespoke deals are still coming through. … If there is a significant recessionary environment and more stress than what we saw in the tech-driven declines of 2021, Tiptree might start to be more active … In times of stress, we still see a fair amount of activity because we're not afraid of something with a little hair on it.
What’s the advantage of the holding company model over the private equity model?
MCKINNEY: Predominantly [the advantage] is that private equity firms have set time horizons. We acquired Fortegra eight years ago, but most of its growth has been in the last three years. If we had been stuck with a five-year horizon, our return on that investment would have been a fraction of what it is.
I think there are a fair amount of businesses, potentially family-owned, or with other unique circumstances, that do not want to be private equity-owned.
We effectively have permanent capital, and we take a very long-term lens toward our investments. In some cases, we have been in and out of investments in two to three years depending on the timing, the relative need for capital, and the return on capital that we can earn in other parts of our businesses or other potential acquisitions. But the longer time horizon is the most significant benefit.
"We buy businesses because we like them, so the last thing we want to do is shake up the management team."
How is the operating structure of the company different from that of a strategic buyer?
MCKINNEY: We buy businesses because we like them, so the last thing we want to do is shake up the management team. They know that they're a subsidiary of ours, but they also know that they run the business. We use [deal] structures to align [management] interests with Tiptree’s for two to five years.
We’ll also assist in building out the finance functions and internal audit and Sarbanes-Oxley requirements. And we immediately get involved in any treasury-related activities because we want to make sure we understand the cash-flow management. But each of our companies can have a different culture.
You spend a lot of time meeting with investors. Why is that?
MCKINNEY: We're a company that files under the radar, so we don’t have sell-side coverage. I go out on the road and have a dialogue with buy-side analysts, so in some ways, I’m acting as our sell-side analyst, obviously within the rules of the SEC.
But in general [for sell-side coverage] there needs to be a revenue source. We don't trade a lot of volume, and given we trade at a discount to what we believe is intrinsic value we're not issuing equity. That, combined with the fact that we are a holding company and require a little bit more effort from the analysts to understand multiple business lines, has prevented them from initiating coverage.
What else are you spending your time on as CFO?
MCKINNEY: I spend a fair amount of time on tax planning. We don't like paying taxes, so we make sure that we have good structures in place within the boundaries of the law.