Jake Pepper  00:00

Five years ago, we probably had five projects that we were tracking in our pipeline over $100 million. Today, we probably have 50. So the projects have just gotten bigger, but we've been asked to build bigger projects along the way.

Nico Johnson  00:15

In the world of construction, there are lots of risks inherent in the business, but when you are inheriting the business from three generations passed down, grandfather and great grandfather, there's much more weight than just are we doing this right. The question is, are we focused on the right direction as a business? The gravity of the conversation is one that very few, frankly, in the business world get to appreciate. Over the last few years, I've gotten to know an entrepreneur who I respect, a guy named Jake Pepper. Jake is a part of the Pepper Construction family, a nearly 100-year-old business passed down through generations, and like his father and his grandfather before him, he is learning to take on the responsibility and the yoke of leadership. Today, we're going to dive into much more than the evolution of a construction company that unfolds into becoming an energy company. It is the inner dialog of a young man learning to take the leadership, take the helm of a business that is in the throes of change in the dynamic nature of the energy sector itself, construction, etc. We're going to talk all about the risks inherent and the choices one must make. If this is your first time to SunCast, you are in for a treat. Each week, we bring you leaders on the front lines of the energy transition, builders and operators whose daily bread is how to think about energy 2.0 and how to build teams and cultures that can, in fact, build the infrastructure we need as we move toward a renewable and clean energy future. I'm Nico Johnson, your host. It is my pleasure to have you here. I hope you'll come back, but for now, I want you to dig in as we lean into another powerful conversation here on SunCast. Jake, man, thank you for having me in your office right here in Chicago. It's good to see

Jake Pepper  02:18

you. Yeah, great to see you too, Nico.

Nico Johnson  02:20

It's been a long time coming, and I mentioned that Pepper Construction is a nearly 100 year old company. You know, most people inherit a company or the responsibility of trying to sort of grow into the the shoes of the family business, and the prevailing thought is, don't break this. The reality is, you came back to the business after getting an MBA and started looking for ways to change it. How do you balance those two responsibilities?

Jake Pepper  02:45

Yeah, it's been an interesting journey, to say the least. The dynamics of a family business add a lot of complexity to those conversations and those decisions. There is a immense amount of pride of what we do, and that is we build buildings.

Nico Johnson  03:00

Yeah.

Jake Pepper  03:00

So I I think thinking back to working with my grandfather, we went back and forth on that a lot. I would ask him about a new idea or new concept, or say we should be doing something other than just building buildings. And every once in a while, he'd look at me and he's like, "What's wrong with doing business the old-fashioned way? Like we got a handshake, we build a building. That's how we do it. And I had to tell him, you know. Unfortunately, we live in a world of complex contracts, and business doesn't happen on handshakes anymore. I wish it did. And every once in a while, you can find a deal like that, but there is this balance of protecting everything that's been built over the years and trying to, to your point, make sure it lasts for another 100 years.

Nico Johnson  03:39

You grew up in a family business where your grandfather inherited it from his father, and your father and uncle and perhaps others in the family were very much involved. What was the conversation like around the dinner table for you as a kid?

Jake Pepper  03:54

Truthfully, my dad wasn't at dinner a lot. He was working so much, so he and he was around quite a bit, but you know, sometimes work just demanded that he was there late.

Nico Johnson  04:06

Right.

Jake Pepper  04:06

I remember his his executive assistant Carol Turek, and she was a fantastic woman. But I remember her calling my mom a lot and being like, "Hey, Stan stuck. He's not going to make it home for dinner tonight. That said, like he, my dad found a very good balance of making time for us and being there, and and we have great memories of of growing up. There was an exposure to the business. I think the the hard part for me growing up is there was always almost an unspoken, you know, an unspoken expectation that I would be in the business.

Nico Johnson  04:37

Yeah, and

Jake Pepper  04:37

that was really frustrating to the point where, and and as a young child, you can't say you don't want that. You can't, you know, and and you don't want to take it for granted. And so I kind of played that role. But my father actually ended up leaving the business, and so he quit mostly because he didn't get along with his dad, and they didn't see eye to eye.

Nico Johnson  04:58

Imagine that,

Jake Pepper  04:59

my. My, I remember we were sitting in the airport, and my dad was really nervous. I've got two older sisters. He was really nervous to tell us, and so he had just quit. And he had quit before, but you know, fake quit.

Nico Johnson  05:09

Yeah,

Jake Pepper  05:09

this was the last row. It was final, and he's like, "I'm done. I got to go do something else. And he he told us, and he asked me. He's like, "I was in seventh grade. He asked me. He's like, "How do you feel? I was like, "This is fantastic news. I don't have to go to the business anymore. I've got options. I can go look for other opportunities, and so I was really happy about that. And I took a lot of different paths through education, and I worked outside the business after graduating college, ultimately to come back. And I had a different perspective than than some others that like my grandfather and my father who went straight into the business out of school, and I appreciate that a lot. Yeah. So that was a that was a very good thing. And then my dad since rejoined, and we never thought we were going to work together. So there were some interesting dynamics there too.

Nico Johnson  05:54

Yeah, you got a chance to to work outside of the business. How did you explore what that career path might look like, and yeah, and as you look back on the skill stacking, what what parts of that turned out to be more beneficial than you might have imagined?

Jake Pepper  06:12

So in college, it kind of started. I I loved physics, and I always have. So I I went to Middlebury College out in Vermont. I studied physics. I decided that was going to be my major, and my third semester, so beginning a sophomore year, I'm looking around in class and I'm like, "Wow, all these kids want to be teachers and professors or scientists,

Nico Johnson  06:32

right?

Jake Pepper  06:32

And that's not what I want to do. So I met with my guidance counselor. I switched to environmental engineering, or sorry, environmental economics. That was great, and this whole idea of sustainably managing our resources while creating business or making profit, and so that kind of played into construction, but not really, especially at that time. This was 2002, sorry, this was 2006. So I had a conversation with my grandfather. I interned at the company between my junior and senior year of college, and he asked me to come work there after graduation.

Nico Johnson  07:06

Yeah, I saw undergrad. Yeah,

Jake Pepper  07:08

after undergrad, and I said no, I don't think I want to do that. And he was really mad. He told me that if I didn't come work there after graduation, that I would never be allowed to work at the company. And I said, "Okay, I am still not going to come, but what I will do is I'll look for opportunities that are peripheral to construction.

Nico Johnson  07:28

That'll give. Yeah, were you in a way? Were you trying to negotiate with your grandfather? I'm going to go build other skills that will be beneficial when I do come back. Sort of the soft pitch of there's hope that you might come back.

Jake Pepper  07:39

I tried. He just he didn't see it because his father told him you're going to go to Northwestern, you're going to meet every important decision maker in Chicago, and then you're going to come run the business. And that was really successful. That worked. So that was what my grandfather knew.

Nico Johnson  07:55

How many grandkids?

Jake Pepper  07:57

Yeah, you're one of how many? I'm one of 18 grandchildren. Did

Nico Johnson  08:00

everyone get this pressure, Jake? Is he having 17 other competitions? Well,

Jake Pepper  08:05

all of my cousins that were older than me, some dipped their toe into the company, some liked it, some didn't. Some are they all? Wait,

Nico Johnson  08:12

they're all older than you?

Jake Pepper  08:13

No, no. There's. Let me think. I think six cousins that are older.

Nico Johnson  08:18

Yeah,

Jake Pepper  08:19

and a lot that are younger, obviously, and and truthfully, just a lot of people love the company, but

Jake Pepper  08:25

construction wasn't what they wanted. Construction's

Nico Johnson  08:27

hard.

Jake Pepper  08:27

Yeah, it is. It is very hard.

Nico Johnson  08:30

Yeah.

Jake Pepper  08:30

So that model worked for Richard, and he wanted it to work for me, and I said no. And so I said, "I'll I'll be in the industry. Let's figure out if I like the industry. And so I worked for a company called Environmental Systems Design. Anybody in engineering just refers to them as ESD.

Nico Johnson  08:47

Yeah,

Jake Pepper  08:47

and it was great. I got I knew the CEO Raj Gupta. I knew Kirk Carnac, who was the number two. And I was they kind of took a flyer on me because I was liberal arts.

Nico Johnson  08:58

Yeah,

Jake Pepper  08:58

and they hire straight out of Big 10 engineering programs only. It was sort of

Nico Johnson  09:03

like a family relationship.

Jake Pepper  09:04

It was. It was like okay. Yes, that that certainly made them look at my resume and consider it. I'm

Nico Johnson  09:10

not saying you didn't earn it. Right. Right. If they only take yes to top engineering schools, then there has to be some sort of backdoor intro that allows you to get your resume on their table. Yeah.

Jake Pepper  09:18

Environmental economics with a physics minor. They're like this kid doesn't know how to do anything we do. Like here's a

Nico Johnson  09:23

stencil.

Jake Pepper  09:23

Yeah, I was lead accredited professional. Oh yeah, as a senior in college. Okay, so I structured an independent study for our J term, and I only got the credit if I passed the test. And the test I didn't know until March, so I actually had to sign up for an extra class my second semester senior year, which was choir, that was interesting, but it was an easy credit. So I maintained. I don't even remember not a baritone, but it was it was fun. And as soon as I passed the test, I dropped choir. So I think having a lead AP designation as a senior. College made me employable,

Nico Johnson  10:01

sure,

Jake Pepper  10:01

and I graduated. Yeah, so there there was not a great job market. No, but

Nico Johnson  10:07

but sustainability, like green to gold, had just come out. Sustainability was on everybody's mind. Yeah, everybody was talking about the cloud.

Jake Pepper  10:14

Yeah,

Nico Johnson  10:15

how is this all going to work with with the new buildings? I feel like every school, every new headquarters was trying to get lead,

Jake Pepper  10:24

yeah,

Nico Johnson  10:24

and like at least leed silver,

Jake Pepper  10:26

right, right, and and even in Chicago now, like you have to be leed silver to build in Chicago, yeah. So the USGBC did a fantastic job structuring that program and getting it to be the standard.

Nico Johnson  10:38

Is that something? So at the at about the same time, I was finishing my grad program at now Middlebury Institute, which was Monterey Institute, and I was studying the same. And I was in the heart of where USGBC was working in California, especially like Northern California. How did you find out about USGBC and leed certification as a senior out in Middlebury from and from Chicago, where like

Jake Pepper  11:01

yeah,

Nico Johnson  11:02

was it was there already a buzz in the construction community that your parents were talking about? No, there

Jake Pepper  11:06

was a buzz at Middlebury. So Middlebury is an incredible place, and their environmental major you know building they had a little house that all those professors had their offices in. They turned that into a net zero building. They put solar panels on it, and they got leed certified, and so that was you know my first exposure. And I'm like, well, what's leed? And my professor, my my guidance counselor was in that building, and he's the one who sponsored that independent study.

Nico Johnson  11:33

Yeah, cool.

Jake Pepper  11:34

And so he was all for it. So I spent January studying for the test. That was it. Right, that was the class. And so and checked in with him once or twice and signed up for the test. So it was good, but having that designation, I was billable.

Nico Johnson  11:47

Yeah, of course,

Jake Pepper  11:48

to any employer.

Nico Johnson  11:49

Totally.

Jake Pepper  11:49

So I ended up at ESD at a new group called their Building Sciences Group, and all and it was great because I had a mentor that taught me mechanical engineering, which theoretically made sense with the physics minor, and I would get to do energy commissioning out in the field. We would do energy audits, and then we would do energy modeling, and we would do leed certification. So I kind of had this mix of office and field, and I got a really good understanding of just buildings in general.

Nico Johnson  12:16

Yeah,

Jake Pepper  12:16

so that was a great first job. I told my grandma and grandpa that I was going to go take that job. They were disappointed, but I think there was still like hope, right? Because it was peripheral. I left that job due to some internal politics there and ended up being a natural gas options trader for three years.

Speaker 1  12:34

What?

Jake Pepper  12:34

That was a signal to the family, like, okay, Jake's out, right? He's not coming back to the business. Oh

Nico Johnson  12:39

my goodness!

Jake Pepper  12:40

Yeah. So that was ESD's office was right next to the Chicago Board of Trade, and Middlebury feeds to Wall Street. Yeah, got a lot of friends that studied economics and went to Wall Street, and that was not for me. I didn't want to go do that. And as I'm looking out of the window, I was like, "Well, what are these guys in finance that are out at 2o'clock? You know, what are they doing? And they were, you know, the corn traders, the commodity traders. So I got pretty, pretty gung ho on figuring out how to be a trader.

Nico Johnson  13:07

Yeah,

Jake Pepper  13:08

studied a bunch, interviewed with a bunch.

Nico Johnson  13:10

Why energy? Why did you go to gas?

Jake Pepper  13:13

That was random. That was totally random. So I, I, I got my foot into the door for interviews and like, and didn't get a job anywhere. Mostly market making firms, so trading in and out all the time. And the one interview that wasn't from kind of like a connection that got me in was with a firm called Ronan Capital, and the guy running the natural gas desk needed a an entry level employee, so he started asking me where all the commodities were trading and I knew the answers because I studied them in the newspaper that morning.

Nico Johnson  13:43

Yeah,

Jake Pepper  13:44

and so that impressed him. And he goes, "Okay, come on over here. And that, and he he was running their NACAS desk. He was just brought on board to build it. So that was it was random to be in energy. And I remember the electricity desk was right behind

Nico Johnson  13:57

us.

Jake Pepper  13:58

Yeah, and I would ask that guy like, "What are you trading? And it was so confusing. How does even still is there electron? Still is confusing. Yeah, exactly. But it's come full circle, which has been pretty interesting.

Nico Johnson  14:11

Three years at the Nat Gas desk. I'm really curious. What did you learn trading natural gas about the energy business?

Jake Pepper  14:21

It was interesting because we sat in Chicago and we had three traders on the floor in the NYMEX in New York. We also talked to the crude desk, which was based out of New York, but they were on the same floor at the NYMEX. Truthfully, I learned a lot about the physical nature of the commodity, which we didn't trade. We trade all the financial products around that, and so it was interesting. I had a a family friend, and he asked me as I was leaving engineering to go to trading, and he said, "Aren't you going to miss like having a real product on something you're building? And I said, "No, I'm going to love it. It's going to be great. And you know that was motivated by the opportunity to potentially, you know, drive earnings, right? And and and earn. Earn good money, but I at the first year of trading, we got through the end of the year. Here's what we made the year. Half of it goes to the the firm. Half of it goes to the guys in the book. My boss decides how to split it up. You hit the reset button and you start over. And and I think as I realized, like it's not even if you if you you have to make money to stay employed.

Nico Johnson  15:23

Yeah.

Jake Pepper  15:23

If you don't make money, they're going to replace you.

Nico Johnson  15:26

Yeah. And

Jake Pepper  15:26

if you lose money, obviously you're going to be out pretty quick.

Nico Johnson  15:28

Yeah.

Jake Pepper  15:29

So there was an incredible amount of pressure. I think I I learned less about energy and more about the financial markets and just how all of that worked. And we were we were market makers, so we traded in and out of options all day.

Nico Johnson  15:40

Yeah.

Jake Pepper  15:40

You know, our our value add to society was we provided liquidity to the marketplace, which at the end of the day is not saying much, right? You either can't feel what you're doing. So it was really good, and I learned a lot about options and equities and all of the different financial structures and swaps. And so that's coming back now a little bit as I'm seeing large companies hedge right, and the producers of energy hedge, and then also you know the buyers are figuring out kind of how long they can buy for. So I've got some exposure to that world, which you know typical folks in construction don't. So that's that's helped in some conversations.

Nico Johnson  16:20

I can imagine. What do you think most people don't understand about the Chicago Mercantile Exchange? Like how,

Jake Pepper  16:27

yeah,

Nico Johnson  16:27

how commodities work at all.

Jake Pepper  16:29

I mean, it's it's a whole new world now. I've got one friend who still is on the floor, and he trades in the S and P pit for Citadel. We built the Chicago Board Options Exchange new office and trading floor, and the trading pits are almost empty all the time. So as I was a trader, everything was shifting from the pits to algorithmic. Yeah, and so we were finding that balance of like, okay, let's trade on the screen with nobody on the other side that we know, and then we had a set of a bunch of we had 13 direct lines open to brokers, so that we could manage trades with them on the floor, on the desk, and then on the screen. And I think the complexity of that, and there was this opacity to that market when Chicago forever, right? The the traders controlled it,

Nico Johnson  17:18

yeah.

Jake Pepper  17:18

And if you were in the pit, then you had the deal flow, and you had the buyers, you had matched them with the sellers. That has since kind of gone away, and so a lot of these trading firms and the algorithms they're writing, it's just way more efficient. So you don't need those humans and those matchmakers. So that's been interesting to see evolve.

Nico Johnson  17:37

I think it's really fascinating that you've gone from building the building physical building where trades are made, to and watching it basically slowly become vacated and empty.

Jake Pepper  17:49

Yeah, to

Nico Johnson  17:49

building the physical buildings where trades are made.

Jake Pepper  17:52

Right, right,

Nico Johnson  17:53

and in the form of data centers.

Jake Pepper  17:54

Yeah,

Nico Johnson  17:55

did you see the data center hyperscaler boom coming? Like, how did that get on your radar?

Jake Pepper  18:02

So Chicago and the trading environment here, the data centers in Chicago proximity is huge, and there's a huge.

Nico Johnson  18:09

Most people don't know there's a big data center pedigree since '99, like all the way back to.

Jake Pepper  18:15

We have a lot of data centers in Chicago, and a lot of people don't know because it's just sitting in that building there. So is it?

Nico Johnson  18:20

Are there? Are they? Are they urban data centers?

Jake Pepper  18:22

Yeah, there's a lot of them. And so, talking to some of the owners of the various trading firms that are doing algorithmic trading, they are finding the balance of like, okay, what processes do I have to do really close because the length of the fiber affects their ability to succeed because of the speed of the transport. And then, what can they ship off to different data centers that are further away that don't require as much speed? So that's always that balance. And so, you know, these data centers that are right next to these financial centers are constantly booked, like they're leased all the time.

Nico Johnson  18:55

Yeah.

Jake Pepper  18:55

And if somebody goes out of business, somebody else will come in and lease it. Why

Nico Johnson  18:58

would they go out of business?

Jake Pepper  18:59

Because they made a bad trade. There's a ton of risk, and that was part of the reason. Oh, you mean the

Nico Johnson  19:05

buildings surrounding the data center? Yes,

Jake Pepper  19:08

the buildings surrounding the data center. That real estate is

Nico Johnson  19:10

prime, right?

Jake Pepper  19:11

For data centers, just because of the compute and the length of the fiber to the to the pits and the trading hubs are is really important. So I can't say we must know hyperscale, but

Nico Johnson  19:22

you must know a number of developers who saw that opportunity,

Jake Pepper  19:26

right? Wow, right. So, and and that it's hard because how do you get the power to that building in the city? And some of it had it. The power also wasn't at the same scale it is today. So it's been interesting to see the growth of the power demands from these facilities, yeah, but that's not driven by trading. That's all different, right? Totally different. So,

Nico Johnson  19:46

when did you work with your grandfather before, after the NBA?

Jake Pepper  19:50

So, as I was a trader, and I loved my boss that ran the desk, but it was a peek into the future, and he had a family and kids, and he had a. Really stressful job. It was. I got up really early to reconcile our trades from the next day, and then I would get ready for work, and I would go down to the office, and then we were we would trade all day. We traded from seven a.m. to 3p.m. Yeah, and it was great. We had a brand new office they built up. There was a gym in there. There was a a cafeteria in there. But the reason for the cafeteria is so that we could get our lunch and come back to the desk and keep trading. And so you're kind of a slave to the desk. And we had really good days. We had really bad days. So those ups and downs were were tough to manage. And I met my wife. We were talking about getting married. We knew we wanted to have a family. And so the writing was kind of on the wall, like okay, this is not a career for me long term. I've had a really good time. I've learned a lot, but this is that's a that's an industry for bachelors. There's a lot of bachelors in it, and so I I reapproached the family, my uncle and my grandfather. My father wasn't at the business at the time, yeah, and it was kind of funny. My wife's like, "This is a bad idea. You should go ask your dad. He'll tell you it's a bad idea. And I asked my dad, and he's like, "I think this is a fantastic idea. So that back backfired on her. That is, and as I negotiated with my grandfather and my uncle, my grandpa said, "Like, we don't need another project manager. We need somebody that knows how to run a business. So if you come back, you have to go get an MBA. Oh, and I was like, okay, it's fine with me.

Nico Johnson  21:21

He sent you to yeah. So

Jake Pepper  21:22

I joined. I worked to Northwestern.

Nico Johnson  21:25

I'm sure.

Jake Pepper  21:25

Yes, that was. It was like I could have maybe looked at other places, but that was not really an option. Like you already

Nico Johnson  21:31

said, you already you should start doing what your grandfather asked at this point if you want to work in the business. Yeah.

Jake Pepper  21:37

So I was put into our interiors group, and the idea there was understand how to manage projects and see them start to finish, which those the fastest projects are are interior build out. So I was in there for about six months. Started the MBA. Started

Nico Johnson  21:53

executive MBA or no?

Jake Pepper  21:55

I did a full time two and a half years, 10 quarters straight, two classes a quarter. Terrible timing started on january 6 of 2014.

Nico Johnson  22:04

Yeah,

Jake Pepper  22:05

my oldest son was born january 11, and so thank God for my wife. She didn't see me for like two years. I would we moved to the suburbs when we were pregnant with our second child, and I left at six a.m. and got home at 10. Right, so it was that was tough, but it was funny because like my I don't remember and I regret it, but the day my son was born, january 11, I was brand new MBA student, and we were apprentice women's hospital downtown, which happens to be right next to Kellogg's business school. I was like, "Hey, honey, I'm gonna go to class. I'll be back in three hours. And popped over to class, came back, and you know that was night two or something, and so that was somewhat comical, and probably wouldn't have made the same decision today. I would have skipped class, but it was a great experience. And then coming out of business school and being able to translate that skill set to the business has been really valuable.

Nico Johnson  22:59

Yeah, coming out of Kellogg, you came back and looked at the business, and you said, "This is skinny margins, high risk. How that conversation with your grandfather and uncle sound?

Jake Pepper  23:11

It was something they knew, right?

Nico Johnson  23:13

Yeah, the

Jake Pepper  23:13

construction industry is high risk. Is this

Nico Johnson  23:16

something that you spent like the two years in business school studying?

Jake Pepper  23:19

Yeah, I studied real estate as well. Yeah, and

Nico Johnson  23:21

and studying the business as well, like asking grandfather for the books and like getting a peek inside how the business. Yeah, there

Jake Pepper  23:27

was my my grandfather's right hand guy was a guy named Tom O'Leary, so he was our general counsel and he knew everything. Yeah, knew everything about the business at Kellogg. They have a really good family business program.

Nico Johnson  23:38

Yeah,

Jake Pepper  23:38

and there was a guy named John Ward who started that program? And the idea is that 80% of businesses are family owned. Yeah, and so let's look at the family dynamics, not just business dynamics. So there's a few few schools that leaned into that, but the Kellogg was early. Yeah, I took a family business course with John Ward, and you don't have to be part of a family at a family business to take it, so there were others that took the class who were employed at family businesses, and so they want to understand the dynamics. But the capstone project there was to write a paper on the family business that you work for. So via that paper, I started asking a lot of questions and questions that most people didn't ask at the business, including my aunts and uncles and father, that was interesting, and I and I went to Tom for most of it. Richard, my grandfather, was involved, but it was like, hey, Tom, can I see this? Can you know how do we do this? And you know, what's this part of the business? And so, and all to put it into a paper. So that was very valuable for me to understand the business over that course.

Nico Johnson  24:39

Talk about coming back to work, you ended up working directly with or for your grandfather. What, how, how did he decide at that point the role and the the progression? What that progression pathway looked like for you? Yeah. So again, and also like the dynamic of working for your grandfather. Yeah.

Jake Pepper  24:57

Yeah. My my grandfather was still there, but he was. He was in his 80s. He worked until he died at 90. Right, he he just wasn't gonna ever retire. Yeah, and I think he the part that was difficult is he just didn't see the industry change as he aged. And so again, that question of like, what's wrong with doing the business the old fashioned way? It's like that that's it doesn't happen anymore. Right, that's not how business gets done. His model was grow revenue. Like, yeah, our our margins are skinny, but if we grow revenue, like that's okay because it's just about that that bottom line number pushing him to think outside the box. He was an extremely smart man, so he he got that. But it was also like, how do we do that and protect what we built and not put it at risk? One of those things that you learn from that family business course is that each generation really only takes one risk. If you take a risk and it works, why would you ever take another big risk? Because then you're kind of putting your reputation, that legacy, on the line.

Nico Johnson  25:55

Yeah.

Jake Pepper  25:55

Like my grandfather, his risk was you know growing the business, and he bought out one of his partners that he inherited when his dad died, but he started insurance co-captive back in the day in the '60s as well. And I feel like that was his big risk, and it's been very successful for the business. What does that

Nico Johnson  26:14

mean, an insurance co-captive? So

Jake Pepper  26:15

if you're of a certain size, you can write your own insurance policies. So that's a wholly owned captive, and so you you take a portion of your your cost of work and you put it into an insurance vehicle, and then you you you write your own general liability, your workers' comp, and

Nico Johnson  26:32

then that that just grows.

Jake Pepper  26:33

Yeah, and that grows, and then you've got a balance sheet to invest, and we weren't big enough to do not just a

Nico Johnson  26:39

balance sheet to invest; it gives you a bigger balance sheet for all the things that that construction requires, and all the ways that financiers ask you to prove your worth.

Jake Pepper  26:51

So, at about a billion dollars as a GC, you are probably viable to have your own captive. Yeah, in the 60s, we weren't anywhere near that. So, Richard, my grandfather, got together with two other contractors and insurance guy, and say, "Let's start a group one, and we'll shelf insure each other, and we'll share that risk. That's called American Contractors Insurance Group, and so now that's 42 contractors, and it's a very large insurance company. And that was, you know, and it over time has returned a lot of those premiums to us because our claims have been lower than what were underwritten, right? And so it puts a huge focus on safety, which is first and foremost at any construction company. But it also means like the less incidents we have, the more money we will make from our insurance products as well, because we'll be underneath that underwriting risk. So that was his big risk. I think I look at my father and my uncle; they went into geographic expansion. We went to Indiana, we went to Ohio, we went to Wisconsin more recently, but we opened in California, we opened in Texas, and so those have since come back to the Midwest. We've wound down California, we sold Texas, but that geographic expansion really did grow revenue, right? Okay, so those margins are skinny, but if you grow revenue, that's the the plan.

Nico Johnson  28:06

The family business started three generations ago. Your fourth generation running the business, as I think your great grandfather was a carpenter. How did the automobile industry change the trajectory of his career?

Jake Pepper  28:18

Yeah, so he was working in the merchandise mart downtown. Ultimately, started Pepper to be contracted to maintain that building, and then I mentioned the the car got invented, and so when a car got invented, people had to build garages. So he saw that opportunity as a as a way to grow revenue, and so he started going to the suburbs of Chicago and building garages for everybody, which became a pretty pretty nice little niche. I think they built a lot of garages. They developed a couple neighborhoods too on the lower side of Chicago, but ultimately came back to commercial. And so Marshall Fields was one of our early clients, and we worked for them forever. Bell Telephone, like we we had some really good commercial clients, and it was like let's focus on that. And so we got out of residential, we got out of garages at some point. I don't know exactly what year, but but it's

Nico Johnson  29:09

really it's interesting that Pepper Construction was also born in a garage. I think it's a fun entrepreneur story,

Jake Pepper  29:14

right?

Nico Johnson  29:14

There's a lot of different areas that construction can focus on. I mean, even when we talk about in the solar industry, you've got folks that call themselves an EPC and they don't do E and they don't do P.

Jake Pepper  29:28

Yeah,

Nico Johnson  29:28

right.

Jake Pepper  29:28

Yeah. So

Nico Johnson  29:29

construction can be applied in every field: infrastructure, buildings, or buildings. There's homes. There's there are folks that just do the shell. There are folks that do the full build out. There are folks who focus only on stadiums, only on data centers, only on large large developments. Naturally, over the course of 100 years, the company has had the opportunity to evaluate where do we want to focus. How would you how would you describe what the focus of Pepper is today?

Jake Pepper  30:04

Pepper doesn't focus on a specific market, and we we used to have you know seven or eight core values that nobody could name because they were long and they were hard to remember. So we we went through a very long process. We positioned the company now as one Pepper to make sure that if you're working for, if you're Pepper's working for you as a client in Ohio or Illinois, it's the same product, it's the same service, and so part of that one Pepper process was we went back to those core values and said, what do we, what's really important to us, and the three that we boil it down to is we find a way, we care, and we do the right thing. We

Nico Johnson  30:38

find a way.

Jake Pepper  30:39

Find a way. So and and our history has always dragged us into complex projects,

Nico Johnson  30:43

yeah,

Jake Pepper  30:44

really hard projects, and that's what we're known for, which is good and bad because we build these really complicated, you know, now data centers or hospitals and labs, but we also like really easy jobs. We love those, you know, when they're not complicated. So it's a double edged sword to be known for that, but that that I think everybody at the company really knows now, and they live by it. Is like we care about each other and we care about our clients. You know, we we find a way. If there's a problem, we're going to figure it out, and we do the right thing. If it's going to cost us more money and it's going to be the right thing for the company and for the client, and they're potentially going to be a future client. Let's do it. Let's do it.

Nico Johnson  31:23

It's so interesting when you describe it that way because we've had this conversation about how, without naming names, you've walked away from projects and opportunities with solar developers and IPPs who essentially are just looking for the bottom dollar,

Jake Pepper  31:36

right?

Nico Johnson  31:37

And if they understood or valued that you care and that you do the right thing and that you find a way, then they recognize that $1 saved is not always $1 kit.

Jake Pepper  31:49

Yeah,

Nico Johnson  31:50

I should want to make comment that I appreciate the clarity of find a way because I have an it's an informal core value in the business, and we call it Fitfo because can't say it out loud in most meetings. And my kids recently were like, "Dad, what is Fitfo? And I was like, "It's figure it out.

Jake Pepper  32:09

Yeah.

Nico Johnson  32:09

My kids were like, "Do you say that in meetings? Like,

Nico Johnson  32:13

yeah, I say it in meetings.

Speaker 2  32:14

Yeah,

Nico Johnson  32:15

because I also have a culture of like we don't hold back. Like, we I'll tell you like I'll we're very direct. I'll tell you like

Jake Pepper  32:22

it is. Yeah,

Nico Johnson  32:23

but I really, yeah, we find. I think find a way is a more elegant way to say fitvo.

Jake Pepper  32:29

It is, but like that's the expectation of our employees. Like figure it out for the client. Yeah, do what's right for the client, and make sure you care about everybody along the way, and don't leave bodies behind us. I think that has allowed us to navigate multiple markets and sectors. We believe in geographic and sector diversification. What's right for a hospital client might not be right for a K through 12 client. So that we've got groups that focus and have expertise in each of those areas. But that diversification has been really good for us, especially when you go through a downturn,

Nico Johnson  33:01

yeah. So the conversation coming back to coming out of NBA was: look, there's skinny margins, high risk. Like just construction is not enough. How do you have a mature discussion with an octogenarian and with your uncle about the options, real estate, technology, manufacturing,

Jake Pepper  33:21

yeah,

Nico Johnson  33:21

all the options, and then ultimately, how did you land on energy?

Jake Pepper  33:27

Yeah, there were a couple steps along the way, and part of it was also other people that had joined the company. So in the middle of my MBA, my dad rejoined,

Nico Johnson  33:35

yeah,

Jake Pepper  33:35

which my grandfather asked him to do. So they they just didn't see eye to eye, my grandpa basically told my dad, you know, no, you can't do that, and that was the last straw. And so he's like, "How do you want me to run the company if I can't make these decisions? That next year was tough, but then they were best friends, and so they they spent a lot of time together. Their relationship was great. So when they came back, when Stan came back, he we also kind of went out and we brought in a new CFO. So his name is Chris Averell. He's now president of Pepper Construction Group, which is that core operating business. Chris came out of the private equity world. He knew finance. He's really good at strategy. He's also an accountant. Very rare find and a fantastic asset to the company. So as I'm going through my MBA, I'm taking a finance course, and I'm I'm talking to my grandfather, and we had all of our excess cash in AAA corporate bonds. Yeah, and every once in a while, when John Buck, a big developer in Chicago, raised a fund, we would put a million bucks in, and so I'm looking at okay, we're investing in real estate, general partnership funds and bonds, and I'm taking a finance course. I'm like, okay, there's a better Sharpe ratio here. We should change these investments. Chris Averell was like, yes, we should. Yeah. So first, we started looking at just our our investments and how do we make those less risk for higher return. Yeah. So that was step one. We. Then went my grand or my father said, you know, we should really take our equipment department in Illinois and make it its own company. And he goes, can you help me do this? And I said, yeah, I'm actually taking a class on this right now. Oh wow! So on what

Nico Johnson  35:14

on spin? How to

Jake Pepper  35:15

like spin a company out? Yeah, and like what what the mechanisms would be, how you build those models, what the valuation should be, and kind of how the transactions get structured. So I put the models together,

Nico Johnson  35:26

but this was common inside of your program as well. Like you weren't the only one that was like, "Oh, look at this! I've got a class on exactly what my dad needs me to do. Or my I signed up for the

Jake Pepper  35:36

class before I was asked to do it, and it was just good timing.

Nico Johnson  35:39

Yeah.

Jake Pepper  35:39

So we didn't proceed. Yeah, we we broke out, and that's what's right across the building from us in a in a warehouse. Here is 365 equipment and supply. And so the idea was there's much better margins on materials and equipment rentals, and we've got it as a division that's supporting our projects. But why shouldn't we be doing that for all of our subcontractors or even our competitors, if they need a piece of competitor, Sun

Nico Johnson  36:03

Belt.

Jake Pepper  36:04

Yeah,

Nico Johnson  36:04

okay.

Jake Pepper  36:04

It's a mini mini Sun Belt, Mini United. We have good partnerships with them because we don't have every piece of equipment. Sure. So we we rent from them and re rent to projects, and it works. Construction materials. There's a ton of opportunity in, so we've got some specific materials we focus on, but that's that was the first step, and so then I was like, okay, look, there's another business now that's part of the umbrella that's got better margins, and if we grow that revenue, we'll make a lot better in margins than on our construction side. So that was the first step, and I think Richard came around, and yes, he always wanted to make sure that we were a builder, and that's what we're known for. And you have some companies of our size that are just CMs, contract managers, and we don't want to be that because we want to know how to build. And we actually self perform, so we pour concrete, pour towers, we do rough carpentry, and so we have a lot of labor that we run as well, and that's important to us. Yeah. So from there, it's like I think my dad he read a book one time, and and this was the the most elegant way for me to to think about it, and for him too, is you know your farmers all throughout America they're unfortunately you know struggling to make ends meet, and that's kind of a function of how that industry is built. But everybody around the farmer is making a lot of money. Your seed manufacturers are making a lot of money. Your equipment manufacturers are making a lot of money. And so we started to look at the construction business as the farm.

Nico Johnson  37:35

Yeah.

Jake Pepper  37:35

And so this doesn't have to be the big money maker. But how do we maintain that farm because it's critical and core to who we are and what we do, and then how do we look for opportunities that are peripheral to that farm? And energy is one of those. Equipment's one of those. How do

Nico Johnson  37:50

farmers do it? Like, can you expound on the farm model or that book? Maybe

Jake Pepper  37:55

your traditional family-owned farm doesn't do it, right? Yeah. And so you've got these big corporate farms now that have vertically integrated all of that, and that's why they're so successful because of those economies of scale. But I feel like the farmer story is kind of a tragic one because they they get put out of business by the bigger players. Our construction business isn't going out of business; it is successful. It makes money.

Nico Johnson  38:17

Yeah,

Jake Pepper  38:17

but the question is like, what are we going to do with that money? We don't have to reinvest it all into the business to win more construction jobs,

Nico Johnson  38:25

right?

Jake Pepper  38:25

And it's you know it's not capital light, but if we make money, you know we can reinvest it into peripheral industries or areas that we see opportunity in.

Nico Johnson  38:34

Yeah. So energy was an opportunity.

Jake Pepper  38:37

Yeah.

Nico Johnson  38:37

And how did how did energy win out?

Jake Pepper  38:42

Yeah. There was a. So going back, I remember we talked about it probably 10 years ago. Our CEO at the time of our Illinois company, guy named Ken Edgey, was like, "We should look at solar. And there was a bill in Illinois that passed the Future Energy Jobs Act, and but it didn't have any requirement for prevailing wage. The Inflation Reduction Act wasn't around, so we never built anything, and we kind of watched it. We tried to figure it out a little bit, but never really dove in. Fast forward, Fija was kind of out of funding. The funding allocated had been used up, and so Illinois was looking at another bill, the Climate and Equity Jobs Act, and the carpenters do a very good job of tracking policy. And so they were in Springfield, and they were pushing for union required labor to be part of that bill. We're union signatory in Cook County and the nine Caller counties around us, and so they called us and they said you guys should get into solar because you can open a new market and then you can hire a lot of carpenters and we'll create a lot of work. Is

Nico Johnson  39:46

that a favor to you or is it just like they were calling everybody? I

Jake Pepper  39:48

think so. I think they probably. I should ask them. I think they called everybody, but most of your general contractors are busy at the time and they're like, "Why would we mess around with solar? We took a swing at it, and one of my. Colleagues, Kevin Connolly, we brought him in to try to win a job, and we did. We won a job for Nexamp. It was actually under the old Fija bill, but it was Illinois Solar for All. Nexamp had bought the project from an originator. They were Nexamp was the EPC,

Nico Johnson  40:17

yeah,

Jake Pepper  40:17

and so they just hired us for C for

Nico Johnson  40:19

C,

Jake Pepper  40:20

and we started it with a senior superintendent who has since retired. She was great, but in the middle of that project, she retired, and we brought a carpenter foreman named Marcos Martinez in to run the job. And we kind of knocked it out of the park. It was like, okay, we can build this, we can run crews, we can, and we subcontracted. We didn't we didn't self perform the labor on that one, but we could run the job with a PM and a carbon reform and successfully do it. And Nextamp was happy with the product, and so we said, "Okay, there's something here. Let's see if we can figure out more more jobs to win. And then Seija passed, and so Cia passed, and it didn't have union required language, but it had prevailing wage requirements in it. And so, the further north you get in Illinois, the more kind of

Nico Johnson  41:08

prevailing wage related union and

Jake Pepper  41:10

prevailing wages. And so, up in northern Illinois, we were we were going to be a good solution. We took on a portfolio of C only projects, and then we took on a portfolio of EPC because we realized, to your point, wait-they're just third-partying the engineering, and then they're not even procuring the panels or procuring everything else. So we could do that. I'm presuming you

Nico Johnson  41:31

have a huge buying shop here for the construction side, or

Jake Pepper  41:35

kind of not really. A lot, almost all the materials go through our subs, and so subcontractors they want to control their materials. They get to mark it up. It's part of their business. So it's part of their heavy

Nico Johnson  41:45

engineering. Like, what's the

Jake Pepper  41:46

we don't engineer either. We manage the project. So like we we bring all those people underneath that umbrella and we make sure that it gets delivered. Like I we have a concrete. We buy all the concrete and like there's UNA there

Nico Johnson  41:58

you win a stadium. Then the architect is a sub to you.

Jake Pepper  42:02

Yeah, we that's design build. We rarely carry design contracts. Okay, it's very common in industrial, but there's risk. And so our liability insurance, we would never stamp a drawing and say that we certify this design. Yeah. So we have architects on staff, we have engineers on staff, but we don't let them stamp anything. Yeah, if we are going to do a design build, we can have that architect work for us. If we were asked to do that on a stadium, we'd say no. So the architect usually works directly for the owner. Yeah, we work directly for the owner. Got it. And then we coordinate.

Nico Johnson  42:34

I'm curious about the nature of like the regionality. So one of the things that gave you the revenue expansion early was going to the coast, expanding to different regions. You expanded to something like 40 plus states at one point, and then you contracted and effectively have said like just not the coasts. One thread I wanted to pull there: What did working for Disney teach you?

Jake Pepper  43:00

I think it was twofold. It was Disney is a really tough client with high expectations, and they, you know, we have clients that believe that we should make a fair profit, and we have clients that don't. We don't work for clients that don't think we should make a fair profit. So that was actually, you know, go back to the '80s. A fair profit was one of our core values, and we told our clients we have to make money, or our business doesn't succeed. We actually used to publish our financials, you know, as a private organization, and we said, "Hey, clients, we make money. We have to make money. If you want us to be a good contractor, that's the only way for us to start.

Nico Johnson  43:37

Last thing you want is me going out of business halfway through your project.

Jake Pepper  43:39

Yeah, right. And so Disney was difficult to work for. I wasn't here. That was in the '80s as well. But we built part of Epcot, and in Florida it was a non-union environment. Right. And there was another project across the street. We would lose our entire crew to the project across the street because they got $1 more per hour.

Nico Johnson  43:57

Yeah.

Jake Pepper  43:57

And then we would have to pay them $1 more per hour to get them back. And so

Nico Johnson  44:00

the and of

Jake Pepper  44:01

course you know Disney's not going to approve those cost increases, and so it was really difficult. My grandparents had been going to Delray Beach forever. I think we did a we helped on a museum down there as well, and then it was like let's never go back to Florida. And it's just a it's it's cultural, and so we focused on the Midwest because we understand the culture, and people work hard, and they want to do the right thing. That doesn't translate to every part of the country.

Nico Johnson  44:26

I think one thing that surprises folks when they come to Illinois, in particular, and they start pulling back the layers of seja in particular, is the underlying focus on the not not equity for equity's sake,

Jake Pepper  44:39

yeah,

Nico Johnson  44:39

but like a fair distribution in the labor force that keeps the labor force

Jake Pepper  44:46

here

Nico Johnson  44:46

instead of them going elsewhere. It keeps the kids growing up here here instead of moving away. Can you talk about the just the underlying sort of the culture of blue collar work in the Midwest and how how that works? For Pepper,

Jake Pepper  45:00

I think. Well, we have a ton of families that work for us, and I say families because there's multi generations that are at the company. The Baldakis are the ones that stick out the most. Their you know their grandfather Warren Baldaki was the field guy for my grandfather.

Nico Johnson  45:17

Wow!

Jake Pepper  45:17

And so I got to meet Warren as I as I was working and and unfortunately he passed away as well. But you know his four son, his three sons work here. His his nephew works here. Now we're into the next generation. I think there's actually more Beldocies in the company right now than Peppers. No way. And so they these families that they come up through the trades. All those guys were carpenters, and they're like, hey, Pepper's a good spot to be. Come on over, and so that thread has worked very well for us. And and those people, we say bleed green. People don't bleed green any anywhere more than our field guys do. So those people love this company, and and it's a tribute to them because they they do the hardest work in the field, so we celebrate them as much as we can. But that that just nature of hard working in the Midwest, and that again, and a lot of it's blue collar work. Like that's important. That's part a big part of what we do.

Nico Johnson  46:14

So you're taking on increasing leadership. You're building a division of the company. You are now responsible for contracts where you're sending people, perhaps further afield than Illinois. I've heard you say that culture has to travel. How do you know whether culture will travel? How do you instill that in your in the organization and in your project managers?

Jake Pepper  46:37

As we've opened other geographic locations, it's always like, okay, who from the company is going to go lead that? So we're not. We very rarely bring in a top level executive from outside the company, yeah, because their culture is already defined by the previous company they were at. So our goal and our plan as a as a company is let's hire these interns, let's have them work there every summer. Let's make sure they come work for us after they graduate, and then let's make sure they retire here. So that's been really successful for us. When we go to Indiana, or we go to Ohio, or we go to Wisconsin, it's like who from that home office is going to go lead that one, so that we make sure. And you can you can partner them with new people from outside of our company, but you still then have that connection to the history and the legacy and the culture and the office. So that's typically how we do it when we go outside of the Midwest. It's hard. It's again, it comes back to that leadership of you know the site and who that project manager is and who's in charge, and then you have to marry that up with the local workforce. I think that was difficult in Texas. In Texas, everybody and these are the field guys. They just wanted to go fast, and so we told them we were like, "Guys, slow down. We need you to be safe, and we need you to be safe more than we need you to be fast. So that culture didn't translate, which is one of the reasons we left Texas.

Speaker 3  47:57

Yeah.

Jake Pepper  47:58

So that, and you know, California is a whole nother world too. It's very different than the Midwest and Illinois. So we were successful out there for a time, and then the market changed, and it didn't fit us. And so we we wound it down and came back.

Nico Johnson  48:11

Better to vacation there than build a company. Yes, just build a company that makes profit, and you can vacation anywhere. Right. I'm curious about how it went from a serendipitous call from the carpenters union, a fortuitous relationship with a company that you had no idea was the largest community solar builder in the U.S. Like that-that your first contract was Nexamp itself-is kind of as you've begun to understand the industry, like you could have you could have landed with a lot worse

Jake Pepper  48:37

yes

Nico Johnson  48:37

customers.

Jake Pepper  48:38

We could have, but we had those early too. We had bad customers early

Nico Johnson  48:42

in the solar side.

Jake Pepper  48:43

Yes.

Nico Johnson  48:43

Okay. So you skipped over a few, but at some point, you, the MBA, have to start crunching the numbers as well. I've been in the solar industry my entire career. I've had lots of friends in the roofing industry and other construction trades not only poo poo but leave the solar industry and say you can have it.

Jake Pepper  49:03

Yeah.

Nico Johnson  49:03

So yeah. Goodbye, single digit margins. Going back to you know 30 plus percent gross margins.

Jake Pepper  49:10

Yeah.

Nico Johnson  49:10

The roofers, of course.

Jake Pepper  49:11

Right.

Nico Johnson  49:12

How did the I'm going to continue to call it energy, but for now the early roots were solar.

Jake Pepper  49:19

Yeah.

Nico Johnson  49:19

How did the energy division earn the right to live inside of Pember.

Jake Pepper  49:24

Well, for context, 2% net earnings pre-tax is a fantastic year for a general contractor.

Nico Johnson  49:31

Yeah,

Jake Pepper  49:31

yeah,

Nico Johnson  49:32

wow. So

Jake Pepper  49:33

our margins are really skinny. So if we can bump, if we can double that to 4% or 6% right? That's a great market to get into, and I think our what does that look like?

Nico Johnson  49:43

Gross,

Jake Pepper  49:44

gross. So our goal is 6% gross, 4% SG&A, 2% net, and that's that's the plan. So that's how our plan comes together. That's a goal. Typically, we're underneath that.

Nico Johnson  49:54

My understanding was like most of the EPCs in the solar industry, at least, or operating. Rating in like the seven to 8% like the solves of the world,

Jake Pepper  50:02

and they are because they're self-performing and controlling multiple buckets. So again, if if we looked at a lot of our work on the general contracting side is self-contracted, yeah, but

Nico Johnson  50:13

that's how you de-risk

Jake Pepper  50:14

yeah

Nico Johnson  50:14

the volatility.

Jake Pepper  50:16

Yeah,

Nico Johnson  50:16

okay,

Jake Pepper  50:16

yeah. So that subcontinent, if we looked at like the amount of actual hours or cost of our work and hours, our margins would look different. But because we carry all of that subcontracted revenue on our books, that it compresses the margins.

Nico Johnson  50:29

So 2% net preset

Jake Pepper  50:31

net pretext. Yeah, yeah, and that's great, right? So then the model becomes gross revenue, and that number, that absolute number grows. Yeah, and so

Nico Johnson  50:40

that also that pays all your people. Everybody's got, and that's after

Jake Pepper  50:43

salaries and bonuses. Yeah, of course, that's right. What I'm

Nico Johnson  50:45

saying is like that is a business that is paying everyone what they should be making, yeah, and is putting away the reserves necessary and has covered insurance. Like everything's covered. This is profit.

Jake Pepper  50:56

Yeah, before

Nico Johnson  50:57

tax.

Jake Pepper  50:58

Well, I think that's part of going back to this one pepper concept, we really dialed into like who are we and why do we exist?

Nico Johnson  51:06

Yeah,

Jake Pepper  51:06

and there were a couple themes there. One is like we're builders.

Nico Johnson  51:10

Yeah,

Jake Pepper  51:11

we build buildings, and I tried to say like no, we don't just build buildings. We build. Right, we build things. But it was like, why did we? Why do we exist? And the reason we exist is not to make money.

Nico Johnson  51:22

Yeah,

Jake Pepper  51:22

the reason we exist is to create opportunity for people, and that, like going back to when my great grandfather started it, my grandfather grew it. It's always been, and again, we have these personal relationships with all these families that have made careers and and lives with us, and so that's what it's about. We want to grow so that we can create opportunity and provide livings for all the people that are part of Pepper. You know, the profit that comes at the end of the year is great and fantastic, but that's not why we exist. And so

Nico Johnson  51:51

it's interesting too to think about the correlation for the younger generations who see. And by the way, I was thinking about like as you're talking, like 2% for most people in business right now doesn't seem interesting because no investors interested in that, no private equity is interested in that. Like the only people interested in a 2% net margin business are people who understand that that is 100 year business. Right, they're people that understand that this is going to employ 1000s of people. It's going to list last forever.

Jake Pepper  52:20

Yeah,

Nico Johnson  52:20

and it also means not only do you have job security, but you're going to work forever. Like you're not going to retire from that business. Your grandfather never built a company he would retire from. He built a company could work at till he died.

Jake Pepper  52:32

Yeah, yeah. And I think it was interesting. Like when COVID rolled around, and we were figuring out is is construction going to be allowed in Chicago or in Illinois, or is it not? Is it going to be deemed essential, or is it not? And we started town halls, and we got on a call, and we said, "Hey, we can last for four months if the revenue spigot turns off. And if that happens, like we'll just burn through our reserves, we'll pay you guys all for four months, and then we'll be out of business. And like that was now, thank God that didn't happen. We were deemed essential. We were able to continue building, but it wasn't like, "Hey, let's lay everybody up. We didn't do any layoffs through COVID, and every other company did. And so, most people forget that pretty quickly. But it was like, we don't need to do layoffs, and thank God we didn't, because as soon as you know we got through the worst of the pandemic, the industry took off, and everybody had to rehire, and we were we were solid still.

Nico Johnson  53:25

You talk about your observation, and I would argue, like even the observation, I would love to hear like what were the thoughts of your your family members as they started observing what you were doing with the with this energy startup. It's a startup inside the company. It's a it's an experiment. Was it considered like a side project of Jake? And also, how did what did the dialog sound like as they're observing the risks, the returns, the opportunity, the expansion? Like, what did that sound like? It

Jake Pepper  53:54

was a conversation with the family members, and yes, it was like, let's see if Jake can do this, and let's see what happens, and let's see if you can build a business and run a business. But we also have a board of directors that includes outside independent directors. And talking to some of them, they're like, you know, we went through the models and we we looked at a big portfolio transaction and we looked at a big investment for energy. We ended up not doing that, but we got approval to do it. And I remember the head of the investment committee looking at me. He's like, "This looks great. Your model looks good, but he's like, we're not approving your transaction. We're really betting on whether or not you can succeed in doing this. You and your team with the energy group. And so, you know, we're four years old as energy. I like to say we've paid for a lot of lessons, and paying for a lesson means working for a bad client, losing money, and learning who we want to work for. and And we came into this industry very naive. We thought that it was going to be very similar to building buildings. We thought that the the debt and the equity players were going to translate. We thought. That the developers were going to translate nothing translated except for the fact that you're building something, right? Project management translated. Yeah, that was like the only thing. So we had to learn a lot, and we knew nothing about the electricity markets either. And so, understanding policy and regulation and electricity markets on top of all new relationships was really interesting. I think what I had pushed so long was we should develop real estate because then we can have the opportunity to make more. And yes, it's risky, but let's consider that the reason we we haven't done a lot of that in the past is because our clients don't want us to. They don't want us to be a competitor. When we came into energy, luckily we had no clients, and so it's a different conversation. It's like, why don't we develop? We'll develop, and we can either hold those and build them for ourselves, or we can develop and we can sell those and sell them with an EPC contract attached. Yeah. And so my whole and I had had a theory of like, let's figure out who's funding real estate. Let's get close to the capital stack and the equity players funding the real

Nico Johnson  55:57

estate for the solar project.

Jake Pepper  55:58

No, I I mean in general for the business a while back, and said we need to understand debt and equity, and we need to get to them early because they are really the ones who decide who builds their building, not the architects, not the engineers, not the owners. Reb, it's the people that are paying for that project to be built. So we went down this path of really trying to get closer to the financial side,

Nico Johnson  56:19

right?

Jake Pepper  56:19

And in solar, it was just like, yeah, let's put that whole financial side together. Let's create our own backlog. Let's create our own projects. And it takes a different skill set, which another guy, Pat, has come in with a real estate development background, and he helped us kind of build that development group out a little bit. But my whole thing is like, let's not compete with six other contractors for work. Let's make sure we build the right partnerships with clients, and then let's try to create our own projects.

Nico Johnson  56:50

Opportunity in building buildings in the last three years, and probably for the next 10, are these big empty boxes moving lots and lots and lots of electrons that power all the AI, making our lives easier and and less complex. I'm obviously oversimplifying. When did data centers start to creep into the mix from a construction perspective, and how has it changed the perspective on how you? I'm actually curious how data center is just a shell.

Jake Pepper  57:19

Yep,

Nico Johnson  57:19

you're not doing the interior build out of a data center.

Jake Pepper  57:22

We are now. You are. So you're taking on like

Nico Johnson  57:24

the work of a Clayco or other like all kinds of yeah. But

Jake Pepper  57:27

again, that's all subcontracted to an electrician that knows how to do it all. So we still have ultimate risk and responsibility for it. But we can't do it without a good electrical partner.

Nico Johnson  57:36

You're doing what, like five data centers right now? Yeah.

Jake Pepper  57:38

So if if we look back at the history, the first we did a tier three data center and corporate headquarters. We don't build a lot of them anymore because people don't build them. But that was a very good market for us over the years.

Nico Johnson  57:50

Building headquarters. Yeah,

Jake Pepper  57:52

building headquarters. So we built Granger's headquarters up here in Lake Forest, and that was our largest project at the time. Yeah, you know everybody had their data centers on site, and so you know those are called enterprise data centers, and we would build them for our clients. And so we've actually how much?

Nico Johnson  58:06

What's the footprint of an enterprise data center?

Jake Pepper  58:08

Yeah, this room. Yeah, you know it's not big. Yeah, server room, but he's just server, just a server room. But depending on the needs, somebody had the requirements. No, they didn't. So now they are enterprise data centers are on site where you own your servers. We just ripped out all our servers. We went to cloud, right? We don't need them, and we we did for a long time. And then it was like, okay, well, what if a tornado hits our building? Cisco, whatever you want, AWS works. Why

Nico Johnson  58:34

am I doing this?

Jake Pepper  58:35

So enterprise was our first foray into the data center world, and then we started building colocation data centers. Yeah, but just the corn shell. So just the box,

Nico Johnson  58:43

core and shell. So we've done that. When you first heard corn shell, I was like, "What's a corn shell?

Jake Pepper  58:47

Yeah, core shell, core and a shell. Yeah, yeah. So we've we've built those for quite a while in the colocation data center sector, and then you know I think middle of last year, so last summer we were having a president's meeting. We've got a president for each of our locations, and we said, you know what, getting into the hyperscale data center, which is your large, you know, dedicated AI campuses, we said it's just going to be really hard, and so we're going to have to spend a million dollars just bidding work to try to get into one of those clients, we said let's not focus on that because colocation and enterprise is actually going to swing back in a few years. And if we focus on that, we'll be the go-to. One of the hyperscalers then came along and said, "Hey, will you bid this job? And we said, "Okay, we'll we'll bid

Nico Johnson  59:38

it. Right.

Jake Pepper  59:38

We didn't think we were going to win it, and we did, and it was a $400 million contract. Wow! Out of an office that does 300 million a year, so it was a bad deal.

Nico Johnson  59:47

Yeah, again, so that

Jake Pepper  59:48

was out of our Columbus office, and then they said, "Can you bid the second building on the campus? Right, and we thought it was just an exercise again, and they gave us that. So another 400 million.

Jake Pepper  59:57

That was 250 million. The first phase had. Three support buildings on it,

Nico Johnson  1:00:01

so one one client doubled that office's annual revenue,

Jake Pepper  1:00:04

and that those first two buildings are on a campus of 15. So

Nico Johnson  1:00:10

wow,

Jake Pepper  1:00:11

that's just big numbers numbers we haven't ever seen before. And I think

Nico Johnson  1:00:15

what does that do? So and that's one of now multiple. Yeah, is that

Jake Pepper  1:00:18

we've got six more, and what does that do to

Nico Johnson  1:00:20

the trajectory of Pepper Construction, the the top line. Yeah,

Jake Pepper  1:00:25

we we took the past decade to grow from 1 billion in revenue to 2 billion, and that you know was a grind. It is hard. Yeah, and then it felt like as we were approaching that $2 billion number, we kind of got invited to the big people's table, right? The adult table and big project. There's only so many contractors in the country that can do a project over $200 million,

Nico Johnson  1:00:49

right?

Jake Pepper  1:00:50

And so, while you know, if we look back even five years ago, we probably had five projects that we were tracking in our pipeline over $100 million. Today, we probably have 50. So the projects have just gotten bigger, but we've been asked to build bigger projects along the way. So, so these data centers come along this year. Our projection says we'll do 2.7 billion, which is a huge jump from a percentage standpoint, and we'll put our business plan for next fiscal year together in July, and I'm pretty sure it'll be three and a half. So we'll go. I remember

Nico Johnson  1:01:26

10 years working two years.

Jake Pepper  1:01:27

Yeah, yeah. And we we I talked to Mortenson, and they had a similar trajectory, but they did it probably 10 years ago. And I was I was talking to one of the guys that built one of their stadiums. I was like, "What was it like when you guys were from 2 billion and now to 4 billion, or five, or six, or seven, or whatever they do? He's like, "Oh, it happened overnight. We were in from two to four overnight, and so we've seen that writing on the wall a little bit, and we've been getting ready for

Nico Johnson  1:01:53

it.

Jake Pepper  1:01:54

And one pepper's part of that. Like we know that our clients are going to be across our regions, and we know that we have to have really good policies and procedures, and everybody delivers the same product. But the the data center, you know, we didn't predict data centers coming along to do that.

Nico Johnson  1:02:08

What do you do with 80 million free cash flow? Now you got a better problem. Well,

Jake Pepper  1:02:12

we renovate all our buildings, right? So the Barrington office is 25 million. We've been renovating our real estate for the past seven or eight years, and all of our real estate. The question now is like, okay, we don't have a building project next year, so what do we do, and where do we have opportunities to deploy capital? Yeah, how much do we need to put back into the construction business, and do we look at an ac? We've never really done an acquisition. Yeah, so that's that's been a conversation over the years, but it is really hard. We're scared of it because of culture.

Nico Johnson  1:02:44

I'm curious around the real estate and development play. Like, what are you learning about powered land through all of this?

Jake Pepper  1:02:51

I'm learning that everybody's figuring it out at the same time, or trying to figure it out at the same time. We were brought into a partnership with a company named DataWat, so we have a couple powered land sites that we control in Illinois. Maybe what

Nico Johnson  1:03:03

does it mean powered land? Yeah, powered land.

Jake Pepper  1:03:05

So we'll we'll we'll rewind a little bit. Powered land is, you know, I think of it. If you look at a big suburban mall, and somebody's going to buy that land, they're going to build all of the pads, the construction pads, and then they're going to look for tenants. You know, one anchor tenant for the the core pad, the big mall, and then you've got all these outbuildings that are going to be restaurants or little shops that are just going to build up on top of that pad. So powered land is the same thing. Only those pads now have an incredible amount of power to them. So you get this powered land, and it's maybe you're not even doing the pad, but you're getting all of the entitlements to build a data center. Yeah, you're getting all the power commitments with the utility. You're getting the zoning. You're getting the community support, maybe depending on how you're doing it. And then you have an end user that doesn't really know how to go originate that powered land coming in and saying, "I want that powered land. Example of the end user

Nico Johnson  1:04:04

would be one

Jake Pepper  1:04:04

of the hyperscalers, but also you have like these neo clouds that you know a core weave could come in with a backing from some financial institution, right, and take and buy that site to to build. You have developers that are just building and owning and operating the data centers and leasing out the servers to the hyperscalers, so there's a bunch of different transaction structures that were that's like trying to become familiar, like an Equinix

Nico Johnson  1:04:29

kind of play. Yeah, yeah. So where does Datawat fit in this architecture? Like, what?

Jake Pepper  1:04:34

Yeah, so they were solar and wind developers historically. Really? Yeah, they a guy named David Halligan is a good colleague now, and he's built out a group that was originally focused on cryptocurrency mining. Yeah, and so they they had this thesis. They went and looked for some land positions. They got them, and then AI came along, and it's like, okay, crypto is not what we want to do. We want. Try to build powered land for data center campuses. They're a small shop, and they can't always open a door they might want to open. And so they approached us and they said, "Hey, can you guys partner with us? You know, you've got a great brand and you've got a good history in Illinois, and that's where these sites are. Are they local? There, yeah. Okay. David lives downtown. There's so he asked questions,

Nico Johnson  1:05:20

and he found he found his way to Jake Pepper.

Jake Pepper  1:05:21

Yeah, got it. Yeah, and there was it was you know one of my Kellogg professors introduced us like secondarily. There was a time where two emails came in back to back, and I was like, this has to be the same company. Yeah. So we met with the Data Walk guys, and and again, you know, a lot of people say it, but you know, you want to work with good people, right? And we got along, and and

Nico Johnson  1:05:40

that's a co-development.

Jake Pepper  1:05:41

Yeah. Okay. So we've got a co-development, a couple co-developments in Illinois. Is

Nico Johnson  1:05:45

that a subsidiary? Like, do you guys set it up as they're just a

Jake Pepper  1:05:47

project company? So technically, it's under Pepper Energy. Okay. But we set up project companies for these various land sites, and we we've got applications and load requests into ComEd, which is a PJM participant. I just want

Nico Johnson  1:06:01

to ask a few more questions. So, you create an SPV under Pepper that DataWat is a participant in.

Jake Pepper  1:06:07

So they actually own the SPV. We're a participant. So we're kind of coming along for the ride in the Illinois projects. But yes, there's a there's an SPV. We have economics associated with any transaction of that SPV. Okay. Flip side, we've got a Kentucky project where we created the SPV. Data Wat will kind of come along for the ride. They'll bring their expertise, and and you kind of

Nico Johnson  1:06:29

provide the the cover for them. Yeah, give them the financial backing to go after. No, there's a

Jake Pepper  1:06:34

financial partner in there. We're not. Okay, we're our strategy's somewhat capital light there.

Nico Johnson  1:06:39

Oh,

Jake Pepper  1:06:39

and there's up there's good upside, but we are our value is figuring out how to do it. There's a lot of people that are out there saying, "Oh, we've got this land, and we've we don't need a power commitment from the grid. We're going to do it all behind the meter.

Nico Johnson  1:06:54

Right.

Jake Pepper  1:06:54

There's not one large campus operating it behind the meter in the entire country right now. That is really hard. Do you think

Nico Johnson  1:07:00

there will be?

Jake Pepper  1:07:01

No, I don't think it will ever happen. We will never focus on behind the meter. It's all going to be front of meter. Oh no, no, no! It's not for you. But do you

Nico Johnson  1:07:07

think that there will be behind the meter? And

Jake Pepper  1:07:09

if they, if there is, it will be really hard to operate. Yeah, really, because a small little microgrid is really hard to operate. So multiply that by 1000, and it's going to just become more complex. I think it's. I think that. I think there will be. I mean, I look at data centers as a bubble. I think there's too much money flowing in. I think there's too many operators that don't quite know what they're doing. Yeah. I think what people don't remember about bubbles is that when a bubble bursts, the industry doesn't go away. It just consolidates, and your strong, you know, robust players survive. So your hyperscalers aren't going anywhere. Those companies aren't going out of business. Those neo clouds, the people that have got big behind the meter projects, who knows? I don't know what's going to happen there.

Nico Johnson  1:07:54

One of the reasons I was asking the question about the architecture of the deal is in a conversation we had, you were talking about how to how you figure out whose credit you're riding on. Yeah, right. Like, talk to me about that.

Jake Pepper  1:08:07

Yeah. So in these projects, we've got them out to a bunch of different people in these powered land developments. We're talking to a lot of different people. We're talking to institutional capital partners, some of which have their own data center development company in house, and so there's a group within that institutional partner that only focuses on financing their developer. Then there's a credit desk that'll provide capital to any developer or any hyperscaler. You have hyperscalers entering leases for servers. You have them originating their own data center campuses, owning, building, and operating them long term. You have them working with developers for the core shell, and then owning the inside and taking it over. And then some of the hyperscalers don't want it on their balance sheet, so then it ends up being a synthetic lease. You know, and so I think that's the tricky part. Is you know even you know Google is you know partnering with an Anthropic. Anthropic is partnering with a developer. There's institutional capital behind it. Google's using Anthropic to ultimately run Gemini or whatever it might be, and so and all of them want the asset if things go sideways, and so that's gotten really tricky from a contractual standpoint. If I go away, or if the developer goes bankrupt, who owns the campus?

Nico Johnson  1:09:26

Yeah,

Jake Pepper  1:09:26

and the end user, the renter of those servers, is fighting with the developer or the institutional capital. So that's getting you know these are things that nobody's ever had to worry about before. So the lawyers are making money structuring contracts as they always do, but it's getting a really complex. Good thing I I love complexity. I've got some partners that love complexity, and that's where we see opportunity is navigating complexity. So it's been a lot of fun.

Nico Johnson  1:09:50

What's the biggest risk facing Pepper right now?

Jake Pepper  1:09:52

Data centers for sure. Getting overexposed to data centers. The question is if an. When the music stops, do we have a chair? So you know we we operate in a model where we pay our subs when we get paid. We also self perform, and so I think the tricky part is as these projects get bigger, we have to have the capital to float them for 6090 days. Yeah, and if something goes sideways or all of a sudden there's a moratorium in the nation. You can't build if we're extended $100 million in a month, right? And they say no, we don't feel like paying you. You know, we're shut down. What do we do? Yeah. So we're we're working through terms with good clients to say we can't take this risk. Do you want to set up an escrow account? Do you want to prepay us? We have to pay our subs. We have to buy capacity. So

Nico Johnson  1:10:43

the

Jake Pepper  1:10:43

question is, you know, what it's the what ifs around if data centers stop being built, and we want to make sure we're not out a bunch of money in that scenario.

Nico Johnson  1:10:54

I'm curious how you spend your time in a day, and how you decide what gets your attention.

Jake Pepper  1:10:58

It's a balance for sure. I got three boys, 1211, and eight. I've got a wonderful wife, and so we went on a vacation last year. Sorry, two years ago, two summers ago, we drove to Montana, and there was a a guy next to the lodge that we were staying in, and he and he bought this house, and he looked at my son, and he's like, "I got to go for a call. I got to make a call. And my son looked at me. He goes, "Aren't you on vacation? And he goes, "Well, I like to think of it like this, Clark. I'm always on vacation. I'm always working. And he's retired. He's semi-retired, right? And so he's built this lifestyle where he can work from where he wants to. He can work as much as he wants, and he's he's done very well. And I don't know his name was Charlie. I don't know him that well, but that stuck with me. And it's not that I'm always on vacation, but I'm always trying to be a husband and be a dad and be a good employee, right? And so it's that balance. Yeah,

Nico Johnson  1:11:48

compartmentalizing those becomes becomes a fool's errand.

Jake Pepper  1:11:52

Yeah, and I don't go I don't go to work at eight and you know not talk to my wife until five and come home and right. So it's always kind of checking in. Luckily, I live in Barrington. I work in Barrington. I can come home for lunch. I can see my kids.

Nico Johnson  1:12:04

Yeah.

Jake Pepper  1:12:04

You know, a typical day, I go back and forth. I'm working out. If I'm in a good routine, I'm waking up at 445 and working out from five to six. Come home. I make breakfast for my kids. Get them off to school or get them going for their day in the summer.

Nico Johnson  1:12:18

Yeah.

Jake Pepper  1:12:18

And then I go to the office. So that's that's typically how it happens. I try to leave, you know, at a reasonable hour. You know, sometimes three, 4o'clock if we got to cart them around to activities. Try to do dinner together, and then log back on. And I do work later at night, and so that worked. Sleep is the one thing I can't find enough time for.

Nico Johnson  1:12:39

Yeah,

Jake Pepper  1:12:39

but that's okay. My my my wife just started a needlepoint business, needlepoint store, and a mahjong lounge, and so she's also very busy. Which I will keep that in mind now at night. Yeah, now at night, like we both just work, which is is working out pretty well.

Nico Johnson  1:12:53

Do you expect that you'll take over Pepper one day?

Jake Pepper  1:12:56

I hope so. We're working on that. My dad is planning his retirement for next year at our 100th year anniversary. He's the chairman and CEO. My uncle Scott is running the Pepper Construction Group. Yeah, so that's that core operating business. So me and Scott will have a partnership after my father retires. When Scott retires, it is me, but it's not just me. It's everybody at the executive level that helps run the business. So,

Nico Johnson  1:13:23

what do you think Richard would think of Pepper Energy?

Jake Pepper  1:13:26

I think he'd be excited, right? Like, as much as I say he was committed to the construction business, he also loved making money and he hated paying taxes. And so, he's a yeah, he's a business person. Yeah, he is, and and I think if he saw it being successful and you know growing the business's opportunity and again being profitable, that would be enough. And so I truly believe that I miss him dearly. He was great. He was fantastic to work with. But I think he would approve.

Nico Johnson  1:13:58

You're going to celebrate 100 years of Pepper in a short amount of time, relatively. What do you hope people will say about the next chapter of the business?

Jake Pepper  1:14:07

I hope they say all the things that they already say, right? I think I this is the the conversation we have around the water coolant and in exec meetings is we have been successful in maintaining our culture as we've grown from 1 billion to 2 billion, are we going to be able to do that as we grow from two to four?

Nico Johnson  1:14:26

Yeah.

Jake Pepper  1:14:27

So there's this balance, and and you hear it every once in a while, like, oh, that feels too corporate.

Nico Johnson  1:14:32

Yeah.

Jake Pepper  1:14:32

And so I go back and forth. I'm like, don't forget, we are a corporation.

Nico Johnson  1:14:36

Yeah.

Jake Pepper  1:14:36

Right. We we have to make money in order to pay people salaries and provide livelihoods, and so we have to act like a corporation sometimes. But we want that corporation to feel like a family to everybody that's part of it.

Nico Johnson  1:14:49

Yeah,

Jake Pepper  1:14:49

and I think everybody does feel that they really enjoy working here. And you know, those those multi generation families that work for us is a testament to that. I think the other thing. That's an interesting thought exercise. Is I think we will slow down our revenue growth if we see that slipping. Yeah, we will intentionally, you know, not grow if it's going to sacrifice our culture.

Nico Johnson  1:15:12

Yeah.

Jake Pepper  1:15:12

So that's going to be the big challenge is maintaining our culture, and that's why we are successful in hiring people is because they they want to work here. We had a we had a superintendent, and you know people jump all the time. The solar industry is bad. People move all the time.

Nico Johnson  1:15:27

Yeah, it is. And

Jake Pepper  1:15:28

we tell people when they work it, we want you to work here for a long time. We don't want you to work here for two years or four years or eight years. We want you to work here for 30. And one of our superintendents, we had lost a a really good person and a high up, and it was a shock to everybody. And he goes, "I don't know what's going on. So we got everybody in a room, and all of our superintendents, and this guy Jeff Follin. He he looks at everybody, and he goes, "Hey, the grass really is greener at Pepper. You always think the grass is greener on the other side of the fence, but it's greener here. And more importantly, the grass is green where you water it. Yeah. So if you just keep taking care of it, it's going to have this this positive feedback loop. And so I I took that to heart. The grass is green where you water it, and let's make sure we keep keep watering our grass and make make this the best place to be.

Nico Johnson  1:16:12

Jake, that was fantastic. Thank you for the time. I know it is the only thing we don't get back. So I'm grateful for the opportunity. I know that those who are watching, if they are still watching, they are at the bottom of page 10 of notes because this was chock full for anybody who's actually serious about building something. Thank you.

Jake Pepper  1:16:34

Yeah, I appreciate it. Likewise, been great to be with you.

Nico Johnson  1:16:38

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