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Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology

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insights in the middle market.

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Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing

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industry leaders and technology experts.

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Whether you're looking to streamline operations, understand the latest tech trends, or lead

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your company towards exponential growth, you're in the right place.

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Stay tuned and let's grow together.

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Hey Mike, welcome back.

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Back in action.

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Back in action, back at it.

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I thought today that we could take a little trip down memory lane from about five years

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ago when I joined TriVista.

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I remember you were pretty instrumental in helping me in what we're going to talk about

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today.

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To kind of set the tone for our listeners, I had come out of a publicly traded company

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and been in publicly traded companies for a while.

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And through a series of events, found TriVista found me and was able to join.

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And what we're going to talk about today...

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You respond to an ad in a paper?

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That's correct.

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Correct.

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Classifieds?

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Yeah, I think it was Craigslist.

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But what we're going to talk about is an introduction to private equity.

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And I was familiar with M&A activities.

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I've been familiar with carve-outs, take privates, all that type of stuff, but hadn't really

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had the opportunity to really understand private equity to the depth five years later that

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I have now.

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But it was thanks to you kind of pushing my boat off the shore that I was able to learn

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some of those things.

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I thought it'd be good for you, Mike, to be able to share some of that with your listeners.

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But to maybe start it off, could you share a bit about how you got in private equity

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and how you kind of started on this journey?

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Yeah, absolutely.

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So not dissimilar from you, my private equity origin story was I used to work at a large

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Fortune 300 business, diversified industrials, couldn't be further from the private equity

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sector.

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Candidly, I don't even think I had ever heard the words private equity.

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Maybe I had read about it in the Wall Street Journal or something like that.

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I wouldn't suggest that I understood what those two words meant at all at the time.

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This is going on 20 years ago now.

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And after a fairly short career in industry, I had the opportunity to start our firm with

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some of our other partners.

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And it just so happened that we decided to start a consulting business that would consult

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to the private equity industry.

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Now, fortunately, my partners knew a little bit more about private equity than I did.

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A little bit is probably an exaggeration.

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They could spell the words private equity.

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I'm still to this day wonder kind of how they found themselves understanding what it meant

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even to at a surface level.

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But that's a story for another time.

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That would be a good interview to do.

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But that was the beginning of my journey.

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So it was via consulting was my first exposure to PE, short for private equity.

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Our business at the time, the kind of thesis for starting the company was that private

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equity investors who were out there acquiring businesses, for us, businesses in the industrial

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space and industries that we were very well versed in from our industry backgrounds, these

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private equity firms were out investing in these companies.

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And we were going to provide them with expertise, sector, industry expertise, functional operational

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expertise and guidance as they did due diligence on some of those acquisitions.

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And then our thought was we could help some of those companies after they were acquired

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to grow and prosper and optimize operations, et cetera.

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So that was my first foray into the private equity ecosystem.

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So spent a good decade or so working in a lot of private equity backed businesses as

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an advisor or as a consultant, sold a lot of work to private equity firms, built a lot

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of relationships with private equity firms.

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I've probably personally visited four or 500, maybe more different private equity firms

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around the world, do a lot of work in Asia and Europe over the years, as well as a lot

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of work, obviously, in the United States and throughout North America.

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And to be honest, through that, throughout those first 10 years or so really started

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to take an interest beyond the companies that they were buying in industries that were interesting

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to us and relevant to our industry backgrounds, but really started to get interested in and

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more involved in understanding how the private equity business model really worked.

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And I think at first it started from a place of pure curiosity, but also I was trying to

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better understand my customers.

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And I felt like if I could better understand the investor's business model as a, you know,

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I wasn't a professional investor by training or by trade at that point.

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I was an operator of businesses and a consultant to businesses, operating companies.

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My thought was that if I much better understood the private equity business model and the

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investment theses and how the underwriting process for new deals took place and really,

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quite frankly, ramped up my financial acumen, my M&A acumen, that I could serve those private

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equity clients better.

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So I decided at one point, and I'm not sure if it was a conscious decision or what, but

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I started researching a lot more than I ever had on how the private equity ecosystem worked.

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We had done a little bit of co-investing into some of the deals that our private equity

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clients were acquiring.

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And that, I think that actually with hindsight was probably what piqued a lot of my curiosity

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too, because we had some successful investments and I wanted to do more of them.

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And I was just really curious as to how they worked.

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So I spent probably five or six years going deep down some dark rabbit holes online and

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listening to podcasts and reading books and attending some courses that I could find that

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were about the topic of how private equity works, how funds get raised, how deals get

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done, how terms of M&A transactions get negotiated, how deals get financed, a lot of things that,

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quite frankly, were impacting all of the businesses that we were involved in.

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Our firm, as we started out, our consulting business exclusively advised private equity

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firms, not the case today.

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We advise a broad spectrum of clients.

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But in spite of the fact that I had worked in that sector for 10 years, I really didn't

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understand how the PE business model really had come together.

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So I spent a long time researching it and that's how I kind of stumbled into it.

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Now, I think the great thing for our listeners today is kind of culminating all that into

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kind of a 101 as we discussed and kind of taking our listeners through all that experience.

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You save them all that Googling, I guess the new way of saying it's all that GPT and they

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can kind of use that knowledge, a lifetime of knowledge for a 30 minute conversation.

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And maybe we can just jump in and kind of the 101 crash course.

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Let's do it.

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Let's do it.

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So as we were preparing for this episode, I was trying to put myself in the shoes of

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the listener.

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So kind of beyond just recognizing there's a lot of folks out there who like me 20 years

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ago, like you five years ago, really don't understand private equity, at least not to

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a level that they would like to.

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So just recognizing there's a lot of people out there that are in those shoes.

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So it's important to provide some relevant content to those folks.

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But also, I think we hear a lot about private equity in the media.

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You can't read a single national newspaper without reading about some private equity

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deal that's getting done in some industry or another, whether it's private equity firms

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trying to get involved in sports teams, private equity firms doing take privates of large

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publicly traded businesses, backing the next great consumer brand, fast growing consumer

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business.

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It's in the media.

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It's prolific.

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It's kind of omnipresent these days.

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The reason that that is, it's not just because private equity firms have great PR departments.

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In fact, I think very few private equity firms even have PR departments.

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But the reason that that is, is that private equity is a bigger part of the US economy

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than I think most people realize.

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And I pulled some stats, and to put that into perspective, the stat that I have is from

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2021.

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You could presume it's a little bit more than that today after a couple more years of economic

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growth.

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But in 2021 alone, private equity invested over a trillion dollars in the American economy,

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one trillion dollars.

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Currently, private equity firms manage about $3 trillion of capital that is committed to

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their funds, but has not yet been invested in businesses.

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Three trillion dollars.

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So it is a huge part of the US economy.

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2021, 5,200 businesses representing 74% of all of the investments that were made in businesses

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in the US were private equity backed deals.

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And 97% of those deals were businesses in the middle market under revenue size of, let's

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just call it roughly about $500 million.

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So the number of 10, 20, 50, 100, 200, $500 million revenue businesses, these are sizable

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businesses could employ hundreds or thousands of people across the country that have private

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equity as an investor is quite significant.

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Maybe something like a couple hundred thousand, maybe three or four or 500,000 businesses

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in the US that are backed by private equity firm in some way, shape or form.

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So a big part of the US economy.

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And I think it's important that executives who are less familiar with their private equity

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ownership model, who are maybe working in a large family owned business or maybe a publicly

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traded business or division of a publicly traded business, if you've never been owned

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or backed by private equity investors before and you're halfway through your career, it's

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highly likely that at some point you're going to be working with a private equity firm directly.

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It's tough for us to think at that scale, right?

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That's that Apple, Amazon scale of value.

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And I think those kind of make headlines when you think about the total, that's a larger

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number than I expected.

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I think one of the things that you mentioned, putting on my 101 hat is committed to their

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fund.

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Could we maybe, and maybe you're going to cover it a bit in the future, but just to

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kind of talk about what that commitment means and kind of parsing that out from deployed

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to committed.

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So let's come back to commitment.

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And here's why.

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I want to start by talking about what private equity is and what private equity isn't.

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So I'm going to kind of go 100,000 foot level, and then we're going to get more into the

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nuances of the actual business model and some of the specifics.

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So first and foremost, private equity invests in typically mature operating businesses.

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So this is not venture capital.

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This is not early stage businesses.

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This is not angel investing.

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This is not $0 in revenue.

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We've got the next Facebook or Airbnb.

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As a result, while there certainly are private equity firms that exclusively invest in mature

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tech businesses, tech is a much more common place for venture capital firms or VC firms

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to play than it is for private equity firms.

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It involves investing in these mature operating businesses.

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Being an investor in those companies for X number of years could be three, four, five,

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seven, 10.

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Some firms have longer strategies up to 20 plus years.

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Trying to grow those businesses to the next level of maturity and then exit or realize

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or sell those investments onto somebody else.

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It could be another private equity fund.

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It could be another corporation, maybe selling it to a publicly traded business, could be

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doing an IPO.

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So big difference between private equity and venture capital.

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Venture capital tends to be very early stage businesses, sometimes pre-revenue, like I

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said, sometimes pre-product concepts, sometimes slightly more mature than that, but oftentimes

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very early stage businesses.

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Also what private equity isn't is private equity is not a hedge fund.

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A lot of people think hedge funds, private equity, kind of same thing.

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Hedge funds typically are buying large stakes of publicly traded businesses using private

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capital that they've raised.

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So that element, the capital sources tend to be similar of the private equity fund to

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a venture capital fund as well as to a hedge fund, but the types of investments that they're

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making couldn't be more different.

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So private equity think investing in private businesses that are mature to some degree

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or another.

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Venture capital, same thing.

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You're investing private capital, but in the early stage businesses.

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Hedge funds, investing private capital, but investing into typically publicly traded businesses.

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So those are some of the key differences, but there are a number of similarities.

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It's not surprising that they're confusing to folks who aren't living in this world each

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and every day.

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Yeah.

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My first business was actually VC backed.

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I think as I learned more, I had that assumption that there was a lot of similarities in the

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two and quickly learned that there are some vast differences on, I think some of the things

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we're into, but around structure and communication, what they're looking for.

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And I think that's a good distinction because I think to me previously, I would view them

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as more synonyms and kind of the way that the firm or brand kind of presented itself,

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but it's more than that.

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So what it is, is a group of professionals will go out and they'll raise capital, right?

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So they're going to go out to any number of different type of investors.

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They could go out to some large wealthy families.

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They could go out to some university endowments, some pension funds, the same places that they

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are venture capital firm is going to raise money from, the same place that a hedge fund,

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the same place that anybody in the world who's raising significant capital, who isn't going

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to the public markets to do so via some type of initial public offering or something similar.

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So this group of professionals will start this private equity firm and they will go

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out and raise a private equity fund.

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So big difference between those two things.

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The private equity firm is the brand, it's XYZ investors would be the brand of the private

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equity fund.

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I'm sorry, the private equity firm.

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And they would go out and start raising their first private equity fund.

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They're going to go out to some of those investors that I mentioned and they're going to go and

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try and raise X number of dollars.

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Let's just, for the purposes of this discussion, they're going to go out and raise $500 million,

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right?

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It sounds like a lot of money.

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It is a lot of money.

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There's more money in this world, certainly than I ever realized.

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There's a lot of these private equity funds out there raising capital all the time, but

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they go out, they raise this capital and they put it into what's referred to as a private

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equity fund.

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So you have many different investors all pooling their capital into one singular fund.

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And then that singular fund managed by XYZ investor, private equity firm is going to

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go out and start to make investments in these mature operating businesses.

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Different investment firms have different strategies.

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One might be focused on industrials, one might be industry agnostic, one might be focused

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on services businesses.

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There's a bunch of different strategies out there, geographic strategies, et cetera, as

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you might imagine.

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So they're going to take this private equity fund, this $500 million that they've raised

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and they're going to go and try and make investments.

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Most of the time in your kind of typical fund, they're going to make, let's say somewhere

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between eight to 10 investments.

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For example, purposes we're going to continue to use 10 to allow us to do some easy math

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on the fly here.

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So they raised the $500 million, they go out and they make 10 investments.

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The size of their fund oftentimes will dictate the size of businesses that they're going

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to buy.

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Earlier when I described them buying mature businesses, mature businesses in what we would

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refer to as the middle market.

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A synonym for that would be medium sized businesses.

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These are companies that typically have between 20 and 500, maybe 20 million and a billion

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dollars in revenue, maybe up to about two to three billion is kind of the upper end.

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Somebody who's raised 500 million in a fund, they're probably going to go look to buy or

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invest in 10 companies doing somewhere between 100 to 150 million dollars a year in revenue.

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So they're buying fairly medium sized, on the smaller end of medium sized businesses.

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And they're going to invest in those companies through a combination of the equity, which

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is the fund that they've raised at $500 million.

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They're also going to go and probably raise some debt and put some debt on the balance

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sheet of those businesses as they acquire them or as they invest in them.

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They're going to try and grow those businesses over time and they're going to try and sell

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them at some point in the future at a profit.

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There's a lot of commonalities that the simplest way I've ever come up with describing this

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is flipping a house, right?

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Private equity firms, they gather a bunch of money up, they go out and they look for

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quote unquote houses to buy.

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They're looking for ones that they think that they could reasonably improve over a reasonable

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period of time.

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And to the extent that they can be successful doing that, sell it to somebody else and make

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a profit.

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There's no more complex than that in its simplest form.

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Obviously, doing it is a lot harder though than the simple description would suggest.

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But that's the basic business model.

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And we can talk more about how they do some of those things in a little bit more detail.

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But that's kind of the next level of granularity.

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For our listeners, who primarily is, as hopefully most of our listeners have come to appreciate,

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we primarily are speaking to kind of operating executives who are leading medium-sized organizations

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who are executing M&A strategies, who are growing businesses, trying to grow EBITDA,

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a little pun intended there.

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I think it's really important for the reasons we described earlier that they understand

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these mechanics of the private equity industry because like we talked about, oftentimes they're

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going to be coming across these private equity firms, whether they're working with them in

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some type of collaborative way or you're selling a business to a private equity fund.

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It's important that you understand some of these dynamics.

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So now I've got my pot of money for all intents and purposes.

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I worked really hard on getting that.

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I know kind of generally what my mantra is and what I want to do.

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Now I want to go invest in a business.

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What do I do?

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What is that process?

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What does that look like?

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What are those kind of next steps I'm doing now that I have my fund?

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Yeah.

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So the private equity firm has raised their fund, and they're going to go out and buy

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these 10 businesses.

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So how they start, let's just go with company number one.

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There are a number of sources that you can go to to look for businesses for sale.

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This is not a podcast about all of those sources, right?

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But there's investment bankers, there's five different flavors of investment bankers, there's

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approaching companies directly.

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And these private equity investors get quite good at finding those sources for what they

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would call their deal flow.

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They're trying to look at a lot of deals because they're trying to be selective.

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Even though they're trying to invest in 10 businesses, it's certainly not going to be

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the first 10 businesses that they stumble across.

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You may not, some of our listeners may not realize just how many they look at.

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To invest in 10 businesses, they're probably looking at somewhere between 500 to 1,000

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businesses, if not over their fund's life cycle.

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Maybe even more than that.

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It could be 500 to 1,000 a year to try and invest in those 10 businesses.

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And by the way, I'd point out those 10 investments, they're typically making those over about

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a five-year horizon.

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So this is not raise $500 million, invest $500 million.

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This is raise $500 million and that might take them one, two, three years to raise the

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money.

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And after they've done that, they're going to go and start investing it, right?

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So a typical private equity fund life is about 10 years.

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So from the time that you commit to the fund, if you're an investor, you're involved in

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that for 10 years, there's really no out that's easy.

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So these are really kind of long-term investors for the investors in these groups.

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So the private equity funds raise the money, they're going out, they're looking for their

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deal flow, they're trying to do their first investment.

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Let's just say they find a business that they like.

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Let's use that example from before, $100 million revenue, industrial manufacturing business.

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So they found this business, they like it, it's in the right geography, it's serving

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some growing end markets.

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They think it's got a decent leadership team.

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It seems like it's got a sound strategy, it produces nice margins.

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And they negotiate a purchase price and a purchase structure for the business.

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They're going to go and do their due diligence, right?

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So they go there, do their due diligence.

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It could be legal diligence, accounting diligence, human capital, management diligence, obviously

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near and dear to our hearts, right, James, especially yours, technology, cybersecurity

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diligence, operational supply chain diligence, they're going to pick apart that company with

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a fine tooth comb, really because they want to make sure they're making a sound investment

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decision.

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They want to know are there skeletons in the closet, so on and so forth.

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So let's say that all checks out and they like it, they think they like the team and

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they close on the transaction, right?

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So they acquire the business.

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Now, interestingly, sometimes they're acquiring 100% of the business, but a lot of people

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don't realize that in many, many situations, they might not be acquiring 100% of the business.

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There may be the founder of the business who is rolling some of his equity into the, we

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call it rolling equity into the deal, right?

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So maybe the founder, the entrepreneur owned 100% of it until the private equity firm comes

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along.

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Maybe the private equity firm buys 40%, 60%, 80%, it could be minority, majority control,

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but they're buying a meaningful percentage of the ownership of the business and deals

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come in many different shapes and sizes.

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We're not going to get into structuring here today.

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We don't have time for it, but I bring this up because it's not always them doing complete

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buyouts.

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Oftentimes there's other parties involved, but they'll go in and acquire the business.

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And then obviously they're going to hope that the company does well over the next five years,

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seven years, whatever their ownership cycle is going to look like and grows the revenue

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and profit grows and EBITDA grows and it creates a nice investment outcome when they go and

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sell it for more money.

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Obviously they're trying to do than they paid for it, right?

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Now I used the word hope here a moment ago.

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Some private equity firms are, their style is a little bit more make a good decision

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and hope it works out.

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But what's kind of played out over the last 25 or 30 years as this industry has evolved

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and it's evolved quite, quite profoundly is that most private equity firms add what they

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call operational value.

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So it's not just going to be that they invested in the business like it is in the public markets

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where you kind of buy X percent of the company and hope the management team does a nice job.

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And if you happen to have a bunch of money and you've bought 10 or 20% of the business,

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maybe you could get a board seat.

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In most cases in these private equity back deals, they're buying a material stake in

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the business, 40, 80, 60, somewhere like that percent.

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And they have governance control.

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So they often have all or most of the board seats.

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So they're rather involved in the decision making at the highest levels.

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They also have the responsibility of in almost every situation, choosing who the CEO is.

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And that could be whoever the current CEO is, it could continue to be the entrepreneur

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or founder who started the business.

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But in many cases, they may be bringing in a new CEO or a new CFO or a new CEO and a

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new CFO.

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Every deal is a little bit different, but they're typically very involved in those decisions.

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And oftentimes, especially in larger businesses, they're going to be quite hands on in helping

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to work with those management team members to try to develop strategies to grow the business

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and make sure the company has the resources it needs to be successful and then implementing

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some of those strategies.

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And it's not to say most private equity firms, the professionals that run those firms, they're

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really not operators.

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00:24:59,560 --> 00:25:06,220
They can be quite wise when it comes to structuring deals, finding good businesses to buy, raising

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00:25:06,220 --> 00:25:10,260
capital to do that, both the debt and the equity, getting those deals done, coming up

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with strategies, challenging strategies of the management team.

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And they're particularly good, many of them at helping thinking through M&A strategies

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and executing M&A and trying to grow through acquisition.

395
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That's really a big, strong value add that they can bring to the table.

396
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But they typically don't have a tremendous amount of operational expertise.

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So there is this, if all goes to plan, there needs to be a really symbiotic relationship

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between the management team who's responsible for operating the business every day and the

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private equity investors who are responsible for making sure that their investment goes

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to plan, that they've got the right leadership team in place, the company has the right resources.

401
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And sometimes they'll bring some of those resources, those resources may be in house.

402
00:25:55,620 --> 00:26:00,420
Those are called operating partners. In many instances, you're going to have a lot of consultants

403
00:26:00,420 --> 00:26:05,100
who come in, not that bringing consultants in is necessarily a bad thing or represents

404
00:26:05,100 --> 00:26:09,440
that there's a deficiency in the business, James, but really it's maybe a company is

405
00:26:09,440 --> 00:26:14,140
trying to do something it's never done before, open up on a new continent, a new manufacturing

406
00:26:14,140 --> 00:26:15,140
facility.

407
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Maybe they're trying to penetrate a new market that they've never done that before, or they've

408
00:26:19,220 --> 00:26:24,680
never been good at or really terribly structured about optimizing their pricing or optimizing

409
00:26:24,680 --> 00:26:28,900
their inventory management. Oftentimes you find businesses at different stages of their

410
00:26:28,900 --> 00:26:33,140
growth need different resources, right? And private equity firms are often very quick

411
00:26:33,140 --> 00:26:38,900
to bring in experts, consultants, new additions to the management team that are going to help

412
00:26:38,900 --> 00:26:42,900
that company grow and prosper. So I can talk about this all day. So you got to stop me

413
00:26:42,900 --> 00:26:43,900
if I'm wrong.

414
00:26:43,900 --> 00:26:49,260
Yeah. Yeah. I think we've done a nice job by we, I mean you on the, we've established

415
00:26:49,260 --> 00:26:55,020
what is a private equity firm. We went into how does it fundraise? We then talked about

416
00:26:55,020 --> 00:27:00,680
how does it find businesses? Really nice conversation right now on how does it deploy? You talked

417
00:27:00,680 --> 00:27:04,740
about it for a second, but maybe we could just kind of close out. Let's finish the loop.

418
00:27:04,740 --> 00:27:10,700
You said three to five to seven year hold for those firms. How does it exit? Now I know

419
00:27:10,700 --> 00:27:14,740
we said where it exits, but how does it exit? Let's close it out on that. And what are some

420
00:27:14,740 --> 00:27:18,420
of the implications? Because now they have these investments. Do I just cut a check back

421
00:27:18,420 --> 00:27:22,460
for you to invest it or how does that kind of exit process work? And guess one of the

422
00:27:22,460 --> 00:27:26,420
base questions, why do you folks invest in private equity and why do businesses exit

423
00:27:26,420 --> 00:27:27,420
private equity firms?

424
00:27:27,420 --> 00:27:31,620
That's a great question. These 10 investments in the private equity world, we call them

425
00:27:31,620 --> 00:27:37,220
portfolio companies. It's a company that's in a portfolio of the fund, right? Portfolio

426
00:27:37,220 --> 00:27:42,220
company. You've bought it, you've improved it. Now you're time to, now it's time to exit

427
00:27:42,220 --> 00:27:49,300
it. How that happens, we on our channel here, we always use the selling house or flipping

428
00:27:49,300 --> 00:27:54,420
house analogy. Another really good opportunity to do that here. We probably should have called

429
00:27:54,420 --> 00:28:00,060
this the house flippers podcast. It's just a very convenient, it's a very convenient

430
00:28:00,060 --> 00:28:06,380
analogy. Not dissimilar from house. There are agents in the M&A world, private equity

431
00:28:06,380 --> 00:28:10,220
community, we call them investment bankers. They kind of act like real estate agents.

432
00:28:10,220 --> 00:28:16,180
The process that they use is the investment bankers will come in. They may already be

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00:28:16,180 --> 00:28:20,160
familiar with the business. Maybe they helped sell it to the current owners, the current

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00:28:20,160 --> 00:28:23,740
private equity firm, but they're going to come in, they're going to look at all the

435
00:28:23,740 --> 00:28:29,260
financials. They typically are very sector focused, especially the kind of more well

436
00:28:29,260 --> 00:28:35,820
renowned ones. They tend to specialize in industrials or tech or B2B services. They

437
00:28:35,820 --> 00:28:39,780
tend to have that type of expertise. So they're very familiar with the industry typically

438
00:28:39,780 --> 00:28:44,700
that you're whatever industry that particular portfolio company may be involved with. So

439
00:28:44,700 --> 00:28:47,540
they'll come in, they know what's going on in the industry. They tend to know a lot of

440
00:28:47,540 --> 00:28:52,600
the buyers in that industry. So they kind of know what people are paying for businesses

441
00:28:52,600 --> 00:28:58,220
of certain sizes in certain sectors with certain characteristics. Characteristics could include

442
00:28:58,220 --> 00:29:04,540
gross margins that look like X versus Y, or if your CAGR is 3% versus 8%, they'll have

443
00:29:04,540 --> 00:29:09,260
a pretty fundamental understanding as to what type of premium you might command for the

444
00:29:09,260 --> 00:29:14,740
7% CAGR business versus the 3%. So they do bring quite a bit to the table even in those

445
00:29:14,740 --> 00:29:20,340
preliminary discussions, but you'll typically approach two, three, four, five would probably

446
00:29:20,340 --> 00:29:24,340
be a large number of bankers that have the relevant sector expertise. You'll say, hey,

447
00:29:24,340 --> 00:29:28,060
we're thinking about selling this business. Obviously, this is all done very confidentially.

448
00:29:28,060 --> 00:29:31,620
We're thinking about selling this business. Come and take a look, give us some thoughts

449
00:29:31,620 --> 00:29:36,140
on where the market is. Do you think this is a good time to sell? And if the parties

450
00:29:36,140 --> 00:29:40,300
agree, yes, it's a good time to sell. The owners of the business, in this case, the

451
00:29:40,300 --> 00:29:43,940
private equity firm, they'll work with the CEO to help choose which banker they think

452
00:29:43,940 --> 00:29:51,460
would be best to represent them in a sale process. They may do some sell-side due diligence.

453
00:29:51,460 --> 00:29:56,300
We've talked about that briefly on other episodes, but sell-side due diligence is really a company

454
00:29:56,300 --> 00:30:01,580
that's selling themselves. They're going to hire some experts to come in and write some

455
00:30:01,580 --> 00:30:06,100
fancy reports. I'm not trying to belittle them, but this isn't a sell-side due diligence

456
00:30:06,100 --> 00:30:09,580
podcast episode, so we're going to cover it briefly. They're going to create some fancy

457
00:30:09,580 --> 00:30:15,060
reports that kind of help prop up the business and why it's a good company to buy. They may

458
00:30:15,060 --> 00:30:20,020
do things like look at the technology stack in the business. Does the company have the

459
00:30:20,020 --> 00:30:24,940
appropriate cybersecurity protocols that a company this size should? You might go, well,

460
00:30:24,940 --> 00:30:30,240
why would somebody selling that want to talk about their cybersecurity protocols and advertise

461
00:30:30,240 --> 00:30:34,560
that to the next buyer? Well, the reality is if you can de-risk the deal for the next

462
00:30:34,560 --> 00:30:39,100
buyer, in this case, if you can convince the buyer that, hey, listen, we know cybersecurity

463
00:30:39,100 --> 00:30:43,660
is important to most investors out there, we do a really great job. As attested to by

464
00:30:43,660 --> 00:30:49,460
this world-renowned third-party consulting firm or advisor, it gives those buyers a lot

465
00:30:49,460 --> 00:30:53,580
of comfort that, hey, we're probably going to check this out when we do our own diligence,

466
00:30:53,580 --> 00:30:59,540
but it gives them comfort that what they're looking at is as exciting as they hope it

467
00:30:59,540 --> 00:31:03,740
is. Keeps them a little bit more engaged in the process. You may do some stealth side

468
00:31:03,740 --> 00:31:07,820
due diligence, but then that investment banker is going to help, again, on a very confidential

469
00:31:07,820 --> 00:31:12,740
and limited basis, go out to the buyer universe that they typically have strong relationships

470
00:31:12,740 --> 00:31:16,540
with. That's what those guys do for a living. They're going to go out to that buyer universe

471
00:31:16,540 --> 00:31:21,580
and articulate the great things about this business and try and convince people that

472
00:31:21,580 --> 00:31:25,540
buy businesses for a living. That oftentimes means other private equity firms, but it also

473
00:31:25,540 --> 00:31:30,700
could mean large corporations or maybe some large families who acquire large businesses.

474
00:31:30,700 --> 00:31:35,820
Try and get them excited about looking at the business and hopefully convince one or

475
00:31:35,820 --> 00:31:40,780
two of them to put in bids and hopefully sell the business for a nice profit.

476
00:31:40,780 --> 00:31:46,100
Yeah. Interesting. Then the beauty of that is that that goes back to the folks that invested

477
00:31:46,100 --> 00:31:51,580
and it's a nice symbiotic circle there. I thought, Mike, we kind of had a really good

478
00:31:51,580 --> 00:31:56,100
chat where we crammed in a lot on the 101 to try to talk about these topics. I thought

479
00:31:56,100 --> 00:32:00,380
we'd end on maybe a little bit of a lighter note if you're okay with some quick hits.

480
00:32:00,380 --> 00:32:02,180
Go for it.

481
00:32:02,180 --> 00:32:08,220
I'm going to read you some sentiments around private equity based on organizations going

482
00:32:08,220 --> 00:32:13,380
bankrupt and the sensational headlines that were created from those organizations going

483
00:32:13,380 --> 00:32:14,380
bankrupt.

484
00:32:14,380 --> 00:32:15,380
Go for it.

485
00:32:15,380 --> 00:32:16,380
The idea is misconceptions.

486
00:32:16,380 --> 00:32:17,380
Got it.

487
00:32:17,380 --> 00:32:18,380
Quick hit.

488
00:32:18,380 --> 00:32:20,500
You're assuming I've read those headlines. We'll see.

489
00:32:20,500 --> 00:32:23,260
You're a studied man.

490
00:32:23,260 --> 00:32:29,780
First quick hit. Private equity only focuses on cutting costs.

491
00:32:29,780 --> 00:32:40,940
Yes. The media loves to talk about how bad private equity is because all they do is slash

492
00:32:40,940 --> 00:32:48,780
and burn to line their pockets. I'm sure there are a handful of firms out there whose culture

493
00:32:48,780 --> 00:32:54,540
it is and their business strategy is and their investment thesis is let's cut every cost

494
00:32:54,540 --> 00:33:00,340
we possibly can to line our pockets as quickly as we possibly can.

495
00:33:00,340 --> 00:33:06,820
I've worked with 500 or more different private equity firms. There's about, it depends on

496
00:33:06,820 --> 00:33:12,260
who you ask, but there's probably about 5,000 or so private equity firms out there. I've

497
00:33:12,260 --> 00:33:18,340
worked with a reasonable chunk of those over the last couple of decades. I haven't really

498
00:33:18,340 --> 00:33:24,260
found any of those yet, at least not at the firm level. There may be some individuals

499
00:33:24,260 --> 00:33:29,660
at some of those firms who would be maybe bad actors as the media would like to describe

500
00:33:29,660 --> 00:33:34,420
them, but couldn't be further from the truth in my experience at least. I think most of

501
00:33:34,420 --> 00:33:36,540
the folks in the industry would attest to this.

502
00:33:36,540 --> 00:33:41,700
The reality is that you can't really get where you're trying to go in private equity if all

503
00:33:41,700 --> 00:33:48,300
you do is cut costs. If you come into a business, let's use this $100 million industrial manufacturing

504
00:33:48,300 --> 00:33:54,260
business as an example, if you've bought it not in a turnaround situation, there are certainly

505
00:33:54,260 --> 00:33:58,460
going to be some situations where businesses are either in bankruptcy or close to being

506
00:33:58,460 --> 00:34:02,980
in bankruptcy or just coming out of bankruptcy and there's a lot of tough decisions that

507
00:34:02,980 --> 00:34:08,220
need to get made because you got to take costs out to save the enterprise. That is not most

508
00:34:08,220 --> 00:34:12,620
private equity deals. Most private equity firms, their strategy involves buying, generally

509
00:34:12,620 --> 00:34:19,700
speaking, fairly healthy companies and helping them to become even more healthy companies.

510
00:34:19,700 --> 00:34:24,500
Really their incentive is to grow them, to grow their earnings. This isn't the turnaround

511
00:34:24,500 --> 00:34:29,820
industry. This is the private equity industry. A subset of that is involved in fixing broken

512
00:34:29,820 --> 00:34:34,780
companies, but the vast majority of these dollars are going into the guy who down the

513
00:34:34,780 --> 00:34:41,020
street from you, he started a company when he was 31 because he had an idea about how

514
00:34:41,020 --> 00:34:45,580
to make some kind of product better or how to deliver a service better or somebody who

515
00:34:45,580 --> 00:34:50,580
started one franchise and went on to grow it to 20 different franchise units in a particular

516
00:34:50,580 --> 00:34:58,980
geography. It now does five or 10 or 20 million, 30, 40 million of EBITDA, very profitable

517
00:34:58,980 --> 00:35:05,300
business. Those people need liquidity. Liquidity doesn't exist anymore in the IPO market like

518
00:35:05,300 --> 00:35:10,860
it used to 30, 40 years ago. In fact, there's been a material decline in the number of

519
00:35:10,860 --> 00:35:15,180
companies that are able to go public. To be a publicly traded company these days below

520
00:35:15,180 --> 00:35:18,900
about a billion or $2 billion in revenue, it just doesn't make sense with all the compliance

521
00:35:18,900 --> 00:35:24,300
regulations. Really, there aren't that many other people out there who you can sell a

522
00:35:24,300 --> 00:35:29,220
business when that owner goes to sell outside of private equity. Private equity firms, if

523
00:35:29,220 --> 00:35:33,020
they come and buy a business that's doing, let's just say 10 million of EBITDA and 100

524
00:35:33,020 --> 00:35:37,520
million in sales, the only way that they're going to make a great investment return is

525
00:35:37,520 --> 00:35:44,980
if they grow sales and grow earnings. It's not a sales stay flat and earnings double.

526
00:35:44,980 --> 00:35:50,300
If it was that easy, it'd be easy to make it. Every executive on earth, if it was that

527
00:35:50,300 --> 00:35:54,140
easy, wouldn't be making their bonuses this year because they'd be all getting costs in

528
00:35:54,140 --> 00:35:58,540
order to get to that place. Even if they were successful doing it this year, good luck trying

529
00:35:58,540 --> 00:36:02,860
to repeat the same performance next year. You can shoot yourself in the foot from a

530
00:36:02,860 --> 00:36:07,220
long-term strategy perspective. It really could be further from the truth. My experience

531
00:36:07,220 --> 00:36:15,940
is this, James. I've seen family-run businesses, a lot of them. I've seen a lot of private

532
00:36:15,940 --> 00:36:21,160
equity-owned businesses, and I've seen a lot of publicly traded businesses. My assessment

533
00:36:21,160 --> 00:36:29,140
is this. Family-owned businesses tend to manage those businesses to, and many of them want

534
00:36:29,140 --> 00:36:35,740
to grow, but many of them also want to maximize cash flow in the year. The reason being that

535
00:36:35,740 --> 00:36:41,660
that cash flow that those businesses generate for those families funds the lifestyles of

536
00:36:41,660 --> 00:36:48,980
those families. When you start earning three or four or five or 10 or $20 million a year

537
00:36:48,980 --> 00:36:54,580
as a family-owned business, you get used to having that type of significant discretionary

538
00:36:54,580 --> 00:36:59,300
income. When you have to go and grow that business, if that means going and setting

539
00:36:59,300 --> 00:37:04,940
up a new factory, and that's going to cost $20 million in new equipment, you have to

540
00:37:04,940 --> 00:37:09,700
make the tough decision of instead of making $20 million that year, I'm going to make

541
00:37:09,700 --> 00:37:16,380
$0 that year, because hopefully five years from now when that factory is at full production,

542
00:37:16,380 --> 00:37:22,380
I'll be making $30 million instead of the $20 I used to take. That's a very large risk

543
00:37:22,380 --> 00:37:27,860
for a family to take on, right? A very large risk. That's just one example. There could

544
00:37:27,860 --> 00:37:29,260
be many others.

545
00:37:29,260 --> 00:37:35,100
Now, on the other end of the spectrum, you have publicly traded businesses. It's widely

546
00:37:35,100 --> 00:37:38,140
known, pick up any newspaper and media is going to give those guys a hard time about

547
00:37:38,140 --> 00:37:44,220
this too, it's widely known that most publicly traded businesses have to manage to the quarter,

548
00:37:44,220 --> 00:37:47,900
because if they don't manage to the quarter, the street gets upset, the stock price goes

549
00:37:47,900 --> 00:37:52,740
down, all the executives don't hit their bonuses, their stock options aren't worth anything.

550
00:37:52,740 --> 00:37:56,380
The executives in those businesses who are running those companies every day are highly

551
00:37:56,380 --> 00:38:02,020
incentivized to keep the stock price as high as possible. How do you do that? You always

552
00:38:02,020 --> 00:38:07,380
deliver on your numbers, quarter in and quarter out. You're managing to the quarter. So family

553
00:38:07,380 --> 00:38:12,040
businesses, they're kind of managing to the year. Publicly traded businesses managing

554
00:38:12,040 --> 00:38:17,140
to the quarter, that's even shorter term thinking. In every private equity investment that I've

555
00:38:17,140 --> 00:38:22,460
ever made, I think I've made now 40 or so private equity investments in every one of

556
00:38:22,460 --> 00:38:29,160
those and in almost every private equity business, back business that I've ever consulted to,

557
00:38:29,160 --> 00:38:33,660
every single one of those businesses has a five year plus investment horizon. They have

558
00:38:33,660 --> 00:38:37,860
a five year strategic plan. They're making those $20 million investments in that new

559
00:38:37,860 --> 00:38:41,780
factory because they're like, listen, the only way that I can achieve my investment

560
00:38:41,780 --> 00:38:47,020
objectives five or seven years from now, which is typically their target hold period is if

561
00:38:47,020 --> 00:38:53,740
I build this factory. Therefore, I would argue that private equity owned businesses or private

562
00:38:53,740 --> 00:39:00,020
equity backed businesses tend to receive a significantly higher level of reinvestment

563
00:39:00,020 --> 00:39:05,040
back in the business to fund growth. And it couldn't be anything more opposite than cutting

564
00:39:05,040 --> 00:39:10,140
costs than reinvesting tons of money back in the business so it can grow. Again, I'm

565
00:39:10,140 --> 00:39:15,020
sure somebody will have examples that they'd love to use to prove me wrong, but that's

566
00:39:15,020 --> 00:39:16,020
just been my experience.

567
00:39:16,020 --> 00:39:22,780
Yeah. That's the point of this. So my inspiration for PE only focused cutting costs is Toys

568
00:39:22,780 --> 00:39:29,260
R Us. A trivia for today, and I make it easy on you, only in the last 10 years is this

569
00:39:29,260 --> 00:39:35,060
answer. In what year or in which year, we'll have someone who's better at English to myself

570
00:39:35,060 --> 00:39:39,940
tell me, did Toys R Us go bankrupt in the last 10?

571
00:39:39,940 --> 00:39:45,260
I feel like Toys R Us might've gone bankrupt twice. I might be wrong. I don't know. It's

572
00:39:45,260 --> 00:39:51,220
got to be post financial crisis. I'm going to guess 2012.

573
00:39:51,220 --> 00:39:58,260
Pretty close. 2017. You know, the interesting thing about 2017 is neither of our children

574
00:39:58,260 --> 00:40:04,380
will have ever experienced the opportunity of walking through Toys R Us, the free Disneyland

575
00:40:04,380 --> 00:40:07,100
and experiencing all that was Toys R Us.

576
00:40:07,100 --> 00:40:12,900
Well, to be honest, with as many Amazon packages as my house receives every day, I'm not sure

577
00:40:12,900 --> 00:40:18,180
that even if they had managed their balance sheet a little better during those tough times,

578
00:40:18,180 --> 00:40:21,460
I'm not sure my kids ever would have seen the inside of a Toys R Us anyway.

579
00:40:21,460 --> 00:40:25,940
Fair point. Okay. You got, you ready for the next one?

580
00:40:25,940 --> 00:40:27,700
I'm ready. Shoot.

581
00:40:27,700 --> 00:40:33,860
Private equity only focuses on short term profit and their short term profit seekers.

582
00:40:33,860 --> 00:40:39,500
Yeah. I mean, like I was talking about, you know, it couldn't be further from the truth

583
00:40:39,500 --> 00:40:45,420
in my experience. I haven't talked that much about debt yet either, but the thing about

584
00:40:45,420 --> 00:40:50,420
most private equity investments, not all, certainly not all, but I think it's fair to

585
00:40:50,420 --> 00:40:56,940
say most are going to involve a reasonable amount of debt. Some might argue unreasonable

586
00:40:56,940 --> 00:41:00,660
amount of debt. And certainly some deals get done with probably too much debt. Usually

587
00:41:00,660 --> 00:41:05,260
that is realized in hindsight. These private equity investors are pretty smart guys and

588
00:41:05,260 --> 00:41:10,180
gals. They're not intentionally putting too much debt on businesses balance sheet, despite

589
00:41:10,180 --> 00:41:15,940
what the media I think would love to have the population believe. But they really can't

590
00:41:15,940 --> 00:41:20,060
be short term profit seekers. When you invest in a private equity fund and the investors

591
00:41:20,060 --> 00:41:24,620
know this, you know, like I mentioned earlier, it's a 10 year fund life cycle. So you're

592
00:41:24,620 --> 00:41:30,060
investing in a fund today, hoping that by 10 years from now, you're going to get an

593
00:41:30,060 --> 00:41:34,420
acceptable level of return on your investment. 10 years is a really long time. I mean, it's

594
00:41:34,420 --> 00:41:38,940
obviously not 20 or 30 years, that'd be even longer, but 10 years is a pretty long time.

595
00:41:38,940 --> 00:41:45,620
So the investors in the underlying fund have a long term mindset. The manager of that fund

596
00:41:45,620 --> 00:41:50,340
who set up the fund in the first place as a 10 year fund has a long term mindset. Their

597
00:41:50,340 --> 00:41:55,920
target hold period is, you know, five to seven years. That is a, I would say at a minimum

598
00:41:55,920 --> 00:42:00,500
a medium term mindset. But when they go to sell that business, if they're going to sell

599
00:42:00,500 --> 00:42:06,100
it for a really nice number, it has to be a growing business that looks attractive to

600
00:42:06,100 --> 00:42:12,460
the next buyer who is going to want to grow that business. Right? So I think private equity

601
00:42:12,460 --> 00:42:17,620
gets a little bit of a bad rap because, you know, some people might want to argue or maybe

602
00:42:17,620 --> 00:42:21,420
it's easier for the media to argue like, well, if you're only going to own a business for

603
00:42:21,420 --> 00:42:25,980
three or four or five years, like you can't be thinking long term. And I would argue,

604
00:42:25,980 --> 00:42:29,580
you know, hey, let's give them a little bit of credit for the fact that, you know, they

605
00:42:29,580 --> 00:42:34,860
can't do what they're setting out and intending to do unless they're preparing the business

606
00:42:34,860 --> 00:42:40,020
for future long term ownership, even if they don't happen to be the owners of that particular

607
00:42:40,020 --> 00:42:45,440
asset, you know, beyond their hold period. So, you know, this right here is something

608
00:42:45,440 --> 00:42:49,940
I'm sure the pundits could talk about for, you know, days on end. And, you know, you're

609
00:42:49,940 --> 00:42:54,720
going to have a lot of differences of opinion, but, you know, I've been in this industry

610
00:42:54,720 --> 00:42:58,780
for a couple of years now, at least, you know, those are my opinions.

611
00:42:58,780 --> 00:43:07,020
I like them, stand by them. So, my inspiration for short term profit seekers was Sears. So,

612
00:43:07,020 --> 00:43:11,980
you know, going back to it, it's kind of interesting. Young James went to Sears a lot. My grandfather

613
00:43:11,980 --> 00:43:15,620
said if it didn't come from Sears, it wasn't worth it. Craftsman tool guy loved it.

614
00:43:15,620 --> 00:43:21,060
Don't you still shop at Sears? Isn't that where you got that outfit you're wearing?

615
00:43:21,060 --> 00:43:23,540
Yeah, that was actually JCPenney, Mike.

616
00:43:23,540 --> 00:43:24,540
Okay.

617
00:43:24,540 --> 00:43:29,380
And the Sears side of it was a popular thing in the bandy household. And so, I was a little

618
00:43:29,380 --> 00:43:38,660
sad, maybe let me rephrase that. In which year was I sad that Sears went bankrupt?

619
00:43:38,660 --> 00:43:44,660
I didn't realize I needed to take a retail history lesson here before today's cast.

620
00:43:44,660 --> 00:43:46,940
Can I step your game up?

621
00:43:46,940 --> 00:43:50,420
In what year did Sears go bankrupt? I don't know. I'm going to probably have the same

622
00:43:50,420 --> 00:43:55,980
answer. I feel like I went into a Sears at one point post global financial crisis and

623
00:43:55,980 --> 00:43:58,420
there wasn't much on the shelves. 2013.

624
00:43:58,420 --> 00:44:04,320
Okay. Unfortunately, it was the domino after Toys R Us in 2018. It's an interesting childhood

625
00:44:04,320 --> 00:44:09,180
domino effect. I would also like to ask you, not accuse it, Tori, but just a question.

626
00:44:09,180 --> 00:44:12,580
Did you look at my show prep sheet before the cast today?

627
00:44:12,580 --> 00:44:14,740
I did not.

628
00:44:14,740 --> 00:44:20,940
Your crystal ball is really coming into play because my next one is private equity always

629
00:44:20,940 --> 00:44:26,180
saddles their target with debt and the deals are always highly leveraged.

630
00:44:26,180 --> 00:44:33,060
Yeah. I mean, like I said, not every deal has debt, but oftentimes it's a tool that

631
00:44:33,060 --> 00:44:43,060
private equity firms use to improve their returns. Going into that in detail is an episode

632
00:44:43,060 --> 00:44:48,740
in and of itself. Listen, there's always going to be examples of businesses that had too

633
00:44:48,740 --> 00:44:53,860
much debt put on their balance sheet, whether it was from their original acquisition or

634
00:44:53,860 --> 00:44:57,740
some other add on acquisition that they did, or they funded new equipment purchases, whatever

635
00:44:57,740 --> 00:45:03,940
the case may be. There's always going to be businesses that get over leveraged with debt,

636
00:45:03,940 --> 00:45:07,500
get too far out over their skis and have issues.

637
00:45:07,500 --> 00:45:12,280
The reality of the situation though, and what I always like to encourage people to do is

638
00:45:12,280 --> 00:45:20,500
look at their personal investment portfolios. Go pull the reports, the 10Ks from some of

639
00:45:20,500 --> 00:45:25,340
the businesses that you have in your 401k or your brokerage portfolio. Go look at those

640
00:45:25,340 --> 00:45:32,300
companies' balance sheets. There are very few publicly traded businesses that don't

641
00:45:32,300 --> 00:45:38,340
have a lot of debt on their balance sheets. In fact, one of the primary reasons to go

642
00:45:38,340 --> 00:45:44,700
public in the first place for most companies is to access the debt capital markets more

643
00:45:44,700 --> 00:45:51,620
efficiently and at better pricing than you can in the private capital markets. I venture

644
00:45:51,620 --> 00:45:55,900
to guess that if you compared the average amount of debt of publicly traded businesses

645
00:45:55,900 --> 00:46:01,220
on their balance sheet to the amount of debt on private equity backed businesses' balance

646
00:46:01,220 --> 00:46:04,820
sheets, that private equity would actually have less debt on a relative basis.

647
00:46:04,820 --> 00:46:11,700
Again, media loves to talk these things up. Actual reality, what we're living and seeing

648
00:46:11,700 --> 00:46:16,180
is we're inside these businesses every day. A little bit different from what you're reading

649
00:46:16,180 --> 00:46:19,780
on the front pages of the journal at the time sometimes.

650
00:46:19,780 --> 00:46:24,380
Interesting. It's an interesting point. I always have these moments where I learn things

651
00:46:24,380 --> 00:46:29,700
by accident, let's call it. I was working at a company, $19 billion company. We go in

652
00:46:29,700 --> 00:46:35,540
and we acquire a $40 billion organization. I'm not the best at math, but it was double

653
00:46:35,540 --> 00:46:40,740
the annual revenue. The way that my life works is it usually I have to make more than the

654
00:46:40,740 --> 00:46:46,700
number I want to spend to be able to get there. That's the first time I ever learned that

655
00:46:46,700 --> 00:46:52,780
these groups leverage debt. The second time I learned that these groups leverage debt

656
00:46:52,780 --> 00:46:58,940
is about 30 days after close when I got my new P&L and I got my new pressure. Because

657
00:46:58,940 --> 00:47:03,820
the new kid in town, everything got cut from my budget. It was a good lesson. I think that's

658
00:47:03,820 --> 00:47:07,300
an important one for folks that maybe haven't had that experience or done the research that

659
00:47:07,300 --> 00:47:13,020
you do. It does happen. Let me tell you the one I have for this one. I think this will

660
00:47:13,020 --> 00:47:17,900
shock people. I don't think a lot of people know that these guys went through a bankruptcy.

661
00:47:17,900 --> 00:47:24,500
Caesar's Entertainment. Do you gamble at all?

662
00:47:24,500 --> 00:47:25,500
No, thankfully.

663
00:47:25,500 --> 00:47:31,980
Great. Well, good thing you didn't gamble on Caesar's because in which year did Caesar's

664
00:47:31,980 --> 00:47:32,980
go bankrupt?

665
00:47:32,980 --> 00:47:35,100
Geez, you're pulling out all these retail businesses.

666
00:47:35,100 --> 00:47:37,940
Caesar's isn't retail. Caesar's is an entertainment brand.

667
00:47:37,940 --> 00:47:39,820
I don't work much in entertainment.

668
00:47:39,820 --> 00:47:45,140
If you ask Zach Galifianakis, it's where the real Caesar lives. It's his house.

669
00:47:45,140 --> 00:47:51,260
By the way, if you start asking me names of celebrities and expect, I know he's a celebrity,

670
00:47:51,260 --> 00:47:57,540
but if you expect that I know who that is, you just couldn't be further from wrong. I

671
00:47:57,540 --> 00:47:59,540
don't do celebrities. I don't know who anybody is.

672
00:47:59,540 --> 00:48:00,540
Do you do movies?

673
00:48:00,540 --> 00:48:02,380
Movies. I watch movies.

674
00:48:02,380 --> 00:48:07,060
Okay. Let's try to get there. He wore a baby on the front of him.

675
00:48:07,060 --> 00:48:09,740
Oh, okay. Hangover.

676
00:48:09,740 --> 00:48:15,220
Hangover. Correct. He, I believe, was quoted to say, does the real Caesar live here? It's

677
00:48:15,220 --> 00:48:16,220
that joke.

678
00:48:16,220 --> 00:48:17,220
I know who that guy is now.

679
00:48:17,220 --> 00:48:22,500
Okay. In which year would Zach be sad that the real Caesar got kicked out of his house

680
00:48:22,500 --> 00:48:24,660
because that organization went bankrupt?

681
00:48:24,660 --> 00:48:25,660
Caesar's went down.

682
00:48:25,660 --> 00:48:26,660
Yeah.

683
00:48:26,660 --> 00:48:31,340
Learned something new every day. Won't catch me in Vegas unless I have to go there for

684
00:48:31,340 --> 00:48:32,340
a conference.

685
00:48:32,340 --> 00:48:33,340
Yeah. Agreed.

686
00:48:33,340 --> 00:48:34,340
I have no idea.

687
00:48:34,340 --> 00:48:35,340
2015.

688
00:48:35,340 --> 00:48:36,340
News to me.

689
00:48:36,340 --> 00:48:40,740
Yep. We're going to round it out with another retail brand just to give you the heads up

690
00:48:40,740 --> 00:48:42,340
and warning before we get there.

691
00:48:42,340 --> 00:48:43,340
Make this stop.

692
00:48:43,340 --> 00:48:47,500
Well, hold on. One of us comes from retail and didn't have the private equity background.

693
00:48:47,500 --> 00:48:48,900
The other has the private equity background.

694
00:48:48,900 --> 00:48:49,900
Yeah. Fair. Fair.

695
00:48:49,900 --> 00:48:54,500
It's a chance for the retail guy to get a swing at it. The last one. I think this one's

696
00:48:54,500 --> 00:48:59,200
interesting because I honestly had this opinion before coming in and learning from you and

697
00:48:59,200 --> 00:49:03,980
others about private equity. They only buy struggling companies.

698
00:49:03,980 --> 00:49:15,140
Yep. We hear that a lot. Common misconception. Even if you have a broad definition of struggling,

699
00:49:15,140 --> 00:49:20,740
again, it wouldn't really be true. Like I was talking about earlier about turnarounds.

700
00:49:20,740 --> 00:49:26,740
Certainly companies that are having a bad day sometimes come up for sale and there are

701
00:49:26,740 --> 00:49:31,380
certain types of private equity investors who like doing those kinds of investments,

702
00:49:31,380 --> 00:49:35,900
who are good at stepping into a situation where maybe some tough decisions need to get

703
00:49:35,900 --> 00:49:41,180
made or maybe they just lost their largest customer and they're trying to figure out

704
00:49:41,180 --> 00:49:48,340
what to do about that situation or businesses that have some type of supply chain constraint

705
00:49:48,340 --> 00:49:53,220
that was unexpected and catastrophic or whatever the case may be.

706
00:49:53,220 --> 00:49:59,460
But again, it depends on what you mean by struggling. I would say there's a couple of

707
00:49:59,460 --> 00:50:04,900
different types of firms. There are firms that like to get their hands really dirty,

708
00:50:04,900 --> 00:50:10,260
really deep turnarounds. Those obviously would be struggling companies. And there are a number

709
00:50:10,260 --> 00:50:15,860
of firms, private equity firms that specialize in that. Not as many as you might think though.

710
00:50:15,860 --> 00:50:21,820
It's a fairly small subsector of the industry. The next group of companies, and there's a

711
00:50:21,820 --> 00:50:26,920
lot of these companies and as a result, there's a lot of these kinds of private equity firms,

712
00:50:26,920 --> 00:50:30,820
are companies that aren't necessarily having a bad day, but also aren't having their greatest

713
00:50:30,820 --> 00:50:38,080
day. And probably a better way of explaining that would be, you know, sometimes businesses

714
00:50:38,080 --> 00:50:45,980
go through seasons is how I like to think about it. You know, maybe you are a founder,

715
00:50:45,980 --> 00:50:54,540
entrepreneur-owned business and the entrepreneur started the business in his or her 40s. And

716
00:50:54,540 --> 00:51:03,420
that was 45 years ago. And now that owner is 85. And maybe they have no family members

717
00:51:03,420 --> 00:51:06,860
that were involved in the business, or maybe no family members want to be involved in the

718
00:51:06,860 --> 00:51:12,140
business. And they've got 10 grandkids that they want to spend a lot of time with. And

719
00:51:12,140 --> 00:51:20,140
for the last 15 years, that's been their priority as they've gotten on in life. But they still

720
00:51:20,140 --> 00:51:25,540
own and maybe still operate the business themselves. Maybe they have a leadership team. But maybe

721
00:51:25,540 --> 00:51:29,260
as a result of some of the things that we talked about earlier as well, where, you know,

722
00:51:29,260 --> 00:51:32,940
they've used the cash flow that the business generates to fund their lifestyle. This is

723
00:51:32,940 --> 00:51:36,820
not every example. It's just one example. They've defund that lifestyle of spending

724
00:51:36,820 --> 00:51:41,200
more time with their grandkids. Maybe you have a situation where they haven't been investing

725
00:51:41,200 --> 00:51:45,540
back in the business as vigorously as they might have when they were in startup mode

726
00:51:45,540 --> 00:51:51,380
some 40 plus years prior. Maybe they're not introducing as many new products. Maybe they're

727
00:51:51,380 --> 00:51:54,540
not exploring new customers because they're happy with the ones that they have. Maybe

728
00:51:54,540 --> 00:52:00,660
they're not great at implementing the latest and greatest ERP system or solution. Or, you

729
00:52:00,660 --> 00:52:04,500
know, they're not able to leverage automation or don't want to fund automation that would

730
00:52:04,500 --> 00:52:09,460
unlock growth opportunities for the business. So, you know, is that business having a bad

731
00:52:09,460 --> 00:52:16,260
day? Listen, we see businesses all the time doing 10, 20, 30% EBITDA margins on a couple

732
00:52:16,260 --> 00:52:20,460
hundred million dollars in sales that fit that exact scenario that I just described.

733
00:52:20,460 --> 00:52:26,140
Are they doing anything wrong? No. Are they struggling? Absolutely not. In fact, highly

734
00:52:26,140 --> 00:52:33,740
profitable enterprises creating really nice lifestyles. But is there room for opportunity

735
00:52:33,740 --> 00:52:41,020
for improvement? Absolutely. We always go back to the great Jim Collins book of good

736
00:52:41,020 --> 00:52:46,860
to great, right? And what we tell a lot of our clients, our consulting clients over the

737
00:52:46,860 --> 00:52:50,340
years was we like to take good companies and help them become great companies. And I think

738
00:52:50,340 --> 00:52:54,660
that's a really good example of just that, right? You can have a great, a good little

739
00:52:54,660 --> 00:53:00,300
company that maybe isn't a great company yet. And I think that really is, you know, private

740
00:53:00,300 --> 00:53:06,140
equity. This isn't my thinking. This is the private equity industry at large. Many, many,

741
00:53:06,140 --> 00:53:10,540
many, definitely most private equity firms are out there hungry looking for those types

742
00:53:10,540 --> 00:53:16,220
of opportunities where they can step in and buy a pretty good business with a pretty good

743
00:53:16,220 --> 00:53:22,820
team and help make it a great business. And maybe that team becomes the great team. They

744
00:53:22,820 --> 00:53:27,020
just needed more resources or maybe in other instances you need to, you know, upgrade the

745
00:53:27,020 --> 00:53:31,900
team. Every situation is a little bit different. But, you know, the notion that private equity

746
00:53:31,900 --> 00:53:37,540
only buys struggling companies couldn't be further from the truth. You know, private

747
00:53:37,540 --> 00:53:41,180
equity investors love to buy good companies, make them great. They also like buying great

748
00:53:41,180 --> 00:53:49,660
companies and keeping them great. It's actually a, you know, I eventually guess there'd be

749
00:53:49,660 --> 00:53:53,100
a lot of consensus if you pulled a bunch of private equity firms. Would you rather buy

750
00:53:53,100 --> 00:53:56,980
a good company, make it great or a great company and have it continue to be great? And they

751
00:53:56,980 --> 00:53:58,580
would probably be happy with both.

752
00:53:58,580 --> 00:54:02,660
Interesting. I know you're a little fatigued on the guessing and I know this one's near

753
00:54:02,660 --> 00:54:06,140
and dear to your heart because you used to be a model for these guys. J.Crew.

754
00:54:06,140 --> 00:54:07,140
Oh yeah.

755
00:54:07,140 --> 00:54:08,140
In 2020.

756
00:54:08,140 --> 00:54:13,500
Yeah. Yeah. I probably modeled for them for a long time. I just can't remember the years.

757
00:54:13,500 --> 00:54:14,500
J.Crew went under in 2020.

758
00:54:14,500 --> 00:54:15,500
Yeah.

759
00:54:15,500 --> 00:54:21,220
Yeah. I mean, if I was a retail focused guy, I spend most of my time in industrials. You

760
00:54:21,220 --> 00:54:26,340
know, I might know some of these dates, but are they still around? J.Crew is still around?

761
00:54:26,340 --> 00:54:27,340
No.

762
00:54:27,340 --> 00:54:32,660
I don't know. I know you know Joritz, but you may not know J.Crew. Well, I want to thank

763
00:54:32,660 --> 00:54:36,140
you for your time. Sorry, we're in a little retaily at the end there, but I think it's

764
00:54:36,140 --> 00:54:41,580
a good education for our listeners to understand private equity, a bit of a one-on-one course.

765
00:54:41,580 --> 00:54:45,060
I think there's a couple of interviews maybe that we can do after this and a couple more

766
00:54:45,060 --> 00:54:48,340
deep dives.

767
00:54:48,340 --> 00:54:53,740
Thanks for tuning into this episode of Growing EBITDA. If you liked this episode, hit subscribe

768
00:54:53,740 --> 00:54:59,460
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769
00:54:59,460 --> 00:55:27,460
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