Episode 34: Michael Chu - Global Chairman and Co-Founder of L Catterton

0:00This week on Generating Alpha, I'm joined by none other than Michael Chu, the global chairman and co-founder of Elkaterton, the largest consumer-focused private equity firm in the world with over$35 billion. under management. Over the last three decades, Michael has helped transform Mel Catterton from a boutique investor into a global powerhouse with offices across North America, Europe, Asia, and Latin America. Along the way, he has backed and scaled some of the most iconic consumer brands of our time, including Restoration Hardware, Birkenstock, Equinox, Peloton, and Vitamin Water. Michael has built a reputation as one of the foremost thinkers on what makes consumer businesses succeed, and more importantly, what allows them to endure across generations.

0:40In this episode, we'll explore his playbook for building lasting brands, the lessons he's learned from scaling Al Catterton into a global leader, and his perspective on the future of consumer investing. If you enjoyed this episode, please follow the podcast and give it a five-star rating on Spotify, subscribe to the YouTube channel, and share it online or to any friends and family who you think might find it interesting. I really appreciate you tuning in. Thank you. Thank you, Michael, for joining me. I really appreciate it. Great to have you on. Great. My pleasure. So I'd like to start where I always start.

1:09Tell me a little about your childhood, where you grew up. What was that experience like? I think what's most important is both my parents immigrated from China. So they were first generation on the first generation. And they met here in the U.S. They didn't know each other in China. But look, they both, it's kind of an American story. They both had incredibly privileged lives respectively in China, but due to war and circumstances, had to drop everything, leave everything, and came to the U.S. and literally started over. Didn't know the language, didn't know the culture, didn't know anything. Certainly didn't have the privileged life.

1:58and uh you know and and the one thing i recall which is really an important lesson is i i don't think i've ever heard them complain and they inculcated themselves to the culture if you ever met them you would never know that they were born in a foreign country that's how acclimated They became, in terms of their mannerisms, their ability to speak, write, think. And so it was quite extraordinary. I didn't fully appreciate it. But very middle class. My father was a really accomplished scientist. Worked for one company his entire career. My mother was a great educator, super smart. And, you know, against the background, they raised four of us.

2:44And they had incredible sacrifices. But, you know, kind of lived the American dream. So you go off to start your kind of college education at Bates. And if I'm correct, you majored in psychology and economics and graduated in 1980. What led you to Bates? And what was your kind of time like there? Because I know you're really still involved in Bates. Just tell me about that time. Yeah, look, my mother in particular was a great educator, super smart. And growing up, we always valued education. And she believed that the best education at that time was in sort of very small liberal arts type colleges.

3:26because you get to have very intimate relationships with the professors and the other classmates. I will say the most important thing out of that experience that I met my wife, okay? So God forbid if I didn't say that. And we're still married after all these years. And so the M.A.B. Bates and other schools of a similar cohort provided back then, and they still provide today, is sort of requirement to take a wide curriculum. That was a requirement to graduate. So you would take organic chemistry and physics as much as you would take math or science or literature or philosophy. And I think there's a pure good to that myself.

4:15And what they really do is they juxtapose that curriculum against a couple sort of foundational principles of the best schools, which is critical thinking, how to learn and how to communicate. And those elements, which I think are best seen in these kinds of small schools, are lifelong capabilities. And I use them every day. And when I did psychology and economics, they appear like very odd bedfellows. But in fact, the whole behavioral economics that Daniel Conaham and others sort of pioneered was really the intersection of behavior against economics. And I won't go into all the treaties, but Bates didn't have that, obviously, at the time.

5:05I was interested, and I literally created my own curriculum in my last two years. And I was the only student, but multiple professors. And I don't think you could have done that in a larger school. Wow. How did you kind of, from behavioral economics to starting your career in Wall street how did that kind of what was that path yeah these are these idiosyncratic things um after four years in in in the rurals of maine the last thing i wanted was staying in the rurals of some other area and i wanted to go to the city and uh uh and i was fortunate because one of the alums uh was the head of a bank a merchant successful merchant bank and took me on as sort of a young person and threw me into there.

5:53And I was living in New York. The following year, I went to London, learned some amazing things. And so it was great. So it was really through the alumni connection of the college that got me into this track. And, you know, and I didn't know anything and but i learned really fast and um i was heading off to business school uh when i was 24 and i got this phone call and uh without going into all of it i ended up getting um this job in san francisco as uh sort of a very senior executive at a bank out there and um i'm not quite sure what the people thought of me when I walked in. So I was pretty young.

6:43And I did that. Then I went to a company in Holland that was owned by the parent company of the company that owned the bank. And then I ultimately made my way to Hong Kong and became the director of finance of that company. Very big, kind of complicated, global sort of position. And it was really in that role up in Hong Kong that I sort of got my first semblance of what was going on in venture capital and private equity, because they had a portfolio of investments that were non-strategic that would fill them in this bucket that I oversaw. And I soon fell in love with that sort of bucket, as opposed to my day job, and said, I want to go expand that.

7:27And after a lot of storm and grong, So the CEO finally relented. I was persistent like you. And he said, okay, I'm going to go support you. I'll give you some money. And no sooner did that happen, I moved back to the US to go start this. Because you remember back in the 80s, the venture private equity world, it was still pretty nascent and small. And so armed with a couple hundred million of capital was like a big deal in those days. and right before I was launching sort of sort of mid-year sort of early June 1989 Tiananmen Square broke out in Beijing why was that relevant because the Hong Kong stock market crashed like over 20 percent in one day and this being a Hong Kong public company just basically said we're going to pull on our horns we can't give you this capital you know come back and at that time I'd gotten married and my wife said, Hong Kong is a great place to visit, but not to live.

8:32And, and so you were kind of forced into this, you know, pivot point where you either follow your dream, uh, or which is a life lesson or to take the safe route. Cause I could have taken the safe route. And I said, the hell of it, I'm going to go follow my dream. And, uh, and, and, and that That was the genesis of the firm. And kind of be more specific. What was your dream at the time? What was the beginning vision of Al Catterton? Because you founded it named Catterton Simon Partners with Frank Vest in 1989. What was the beginning vision? What was the beginning kind of idea? And did you know from the get-go you were going to become global?

9:09Because if I understand, like you were at that Hong Kong bank and it was a pretty global position. Did you know at that time? Because I'm pretty sure global private equity firms were pretty rare in those days. I don't think there was one. So the answer to that was clearly no.

9:24But one of the things this company had, it was a global portfolio of businesses, quite large, many of which were consumer businesses. And the company in Holland, where I was the director of finance for a year or so, was a very, very large consumer products, marketing, trading, distribution company. quite large. And the, the, and so you learned, you know, what it meant to be a consumer and, and, and market and market their products and services across 50 different countries around the world. And so, so that was a very, very sort of trial by fire, jump in the middle of the pool, you know, sort of situation.

10:06And the, the, but you got to see and study instantaneously consumer behavior back in the 80s, you know, before the internet, before anything, you know, and it was an extraordinary thing. And I fell in love with the consumer. And remember, I was a, I was sort of a budding behavioral economics person. So I was interested in not just classic economics around rational behavior, efficiency, but what the behavioral economics sort of said, it's not so easy as that. There are idiosyncratic or cultural, there are cognitive biases that do influence consumer behavior that need to be taken into account. And I was fascinated by that.

10:59And then if you overlay that against a global perspective, you have even more sort of more interesting, complex, you know, analyses to go through. So I kind of fell in love with that. And so I always knew that I wanted to do something in the consumer space. In those days, in the 80s, private equity was pretty generic and mostly leveraged buyouts. And the kind of generalist, I'm not even sure how many industry specialists there were at the time. But, you know, look at it. I think the second takeaway here is follow your dreams and also, you know, do what you really have high passion in. And so I was passionate about the consumer.

11:39I studied it in college. I practiced it prior to starting the firm. And so I said, that's what I want to do. I don't really care about being the biggest or the best or whatever. This is kind of what I want to do. So I embarked on this journey really to be the best consumer investor we could possibly be, by the way. And the other part that was relevant was we were in the middle of a recession. People forget that in the late 80s. And it was quite a deep recession from a consumer standpoint, number one. Number two, the consumption was really driven by baby boomers. And today we talk about millennials or Gen Z.

12:19they're really the children of the baby brewers. And, but, so this was a big wave of people and scale. And more importantly, they were really quite different psychologically from their predecessor generation. So, so what, what arose out of this wave of new demographics was new forms of companies, brand channels, et cetera, that arose literally from the baby brewers. So we were kind of in the early innings of that wave. You could see it in plain light that this was going to be different. And so I love the alchemy of all that. What were kind of the early deals that shaped the firm's vision or the firm's mission or just what the firm eventually became?

13:03Were there any early deals that, I mean, fast forward from 1989 to maybe mid-2000s, what were the deals that shaped the firm? Well, the deals that I look at and think about are deals that not necessarily were the most successful or deals that people knew about. But I like the deals that began to sort of evolve our firm into a different definition of consumer. So the first couple of deals we did were in the restaurant category, broadly speaking. And at a very high level back in the 80s, early 90s, there was more demand than supply. And as a result, the more you bought a restaurant chain and you could predict with some level of efficiency how the next unit would look like given the disequilibrium between demand and supply.

13:57Today, by the way, that's not the case, right? So it's about market share graph, which is a very different sort of economic treatise. and the the but back then because you had this sort of structural imbalance uh we saw that and and we invested and and one of the deals we did many of them but one of the deals that was notable was a company called pf chang's um we did it when there was two two units and it wasn't and and it was sort of a restaurant business on the one hand but it began to evolve two other vectors that were really relevant. One was what we call polished casual. So it was casual dining, but at a very polished, more elevated, not fine dining, but more elevated.

14:39And that created a whole new class of category, subcategory within the restaurant sector. And the other obviously was ethnic, by the way, in this case, obviously Asian. And so back then in the 80s, early 90s, it wasn't as prevalent to find a casual dining concept, higher price, more polished, ethnic. And we looked at that together with the management team and we said, wow, we're going to go back to this. And we could have just stayed as a restaurant investor, but we kind of consciously evolved our way. We knew there was a lot of health and wellness going on. we did a deal called Adwalla juices, we sold the Coca-Cola that was pure health and wellness by the way, Colaton is another health and wellness more recently, people know about that but the roots of executing an evolving strategy of how we entered new categories started with their, especially retail I would say restoration hardware back in the mid 2000s, beauty we did a beauty deal with a very well known hairstylist back then bought the business from Chanel, sold it to P &G.

15:54And that got us into the beauty, personal care category. And health services, we did a deal called Clear Choice. You see it on TV a lot. And again, that penetrated us into a whole new realm, a whole new category. We've done a lot with food, lots of food deals, but our early food deals included. We did a candy deal called Ferrara, sold into a very large business in Italy. We did kettle chips, by the way, that you see in the grocery stores through a friend, by the way, who owned it at the time, which again was gourmet snacking of a product that's obviously been around a long time. We did our early pet deals.

16:39Again, brand new category when we did those. We did wellness, pet vet, et cetera, on the veterinarian side. We did Montisol. You never know it, but it was a supply chain deal that provided the water soluble film that held the what is today the Tide Pods, dishwashing detergent, laundry detergent. And you always wonder, what is that film that surrounds the liquid and how does it know when to be released the product? OK, and and so this company was the leader in that pioneer. And and so, again, what in this board, by the way, I'll stop here. But the point being, each of these each of these investments were all successful.

17:26But the one thing that had in common was they was they incrementally moved our firm to and widen the aperture and the kinds of categories that we could that we invested behind and now have permission to invest. And if you took a step back and looked at mid-2000s versus today as an example, how would you define kind of differences and similarities across kind of the investment process as you scaled from, I think it was mid-hundreds of millions, early 2000s, to now it's almost$40 billion in assets under management. And also the culture from then to today. I mean, you guys have obviously scaled to very large assets under management.

18:02What's different in saying about the culture and the investment process? um look and i think the many of the people that um were around uh back in the earlier days you know the a that many of them retired by the way and the uh so they either retired they moved on um and obviously you have to bring in talent you have to bring in different capabilities but And I think there's only four or five of us that are still involved in the firm, you know, that go back over 20 years, by the way, or 25 years. And the, the, but what I would say is, so while there's obviously new faces and that's, that's always a good thing.

18:48It's always good to replenish with new people. I think, you know, when we think about the qualities of the people we want to bring on, there are a number of things that have remained the same. And I think that's probably the most important sort of takeaway. Number one, of course, table stakes, you got to be smart. You got to be hardworking and smart, et cetera. But there's a lot of those people, frankly, that are out there. I think for our business, and you have to think about it against a very unique situation or profile where we can invest literally as low as$5 million up to$3 billion per deal, and we can do that on a global basis, all in consumer.

19:32But that's a that's a kind of a unicorn profile. And so we're dealing with large scale, mature businesses as much as we're dealing with entrepreneurial, small, smaller type businesses. And so the range of characteristics and attributes is has to be definetially blotted. It's not just about how do the model, do I understand capital markets and corporate finance and so forth. you have to have a high EQ, right? That's certainly critically important. You have to learn how to communicate. Yeah, I would say you have to be humble, by the way, particularly when you're dealing with entrepreneurs. And I think sort of existentially, you know, the people that are most successful love what they do.

20:19It's passionate. It's not just a job, right? And it helps when we make many of them owners of the firm. And so they adopt an owner mentality. And the bridge between small and large, which is the root of your question, is partly through the function of our structure, how we take our partners and make them owners, how we manage that they become not just skilled practitioners, but also entrepreneurs, right? And so this is kind of a unique alchemy that I think is specific to our firm. And in the super early stages when you're interviewing these people, how do those kind of characteristics manifest themselves in like the interview if you're sitting down with them for an hour?

21:06What does that usually look like? Yeah, it's hard, by the way. And I think for young people, you know, there's an obvious tilt towards transactional capability. and uh but you look at what you try to find sort of the the glint in the eye of people who not only possess the table stakes of yeah i know how to run a model and i understand accounting and public finance uh got it um uh but also i have real high passion for this and i'm kind of a go getter and and and you can sort of glean that out by the way over the course of time I'd love for you to tell me about the L in L-Catterton. You guys merged with Catterton Partners, merged with LVMH, and then Bernard Arnault's family office, which I'm not going to pronounce because I don't think I'll get it right, to create L-Catterton in 2016.

21:59Tell me about that partnership. How did it come about? Well, I think the background is because we were a consumer-focused firm, we recognized that we had the ability to bring on board partners in the corporate industry world and create sort of a disadvantage on insight and information. And then the question is, how do we then leverage those insights into investments? And so very early on, we kind of bear hugged many of some of the largest multinational consumer businesses. And, and, you know, LVMH was not the first of those. And in 89, I think, had the opportunity to go meet with Arnaud. This is, I always kid him.

22:53This is before Arnaud was Arnaud. People knew him, but didn't really know him. And the, and I think he took a liking. He You know, it's, you know, hey, I know a lot about luxury goods, but I don't know much about the rest of what's going on in the consumer landscape. So let me put some money with you and have the ability from time to time to have these conversations where I can test what we're doing relative to the world more broadly. And that conversation mimicked itself across different geographies and usually always at the highest levels of the firm. And so we were able to build a portfolio, as it were, of these relationships.

23:39Seabeans is one of them, by the way. And so I think we did a good enough job where they kept giving us money. And in a meeting, a conversation we had in 2015, at that time, LVMH was becoming incredibly successful. because it took the concept of luxury, which is predicated on scarcity, right? Never goes on sale, right? If you find it, you better buy it because if you come back a day later, it may be gone, right? And there's no substitute for that. And which is how they're able to charge very high prices. And they took that concept and they figured out how to scale it. And they scaled it two ways.

24:25One is they widen the aperture of the products that carry the brand. If you go back 25 years ago, they weren't in sneakers or sunglasses or this or whatever. They had a more narrow product line. So they've been able to be incredibly successful of scaling the aperture of the product categories that these brands present themselves in and create more of a lifestyle than a transactional utility. relationship, and they went global. So those are the two simple things that they did that created this enormous value for them. And as a result, Arnaud and his people were traveling the world, and they were seeing the successes.

25:11And there was one takeaway, and that is the consumers in Japan or China or Australia or Latin America or wherever were just as hungry for these brands as they were in Paris, right? Or Milan or whatever brand that happened to be. And so we ended up in this conversation about, you know, what are we doing to take advantage of that? Because here we are with, at the time, back in 2015, arguably one of the most prominent consumer-focused private equity firms, very research-intensive, very category-focused, but very North American-centric. And at the time, we had just started thinking about and executing against the Latin America strategy and basically testing what we call lift and shift.

26:01How do we lift the brand qualities in one region and shift it into another? And look at the road was well paid by what LDMH had done. And it showed that consumers globally, despite cultural language, geography, were actually quite similar and thereby, you know, more predictable than people would have thought. And so we then sort of had quite a number of conversations that led to, in effect, acquiring their private equity business, which was called, which was, had another name to it, merged it in effectively into ours. Because that's how the L got attached to our name, which is L for LVMH. And it was all public information.

26:50It was a deal that included both LVMH as a minority shareholder and financier Agash, which is the family office of our now family. And I want to touch a bit more on consumers because I just find this topic fascinating. And you're obviously the kind of person to talk to about it. But over the past three decades, like, what are the biggest lessons or what have you learned about consumer behavior that you didn't know 30 years ago? You know, the we could spend hours talking about this single topic. But, you know, look, I think there are clear cultural language differences, geographic differences that are relevant and that are meaningful.

27:32But I think what's happened over the course of the last 30 years, and in part, by the way, driven by technology, right, so the brain equalizes, is that there is an increasing sort of marriage between behavior in other geographies to geographies all around the world. and we're seeing that, which gives us higher conviction around what investments that we should be making because we kind of know what the analog looks like in other geographies. And we just closed a deal today, this morning in Japan and I was reflecting on the last four deals we've done in Japan. One of them was a high-end specialty kind of steak restaurant.

28:24one is a specialty furniture business one is a very very distinctive high-end apparel business and one was a sport fishing business right i could have said those things those four deals and it could have been anywhere in the world right and instead they were in japan which is a very idiosyncratic country that's actually quite closed off given language issues and so forth But the behavior, the demand side of that equation actually is quite predictable because we see analogs to these businesses and other geographies. And that's given us an ability to create high conviction, do the right diligence, and more importantly, think about how to grow these businesses in an outsized manner.

29:09So the, and there are, and literally at our meetings with investors, we literally just throw on the screen all the deals that we've done by description of that year without naming the geography. And they all could be in the Midwest or, you know, wherever. And then we throw out, you know, let me tell you the geographies and people are like, wow, okay, they're all over the world. And I think that to me is a telling attribute to consumer global. Again, companies like Unilever, Nestle, P &G, LB &Hs of the world, they've kind of paved the way. Coca-Cola, Pepsi, they've all kind of paved the way.

29:58But in terms of private equity, I think we're probably the only one of scale that's doing this on a global basis. What's the key to understanding what consumers want? How do you kind of understand the demands there? Well, I'm still learning.