Deal Origination from a PE Investor's Perspective

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I'm Kisan Patel and you're listening to M and A.

Science where we talk with deal professionals and learn valuable lessons from their experience.

This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science Live, where leading M and A practitioner share lessons learned from their experience. When you use proven techniques in M and A, more value is created. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our newsletter. Again, that's mascience. Com. I'm your host Kisan Patel, CEO and founder of M and A Science in Deal Room. Joining me today is Jay Jester, Partner at Plexus Capital. Jay also previously was Managing Director at Audix 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. How's it going Jay?

Really good. You make me sound really old though. Summing it up in decades, I'm a little rattled.

We love and respect experience here. That's what we're here to learn from you.

Thank goodness for the filters on Zoom that really that helps.

Maybe we kick things off with a brief intro on your MA background Jay.

I have 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. Went and worked for a firm called Bulls Hollow o', Connor, which I think of as really one of the OG non Wall Street MA 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 entrants, a firm called Florida Capital Partners that spun out of Chemical bank and Chase Capital Partners and got to learn the feet of the master Glenn Okun, 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 there about eight years. And then in 1999, Jeff Rennert and Mark Walpo, who were two of the early guys at Bain Capital, they were starting Audax and invited me to come join that team that was a foreman Audax and got to spend 20 years in Boston shaping the private equity team and the Audax platform. From really a half billion dollar fund in 99 to I think they're north of 25 billion total. Wow, it was fun. And then for the third chapter of my career, had a great time coming back home in two ways. Back home to North Carolina where I'm originally from. And it's been a great time to be here during COVID And then the other part of coming home is coming home to the small deal market, watch the core middle market get increasingly crowded and increasingly competitive. And it's really been fun to come back where I started companies 2 to 10 of EBITDA.

Wow, that's such a variety to have all that experience and sounds like you had some great influence.

Been blessed with a lot of folks that have looked out for me and taught me a lot. I feel like as soon as you stop learning, you're a dead man walking. And got a lot of really interesting folks to work with that have been very patient in trying to teach this old dog a few new tricks along the way.

Jay, I want to get your perspective where 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?

I think 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 Forceman, Littles and the kkrs. And I think 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's very few deals. And particularly as a lot of the early deals were large. So it was somebody from Wall street, be they private equity funded group or Goldman Sachs. Investment bankers were just tooth and nail fighting for that small handful of deals. I think 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 either run an 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. People forget the really critical role that investment bankers play in prepping a company for sale and in creating a way for the management team to run an M and a process without totally disrupting the business to simplify the story so that I can learn about a business through seeing a teaser and really well prepared materials versus having to file over and collect that information myself. So I think they bring a lot of efficiency. 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.

You had a good point. Like the market's grown significantly. There are so many deals, but now there's so many different markets, vertical strategies and everything that there's a lot to navigate there. Good points on prepping the company for sale, but isn't there a premium to pay at the end of the day.

Because of an investment bank?

Yeah, if you're running a competitive process as opposed to really developing your own origination process to turn rocks over and find that proprietary deal.

Yes. But I would argue that it's the market speaking. 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?

That's true.

That doesn't happen 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 who understands the markets, who understands the legal complexities, who understands staging and understands the benefits of competitive tension. 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's 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.

That's a fair point. And obviously there's little nuances to it depending on what the deal is.

I think that's what makes those small to medium arbitrage work. 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, I think 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. This competitive system of advisors is one of the things that really makes it work.

What's the difference between the origination from private equity to corporate?

I think a lot of people make a 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, just strategics always pay crazy multiples. That's juvenile thinking. On the flip side, the corporate development guys would 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 I think 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 industry and as corporate development groups figure out how to think about stock options and operator motivations, they begin to act a little bit more like private equity and we're merging. To me, the differences that remain would be around timeframe. And I think that the strategic buyer has the ability to think about 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 army. They were looking at 100 year global chessboard. And private equity just can't think in those terms just because of our fund structures. And 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 I do think 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, 5, 6, 7 times and how profitable that can be as a serial CEO 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 a 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 a positive. Now people are seeing the benefit of doing multiple transactions and corporates have to respond to that.

Those are really good points and differences. Developing those incentives for the seller, multiple exit points as well, and then timeframe to close these transactions. 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. 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 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 is brand building. Two, I would say is 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 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 break out 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, 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? 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 got to look at the numbers. Bring a thousand deals in, you'll visit a hundred, you'll issue Lois on 20, and you'll close 10. 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.

All right, let's take these apart. The first one, the brand building exercise.

You're making me nervous. You seem really serious about drilling and I kind of feel like I'm being cross examined.

I just want to learn. This is interesting stuff because I never thought about the brand building part of private equity. I want to understand your view around it because it is important. Even as an operator of a company, you constantly get reached out and that's the first thing. It's have I heard of this firm? Have I not heard of them? And if I have heard of them, what's the media association of the reputation? 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 built great businesses. But I think 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, they trade out. The management team is the first thing they do. And they put in a rock star management team and they fix that business and they make great money. I could take the word sharp elbow, 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, but 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 are, 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's spread over into the Deal Source Network. I think it's a really important thing to think about is 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 I think it is. The first thing I would say is sit down with those groups, the Execution Team, the Originations team and the capital or the LP Originations team, and come up with the consensus message of what it is that you do. And I think that needs to be consistent. And it has to be simple because there are, I don't know, there are 2,000, 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 go out and actively try to listen to a bunch of other people in private equity who've been successful, tell their story, tell their elevator pitch. And I remember in the. I want to say it was probably 2006 or 7 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 it was 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, that's 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. He said all the same things. He had half the jokes overlap as he was talking to a management team. 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, 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 one of the hardest things in private equity.

It is a challenge. It's got to go beyond. We buy businesses, fix them. And it is.

It's not, as 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 got to lead with trust. And if you can build trust with whether it's deal source or the management, you've got a really good chance of at least having your story heard. And I think also of winning. That's what makes this game so fun, is that it's not like there's a magic bullet out there or somebody's going to come up with some new and innovative structure that can't be copied by everybody. As soon as it's done one time, you got to go find these Deals and you got to form and forge these partnerships one at a time, which again, I think it's the greatest, most entertaining educational industry in the world.

When you talk about the brand and projecting it out in the story, did 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?

100%. 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 IC decks. And I bet 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 buyer's list of 150 on down to 10 management meetings and two or three final bidders to see how common. Even after all that work, the Lois look the same, the numbers look the same, the management incentive packages look the same, 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. When that is the case and there is so much commonality in terms of valuation. It's another thing I like about the industry is that people get to say there's three bidders here at the same price. So how are they going to break the tie? They're going to say, 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 going to be hard and we've paid a big price for this. We've got to go into a competitive market for the add on acquisitions. I want to do this with somebody that I actually like spending time with. I think that the values and the trust and the character and the friendship matters in an efficient market.

Really good points on the second one you made around customer focus. You made a point. You have your relationships with your LPs, the management teams you're supporting. What goes into that? Like how do you look at keeping that focus and making sure that you're really delivering value to those different entities?

And the 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 is 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 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. So that's hugely important to that family office investor. Same thing with investment banks. Visit a small intermediary that's a three man shop and they do two deals a year. Is very different than Houlihan, Loki or Lincoln or Blair that does hundreds of transactions in a year. The coverage person that you're dealing with there 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. And it's probably a good segue onto the private equity coverage side of the conversation. I 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 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 contingency on the deal sourcing side.

That's a lot to manage, to really map out and sort of understand what people's incentives are. It sounds like you're having these conversations individually.

It is a one to one brand. Each of your LPs has a nuanced and different agenda. And you can't feed your LPs or your deal sources or your management teams through the trough. 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 are how you support and reinforce the habits of good coverage and good relationship building. And there's so many great tools out there, whether it's Asana or Tableau 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, really managing what these different priorities are with these relationships and using those type of technology so that information is accessible as you interact with various parties, be it LPs so forth that you can pull that up and see what that conversation looked like or what those summaries were around that.

Yeah. And I think if you go back to it, the reason the independent sponsor model works so well is that an independent sponsor goes out and, 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, 3, 400 people at audax 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, that's what allows. I think it's brilliant what Jeff and Mark have built there in terms of how that organization is coordinated across multiple offices and multiple asset classes. That's a ton of hard work to pull all that together. And it starts with great habits, great values and great systems.

Really good point. When you talk about systems, the third point you mentioned was this sort of one at a time approach. I think this is when we start getting into actual mechanics to get to that one deal to complete and move on to the next one. 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?

It starts with an analysis of what's your pipeline 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. It's not that hard to put together a very simple Excel spreadsheet and say, all right, 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? How many signed, Lois? How many did we go 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 funnel 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 100 to 150 really high quality relationships or are we going to go with more of a social media approach and build a and try to build a mass market brand? In terms of how you think about sourcing, 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 like that's step number one. And then out of that will 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. That's a one of the worst mistakes I've seen is that small two partner firm starts out and before they've really done that analysis, they go out and they pay for a full salesforce implementation. With this idea of 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 are my other deal sources within 20ft of me so I can go see them before I go back to the airport? 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 it 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, I don't think sending the mass emails out does anything. I think it's what you alluded to prior that you actually have to have people that own relationships and have the bandwidth to make sure they're creating quality relationships.

To me, that is the only thing that works is building a really deep, sincere relationship that's based on trust and based on I know 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 Never tracked this, but there are probably somewhere between a half dozen and a dozen investment bankers that I feel like I had. I played some small part in helping them become partners. It was that 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 this many pitches, that would help advance their career. And I think 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 with my kids. More of them were about, I really helped this guy today. Then, oh, we made five times our money on this deal. 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 I really cared about. I helped them move the ball or they made partner. Yeah. So I guess that's a very long winded way of answering your question about what works. And I would say really good relationships is what works.

Absolutely. And part of that model, we want to stay focused on that. And we talked a bit about creating the goals. So we started with the $100 million fund. We went by a bit 10 companies. How many zones we got to turn over to store to find those deals that we would actually pursue. Once you start building this out, get a game plan going, figure out the resources you need. I want to know what makes you, Jay, like, you've done this before and you've had a lot of success having these conversations. And I feel like there's so many people out there that are so early where they're tasked with building this out, whether they're in pe, corporate dev function, and they're doing it from scratch and they don't know where to start, it's almost like, how do you even initiate that first conversation? What's the appropriate outreach to get that person's attention without just being annoying? Self serving again, 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 let me make sure I'm understanding the question. So brand new person in business development, launching their career and what's the first thing I do?

Yeah, we're getting past the research. Hey, we got a strategy. Mind Here's a list of companies I've identified we need to go after. I need to start developing those relationships. What are those early steps to really get things going? And I feel like that's the hardest part is just whether it's picking up the phone or drafting that message and sending it out, but actually making those initial steps that get things in motion.

What I would say is go to a conference and make one friend. And I had a couple colleagues that they would go to a 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. 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 weeks. That's where I would start. And I think what will happen is that 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 it'll be a dinner with six or eight people between the conference and you will begin to build a brand that way. And I think 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?

Share data. You can share your own network. You can listen and empathize with the challenges that they're having inside their company or trying 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 figure out how to focus, say the greatest gift you can give somebody is to focus 100% of your attention on them, even if just for a minute. I think that's the number one thing you can do. Feeding back in the network, I got.

Chair data, make some thoughtful introductions and listen. Understand their challenges.

Yeah, somebody should needlepoint that. I think that's a pretty good place to start.

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. Here's five that we're really looking for or getting after in their own day to day environment. You want to get some of that time to start getting those conversations to see where they're at in terms of their life cycle. If there's an opportunity to do a deal.

You know, 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 and A transaction is a massive once in a lifetime partnership for a lot of people. In fact for most people, particularly a business owner. 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 through the next phase of growth. 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 the accounting firm and the wealth planner and the family members. You are 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 got to realize.

You'Re playing a long game, not a short sales cycle.

Right.

How long are we talking about?

The longest I've gone chasing a single deal and a single business owner was 13 years.

Wow.

And it depends on where you are. When I was up market in the at Audax where a lot of the platform businesses that you buy, if you first see them or when you first see them is the teaser from the investment bank. It's Very much a compressed cycle. We know one of the things I love about what we're doing at Plexus is we have an SBIC strategy working with independent sponsors that's credit oriented and then we have a control equity strategy, the opportunity to go in at these companies that are at one stage of their growth and invest in them as a debt investor or credit investor and really get to know the management team in a non control way. And we've done almost 130 deals like that. Out of that universe of 130 deals, we've been building trust and delivering value and being great partners. And I think a lot of the deals that we will do out of our equity strategy or 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 recap or full buyout to build on that. 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 trying to build trust and doing increasingly significant transactions that align with the life cycle of the company.

Yeah, it's a lot of long term considerations there. What about red flags?

In what sense?

And pursuing deals like some of those things where you're really looking at those relationships because you got a lot of time invested into it, but when you get things that may signal that, hey, you should stop, that this isn't something worth pursuing, 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 have 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 their end of the bargain. But that's a meaningful data point for me and definitely believe people can change. I believe people go through their own, everybody's on their own journey and learn 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 is very different from, yeah, I own it all now because I screwed the two other guys that were my college came into business. That's a red flag. Somebody who is making this lifelong, really important decision and there is this Artificial time pressure. And I think 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 I feel like I work every weekend. But making haste is important because 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 they are crushing it in a short term market. There's 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.

These are great examples. I like that focus on character and values. That really makes a lot of sense. What about decision making? When you actually decide, hey, we want to move forward, we want to pull the trigger on this, what does that look like within the firm? Who's involved? What are the considerations?

I'm a James Saraki fan, sort of wisdom of crowds. I think 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 in that those are typically misaligned. 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, they 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 it's 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 junior, 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 IC conversation is a. I guess they'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 of the spectrum together in the middle.

That's tough to do. You got to zoom in, zoom out with all this information. 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?

I'm going to sound like a broken record here, but it is teaching your organization to listen and really investing a lot of time in what that looks like. 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 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. If you can figure out, at least as a senior team member how to be the most curious person in the room, I think you're going to make much more significant contributions to good decisions than if you are the guy who does the most talking.

It's a good point. Mentioned the book you made me think of. Just listen. Mark Goldston.

I can't believe I didn't find that one yet. On my journey for listening. That seems so simple. I'm a little bit embarrassed. Just listen.

Just listen. Mark Goldston. That's a good one. I actually interviewed him for a podcast. We walked in some cases related to M and A around empathy in the post closed transition period.

Perfect.

Just listen. It was a good. I'm reading. Never split the difference. My daughter right now there's some interesting points around that I want to talk to you a little bit about. The selection process for bankers when you do decide to sell a company. I think that's a fun and interesting one. I'm curious how you do it because everybody knows the fabled bake offs and we talked about how do you differentiate your brand and those things which applies well for the advisors. How do you do it?

I think it starts with a good playbook and it starts way in advance. I think a lot of business owners, and I've heard the phrase a thousand times, they're putting together the list their business has grown from 5 of EBITDA to 30. And they'll say okay, who are the bankers? Where would you start? And they're like, well this guy's been calling me for three years so we have to put him on the list. What? 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 the 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 bank does in a year and I also don't want to be the biggest deal that bank does in a year. But I believe 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. And I think you should have a scorecard that you share with, you know, the management team, the board members, you know, whoever is going to be on that call with you and force people after the pitch to write down. And to me it's 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 will always do a ton of talking, but that sort of vp, principal, Young, md, that's going to be your point man. That'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 a Batman and Robin combo. Batman and Robin are your superheroes and they work together and they go everywhere together and they can finish each other's sentences. Another critical piece is when they send in the fee proposal and the first break point in that investment bank's fee. If there's probably one single data point that tells me how convicted they are about the business, that first breakpoint is a really important one.

So we got the size, making sure that it's not the biggest or smallest deal. It's almost both like culture, fit and capabilities that you see how they're working as a team. And then the fee you negotiate those fees?

Absolutely. 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 break point in the fee is at $600 million and somebody else comes in and their first break point 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 single and very powerful data point in that evaluation.

These are really great tips. 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. If you want to be in deal execution, go be in deal execution. I think 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 that 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. The person who's the only reason I'm in sourcing is because I hope to one day 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. I think you got to 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 to hit that number. That's going to be a short and ugly career in business development. I Think as the market has matured that long term, building a long term brand is far more important than just getting the next deal done. And again, you gotta be urgent, you gotta 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 in the origination side and to the point where we're actually looking at putting a course together around it. I'm curious if you have thoughts for that person that you spend years doing. The execution side. You are in the data room and the spreadsheets and doing all those things, but now you're getting pushed up to be more front running the presentations, explaining things to the group. It's a different skill set to develop. And it seems like that seems to be the gap.

It really is. And it is almost comical if you go back and 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 do is the math and the execution work of getting a single transaction done. And they go through their career of analyst, associate, senior associate on up the food chain. And then somebody a decade later goes, okay, if you want to be a partner, you got to go find some deals. What point in time did somebody say it just switches? You go from being able to execute a bunch of deals, somebody goes, 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 1, Gen 2, 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 somebody says, okay, switch, become relationship oriented sourcing guru and then I'll make you partner. 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 is totally different. In a lot of cases, from the person who's awesome at execution, those are really fair points.

What could be done to help solve this gap? Sounds like we need to put people through sales training.

I'm thinking, like, some dude with an awesome setup and cool retro art in the background. And they're like, dynamic. Mike there ought to run a class that feels like that would be really helpful to people.

Anybody set the stage, you'll be the next speaker for it. I got to ask you, Jay, what's the craziest thing you've seen in M and 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. Whatever. 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. And the idea that let's demonize and vilify private capital to fix anything. And I will try to use fewer obscenities, but it is the dumbest thing that I have ever seen. We are all aligned. Jobs are good. Make more of them. Grow our industrial base, grow our. 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 it to the positive. I think 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.

Yeah, I agree. It's one of the greatest tools in capitalism. But then to demonize it is very contradictory of that.

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, it's great. I'm glad that guy started a small business, but someone who's built a 20, 40, $50 million business and created 100 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.

You should get in politics and change it.

No, I don't want to be in politics.

Jay, thank you so much for your time today. Really enjoyed this conversation and learned a lot.

Back at you. Thanks for the book recommendation and I like the work you're doing here. I think this is. Like I said, it's a great industry and it's a really important industry. Sharing this knowledge around and helping people along this journey is a worthy cause. So thanks for investing in that.

Hey, thanks Jay. Here's to the deal.

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