Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I'd love to hear about your background broadly and how it relates to PPHC.

Sure, absolutely. After spending about eight to 12 years bouncing between Capitol Hill and various presidential, gubernatorial, and Senate campaigns, I left the Senate for the last time in 2013. I then spent about a year working for a biotech trade association here in town, leading all their advocacy communications efforts. At that point, Jeff Forbes, one of the founding members of PPHC, brought me over to Forbes State, where I spent about nine years. I left just over 14 months ago. I spent about a year and a half as an SVP before becoming a partner. My role was somewhat hybrid, involving a lot of Senate Republican lobbying while also working within the state government affairs practice, collaborating with governors, attorneys general, and their staff. Additionally, I was one of the first two partners to work within the public affairs practice, which we started building soon after I arrived, about a year and a half ago.

So you're saying public affairs is more on the public relations side, not the lobbying side, correct?

Yes. Public affairs is an amorphous term, but we framed it, and most people in town see it as encompassing all PR and advocacy efforts around a GR campaign. If lobbying involves direct interaction with a member of Congress, Senate staff, or White House official, public affairs includes all the surrounding efforts, such as digital, PR, press relations, third-party engagement, coalition management, and more.

I'm interested in learning about both the lobbying side and public affairs. Let's start with lobbying. Could you give us an introduction on how a company chooses a lobbyist? How do you win business as a lobbyist?

I think it depends on the exact scenario. Companies approach this from different perspectives based on their current position in the marketplace, their industry, the size of their connection with the government, and their stage in the company lifecycle.

Startups might hire a lobbyist for a specific need, realizing during rapid growth that they're encountering government regulations. They might think, "We've operated independently for so long, and now we have a specific problem."

In contrast, larger, more established companies look for lobbyists, both internal and external, to maintain a constant presence among key officials who significantly impact the issues affecting the company. They also need to ensure a steady, working relationship with elected officials, considering their consumer or employee base.

Additionally, they require technical expertise to handle intricate needs. This leads to two different lobbying approaches. One is having a strong relationship-based network and the other is a having deep-in-the-weeds policy specialty.

Both types of lobbyists can be successful. Some are deeply knowledgeable and can quote regulations, while others, in a simplified view, are more about networking and can easily contact members of Congress. They leverage their network in compliance with rules and regulations.

Regarding your earlier comment, some customers, like startups, focus on single issues, while larger, mature companies are more consistent. What percentage of the mix would you say consists of ongoing clients versus single-issue clients?

I would say that, now working for a tech startup where recurring revenue is crucial, it's different. In the government relations (GR) space, depending on the company or firm, you probably have anywhere from 70% to 90% of your clients and revenue tied to long-standing relationships. These clients have been with us for multiple years, and even if there's turnover, the new clients coming in are those we expect to nurture and grow relationships with over many years.

You might have 10% to 30% of your business from companies that approach you for short-term issues. This could include smaller companies or even Fortune 100 companies. They might have a stable of contract lobbyists but could bring on additional help if an important issue arises, which also contributes to a portion of the work.

For those long-term relationships, it sounds like established clients don't usually switch from one lobbying firm to another. Is that correct?

More often than not, yes. A new CEO or head of the Washington office might bring in their preferred firm, causing some turnover based on style decisions. But generally, if you're doing it right, it's a stable business.

It's a relationship-based business.

Yes, largely.

How often do clients switch from one lobbying firm to another due to disappointment with performance?

If you're doing it right, it's rare. I've seen it happen more due to budget cuts or as a precaution rather than a firm's lack of performance. Some firms overly rely on senior former elected officials who don't do much work. These firms might see turnover because someone was attracted to a high-profile name, but then realize the return on investment isn't worth it.

They're not actually doing anything. I'm curious if pricing is ever an issue when a different firm comes in at a lower price point.

I think this is more relevant to public affairs and government affairs, or GR.

I just want to focus purely on this aspect.

On the public affairs side, pricing is an issue. However, on the GR side, it's not really an issue. The pricing in the GR space is often publicly available due to the Lobbying Disclosure Act. There's not much undercutting, and pricing is often based on a feel for the workload. For example, a client might be quoted $25,000 a month based on the workload. If a client comes back and says their budget is $22,000, most lobbying firms would likely agree to that. The business model allows for profitability even with such concessions.

So it's not generally like Forbes quotes $25,000 and another firm comes in at $20,000 and wins the deal because of the lower price.

Exactly. It's more like a client wants to work with us but asks us to meet a specific budget, and most firms would agree as long as it's reasonable.

Regarding budget tightening, how cyclical is this business? Do you see a drop in demand during recessions?

I believe this industry is more recession-proof than most others. COVID is a recent example. When things get tight, people often turn to the government for assistance, so they don't significantly cut their footprint. However, if a client has a specific issue, they might trim budgets, but that's more on a micro level.

So a client in financial distress might cut back, but overall, it's not like advertising where there's a significant tightening during a recession. That's helpful. Specifically, regarding some of the PPHC government relations firms, what are their reputations in the industry, like Forbes or Crossroads?

On the GR side, they have a really strong reputation. At Crossroads, right up near center. Alpine, I would say they have more issue-based specialties compared to others. Across the board, they're well-regarded and within the top 15 at this point. These are seen as growing, young, dynamic places that are still good to be associated with. If you hired them, people would think, "Oh, that makes sense, right? That's a good firm. I know someone there." It's very relationship-based.

I think all of them, except Crossroads due to its business model and client group, have positioned themselves well. Crossroads has made itself a niche player, ensuring strong relationships regardless of leadership changes. Forbes Tate, on the other hand, has proactively prepared for any political outcome, whether it’s Biden, Trump, or Clinton who wins, or whether Schumer or McConnell is majority leader. This has made their portfolio sustainable regardless of the shifting political landscape in DC.

You mentioned them being recession proof. What are the macro factors that drive strong demand in government relations versus weaker demand?

If you have a unified government, like if Democrats take back the House, keep the Senate, and Harris wins, there will be strong demand for government relations. Corporate America would have a moment of concern and fight back against policies they see as detrimental to economic growth. In a divided government, there is potential for deal-making, which could drive government relations budgets.

If Republicans control everything, various regulatory reforms would prompt the business community to ensure they have a seat at the table to address their issues. This makes the field relatively recession-proof. There are cyclical elements, like a big tax bill, which would increase demand and revenue across K Street. The pandemic is a prime example, where the government was actively making moves, and companies ramped up efforts to ensure they weren't negatively impacted or to secure their interests.

So what is the worst-case environment for demand?

A perception that nothing is going to get done. That might reduce demand, but I don't think it would eliminate it. Large companies will always want ongoing conversations because when DC or different states finally get things right and a deal comes together, it's crucial to have been making your case leading up to it. If you haven't, you'll have no success in the 11th hour. So even if people feel like nothing's going to get done, they won't make dramatic cuts because they want to maintain the reach and touch needed when something big happens.

That makes sense. It ties in with what PPHC has said, that government activity is good for business. There’s a perception that if there was no activity that would be bad. But that wouldn't take away demand, demand just wouldn't grow as quickly.

That's exactly right.

It seems fascinating. You need it in bad times, good times, essentially all the time.

Yes, because at its core, it's a form of insurance. It can be a proactive tool in times of action, both opportunistically or defensively. But at every other point, it's the insurance policy in your pocket.

That's really helpful. Let's switch gears to public affairs. While it's a significantly smaller part of the PPHC pie, I think it's more volatile.

Let's start at the macro level. What drives demand here? What's a good environment for public affairs and what's a bad one?

The same environments apply. Different tactics and messages will change based on the shifting sands of DC. The worst case for a public affairs business is a perception of stasis. If you feel like nothing's going to get done, you'll hold on to your GR budgets and some public affairs to keep a drumbeat, but you won't ramp up big campaigns or digital advocacy. It has a more cyclical nature than GR.

It sounds like it's more project-based rather than retainer-based and recurring.

Yes, exactly.

I assume it's more economically sensitive than the lobbying work.

If there's a perception of either a divided government requiring a deal or a united government being more active, then yes, activity will increase. Public affairs doesn't disappear; it's still a strong and potentially very profitable business when well managed. However, it might pull back more compared to lobbying.

It seems like public affairs could ramp up quickly with a big project, although those aren't always available.

Exactly, yes.

Regarding the macro environment, do you follow PPHC in the markets?

I wouldn't say actively, but I generally keep an eye on it as my former colleagues.

They claim it's a bad time for public affairs due to political advertising, with corporate clients waiting until after the election to avoid their messages being drowned out. Does that make sense, or is it not a valid excuse?

I think corporate decision-makers might be wrong, but they are the ones making decisions. It's not an excuse, but a valid perspective on the current marketplace. It's probably a valid perspective over the last three months.

In the first half of 2024, the public affairs business significantly underperformed compared to government relations for PPHC, which was their argument.

There's some truth to that. In my new role, working with former competitors, I noticed that the slowdown wasn't as significant as expected. Some firms remained busier than anticipated, but the notion of a slowdown is not entirely wrong.

You've noticed some weakness, but not as much as expected. You believe that while this may be the current approach, it might be a mistake.

Switching to the buying decision, what are the major factors when choosing a public affairs firm? What are clients looking for? As you mentioned, government relations is about relationships and influence, but this seems different.

Yes, it is different. In public affairs or broader issue management firms, strong business development leads are still important because it's a relationship game. Getting in the door matters, but the strategy you bring is more crucial here than on the government relations side.

There's also more price sensitivity. This is an area of growth for PPHC and the public affairs industry. Corporate America is experiencing a shift, with more alignment between government relations and corporate communications. Now, you might see a head of policy communications at a Fortune 100 company with connections to both teams. This alignment feeds into public affairs, which has a long-term growth path.

However, there is price sensitivity, and it's strategy and tactic-driven. You need the right messaging, strategy, and tactics. Managing a public affairs firm requires active management of project profitability, unlike a government relations campaign. In lobbying, many partners create value and incur costs, with a small support staff. In public affairs, there's more support staff for content creation, ad buying, and digital work. Without active management, a profitable project or client can quickly become unprofitable.

More support staff is needed for writing content, buying ads, and digital work. Without smart management, this can turn a profitable project or client unprofitable quickly. It requires more active management to maintain profitability because of that.

Exactly. Like we were saying, if a company comes to you and says, "Hey, we've got a $20,000 budget, but you quoted us $25,000," on the lobbying side, you might be inclined to say yes, but then you realize you've just scraped away the profit. So you might say “Sorry, I can't do that.”

It sounds like this business is still relationship-driven, but it also depends on whether the client agrees with your tactics. It's also more price-sensitive. Is that fair?

Where would you position PPHC's assets in this industry in terms of reputation and other factors?

I think SevenLetter and what Erik Smith have built has done very well. They have done a good job over the last couple of years growing that. I haven't looked at the exact numbers, but anecdotally, it seems like they've been doing well. You have the smaller players, like the KPs and others, which have been more recent acquisitions. I'm not sure how O'Neill is framed within that.

O'Neill is framed as public affairs.

And then there's Forbes Tate. They recently announced Concordant. As much as it taps into public affairs strategies, it also seems like a broader corporate advisory. I think that's a real opportunity for growth. Looking at Forbes Tate, any news coverage over the last year would show some partner-level departures, which have changed the business's look. They brought in a woman, who I think is really good.

Are you referring to Concordant?

No, I don't know her personally, but I've heard good things about her. The woman at Forbes Tate, Michelle Baker, is now managing the public affairs business, and I think she's really good.

So the Forbes Tate partner-level departures were mostly on the public affairs side, correct?

Yes, that's correct.

You believe Michelle Baker has a good reputation?

I think she believes she's doing well, and now she'll probably have some room to explore that further. I understand that turnover takes time, so I see her being given some freedom to work with it, which I think will be beneficial. I'm more intrigued to see where this Concordant piece goes. Bear with me for a second. I believe more of the industry will move in that direction. About 10 or 12 years ago, when I started at Forbes, Tate and Forbes's line to me was like, I hired you as a... [This is all anonymous, so I know this is never going to be public. I just want to make sure this doesn't get out.]

Maybe I'll just say that Forbes realized I have some lobbying people who can actually sell public affairs and communications, with strong backgrounds in those areas, and empowered them to run with it. This was happening while, for instance, another company, Elmendorf Ryan, brought in a public affairs firm. There was a shift from pure lobbying to a more comprehensive issue management firm, with everything under one brand. CGCN is another example. Purple did it for a while. There are many examples where a lobbying shop added a public affairs practice or vice versa. Some integrations felt organic, some felt bolted on. One challenge these companies face, which I experienced, is that many referrals came from lobbyists needing public affairs help. They'd say, "I'd love to bring you in, but I can't because you also have a lobbying practice, and it would be competitive." The referral network was somewhat affected by the internal fear within strictly public affairs or lobbying firms.

Fast forward to now, instead of having everything under one brand, you have Concordant. Other places are trying similar approaches. Concordant is a brand standing on its own. GP3 is another brand doing the same in a different roll-up, saying, "We're going to pull together teams within PPHC as appropriate for each project." This approach avoids some issues related to business development, referrals, and competition.

So, Concordant isn't really standing on its own. It's more about providing management to the various PPHC assets.

Yes, and now leveraging them.

Would someone engage Concordant separately to do that?

Yes. As I understand it, Concordant would then engage the appropriate internal teams within PPHC for the needs of that engagement.

So you still have Forbes Tate, and Seven Letter getting their fees, but there would also be an additional fee to Concordant on top to help manage the entire process.

Yes, that's my understanding. This approach allows for more value creation across the companies, rather than just relying on back-office economies of scale. It becomes a more strategic initiative.

That's very interesting because that was going to be my next topic, the PPHC umbrella, and how it adds value. Right now, Concordant is losing money and, obviously it's in a startup phase, but it is not contributing to PPHC's bottom line. In fact, it's actually hurting the bottom line. You've helped me now understand a little more what it actually does.

It creates opportunities to unlock synergies. Without it, there wasn't a formal structure to ensure more than just back-office economies of scale and referrals. Now, it's an independent brand that can engage at a high level, moving beyond just DC heads of office budgets into C-suite budgets. It offers a team that can solve problems, not just act as a contract lobbyist, leading to more strategic conversations and leveraging synergistic assets across PPHC.

They talk a lot about cross-selling opportunities, but it hasn't happened significantly yet. So Concordant is key for that cross-selling.

Yes. I didn't initially understand that until I saw the news and had a few conversations over the last couple of months. Then it clicked, and I understood what they were doing.

That's helpful because I didn't understand either. They were excited about this asset, and I couldn't figure out why. You can argue about why PPHC needs to exist. Yes, there are back-office synergies, which are attractive, but the real value is if it unlocks cross-selling opportunities.

What about cross-selling between federal and state and other geographies? You mentioned KP. I think they also acquired Lucas in California, and they own multistate. They just bought something else; they purchased Pagefield in the UK. There's an argument that, as you mentioned, this consolidation is moving more to the C-suite. It's not just about lobbying a specific issue but solving a communications problem for clients. The idea is that the client wants a single point of contact. Does it make sense that a big corporate client would want you to handle DC, Sacramento, London, Brussels, etc.?

Yes, it takes work, but there is absolutely potential there. One of the challenges is moving beyond the traditional model. Many DC firms rely heavily on their relationships with clients' heads of DC offices. That's important, but to unlock real budgets, you need to move into the C-suite budgets. Zach Williams, who is on the board at PPHC, has been uniquely focused on this for years. Most lobbying shops in DC live and die based on their relationships with the DC office heads. But if you want to unlock real budgets, you have to move out of that office, which is seen as a cost center in most companies, and into the C-suite budgets. Zach has been focused on that for years. You can't necessarily cross-sell if your only relationship is with the DC team.

You can't cross-sell a London service if you might be able to indirectly help. It's not a direct thing. If you have a higher-level relationship, you can say, "Oh, I saw you doing that," and you're able to talk to someone who is living and breathing the issues in DC, Brussels, and London while also being aware of what's happening in Sacramento. That's where someone like an EVP of Global Government Affairs or someone in the C-suite comes in. Cross-selling becomes much easier because you're not limited to one budget line. In the old model, you'd have to convince the GR person in DC to talk to the state guy or the international guy, who they might only see every few quarters. But now, you're moving beyond just one budget line.

They talk about the persistent communications idea being part of the C-suite budget. Zach is not terribly investor-facing, with mostly Stuart and Thomas handling investor relations. But Zach is on the board, so he's clearly involved.

Is PPHC as a holding company an attractive place for lobbying or public affairs firms to join, in your opinion? It's a holding company and publicly listed. Does that make it attractive?

It depends on what the partners at a firm want to prioritize between short term cash flow and long term growth opportunities. Anecdotally, I can say that some people see that and they intuitively get it. Others are like, hold on, what does this do to what I have right now?

Core to their offering, and to anyone trying to do something similar, is structuring the right pitch that balances the long-term and short-term needs of partners or equity holders. Whether leveraging the public market or private equity, everyone has a different approach.

Another important aspect is how the companies within the portfolio continue to attract good talent. Each company has its own approach to running its business, including staffing, salaries, and compensation. Ensuring they are smart about these aspects is crucial for long-term growth, as the business is still driven by larger firms that have been part of it from the beginning.

Yes, as you mentioned, their structure seems very long-term oriented, with five-year earn-outs and four-year vesting periods. A lot of the equity is allocated to the next generation of the firms they acquire.

Currently, there are about 83 employee shareholders in the company, which is quite significant.

Yes, that sounds about right. I would have guessed it was a bit larger, but yes.

I believe that was the most recent number. Were you there when the decision was made to go public?

I was there, yes. Although I was a partner and an equity holder, I was not part of the conversation.

When it was pitched to you, do you remember what the pitch was?

It was very similar to what you've described, focusing on the growth opportunity for the company and the financial gains for equity holders. It also emphasized the ability for not just partners, but also senior and vice presidents, to hold equity, which is significant for the business at a micro level.

Day-to-day, each brand or whatever.

Yes, exactly.

Do you still hold your PPHC shares?

I forfeited a significant portion, but I still retain a relatively small number of shares.

Is that why you're not paying close attention to the details?

Yes. It's there, but it doesn't have any impact on me.

It doesn't affect your overall net worth. Understood. What is your opinion of the senior corporate team? Did you know Stuart Hall?

Stuart is very smart. I didn't interact with him much, but he is savvy and understands traditional DC while also being well-networked and aware of its changes. From a strategic perspective, he aimed for long-term sustainability and ensured there was an opportunity for growth and continuity beyond his tenure. Thomas is smart in terms of the business's future direction, though I can't speak to his investor relations skills.

I can assess that based on his business acumen.

Yes, he's insightful about the non-GR side of the business. Rolf was involved in HR matters, which was my only interaction with him.

Yes, he was deputy CFO and is now CFO.

Right, I forgot about Bill. I still have a high regard for Jeff, who is not on the board but is a major shareholder. Jeff's ability to anticipate the business landscape in DC, combined with his network and understanding of public policy, is exceptional.

Got it. It seems like a smart team with an interesting opportunity. However, one of their challenges is being listed in the UK, where lobbying has a negative connotation and is less regulated. In your opinion, what is the biggest risk to PPHC? How could this business face significant challenges?

I don't think there's a scenario where the business performs terribly. It's all about the level of growth and what's organic versus needing to introduce new elements. Unless there's gross mismanagement, which I'm not suggesting is likely, you will probably maintain a strong, sustainable profit margin. This isn't a risk, but something to plan for.

Since this is relationship-based, how do you ensure you're constantly bringing in the next generation of people with strong relationships? I don't foresee senior leadership leaving anytime soon. But how do you ensure the next generation is ready and incentivized appropriately?

It seems like they are aggressively considering this. They ensure every deal locks up key principles for nine years. Generally, each deal is structured with a five-year earn-out. Some shares vest earlier, but you must be there for nine years.

With some payments, that's a significant portion.

The earn-outs have been the majority of every acquisition price. If you grow profits significantly, you get the maximum earn-out.

Aligned incentives are key for both those being bought and the investors. If done smartly, you're in a good place. Different portfolios will have different growth patterns, but overall, they can be naturally very profitable. The challenge is how to reinvest that profit wisely for non-organic growth.

Is there anything I'm not asking about PPHC that I should focus on?

Nothing specific comes to mind. The Concordant piece recently became clear to me. Initially, some were puzzled, but now it makes sense. I'll be watching that more carefully now.

You've helped me understand the Concordant piece better, which is very helpful.