I'm your host, Kison Patel, CEO, and Founder of M&A Science and Dealroom. Joining me today is Jay Jester, Partner at Plexus Capital, LLC. Jay was also the Managing Director at Audax Group for almost 20 years.
His M&A career spans over 30 years starting from investment banking. Today, we're going to talk about developing a deal origination process from a private equity perspective.
Maybe we kick things off with a brief intro and your M&A background Jay?
I’m from an unconventional background. I started out as an English major at the University of North Carolina and was able to BS my way into a job in investment banking.
I went and worked for a firm called Bowles Hollowell Conner, which I think of is really one of the OG non-Wall Street M&A boutiques back in wave one of modern private equity, and had a chance to learn and see the inside of that firm as an analyst for a couple of years.
Went from there to another firm that was one of the early entrances, a firm called Florida Capital Partners that spun out of a Chemical Bank and Chase Capital Partners and got to learn.
Defeated the master Glenn Oken who's now with Mangrove Equity, but he taught me the business development side of chasing small deals.
And I was there and eventually became a Partner at FCP, was there about eight years. And then in 1999, Jeff Renner and Mark Walpole who were two of the early guys at Bain Capital.
They were starting Audax and invited me to come to join that team that was forming Audax and got to spend 20 years in Boston shaping the private equity team in the Audax platform from really a half-billion-dollar fund in 99 to I think there, north of 25 billion total, it was fun.
People used to think that investment bankers are a necessary evil, but now they're shifting to think of them as a really important channel partner. Why is that? What's changed?
You can go back and look at the trajectory of the industry. So early on, if you could raise the capital, you could do deals.
And there was a finite amount of capital that was raised by the forcement levels and the KKRs. And people started out with this mindset as a private equity investor. I am competing with an investment banker.
So the investment banker, instead of doing a private equity deal might go public or might sell to the strategic buyer. And there was this mindset that there are very few deals. And particularly there's a lot of the early deals were large.
So it was somebody from Wall Street, be it a private equity-funded group, or Goldman Sachs investment bankers who were just tooth and nail fighting for that small handful of deals. And that's where it started from.
And I even remember taking an organization like ACG. It was very late in ACG's evolution that they even wanted to include investment bankers in the ACG ecosystem.
And I think that as the industry has matured, private capital has developed into its own ecosystem and investment bankers and deal sources are a critical part of that.
So the mindset can be on the running auction and they drive the price up. Yes. But the market does that. The plethora of buyers is what drives prices and leverage multiples up.
And people forget the really critical role that investment bankers play in preparing a company for sale and creating a way for the management team to run an M&A process without totally disrupting the business.
So simplify the story so that I can learn about a business through seeing a teaser and really well-prepared materials versus having to fly all over and collect that information myself.
So they bring a lot of efficiencies as we move into what I think is wave five of modern private equity, the thousands of private equity players and the tens of thousands of intermediaries have to work together and are really important channel partners.
Good points on preparing the company for sale, but isn't there a premium to pay at the end of the day because of an investment banker?
Yes. But I would argue that it's the market speaking. Sure. But who do you know, who has sold a house to someone who came and knocked on their door and said, I would like to buy your house?
For most people that is the largest transaction they will ever be involved with and I'm sure that happens. But for most people, they hire a professional real estate agent who understands the market.
Who understands the legal complexities, who understands staging, and understands the benefits of competitive tension. And I have gotten to the point, I'm a little bit jaded.
If a business owner sells me his company because I'm the first guy who knocked on his door and asked him to, I'm willing to bet that's not the first really stupid decision that dude has made.
That is such a massive transaction, especially for a family-owned business. If he's not getting at least a really good attorney and really good advisors and reaching out for counsel, I question what I might be buying.
And I think that's what makes those small to medium arbitrage work in a market. In the market we're in today, there is a tsunami of private capital.
There are trillions of dollars, and this is a longer conversation but you look at the contraction of the public companies you could invest in as an investor. It’s down 25% over the last decade.
The incredibly deep and fluid private capital market is a really important part of the US economy. And there are lots and lots of players there. And this competitive system of advisors is one of the things that really make it work.
What's the difference between deal origination from private equity to corporate development?
A lot of people make the mistake of looking at their competitors. And I would say this was more the middle innings of the private equity world.
And you would hear people say oh yeah, we lost out to the SSB, which was the silly strategic buyer with this mindset of like oh, they're like just strategics, always pay crazy multiples.
And that is juvenile thinking. And on the flip side the corporate development guys will say, oh, here come the crazy private equity guys that are using all this leverage and don't have any idea what they're doing.
And that the two worlds are breaking out of those stereotypes and kind of meeting in the middle in a lot of ways.
And I would argue that as private equity groups specialize around the industry. And as corporate development groups figure out how to think about stock options and operator motivations. They began to act a little bit more like private equity that was emerging.
To me, the differences that remain would be around the timeframe. And that the strategic buyer has the ability to think about it like we sold the ready-mix concrete business years ago.
And a handful of global cement players that could look at a ready-mix business as their distribution arm. They were looking at a hundred-year global chessboard.
And private equity just can't think in those terms just because of our fund structures. And so that the timeframe can be a meaningful difference and strategic buyers can come in and not just look at the undulations in the private capital cycle and look beyond that.
It's probably one of the biggest differences. And as strategic buyers try to figure out how to motivate a management team.
There's an increasing body of work where management teams are writing books about how to sell your company 4 or 5, 6, 7 times, and how profitable that can be as a serial CEO goes flowing through the private equity system.
The best operators should be able to do that and should build up a track record.
As the market for management options and management compensation gets more efficient and more of that value is pushed towards the management team.
I think that's something that the corporate strategic buyers have to deal with where the old playbook was great. You only have to do this transaction one time.
You're in the Roper, the Danaher family forever. That used to be positive. And now people are seeing the benefit of doing multiple transactions and corporations respond to that.
How does private equity source deals?
Again in the simplest form, it is a brand-building exercise. And if you think about the definition of brand, it is the relationship between whatever the company is and each customer.
And that it goes back to your initial comment about deal sources and intermediaries being a channel partner, not a competitor.
The complexity of building a private equity brand has to factor in lenders, deal sources, LPs, company owners, company operators are all a part of that brand.
It’s one of the awesome things about LinkedIn and the massive amount of information available on the internet is, it really matters what your reputation is.
Because every single person that you talk to, every transaction you try to do, somebody can go back and look through your entire canon of work effectively back to the beginning of time and I love it.
That brand and character and good behavior and references are all really important. So that's one, brand building. Two, I would say, as a customer focus, really figuring out inside your organization, who your customers are.
And I look at it pretty simply like the IR team, our customers are our LPs, and the investors are our execution team, the customer is the management team.
We have to be great partners and help deliver value to those companies.
As you watch the industry grow and mature and specialize, and you see those constituencies breakout in terms of who your channel partners and who do you have to work with?
I think that's at its root and then the last thing I would say is the overarching theme, and I've had people ask me this question over time is, how did you find a thousand deals a year at Audax that were in your zone?
And the sad truth is the answer is one at a time. There is no magic fountain of thousands of proprietary or interesting deals. You have to set up a system to filter through, you gotta look at the numbers, bring a thousand deals in, you'll visit a hundred.
You'll issue LOI on 20 and you'll close down. And you have to think about it in almost a commercial fishing, filtering mindset in order to make good decisions in a really crowded market.
So I'm curious to hear your view about the strategy of developing that brand for a private equity firm. How are you really differentiating it?
I'm not going to name names because a lot of the people at these firms are friends of mine and they've built great businesses.
But you can go back to the early days of private equity and I could say, wow, those guys are really smart. And they go in and they trade out the management team, it is the first thing they do.
And they put in a rockstar management team and they fix that business and they make great money. I could take the word sharp-elbowed and just that phrase and throw it out in certain circles of private equity.
And there's one firm name that you'll probably get about an 80% hit ratio on that. That's somebody who went out and built a very strong brand with the LP community around what they do and how they operate.
And LPs loved it. They're like, wow, these guys, they are not afraid to go toe to toe and make the tough changes that have to be made. But the problem is they built such a great brand with the LPs that it spread over into the deal source network.
That’s a really important thing to think about like these if we go back to those three different constituencies within your organization. Ideally, you want to figure out how you can build one brand and everybody's singing off the same sheet music.
And it is, the first thing I would say is to sit down with those groups, the execution team, the origination's team, and the capital or the LP originations team and come up with a consensus message of what it is that you do. And that needs to be consistent.
And it has to be simple because there are, 2000 and 5,000 active private equity firms out there. How are you separating what you do from everybody else?
The other piece of advice I would give is to go out and actively try to listen to a bunch of other people in private equity who've been successful, tell their stories, tell their elevator pitch.
And I remember in, I want to say it was probably, 2006 or ‘07 at Audax. We were looking at doing a deal with another private equity firm. We'd seen the deal. It was a little bit big for us. And there's another group that we brought in for a second management meeting.
So the same team and I got to come in with another group. And the management team had already heard my story, which I'll be honest, I was arrogant. I've told this story 10,000 times. I'm great at it.
I got all my jokes lined up and I sat there and had to sit back and watch another private equity group give their pitch.
And my first reaction was, the dude stole my pitch. You know, it's exactly, he set up all the same things. He had half the jokes overlapped as he was talking to a management team and as I stepped back.
And if you don't go out and actively listen to the ways that people tell the private equity story, you can start to believe your own BS and think, oh,I'm a great board member and I'm a really good listener, whatever it is.
And everybody's telling that story. There’s only so many ways to tell the private equity story. We all use the phrase second bite of the apple, management friendly, the alignment of incentives.
The same phrases come up over and over again and trying to figure out how to come up with a different way to tell that is, I think it was one of the hardest things in private equity.
A friend of mine likes to say, it's not rocket surgery it's just math and the way that the deals are structured is not how you're going to differentiate yourself. At the end of the day, you gotta lead with trust.
And if you can build trust with whether it's the deal source or the management, you've got a really good chance of at least having your story heard and also of winning.
And that's what makes this game so fun. It's not like there's a magic bullet out there or somebody who's going to come up with some new and innovative structure that can be copied by everybody as soon as it's done.
One time you got to go find these deals and you gotta form and forge these partnerships one at a time. Which again, I guess the greatest, most entertaining educational industry in the world.
When you talk about the brand and building it out or projecting it out in the story, they're like values become a part of it. Is that sort of something that you have conversations around and weave into that? What elements go into it?
A hundred percent. I'd love to see if somebody like a researcher at Stanford should go out and collect a thousand different private equity, LBO models. Thousand different icy decks.
And I bet them the standard deviation away from the mean on those would be tiny. You look at the heritage of private equity firms, as people have branched out and formed new firms, the way that we look at and do the math around deals is very standardized.
And having been through 60 exit processes, bringing in four banks to pick one, to go out and build a buyers list of 150 on down to 10 management meetings and two or three final bidders to see how common. But even after all that work, the LOI has looked the same.
The numbers look the same, the management incentive packages look functionally the same and in a hot market like the one we're in now, the winner wins by an eighth of an inch in terms of price and package.
And when that is the case, there is so much commonality in terms of valuation. Another thing I like about the industry is that the common values people get to say there are three bidders here at the same price.
So how are they going to break the tie? As I said, I like working with these guys. I see eye to eye. I like how they interact with my management team. I like how they interacted with the hostess at the restaurant we went to for the management dinner. The little stuff like that.
I like how they interacted with the receptionist at my company. All of those things begin to matter when people are saying, Hey, this is gonna be hard. We've paid a big price for this.
We've got to go into a competitive market for the add-on acquisitions. And I want to do this with somebody that I actually liked spending time with. I think that values, trust and character, and friendship matter in an efficient market.
You made a point about your relationships with your LPs, the management teams are supporting. What goes into that? How do you look at keeping that focus and making sure that you're really delivering value to those different entities? Do they all have different incentives?
First part of that starts with just a deep understanding of what your customer needs. Are you dealing with an LP who's invested in 200 funds?
They don't care about how awesome and entertaining and how much fun your annual meeting is. They need the data in their form on time. That's like the number one thing.
Assuming that performance is in the band, their hot button issue. If they have 200 funds, make this easy for me.
You're dealing with a family office that mostly deals with public securities and they have one private equity vehicle that they're in and they love getting back to their roots where they where they built their own wealth.
Talking with small entrepreneurs, they love the annual meeting. They love to walk around and have a beer with our CEOs and hear about how we did the deals. That's hugely important to that family office investor.
Same thing with investment banks. It is a small intermediary that's a three-man shop and they do two deals a year. It is very different from Houlihan Lokey or Lincoln or Blair that does hundreds of transactions in a year.
The coverage person that you're dealing with, not only cares about who's on that buyer's list, but they want to know which of the companies that I'm involved with might be for sale next year so that they can circle up their industry specialists.
It’s probably a good segue into the private equity coverage side of the conversation. Also, think about what's the worst thing that can happen to that person.
And for the coverage officer at the investment bank to get an announcement, an email announcement, I send out that, Hey, we just sold this deal through his biggest competitor.
That's a great way to make him look really stupid if he didn't even know that the deal was happening and his deal partner in that group gets that deal announcement I've made it, I've really done damage to that relationship.
I've got to figure out how to give him a heads up at the right time of what's happening, what are we doing with that company that he thought he was chasing? That's a way that you're managing that part of the constituency on the deal sourcing side.
It's a one-on-one relationship with each of those constituencies.
And it starts with good listening and good systems. The systems you build or how you support and reinforce the habits of good coverage and good relationship building.
And there are so many great tools out there whether it's Asana or Tablo Software or Salesforce that help you set up those systems where everybody in your organization knows what everybody else is doing. So that you can have these one-on-one relationships.
So that's really managing what these different priorities are with these relationships and using those types of technologies so that information is accessible as you interact with various parties.
If you go back to it, the reason the independent sponsor model works so well is that an independent sponsor goes out and they want to do one deal. And one or two investment professionals can do that.
And as you try to build a scale organization in this really competitive world, three, 400 people at Audax that's to take advantage of that scale.
While at the same time maintaining the one-to-one relationships and the quality, and really knowing who your customers are in each of those constituencies.
I think it's brilliant what Jeff and Mark built there in terms of how that organization is coordinated across multiple offices and multiple asset classes.
But that's a ton of hard work to pull all that together. And it starts with great habits, great values, and great systems.
When we talked about systems, you mentioned it’s a one at a time approach. Can we walk through that? How does that work? How do you start building out your systems to be able to get those activities in to reach those?
It starts with an analysis of what your pipelines are going to look like. So let's say you're going to raise a hundred million dollar fund and you're going to do 10 deals. Like you, it's not that hard to put together a very simple Excel spreadsheet.
10 deals, 10 million bucks each. What does that look like in the current market? And then okay, let's go back through our history.
Like how many management meetings did we take out of those management meetings? How many LOIs? How many signed LOIs? How much did we go into deep diligence? And you can build that pipeline.
The heuristics and pattern recognition of what the pipeline looks like, so that, okay, here's what we have to put in the top of the fall. And that tells you how many business development people you need to have.
You can go back and look and say, do we believe in Dunbar's number that each business development person can have a hundred to 150 really high-quality relationships?
Or are we going to go with more of a social media approach, milled up and trying to build a mass-market brand in terms of how you think about sourcing?
And your best tool there is just cracking open and going to your advisory board members and your senior partners, and really digging into the numbers and the pipeline and the flow. That’s step number one.
And then out of that, we'll drive, do you even need a CRM system? If you do have a CRM system, what kind? Do you want to build it in Asana, which you can do?
Or do you really feel like you need a full Salesforce implementation depending on who else is on the team? I'd say one of the worst mistakes I've seen is that small, two-partner firms start out.
And before they've really done that analysis they go out and they pay for a full Salesforce implementation with this idea of, okay, everybody's on the coverage team, Everybody's on the sourcing team and every partner is going to log every phone call they have.
There's probably been more time wasted thinking, okay, I'm in Chicago, so who else is whom other deal sources within 20 feet of me so I can go see them before I go back to the airport and that's never happened.
That type of aspirational system approach versus, we need these hundred people to care about us and think about us. I think that is a better way to approach that.
So first start with the strategy. Are we doing a mass-market approach or we're going to have feet on the street really developing these relationships? And then what's that strategy look like, and the vertical we're focusing on? what actually works at the end of the day?
To me, that is the only thing that works is building a really deep, sincere relationship that's based on trust and based on what matters to you and what you are trying to achieve, and I'm aligned with that and what I'm trying to achieve and you're aligned with that.
And let's say in this example, you're the investment banker. I feel like I never tracked this.
But they're probably some are going to have a dozen, and a dozen investment bankers that I feel like I had played some small part in helping them become partners.
It was that a mid-level guy that was assigned to cover my firm and I connected with them on a real sincere friendship level. And I knew that if they could win this big assignment or if they could see these mini-pitches that would help advance their career.
And likewise, there's a handful of those individuals that said, okay, what does Jay need to do to get to the next fund? Or what are the deployment goals for that year that I could help with?
And when you start caring about the person on the other side and pulling for them and you're invested in their success, of the dinner table conversation.
I went home and shared it with my kids. More of them were about, “I really helped this guy today”. And then we made five times our money on this deal. And those were great.
Everybody knew those were really important, but the stuff that makes life fun and gets you up the next morning is “wow! This person that I really cared about, I helped them move the ball, or they made partner“.
What's the appropriate outreach to get that person's attention without just being annoying and self-serving? Thinking more in terms of building a quality relationship of how can I align with your goals and help you achieve those and move further doing that.
So what I would say is go to a conference and make one friend. And I had a couple of colleagues that would go to the big ACG intergrowth conference, and they would come back with a stack of business cards. Look what I did and hundreds of cards.
And then stop, that's not what you're trying to do. Like you had that before you went. If you want to do that, just pay to register for the conference, get the attendee list. And you got the same thing.
But if you can figure out how to go to that event and literally make one friend that you feel like you have an idea of what makes them tick.
And yes, be somewhat Machiavellian, make a friend who is roughly in the zone that you're in and has a chance at some point of showing you a deal that you'd be interested in, and start there.
And really think about what's one thing I can do to help this person along their journey over the next couple of weeks. That's where I would start.
And I think what will happen is that it will be infectious. And that will be the beginning of the brand that you're building as an individual there.
And the next conference you go to you'll call that person ahead of time and the two of you will set up the dinner. And he'll invite the few other people that he knows.
And then there'll be a dinner with six or eight people between the conference and you will begin to build a brand that way.
And I would start with this mindset of I'm not trying to bring home a stack of cards or I'm not trying to round out my database. I'm going to start with a bunch of very high-quality relationships and make that go viral.
I would say that's the beginning of brand building. And especially, now in this market, that is so efficient and so competitive.
What do you specifically do in that relationship that adds value for the other person?
- Share data
- Share your own network
- Listen and empathize with the challenges that they're having inside their company
- Try to figure out how to build their own network.
That's probably the most valuable thing you can do in a world where we're all yapping is figuring out how to focus.
So the greatest gift you can give somebody is to focus a hundred percent of your attention on them even if just for a minute. That’s the number one thing you can do feeding back in the network.
What about when you're looking at some of those proprietary deals and maybe you're outside of the conference network but you're going down looking at targeted companies. Is there an approach to see where they're at in terms of their life cycle, if there's an opportunity to do a deal?
One of my catchphrases has been, if I can talk you into getting married, I can probably talk you into marrying me.
At the end of the day, an M&A transaction is a massive, once-in-a-lifetime partnership for a lot of people. In fact, for most people, particularly business owners.
And so it is a really long journey to get to that point where the single most valuable asset in the history of my family, I'm going to trust you Jay and your firm Plexus to take us, to help us do the next phase of growth.
And figuring out a lot of different ways where you can showcase what kind of partner and what kind of friend you are going to be is how you advance the ball there.
I just don't think it happens where I just show up and I'm so charming and convey how awesome my firm is that somebody goes, great.
You checked all the boxes. You win. Here's the deal. You're going to have to figure out who the key advisors are and help them and build relationships with the accounting firm and the wealth planner and the family members.
You’re actively looking for opportunities, not through your words, but through your actions to say, this is the kind of partner I'm going to try to be. And I think you gotta realize you're playing a long game.
And it depends on where you are. When I was upmarket at Audax where a lot of the platform businesses that you buy if you first see them or when you first see them as the teaser from the investment bank, it's very much a compressed cycle.
One of the things I love about what we're doing at Plexus is we have an SBIC strategy working with independent sponsors that are credit-oriented. And then we have a control equity strategy.
The opportunity to go in and these companies that are at one stage of their growth and invest in them as a debt investor or a credit investor, and really get to know the management team in a non-control way.
And we've done a hundred and almost 130 deals like that. Out of that universe of 130 deals, we've been building trust and delivering value, and being great partners.
A lot of the deals that we will do out of our equity strategy are where we have had the chance to prove ourselves over years, if not decades in a smaller non-control transaction.
And that is setting the stage for, okay, now when they get to the point, they want to do the full reach out or a full buyout to build on that.
And I love the fact that we have this highly diversified credit strategy alongside an equity strategy where the investment vehicles that we have are aligned with us trying to build trust and doing increasingly significant transactions that align with the life cycle of the company,
What about red flags? When you're going through this process, what are some of the things that trigger you or look at as a red flag?
When you see a huge misalignment in character and values, it's a good time to go pencils down. In a competitive market, I love hearing from a management team about their former partners or their early investors.
And there've been some cases where they have gleefully described basically how they shafted an early investor.
And there's always a rationalization that they weren't adding a lot of value or they weren't holding up there and bargain. But that's a meaningful data point for me.
And I definitely believe people can change. I believe people go through on their own. Everybody's on their own journey and learning stuff.
But somebody who can talk about that difficult time in their history. As wow, this was a mistake and I wish I'd done it differently.
And it didn't have a great outcome but I learned a lot. It is very different from, yeah, I own it all now because I screwed the two other guys that were my colleagues that came in the business. That's a red flag.
Somebody who is making this lifelong really important decision and there is this artificial time pressure. And time pressure is important to make the decisions and get back to work.
But I can't think of good investment decisions that I've made over my career where I felt really rushed. And I'm not talking about how I feel like I worked every weekend, but making haste is important cause we all got stuff to do.
But when the other side is really rushing you in an artificial way, that's usually a red flag of something that hops up.
Business owners that are crushing it in a short-term market. There are some companies that did incredibly well during COVID and that could be a total shift in the business model that has opened new doors as their competitors have struggled.
But it could be something that's just like a one-time market anomaly, that probably raises a red flag as well.
What about decision-making? What does that look like within the firm? Who's involved? What are the considerations?
I'm a James Rocky fan, sort of the wisdom of crowds. It’s trying to find the balance of the people who have done the most work and know the most about the deal. Making sure their voices are heard.
And then also figuring out a measured way to bring in the pattern recognition and the heuristics from the senior partners.
And it's interesting that those are typically misaligned. That the people with the most experience also have the largest span of control and are probably less in the weeds on the specific transaction.
And then your newer junior people know every number in the deck, they've been up late at night, grinding it out. But they don't necessarily have the broad pattern recognition across multiple cycles and things like that.
And one of my favorite things is trying to bring those two constituencies together. And you think about it on a spectrum. You've got very junior, very senior, deep in the weeds, very high level, no experience, lots of experience.
And then trying to figure out how to blend those into a constructive icy conversation is a, I guess I'll call it a wicked problem. But it's one of the most fun things to try to get.
You can go back and look at terrible mistakes that have been made. Awesome opportunities missed because the senior partners didn't take the time to let the highly engaged junior team make their case.
Or on the flip side, the senior partners who didn't blow the whistle and pull the plug because they were overpowered by the passion of the junior team.
It's that fine line in the middle of bringing those two opposite sides of the spectrum together in the middle.
How do you put it together? Is there like a matrix you put together or is it just having a qualitative conversation to really assess all these decision points?
It is teaching your organization to listen and really investing a lot of time in what that looks like. The easiest thing in the world is to show up.
Usually, the person who does the most talking in an investment committee discussion over my career is the person who's done the least work.
And they're probably doing the most talking as a defensive mechanism for feeling a little bit bad about not getting down in the weeds enough.
And actually, I'd love it If you have any book recommendations on this. The short version of how do you become a better listener in a business context?
The only thing I can find that I'm sinking my teeth into is that it's not about developing your listening skills, it's about learning to develop a really aggressive personal curiosity.
And if you can figure out at least as a senior team member how to be the most curious person in the room, you're going to make much more significant contributions to good decisions than if you are the guy who does the most talking.
I want to talk to you a little bit about the selection process for bankers when you do decide to sell a company. How do you differentiate your brand and those things which apply well for the advisors. How do you do it?
It starts with a good playbook. And it starts way in advance. A lot of business owners, I've heard the phrase a thousand times. They're putting together the list. Their business has grown from five of EBITDA to 30 and they'll say okay, who are the bankers?
Where would you start? And they're like this guy has been calling me for three years. So we have to put him on the list. Just because they've got a good CRM system and they bug you every 90 days does not make them qualified to sell your business.
And it's just interesting to me to see how many times that guy actually gets a pitch versus a methodical, who's done a bunch of transactions in this space. I think it's really important to align size.
You can get the bulge bracket bank and yes, a couple of senior partners will show up for the pitch, and then you will never see them again. I don't want to be the smallest deal that a bank does in a year. And I also don't want to be the biggest deal that the bank does in a year.
But I believe that at least as a private equity person, especially in a crowded market, you should be able to, and you can do all the pre pitches you want in terms of phone calls and understand their credentials.
Let's call that somewhere between, five and seven. But in terms of actual 90 minute to two-hour pitches, it should be three or four.
You should have a scorecard that you share with the management team, the board members, whoever's going to be on that call with you, and force people after the pitch to write it down. And to me, do they really understand the business?
I spend a lot of time trying to figure out who your point person is going to be. The partner we'll always do it, but that sort of VP principal, young MD, that's going to be your point man. It's really important that you align with that person.
I always love to ask, what else is going on that's going to distract you from this. I love to see a team where the first chair and the second chair are working on everything together. There's a lot of matrix models out there.
And one MD can have four different VPs that he's supporting. I like to see, what I call it, Batman and Robin combo where Batman and Robin are your superheroes and they work together and they go everywhere together and they can finish each other's sentences.
And then another critical piece is when they send in the fee proposal. And the first breakpoint in that investment banks fee, there's probably one single data point that tells me how convicted they are about the business. Those first breakpoints are really important.
Do you negotiate those fees?
Absolutely. But I guess the caveat there is, it is really important for me to see their first volley.
If one group comes in and their first breakpoint in the fee is at $600 million and somebody else comes in and their first breakpoint is at $750 million, that tells me something.
You can probably push them both or you can push the high guy up, but what they think their first bid is a powerful, single, and very powerful data point in that evaluation.
What's advice you would give to going back to the origination process for that firm person that's really developing it again. Just looking back at your experience, what do you think were some of the key tips or golden nuggets?
We're going back to the new guy, and looking for deals as part of a private equity fund. One of the things that drives me nuts is somebody who wants to be in sourcing as a backdoor into execution.
Do you want to be in deal execution? Go be in deal execution. The market is mature enough. I love seeing the people that say, I love the chase, I love building the relationship and finding the deals. And that's what feeds them.
And I believe it's two different kinds of people. Almost by definition, a really good execution partner is really good at zeroing in on four or five relationships and the ability to hyper-focus on adding value at those deals.
And that would make them a crappy sourcer. And the really good sourcing person is fed by the new conversation, learning that person, figuring out what matters to them at scale with lots of people.
I see it all the time that the person who's the only reason I'm in sourcing is because I hope that one day to be an execution and vice versa.
Cross training is really important and I would recommend every young person on the execution side, figure out how to get a tour of duty with the sourcing team and the opposite is also true.
But I would say, get into sourcing if you really get fed by the activities that are critical to sourcing.
You gotta have, what I'll call the long-term fair mindset. If you were in with this idea of transactional, I need to see this many companies this quarter and I'll do anything just to hit that number.
That's going to be a short and ugly career in business development. I guess the market is matured. Building a long-term brand is far more important than just getting the next deal done.
And again, you got to be urgent, you got to follow the current metrics and drive that but play the long game. Don't just think about this year or this quarter.
I've seen more practitioners come up from the execution side and then struggle with the skills you need to develop relationships that ultimately get you on the origination side. Do you have thoughts for that person?
It really is, and it's almost comical. If you'd go back there are a bunch of great firms that are finally doing a better job of this. But for the most part, you look at who you recruit for the analyst or early associate role at either investment banks or private equity firms.
And what they are trained to do is the math and the execution work of getting a single transaction done. And they go through their career of analyst, associates, a senior associate up the food chain.
And then somebody, a decade later goes, okay, do you want to be a partner? You got to go find some deals. At what point in time did somebody say, it just switches.
You go from being able to execute a bunch of deals. Somebody go, okay, go find a deal. You can be a partner when you show that you can grow the pie or the other senior activity.
And when you look at, for the most part across private equity, the most senior people at the firms, they're in sourcing capital or sourcing deals. And who trained them for that?
And again, in gen one, gen two, everybody did everything, everybody was chief cook and bottle washer, it was a much less efficient market. The well-rounded utility player could do a lot of different things.
And as this market has gotten so damn competitive and everybody's specializing, it continues to crack me up that 10 years into your career or somebody says, okay, switch, become relationship-oriented sourcing guru, and then I'll make you a partner. It makes no sense.
And it stuns me how much that still happens and how little is invested in creating a bench on the sourcing side and hiring the person who's awesome on the sourcing team right out of college, or right after their first job.
It is totally different in a lot of cases from the person who's awesome at execution.
What's the craziest thing you've seen in M&A?
I am not going to be one of these people that is just going to criticize politicians because they're politicians. But the idea that with all of the challenges ahead of our country, we should attack private capital as the bad guys, is the dumbest thing I've ever seen.
You can talk about the excesses with the huge funds on one end. But private capital is the fuel that makes our economy work, job creation. If there's no private capital in a community and a guy builds a great business and he dies, the business dies.
And the private capital is the fuel that allows that business to go from being owned by that one family to now this management team who's worked really hard gets their shot that they deserve.
We are all aligned, jobs are good, make more of them, and grow our industrial base.
All of those things are fueled with private capital and that we're going to go into this season of debating, how bad we should hurt people that are investing private capital is one of the least American things that has happened in a really long time.
Or let me turn to the positive. One of the most American things that you can actually do is to help a small business grow and create jobs. And that's all private capital does.
Every state of the union address you put the guy that owns the laundromat on the front row of the balcony, and you talk about this guy, that's got this tiny company that has one employee.
And then you demonize the massive company that did whatever the bad thing is that happened that week. That's the pattern and no one talks about the 97% of companies that are in the middle that create all the jobs.
And yeah. That's great. I'm glad that guy started a small business, but someone who's built up a 20, 40, $50 million business and created a hundred jobs and figured out how to survive for a couple of decades. That's what drives our economy and that's what makes this country.
And we've just decided that the national conversation is, that's the thing that we have to hurt to help everything else and it's exactly the opposite.
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