Private Equity in 2025: Market Shifts, Strategy, and the Rise of AI

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You want to keep up with us on the go, head over to LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and Founder at Deal Room and Chief Scientist at m and a science. Joining me today is Hugh MacArthur, chairman of global private equity practice at Bain & Co. Bain & Co. Is a.

Global management consulting firm that collaborates with.

Clients to address critical challenges and drive transformative results. Today we're going to talk about the.

Evolution of private equity.

Hugh, how are you doing today?

I'm doing well, Kees, and thanks very much for having me on the show.

Thanks for hosting me here in Florida.

Sarasota and beautiful Longboat Key. Thanks for making the trip down.

Thanks for taking a break from operating a global consulting practice in private equity to have this conversation with me.

I couldn't think of anybody better to take a break with than you this afternoon. It's not sunny so I can't play golf, so this is the next best alternative.

Next time we'll bring the mics in the golf course.

Put it right in the car. Exactly.

Can we kick things off the intro and your background?

I've been at Bain for way too long. About 32 years. I'm a dinosaur in the consulting industry and in the private equity industry. About 30 years ago, a few folks and I founded our private equity consulting practice, which was the first consulting, first practice area actually ever founded at Bain generalist firm. Before that, we decided that Since Bain & Co. Actually created a successful private equity GP, Bain Capital, our cousins we affectionately call them, even though there's no legal relationship between the two companies since they were successful in private equity, that we should be in the consulting business for other private equity firms in addition to Bain Capital to try and see if we could make a business out of it. From very humble beginnings, with just a very few of us, it's grown to be a very large and thriving practice area for Bain globally.

How big is the practice today?

It's about a third of everything that Bain does when you take it in its totality. We do commercial due diligence for GPs. We work with LPs, we work on portfolio companies once they've been purchased in order to maximize the value that's been underwritten. And we also do a lot of work with GPs and LPs on their own areas of strategy, operations and organization. So it's really quite a wide range of topics across all private asset classes. I refer to it as the private equity practice, but in reality it's a financial investors practice because we started focusing on buyouts. That was the number one product that we looked at. But talking about private assets today is like talking about sports. Are we talking about baseball, football, badminton? There's now private credit. There's infrastructure, there's real estate, there's hedge funds, there's the LP side of the coin, the GP side of the coin. Even in private equity. There's buyout, there's growth equity, there's venture capital. There are just many different types of flavors now that didn't exist 30 years ago. As the industry has grown and professionalized over time, and we play in all of them globally.

What was it like starting this practice? Because it's really interesting, you said the firm was essentially generalists and then this was the first specialized practice. Was it you just raising your hand and saying, hey, I got an idea. Like, how did it turn about?

Well, we were lucky. We certainly didn't know what we were doing. So being lucky was actually a very good thing. Thirty years ago, we did have this fascination with financial investors and what they did. That's kind of part of our DNA at Bain in our corporate consulting lives. That's one of the reasons why we founded a successful private equity firm like Bain Capital. Is that because we wanted to go see how do you win in industries and how do you make companies win and how do you generate results and how does that all work? And this was another specific application of how that works. And it differs a lot from the corporate consulting world because at that time, and in these times, corporate consulting can be months and years of activity to improve the operations and the strategy of a firm. We were talking then about doing things in a few weeks in commercial due diligence. And one of these things didn't look like the other. We were fortunate that the firm does have an entrepreneurial streak in it. It was very entrepreneurial back in the day, still is, and said, if you guys think you can make a run at this, then go for it, we'll back you. And then we'll see where it goes.

That was what year that was?

1995.

You were like ahead of, I think private equity started till after that.

We weren't quite ahead of it, but we were pretty darn contemporaneous with the beginning of private equity. Yes.

You also were the CIO at the firm. What was that like?

Long time ago. That was actually an interesting few year journey there and that I had no idea how to be a cio. First of all, when I got to be the CIO of the firm, it had everything in it from help manage and figure out what we should do with our co investment funds. We do deal by deal co investment with some of our clients and have for 30 years. We also invest as LPs and some of our client funds to provide opportunities to our people. And this is all personal capital for our people. It's not Bain and company capital all the way through to hey, we have a 401K. Do we have the right manager for our 401K benchmark? That so there were a lot of different things that I certainly had a lot less knowledge about how to deal with that the CIO of the firm has to think about for all the employees.

What did you learn from that? What have you been able to like take and apply in other areas?

I learned I didn't want to be a cio. I wasn't very good at it. I also learned that it's like having a menu in front of you at a restaurant that you kind of like and you're kind of interested in. There's a temptation to potentially order too many things off the menu that look good and then you get sick to your stomach. And there's a big menu of things that you can do as a CIO and a lot of things that you could invest in and a lot of opportunities that you could bring to your partner to say, hey, this would be cool if we did this. But one of my big takeaways was if we as Bain didn't uniquely know something about an investment opportunity and we couldn't add value to it and my partners could get at it or get at something very similar in a different way that we shouldn't be offering it, we should take it off the menu, only put things on the menu where we could hold it out and say we should eat our own cooking because we can uniquely provide value to this in a way that you can't get someplace else.

Makes total sense. You built the practice up and today what's like the sweet spot for your private Equity practice. What's the area of practice that you do better than anybody else in the world?

I'd like to say all of it. I'll tell you that we founded the practice and the core product was commercial due diligence, which is this outside lens that we apply to assets and their industries and really try to understand how they're likely to evolve over the next five plus years. The holding period that a typical private equity investor would have and what the key value levers are that you could underwrite and then go build a plan and execute against in order to really create alpha, to create those excess returns that your limited partners and everyone's looking for. That remains the core business that makes everything else go. We have a post acquisition business where we help actually go and do the things after we perform the due diligence. We have, as I said, a solution that focuses on the strategy or the top of the house as we call it, for GPS and LPs, because guess what, big financial institutions now need strategies too, in a way that they didn't 25 or 30 years ago. All of these things hang together, but the commercial due diligence business was the first thing that we really did that was groundbreaking in the industry. I recall Keeson going up and down Park Avenue as one did in New York those days. That's where all the buyout firms were located and banging on doors trying to explain what we did and how to generate business. With my partners, GP after GP would tell us, I know why I need an accountant to do a deal and I know why I need a lawyer to do a deal, but why the heck do I need a consultant to do a deal? And we would start to talk to them about issues in areas that they hadn't necessarily considered. How would you like to know exactly how fast this industry is going to grow over the next five years? Or how would you like to know what the customers really think about this target company's product or service? And whether they think the prices are too high, too low, whether they're planning on spending more money with this target company or more money with their competitors? And how about those competitors? Are they doing things well? Are they messing things up? Are they lower cost in your target business? And I don't think many dealmakers at that time they were consumed with quality of earning, which of course we still are, and deal room data and a lot of that. But this external view was kind of a new lens entirely. And people said, you can really tell us things like that. And we said, sure, that's what we do for a living. For the corporate world, this is just a deal application of that. We'll have to change it and evolve it and make sure it happens very fast, because that's what your time need is. But these are all things we know how to do and we've been doing for years.

It sounds like a hybrid between the competency area of strategy and diligence. I talked to a lot of these firms and I feel like a lot of boutique firms take a very tactical approach at diligence. But what you described is a lot of bringing in a strategic view when you start looking beyond the scope of the deal at hand.

I think that's right. You think about the way things are changing today in the contextual landscape of just the world and the economy. Think about how fast technology is changing and I'm sure we'll talk about it later. But things like AI is a complete game changer. And at the beginning stages of all of this, things like automation and the Internet became game changers. And unless you understand how technology is going to impact different industries, and it's very transformative in many industries around the world, it's hard to make an investment at any price and know whether or not you're making a smart bet or not a smart bet. So that's just one example. But regulatory issues are another example. But there are all different kinds of things that are impacting how industries behave and how they change. And I would argue that the half life of business stability is declining dramatically over time. It's going to continue to decline dramatically over time. Paying more attention to the external world is important for those reasons. It's also important because the pricing in this industry has changed a lot over the last 30 years. When I started in the private equity world, if you looked at a buyout, the typical price would be something like five or six times EBITDA or cash flow. Now it's twice that or sometimes more than twice that in different industries. So the margin for error in buying well has gone virtually to zero. So you're paying double what you paid 25, 20 or 30 years ago. And therefore you've got to make sure that this asset really performs to generate those returns. You're also actually doing that in a much more competitive world than 25 or 30 years ago when the industry started. Two of the most important differentiating tools that a deal maker had was his Rolodex, if we can use that word for people to understand it, back when Rolodexes really existed, because you sourced a lot of your deals in a proprietary fashion. That means you went into your Rolodex and you knew people who might be selling a business and you called up the person who owned the business and you negotiated a deal one on one, proprietary. Now 90 plus percent of all the deals you'll see out there are intermediated by a bank or someone like that who wants to get maximum price for the seller. They invite all potential interested buyers and the prices are much, much higher because it's a much more competitive marketplace than it was 25 or 30 years ago. The second tool that was very differentiating 25 or 30 years ago are your banking relationships and your banking acumen. Because bank financing was bespoke and the cleverer you were at creating a financing structure that was efficient, extremely leveraged, got you the kind of amplification on the returns that you wanted than the better returns that you actually generated. Now most of the financing and deals is commoditized. Anything that's being put for sale that's a normative asset typically has what we called staple financing, which means the selling intermediary offers the same exact financing to any buyer. Being an expert in financial structuring, except in special situations. No longer the value that it was in the past having this deep network of proprietary relationships for sourcing deals in a non competitive way. Again in most instances, no longer the kind of differentiator it was in the past. So you've got to be really good at the other skills around generating returns and where the value levers are that you can confidently underwrite in order to deliver those returns.

All right, we got some themes to have a nice conversation about how private equities evolved. You mentioned just the multipliers. The valuation has changed. You mentioned the way we source deal has changed the financing. Probably want to expand a little bit about just general structuring of deals and then value levers. Ready to take these apart?

Let's take them apart.

Let's do the first one. Because you mentioned the ebitda, which is right, like it's gone up, especially the last few years, went down a little bit, now it's back up. EBITDA has and then I work in tech and we're like screw ebitda, we just want gross revenue. In fact, we'll just take our best month in the quarter and times it by 12 and that's what our ask.

Is, forward 12 months, revenue multiple.

Yeah, love to hear your perspective on what are you seeing how that's evolved. Was there any other inflection points in the 30 years you ran this practice.

There are a lot of inflection points. I'm trying to talk about the major ones. Essentially, we're talking about an industry and a set of industries that started out as. It's a cottage industry. It was a few folks getting together, creating a simple llc, doing some deals, getting some financing, expanding their network of contacts, and that's what it was. No one had any idea at that point in time that we were going to grow this business into a multi trillion dollar asset class that spanned the globe. A lot of the changes have been because of this phenomenal growth, this large secular growth in private equity and buyouts in all private asset classes, really, that we've been seeing over the last 15 or 20 years. And that growth has really fueled a lot of changes in the industry because that growth has helped professionalize the industry over time and it's driven more competition. And when competition comes into any industry, the prices go up, the margins tend to go down, and you've got to find a smarter way to do business.

Overall asset class. More money is getting poured into this private equity market, which has created more competition. How many firms were there like now? What do they say? There's like over 5,000 private equity firms.

If I remember the number correctly, Last year there were 1700 private equity firms raising money, just raising money out there. So I don't know how many that implies there are in total, but it is a number that's in the thousands. Certainly when you take the global lens to that. And that's just things like buyout that doesn't account for other types of private equity.

Private asset classes, when you started the practice.

Oh, a few hundred at most. Yeah, it's like night and day. The industry is now all private assets. If you take it together, it's about $20 trillion as an industry. In AUM, to give you an example, the average size transaction in just the buyout world 25 or 30 years ago was about $100 million total enterprise value. And the average transaction size now is about a billion dollars total enterprise value. That's on average, that would've been the biggest deal of the year in 1997. Now it's the average size of deal.

You work with some big firms. There's a whole Lora market spectrum that probably has its own. But what have you seen in terms of industry focus, how that's evolved over time? Because we've seen multipliers go up in terms of spaces that firms are investing in. What does that trend look like?

Keezen? It's amazing. It's really exploded as well. The classic buyout 25 or 30 years ago was an industrial company that might be a little bit of a dented can, or it might be doing fine, but could do better and a buyout fund would lever it up and go in and reduce the cost and make it more efficient and more valuable and then sell it and make a lot of money. Consumer products was also relatively popular, but I call them kinds of businesses where you can touch and feel things and people feel like they understand it. But it was very much a value oriented mentality that the industry was grounded in. And we've seen an explosion to where the point where almost any industry sector is available for private equity growth. You mentioned you're in the software business. If 25 or 30 years ago I said we're going to take fast growing software companies, put debt on them and people would be laughing at you. This is just not a conceivable thing. And now software and tech are the single largest sector in the entire buyout industry. Healthcare was not by popular back then. That's now the second or third largest sector depending upon the year. Really understanding how sectors behave and getting to have a deep grounding and expertise within not just sectors but subsectors. Because when I say healthcare, that's a lot of industries that comprise 17.5% of global GDP. So getting really smart at those subsectors that you want to invest in so you know more about where value is created than anybody else has become one of the mantras of the entire industry. Simultaneously as some of these sectors have changed, that the private equity investors are investing in, the types of investment theses have changed as well. So I mentioned earlier that in my mind the industry was always grounded in value. But where is the value? How can I pay a good price and make this a more efficient, more streamlined organization? Over the last 15 years or so, we've seen the industry evolve to be much more about growth than value. Much more about how do we double, triple, quadruple the revenue growth of this business depending upon what it is. And a lot of that has to do with technology. If you look hard under the hood, you'll find technology everywhere. It's not just in and of itself a software business. Maybe it's fintech or it's healthcare IT or it's tech enabled business services. But technology is bleeding into many industry sectors and in every case it's about faster growth. Efficiency, sure, but it's about faster growth. The industry has had to shift from a mindset of Cost and margins being primary to, to in many cases, revenue growth being primary. And one interesting study that we did, Keyson, that sticks out in my mind is that we went back with a proprietary database that we have and we disaggregated these sources of value of all the deals that have been done from 2013 through 2023. And what we found was about half of the value created in all of the deals and buyouts globally during that time came from revenue growth. The other half of the value came from multiple expansion. 0% of the value came from margin expansion, which if you're an old dinosaur like me, is an absolutely astonishing outcome. That none of the value over a decade was because margins went up on average in buyout deals is extraordinary. But we were in an extraordinary period where there was this shift going on toward underwriting more growth as being the predominant driver, controllable driver if you will, versus margin. And we were in this period of zero central bank interest rates, which made that very cheap in an era of very steady GDP growth. And that made multiple expansion almost a mathematical certainty. If you're getting the revenue growth, we didn't have to have margin expansion. Now of course, the interesting end of that tale is that what have we seen in many countries over the course of the last several years, rising interest rates, Central bank interest rates are not zero anymore. They may be bouncing around, they may be coming down a little bit, but they are not zero. They are actually positive. That is causing a reexamination in the industry of how do we make money Again, revenue growth is still important. I still like growthy industries. But whatever you think multiple expansion is going to be over the next decade as a contributor to value creation, it's probably not going to be as big as it was when interest rates at the central bank level were zero. That means I got to dust off my old margin improvement plate kit and figure out how do I make these margins expand. And that's not always about reducing cost. Sometimes it is, but sometimes it's, hey, I've got a fast growing software business, how do I get real operating leverage and make sure that I'm pursuing this rule of 40 or rule of 50 or rule of 70 or whatever rule.

You are pursuing, we have increase of revenue has been a big factor to the growth. Then we have multiple expansion. When we say multiple expansion, is it just the general valuation multipliers have gone up across the sector or just more companies are consolidating businesses that therefore they triage their valuation from small asset to bigger asset?

It's really about the fact that when you shift into growth as a mode and you're actually successful in generating that growth as an industry, which the private equity owned assets have done, you're going to get rewarded with a higher multiple over time. As GDP continues to go up, earnings go up, my EBITDA is going up, my revenue's going up at a very fast rate. People are going to be able to pay you more for that in the future and have the same kind of interest coverage level. So I'm manufacturing, if you will, the increase in multiple. And of course that's being helped along by 20 other private equity firms that want to buy that exact same asset and are willing to pay a little bit more for it. So there's a competitive aspect and then there's a structural aspect of hitting those growth targets. Just having EBITDA on a steady march upward in many industries over that period.

Of time, and software growth is so important. You're over 40% year over year, get nice healthy valuation. If you're like 20 to 40, it starts dropping off pretty quick.

It's incredible, isn't it?

Is that across all industries or is it just unfortunate to be in the software space?

It's across many industries. It's most prevalent in software. And as I said, tech is the largest sector in buyout by quite a wide margin and about 90% of the value. And anything you could call tech in buyouts is software. We've seen the rise of a lot of large software specialists that are GPs. The interest level is definitely there. And of course software permeates, as I mentioned earlier, all of these other different subsectors. So a lot of it is software enabled. And when people hit the growth number, they were rewarded because people thought that that's clearly success. But when I referenced earlier that out of all of the deals done, margin expansion was not a contributor to value accretion over the last decade. There's now the concern in the industry and we have seen this blip crop up after interest rates came up with like, can these businesses really make money? They're growing very rapidly. They may be a certain level of profit in there, but if I can't believe that EBITDA or cash flow is going to grow along at some rate with revenues over time, then this business isn't as valuable potentially as the multiple that I put on it. So we're in this period right now where we're coming back to the future, if you will, of show me exactly how this business makes money and show me how it's going to make money over the next five years. Not just that you can grow fast. That's not enough anymore the way deals are getting sourced.

It started mostly proprietary, but now it's getting more competitive, which means a lot of money for bankers to make.

A lot of money for bankers to make. Yes. It has not gone unnoticed on Wall street that this is a very lucrative and growing asset class.

Is it the culture for private equity to rely on banks for deal sourcing versus a lot of strategics are building their own search to find proprietary deals very proactively because they're always like focused on that strategy that are supporting their corporate strategy. Is that the case? Is that what's fueling a lot of this is just here's a culture in private equity where they play friendly because you go to all these conferences. A lot of matchmaking with the bankers. Is that what it is? Or are they still building their own pipeline as well?

It's a really good question, Keesen, because it has changed over the last few years. It used to be exactly what you're describing that I'm a GP and I get a thousand, what they call SIMs, confidential information, memorandum in the door every year. And I pick out which ones I'm interested in and do triage and then I get serious about a few and I bid on those and I win what I win. That was what much of the industry was like. But this need to have industry sector and subsector specialization means I'm actually narrowing the aperture of things that I know a lot about, which means I'm narrowing the aperture on things that I want to look at. So I don't want to look at a thousand things that may come in the door. If I'm interested in these eight subsectors of the software space, for example, I want to understand who are the players in this space and who might I want to acquire, even if they're not for sale right now. And I want to begin to build my own sourcing because at some point a lot of those assets will come for sale. And when they do come for sale, I'm not expecting that I'm going to get a proprietary look and nobody else will, because again, sellers have become a lot more sophisticated. They're going to want to go to an intermediary and say, please find me the highest price for this asset in many instances. But if I've known the asset for a few years, if I know more about it than anybody else, I'm going to get speed to certainty on value faster than my Competition and therefore be able to put a number in that's fully financed and win that asset more often than not. That's really the state of play. And where we're seeing the private equity.

Industry evolve, that's leverage. Having that relationship, be able to call, say, hey Joe, why don't we go grab a cup of coffee and chat before.

Absolutely.

That's really good to see that. It's sort of pendulum. Went one direction, LA banked, and then it's coming back the other way. Because partly being so competitive financing, that's changed. We kind of mentioned the whole there's like private sector and that's a big part of it. Now that you're seeing a lot of these funds offering different types of debt, products and things. Teach me, what have we seen happen?

Financing for buyouts has changed a lot. In fact, it's changing even more still with the rise of private credit. So it used to be a bespoke negotiation. There were few enough deals that people talk to different types of banks, got different rates from different banks, got different leverage ratios from different banks having the skill to put together. And I'm just talking about a vanilla standard buyout here, not something that's very complicated, but you needed to work at it to get the most efficient capital structure at the lowest possible cost so you could make the most money. Then as I mentioned, staple financing became popular, which is every buyer gets the same financing package. Here it is. And there's really no ability to differentiate because we can all get the same turns of debt at the same rate. The ability to really get a lot less in terms of cost or a better structured package went away. Now, especially with the banks having pulled back a bit. Just in the post Covid era, we're seeing the continued rise of private credit. So there are a lot of private direct lending funds in there that they understand. Heck, some of these firms actually have buyout businesses alongside of their private credit businesses. So they understand buyouts, they understand credit, and they're stepping up and filling the gap and saying, we will do the credit needs for this deal. And that is a different source of capital than the traditional bank. So there's a lot less syndication on the private side. So the risks are up. So in some cases the prices can be higher as a result. Not in every case, but in some cases they're also in many of these groups, there's no workout groups. If something goes wrong the way that a bank has it, the ability for a GP to maneuver and do things differently in some cases is different. With Private lenders providing most of the capital versus the banks. And it will be interesting to see as sources of capital on the debt side evolve over time. Whether there's a blurring of the lines here, one could argue that we're seeing whereas the sort of the private lenders start to look a little bit more like banks. The banks may come back in start to look a little bit more like private lenders. But how is this actually going to evolve particularly in a time where interest rates are going to be real again? Interest rates are not zero. So instead of paying 5% of what the coupon on the debt. I'm now paying 8, 9, 10% coupon on the debt. In some cases even a little bit more than that. The chances of things going wrong in that environment are higher simply because the interest rates are real. And if things go wrong and I have to pay that interest rate, there may need to be a restructuring or a workout or some other type of issue. And that's going to be a different conversation now with the multiplicity of credit providers than it was 15 or 20 years ago.

Private lenders are expensive. Is it me or is just something from the software industry? We get taxed more.

They can be expensive. They also can be much more efficient than banks because in many respects they're not syndicating a lot of the credit, they're taking it on themselves. They get their sense of certainty and they hit go and they can do things faster. And GPS appreciate that as well. They can be more expensive. Absolutely. But again, the more competition there is even on the private side to we're seeing with this explosion of private credit, the industry is probably four times the size it was even 15 or 17 years ago that the competition level there has gone up a lot as well.

The private capital side obviously that's a good thing. If it gets more competitive, which gives better terms. What other things have you noticed in terms of structuring deals? Earn out. It's always been a common tool to use. What are other things like what does that trend look like?

One of the interesting segues as we're talking a lot about credit is that because the industry has shifted to underwriting a lot more growth, we're seeing in many cases less debt as part of the capital structure and deals. So a typical fast growing software company might have 30% of the capital structure in debt and 70% in equity and literally effectively taking the l out of LBO. Where's leverage? If I've got to put 70% equity in to get a deal done that Just fundamentally looks quite different than the structure you might have seen at a slow growing 3% industrial business in the 1990s, you might have seen the opposite capital structure. 70% credit and 30% equity is like you generate value the way you would in owning a house. You have a lot of bank loans in there, but your equity is worth an awful lot if the house price goes up over time. And that same kind of amplifying effect of credit was definitely used a lot by the industry when they had slow growing assets that they were fixing. And most of the capital structure would belong to the bank and the equity belonged to the GP as provided to the LPs. In this world where I've got 30% potentially of my capital structure and debt, I've really got to, no kidding, make sure that this asset grows and performs because I'm not going to get paid. That amplifying effect of the credit is much less in these fast growing assets now than it was with the slower growing assets.

Why is that? Why? Why is that debt ratio so different than it was before?

It's different for a number of reasons. One is a lot of these businesses don't have the cash flow because they're growing so fast in order to pay off a lot of debt. So I'm still getting maybe seven times EBITDA leverage, but the EBITDA is not that high for this particular business. Therefore there's only a certain amount of leverage you can get and you need to have the ability to invest in the business to grow. So playing with that capital structure to make sure you've got enough credit on, so you're juicing your returns a little bit if you will, but not so much that you're actually hamstringing. The business's ability to grow is an important thing to consider.

So the high multipliers works against you when it comes to leveraging.

High competition for good assets means less margin for error. Absolutely.

A lot less. Now the operational efficiency against your purchase price for now you got less debt you can put in the business makes.

Believing in the business all the more important, really knowing what you're buying.

Let's talk about creating value, the value levers. How's the playbook? Evolved?

The playbook's evolved a lot. We talked a lot about the fact that margins and costs were very important and they still are obviously. But that was a lot of the playbook in the past and now the playbook is much more about how do I grow profitably. What is the best way in a B2B situation. What does commercial excellence look like? What does my strategic view of the marketplace look like? What are my customer segments really? What do they want? Does someone want Rolls Royce treatment and is prepared to pay for it? Does someone want the least cost imaginable and they're only willing to pay for a little bit? What's my value proposition to those different segments? Where do I focus? Is my salesforce big enough? Is it fit for purpose? Am I selling the right messages? Is my pricing appropriate for what I'm doing? Do I change my pricing? How do I augment my pricing in certain ways? How do I make that more dynamic in a way that's going to be useful to my customer as well as to the actual target company that I'm buying? These are all highly complex issues that are now crucially important to the industry. I'm not saying that revenue growth wasn't important before, but if I'm underwriting things where the primary value lever is going to be on the revenue side and let's call it B2B, all of these things are now must dos and must do very well in a specific industry segment. Getting that right and knowing it's there and having the confidence to bet on the come that the revenue at a certain margin structure will occur over a five year period. If I do the following things, that's a different act than carving out a big industrial business and saying I know I can cut costs here, I know I can cut costs there, I know I can actually save this by selling these non core assets and I'll be able to make that happen. It's just a different equation and we're seeing the kinds of value creation approaches and teams in the marketplace evolve along with that kind of dynamic. This isn't the only way that people are adding value, but it's probably each end of the spectrum, if you will. And many firms need to be good at both because they're buying fast growing software assets over here and their industrial group is buying carve outs over there.

It sounds like it's gotten a lot more sophisticated. I feel like the traditional model, the term buy and build, you buy and you go buy some more. And just valuation triage, that was pretty much the straightforward. That's not the playbook anymore.

It's not. And we flirted with buy and build rollups.

Doesn't roll ups. Isn't that what they do? They just consolidate sector roll up buildups?

There are lots of different things that have been called over time and they've changed dramatically over time. There's a right way to do them and a wrong way to do them. What we've learned at Bain is that a few things need to be true in order to get this right. And this has changed even a little bit since interest rates went up a couple of years ago. But one is you have to be buying a stable platform, which sounds like a platitude or a tautology or something completely obvious. But there are many instances where some of these businesses that GPS are buying are themselves amalgamations of investments. They're somebody else's buy and build. Someone bought something, they bought four other things and now they're selling it to you. And understanding whether or not that's one company or four companies that you're buying is the first critical question. Because if they have four different ERP systems, four different sales forces, that could be a company that's very challenging to then build upon and use as a platform because it hasn't been integrated, it hasn't actually been made into one company yet.

Do you look at that as an opportunity to integrate that company and then unlock some value?

It is an opportunity. Now, why a lot of folks don't do it is that it's hard to do and it's expensive. You have to believe that the synergies are there and that they're measurable, but you absolutely need to do it in order to get the full value out of an asset today. And I'm going to come back to that because that's the thing that's changed. But one thing is it's got to be a stable platform. The second thing is it actually has to have enough fragmentation, not just for your ownership period in the industry, but for the next owner as well. Because when you go to sell, the next owner has to look out and see lots and lots of targets that they can buy, continue this buy and build. If they don't see that same level of opportunity or greater for themselves, they're not going to pay you the multiple you want for that asset. So there has to be real fragmentation of lots and lots of owners of businesses who will be willing to sell over a long enough period. We're talking 10 plus years, 15 plus years, not just the next five years, in order to give you confidence that's the right kind of industry. Another critical one has to do with the industry structure itself. This is number three, and that is, is that it doesn't have to be an exciting or sexy industry, but it has to have stable EBITDA growth. Cyclical businesses do not make good buildup targets. Because when EBITDA goes down, my ability to effectively do the buy and build goes away. And that's why we see a lot of these things in veterinary centers. Everybody always takes Fido to the vet, no matter what happens, no matter what the economy is. It's not the sexiest business in the world, one could argue, but it's going to grow at a certain rate that you can predict. So that steady growth is crucial. And now to your point, Giesen, the other thing that was always on our list is nice to have, but now it's must have are these synergies have to be real? It's not just buying things that look like one another, but there's no real operating synergy in there. It's putting businesses together where one plus one equals three or one plus one equals two and a half and actually having that work because the cost of debt is real. I've got to be able to put these things together. I may actually lose my arbitrage and my multiples if too many people are trying to buy these smaller businesses and do their own buildups. My only bug spray against that is to have real operating synergies that I then go and get when I integrate these businesses. At the end of the day, you have to.

You don't have a choice. You're paying more, you got to do more to make a return.

We agree. All those things have to be true in today's buy and build and buy and build is still, I would argue, the most popular way that many GPs add value. Over 60% of all deals in the marketplace are still add ons. And the majority of deals have been add ons for years.

I've noticed that the strategics will do a lot of things in house when it comes to executing a value creation plan. This is like a really big deal. Billion plus. They'll call Bain and co after that. Then private equity seems to outsource everything. Everything goes to some consulting firm. Shape or form. Is that the same thing? You've seen? Have you seen that change at all?

Yes, it does. Ebb and flow. The GP landscape is very different than the strategic landscape. Strategics are generally speaking, if you're in the business and you're buying a business that's very similar in the same categories, sub sectors that you're in, you tend to believe that you can integrate it because you're in the business. Most GPs are not in the business. They may own it for a few years, but they're not in that business. They haven't been operators for 30 years. They don't want to be operators. Some GPs have a lot of in house folks that actually make that work. And I would call the term, if you're specific enough about what you do and you repeat it often enough, you kind of have a playbook. Whether that's buying only software businesses and growing them incredibly rapidly and improving their profitability, whether it's doing carve outs and taking loss of costs out, if you're doing similar things again and again, it can be worth it to have a large team of folks that's on the cutting edge of how to make that happen. Because that repeatability factor makes you more efficient and makes you more knowledgeable, makes you better than others at what you do. So you'll get more value out of the same asset than someone else who's not doing that. For folks that are buying across many different sectors, different types of investment, theses some buy and build some organic growth, some fix that dented can. The business is a little broken, we can make it better. Those are a lot of different things. And most buyout firms, they don't have thousands of people running around. They may have 100 people, they may have 50 people, they may have 200 people. But they don't want an army of people on staff for something they may do once in five years. So it doesn't make a lot of sense sense to have every possible value lever covered with someone on your team that you're paying for. What makes more sense is that you agree that you want to have a certain rigor in your value creation plan process. You'd like to try and do the same thing in partnership with management every different time. There may be some people on your payroll as a GP that you want involved the majority of the time. The air traffic controllers I call them. But you're going to have an ecosystem of partners, experts, CEOs, other advisors, consultants, people that are going to be useful, that can do a lot of different types of things so that you can use them on a bespoke basis for when you do that deal, you're going to do it once in five years. I'm not going to have that on my payroll, but I know how to put together the people can actually help me get that value.

This sounds great. Why don't we start a private equity firm?

Well, it sounds great. It's easy for me to say Keisan. It's actually very challenging to execute on. And while I have thought about starting a private equity firm at times in.

The past, we'd be a great team.

Well, we would be a good team. We've got a good thing going here in this dialogue right now. The unfortunate reality in the world is that when I started in this business, the scarce commodity was capital. People actually needed the money, the equity, to get a deal done. That is now not at all the case. If anything, we have a surplus of capital. There's more money chasing fewer assets than in the past. What the world doesn't need is another dollar of private equity capital chasing those assets. What the world does need and what is rewarded is that differentiated angle, that view of an asset, a subsector, a thesis that plays across subsectors, that's going to make a repeatable play happen. That's what LPs are looking for and that's what's new and exciting in the private equity world. So it's not that we're not going to see new firms pop up, we are going to see new firms pop up. Private equity has always been an entrepreneurial asset class and it always will be. But if you don't have the idea on what's going to generate alpha, that excess return, it's going to be much, much harder to get in business and to raise capital.

All right, so we're not going to start a PE firm, but we can build an investment thesis. This is actually interesting. What have you generally seen of this interesting investment thesis in the past decades?

What we're seeing now is people in search of interesting, repeatable long term trends. One of the ones that we've done a bunch of work on is the changing demography of different countries over time. In general, there's an aging population trend that's going on in a lot of places. If you look at the US with the baby boomer generation, we're going to have more people, I can't remember the numbers, but more people over the age of 65 than ever have existed in history. And they need and want to do certain things, their entertainment, their exercise, their sporting, all of the things they're going to spend money on. We're now going to have more people in that age cohort, more healthier people in that age cohort than ever before. And they're going to spend money on a whole bunch of different products and services. So if I can understand that, predict it, and then figure out how I want to play it, there's a lot of value in that, particularly if I understand that better than other players that don't. At the same token, there's another even larger cohort of folks in the United States that are in their household formation years. So these are people that are about to, if they can afford it, buy houses, have families again. When you start to have kids, when you start to buy a house, there's a predictable set of things that you're spending money on in terms of products and services. And we are going to have more people and the largest cohort of those folks in that age range in history in the United States. And if you understand that, and understand what we call the spend corridor better than others, then you're going to be able to get there first on a lot of these businesses that may be doing fine now, but they're going to take off in the future because of the way that the demographics of the country are playing out. So that's just one example. But it's those kinds of longer term thinking about how is the world going to change, how are the macro and microeconomics of things going to change? And if I can get certainty around what some of those things are going to be, then I'll get ideas and investment theses around where attractive places to play might be and recognize those opportunities perhaps faster than my competitors.

You know, with AI in play, it's like every industry is going to be evolving, shaping quickly. But I get what you mean of like, where's that big trend you see that's going to indicate where the puck's going?

Absolutely right.

What is it? What are we betting on?

What are we betting on? I had a very wise partner once tell me this was probably two decades ago, maybe even a bit longer than that. Never ever bet against technology. And he meant it in the case back then of retailing. This was the beginning of E commerce and he was very wise because that remains to be very good advice today. Never ever bet against technology. Now, timing is important and understanding what technology is going to do is even more important than that. And as you mentioned, AI is the zeitgeist for technology. Everything and everything is not generative AI, but some things are. And I think the rate of change and the amount of impact that AI is going to have in any given industry is very different from one another. It also may take a little bit longer in many industries to have the kind of transformative impact that a lot of people read about or talking about in the newspapers or on TV these days. Transformation is very difficult. There are some things where it's easy to see how a bot might be able to answer student questions at an online university faster and more efficiently than a person can. And you get that accuracy rate up and you say, gee, That's a great use of AI having that bot answer student questions. That is a tremendous productivity enhancement idea. That is not a transformative idea that changes an entire industry. What I'm seeing, at least from my vantage point, is lots of ideas about where this might go in time, but how fast we get there and how transformative these things really are in different industries by when they're very much up in the air. I don't want to throw cold water over any of our ideas to start a private equity fund, but I'm just trying to be a little bit realistic here.

I changed it. I wrote AI M&A Services.

I have a feeling somebody in your.

Team is working on that. I have a feeling we have a.

Lot of people working on that. Absolutely.

More than one.

Yeah. The entire investment process is changing. So AI enabled M& A Services is something we are definitely experimenting with a lot.

Okay, we can use that or we can make up another example. Can you teach me how to pitch a private equity firm? It's the whole dynamic shift. It's not about creating a fund and go soliciting LPs to invest in the fund. And here's like more of a capital allocation thesis. Now we're coming up with something that's more of real capital allocation, but operationally into something that we're going to either build or acquire a specific business around. I'm trying to flip your view from your experience of working with private equity and knowing what their appetite is and how that's evolved to like somebody that's on the other end. When you're trying to be attractive to private equity firms, what would that look like to appeal to them? And maybe it's shifted. Maybe it is the other way around. We get a lot of inbound from private equity.

Maybe it's the pitches shift, maybe it has shifted. I don't know. But to make yourself attractive as a company to private equity firms.

Yeah. Because I feel like you have a thesis, but it's a little more than that. Here's an idea. Because there's like certain things that you really prepare that makes it attractive.

My view would be if you were a seller, you have to have things that have legs. They have to have something that is going to last beyond the investment horizon and be attractive to the next buyer. Because at the end of the day, private equity firms take money from institutions, individuals, insurance companies, increasingly complex set of sources. Wherever the money comes from, that money needs to go back. There needs to be an investment horizon that's attractive and an exit multiple that's attractive, particularly in a world where the entry multiples are going higher and higher. So whether you fit into some long term macro trend, whether your business has a repeatable model and you're in the first inning of the game and the whole nine innings is going to take 25 or 30 years to play out, it's better if there's some tail along those lines that's provable with analysis in the diligence process than it is here's a high quality asset. A lot of people are going to look at it, it's going to sell for a very high price. Nobody, including the management team understands how we're going to get the year five projected EBITDA and revenue numbers because they're just so high, because they need to be high high to support the price that the seller wants. That's what you run into when you run into it's time to sell the asset. But I can't really link it to anything that's repeatable, extensible or in some long run trend. So much better to be able to say and that's why buy and builds have become popular, right?

If all the things and that's what most of it is like. I haven't met a single PE firm and maybe I haven't met that many that doesn't include M and A or add ons as part of the strategy.

It is and has been a very attractive way to build value. And of course it solves the problem of where do I find a scale asset. I can have bigger and bigger funds and still buy medium sized businesses and then add onto them and make them big companies over time that consume a lot of equity. It's much easier to do that than it is to find a $1, 2, 3, $4 billion TEV platform and finding the next platform, that's really scale. That's tough. And by the way, the more scale it is, the more visible it is to the large funds and therefore the more competed it's going to be in that process.

So have an investment thesis, find a space that's got a good investment horizon that there's like more than one deal to do. But the synergies, that's the other piece. It's got to be something. There's a thesis built around how you're going to actually generate value more than just buying the businesses and also looking at a long term future. The real strategy for how it's going to improve outcomes down the road.

You got it right.

I'm going to work on it. I'll Come back with some ideas to pitch you.

I'll be listening.

All right. We got the first question done with this interview.

Is that one? I thought we did them all.

What are the key challenges private equity firms face when scaling investments to the billion dollar range?

It's what we talked about. Everything just gets more competitive and more visible. The bigger things are then, the more by the way, it's obviously fixing and turning the supertanker is harder than a fleet of little ships. The bigger something is, the more unwieldy it is. The harder it is to add value. The longer it takes to add value. It's not a bad thing to do. But you need to be aware that the larger, more complex businesses that you buy are simply going to take longer to transform. And that's why when you look at the very largest checks that are written in the industry, you don't see the absolute highest returns. The highest returns are still in the middle market. But when you're talking about these larger organizations, there's a narrow range of outcomes. If you look at the normal distribution of outcomes, you don't see a lot of companies going bust either. Because you get to be a big company because you have a right to exist. There's a reason you got to be a big company because people found value in your product and service and you grew. The chances that it's going to be a really horrible outcome are lower. The chances that you're going to take some giant supertanker and go to the moon in it are probably a little bit lower as well. But you could make a very good return in just a slightly narrower range with a bigger asset and being geared up with the right resources to make sure that you understand that's the game and that's going to take a while and it's going to take investment to get there. Is important to ensure success.

How has competitive environment for private equity evolved? What does it take to succeed in today's market? We talked about being more competitor, but what do you really break through? I think you covered it in terms of unique thesis.

Yeah. And just differentiated point of view and real sector expertise. It used to be when I started doing a lot of work for LPs about 20 years ago that I could go and say go into a sovereign wealth fund that had a big portfolio and they would have lots and lots of books from gps that wanted to raise money. And every single book looked pretty much the same. It was, we have a really good investment track record. We have the same team that created this track record today. And we have aligned economics, so we've done well, we're smart guys and gals and we're going to have aligned economics. The problem was, if that's what all the books say, how do you tell where it's really true and where it's not true? Again, that was the standard and that was adequate to raise money. Today, you couldn't raise any money with that kind of a statement because people want to understand, well, there's a lot of money out there chasing deals. What do you know and what do you do differently that allow you to do deals in a way that creates alpha that other people that are larger than you maybe better capitalize than you cannot? What is your secret sauce? What is your repeatable model? What is it about how you find deals, what value levers you underwrite in which subsectors, how you go about creating the value, how you go about partnering with management? What is it that you do that's got a mode around it that's unique that allows me to believe as an investor, and by the way, that means you're going to have to show me examples of where you've actually done it. So I really believe you. That is going to allow us to walk in partnership together as an LP and a GP in the future. What's going to give me that confidence that you've got, that special sauce that I can trust for the next decade.

There's no magic formula in that. It's about what your story is about, having your differentiator, your moat, but then also validating and improving it.

Absolutely. There's more validating and proving required now, certainly than there was before the gfc. Now it's okay, you've told me this is your model when you're at your best. Show me the examples. Let's talk about your investments all through your history. And you tell me exactly how you applied these levers, these advantages, how these moats actually work when you're at your best. And we're going to go through these examples in a lot of detail, what.

Strategies have been most effective in helping GPs and LPs align on operational and organizational goals?

We go through cycles, communication cycles, and they follow capital velocity cycles. And let me tell you a little bit what I mean. In 2007, early 2008, 2006, as well, capital velocity cycle was going way up. People were raising funds every couple of years, deploying them. The check sizes were Getting ever bigger and 06 and 07 were the two largest buyout years at the time by value that the market had ever seen. Then came the crash of 08 09, what we call the GFC.

GFC, aka Great Financial Crisis.

Some people call it the Great Recession, but I said gfc. And when you're raising money that quickly and recycling it that fast, the alignment between GPs and LPs is that everything's going really well. I'm writing lots of checks, I'm getting lots of checks back that say they have profits on them. That's great. When the music stops is when you get the crisis that forces a different type of communication style. And what we saw after the GFC was that LPs were a bit nervous, obviously, because we just had a massive recession, the biggest in 75 years. They weren't sure if any of the portfolio companies that they'd invested in with any GP were solvent, whether they were going to get their money back. They wanted to have a different type of conversation with their GP partners, which was, come in, let's sit down and let's talk about your entire portfolio and let's talk about where your assets stand, what your approach is to go through the entire portfolio, where you're going to invest time and money, what you expect to get back from that by what period of time, and just show me a picture of what my cash flow models are going to look like from you as my GP partner over the next several years and give me comfort that you're coming at this in a structured, rigorous way and it's not deal by deal everything, which tends to happen when capital velocity goes up, but that you're thinking about this strategically and I can have confidence and faith that we're going to get to a certain set of results in a certain period of time. We're at a very similar spot right now in that deal making came to a little bit of, I won't say halt, because it didn't come to a halt, but it went down dramatically after the capital velocity cycle went up dramatically in 2020 and 2021. 2021 was the largest by value dealmaking year in the history of the buyout industry. And then in mid-2022, the Fed and the ECB started hiking up interest rates at an unprecedented pace over 18 months, almost 500 basis points. And that put the industry in shock. Not only were people worried about doing deals with the cost of debt being so high, but for all of the deals that I did with 5% coupon debt, the next buyer has 10% coupon debt. I can't make the multiples work and sell those deals back. So the Exit activity has dropped dramatically since 2022. That once again has made LPs nervous as the years go by. And some of these assets are aging in portfolios. What are they really worth? What am I going to get? At the end of the day, it's time for that structured conversation again where GPs come back in and say let's array the portfolio. Let's talk about where we are, let's talk about each asset. And let me help you, Mr. LP or Ms. LP, understand what your cash planning scenario should look like and what you can expect by when. And let's have that structured conversation the way we did 15 years ago, just post GFC to make you comfortable. Whether you're talking about cash flows which are critically important, whether you're talking about esg. That's another whole topic that having a more open, transparent and wholesome conversation about the full suite of topics and levers that are going to deal you're going to deal with in the portfolio is most helpful and builds the most trust between the LP and the gp.

That explains a lot. That's why we hit a record hold time on these portfolio companies. Because nobody wants to sell at a loss.

Nobody likes to sell at a loss because it makes it real hard to raise your next fund if you're selling at a loss.

You know, make friends that way. Where have you seen the highest returns? You got to like study all these PE firms. You got to know, I don't want names.

Study firms, study segments.

I'll get the list of names afterwards. Is there certain like size or industry focuses that you've seen pay off the best? And obviously this isn't a future indicator.

Here's the funny thing or the history of the industry and this definition has changed over time. In terms of size, middle market deals have tended to do the best. Now the notion of middle market is probably five times larger now than it was 20 years ago. So what middle market is goes up as the industry goes up and the average, average deal size goes up. But middle market deals, companies you can get your arms around more easily, inflect the value if you really understand what you're underwriting. That tends to be in the sweet spot of the industry size wise. And again that's an amorphous thing to say. A lot of people think about sectors when it comes to return. They say with all these fast growing software businesses that's just gotta be the highest return sector or healthcare really is not impacted by economic cycles the way the industrial and other businesses are. So maybe that's gotta be the highest return or maybe it's high flying consumer products or what have you. The reality is when you look at sectors over the long term, over decades, there is more standard deviation of return, higher delta in return within a sector than across sector. There are great deals that have been done in every single sector, but the variability of return within that sector from the best deal to the worst is always higher. So it's not so much about the sector, not good sector, bad sector, but what do you know about a sector and what are you able to underwrite and then execute on confidently again and again. That gives me the belief that you'll be able to do it for your next fund. That's the right question to ask, not am I in the right sector?

Middle market stay focused and middle market stay focused.

I should have said that. That would have been a lot shorter.

That's my job. I just take what you say, put it in the most layman terms possible. Biggest innovations when it comes to the deal execution, due diligence. Big trends happening with AI advanced data analytics. What do you see in reshaping private equity?

We see a lot of innovations in due diligence. When I started doing due diligence there was embarrassed to say this, but people didn't use the Internet too much. So it was very analog with lots of slides and lots of smiling and dialing people trying to find out information. Then the Internet came and we took a big step function we could do in a week and in a few days what used to take several weeks with a high degree of confidence. Then we got to a space where lots of specialized tools, analytics and data sets became available. Think about things like credit card spending for different customers in different countries across all different types of formats. So I could go into a get some credit card data for a fast food restaurant and tell you exactly what your customers were buying, what they liked, what they didn't like. If they actually left your fast food establishment and spend money in another one, I could tell you where they go, what they're buying there. I don't even need to do a survey. I can just follow the credit card data and query it and figure out exactly what's going on. You saw an explosion of specialized tools and specialized data sets and allowed us to answer questions faster. I could do scrapes of LinkedIn and Glassdoor and I could tell you whether or not your salesforce looked competitive with the competitors in the industry. And we could go to Glassdoor and talk about what the employees were saying versus other competitors in the industry and do that in a very rapid way. So these types of tools started to become more and more ubiquitous, and then we created a lot of them. And now we're moved into yet another realm of AI. What can AI tell us? We do more expert interviews than any firm in the world because of the size of our due diligence business and the size of our consulting business. What if we had transcripts of every single one of those interviews that we were able to query using AI and understand dynamically at any point in time what was happening in a subsector of an industry and what an expert said, and get that summarized in three bullet points, three pages or 30 pages, depending about how deep you actually wanted to go. The kinds of things that are possible now in due diligence simply didn't exist even two years ago. And the kinds of other things that I was talking about didn't exist seven years ago. And you can go back and back. The industry is constantly pushing the boundaries of how much can we know to reduce risk rapidly and how much can we know to get us to certainty that this is an asset that we want rapidly? Because the faster I know those things, the more confidence I have and I'm either out and I'm on to the next thing and using my time productively, or I'm bidding and I'm bidding a full price with certainty because I know that I'm the right owner for that particular asset. That's what these tools are designed to do. Speed to insight, we call it speed to insight. In every given situation, the clock is only moving forward on that and we're going to see more tools and we're part of the creation process for these tools. So we're going to continue to do it and push the envelope at how fast we can really understand what we need to know to recommend to a client whether or not their investment thesis is a good thing or not a good thing.

Learn faster, minimize risk, build better value creation plans.

There you go again, shortening what I said and making it very accessible.

We can go on about the tech, right? There's just so many examples you can like, apply to every piece. How about the broader private equity as a whole? What do you see in the future?

I see private equity. And if I could make it a broader note, keys and private assets in general is on an inexorable march to be a larger and larger piece of the investable pie for individuals as well as for institutions. Now, why do I say that? Let's again look at something like the US stock market as an indicative example, US stock market has what, 4,000, 4,500 issuances right now, down from over 10,000 20 or 25 years ago. A lot of that happened because of Sarbanes Oxley. Sarbanes Oxley made it extremely expensive to be a public company. If you don't have five or $10 billion more of value, you don't want to pay all the costs and deal with all the compliance. What that did was effectively take the entire middle market, or a lot of it in this public markets and chase it to places like private equity. They all went private and got bought out. It also means that the ways to play the public market are now far fewer than they were in the past with these much larger entities. And whether you believe that there are seven stocks or just one. How much Nvidia do you want to own before you say I've got enough exposure to tech through the US stock market, I need something else. A friend of mine put it really well where he said, you know, the problem we have or the challenge or the good thing, depending upon your view, is that you've got 10% of the investment opportunities being chased by 90% of the dollars. And you've got 90% of the investment opportunities being chased By 10% of the dollars. It just can't be that way going forward. And in other non US stock markets are even more thinly traded than the US So this problem compounds itself. So it's not that public assets and public debt are inherently unattractive places to put your money. They've been very attractive, especially in the US for the last 15 years. But it's just that, particularly with tech being so pervasive, you're playing the same theme with every dollar that you put in. And at some point investors say I've got enough of that exposure. Where else can I get exposure? And that's where we've seen an explosion of different types of private equity funds. That's where long hold funds have come from. That's where sector specific funds have come from. Only healthcare, only tech, only other things. That's where large scale firms have come from, smaller scale firms, growth oriented firms and other asset classes as well. Infrastructure firms. As infrastructure is starting to blur a little bit now with buyout, when it's a toll road, I can tell that it's infrastructure. Where it's a hospital and some people say that's healthcare infrastructure. Another person says, no, no, no, that's in my buyout fund. There's a little bit of a blurring of the line. So where does infrastructure start and stop, especially when it comes to things like digital infrastructure and the Internet? Hard to say. More and more money, though, is interested in those kinds of activities. We've heard a lot about how AI is going to require a tremendous amount of infrastructure, energy infrastructure too, and people are interested in that. There are a lot of different opportunities in the private sector. We talked about private credit earlier. Real estate's another one where the number and different ways to play in private assets is simply more than in the public space. And individuals are actually going to fuel an awful lot of this growth. We did a study at Bain where we tried to forecast out what are the sources of capital going to be for private markets over the course of the next decade. And about a quarter of all the money going into the private asset classes we forecast are going to come from people like you and me. They're going to come from individuals because of the kinds of factors I described that people, they want to invest in the stock markets and it's all great, but once you've had enough, where else do you go? And their investment advisors are increasingly telling them you should get into the private asset classes just for some diversification. This is coming. It's coming not just from the traditional alts. It's coming from traditional asset managers themselves. We've seen BlackRock buying companies. We've seen Franklin Templeton buying private asset managers as well. They're clearly intending to create products that you and I can buy at the retail level. More and more of that is going to be available from more and more channels and that's going to fuel tremendous amount of growth in the private asset industry. So a little bit of it is the consolidation and the nature of the public opportunity. And a lot of it is just easier to play in the private markets in many different ways.

For individuals, we see growth ahead, which means more capital, means more niche funds and then access to retailer. I heard the term perpetual funds, I think is one of the terms or long hold. Yep, long hold. That's going to drive evaluations.

It's tbd. The amount of investable assets out there is still large. The amount of money chasing those assets is going to go up. So one would naturally believe that. Yeah, if you're waiting for multiples to go back to five times ebitda, you're going to be in for an awful long wait in the business. I think the multiples are going to stay high. The markets are going to get even more competitive and more specialized going forward. But when we talk about the whole world. And the way things are changing, whether it's energy transition or new ways of creating more generation capacity to make all of these AI chips or whatever it happens to be, there's always new and dynamic areas to think about to put money to work in. So it's not all about these same set of companies are out there and now it's just purely more dollars chasing them. Yes, it's a lot more dollars chasing them, but there are new trends and new places to invest that didn't exist five or ten years ago, and that's going to continue.

What are common mistakes private equity firms make during acquisitions?

What kind of mistakes do private equity firms make? And their consultants, I should add before I say I heap all the mistakes on the private equity world because we're a part of that.

Well, when I interview them, they always blame the consult.

I'm used to it, I guess. When you identify what your sweet spot is as an investor, we've talked a lot about your repeatable model, your moats. There are a lot of different ways you can characterize it, but what it is that your firm with its DNA and its talent does uniquely well and can do on a repeatable basis, you want to stick with that. Everybody wants to stick with that because that generates the highest return. But when you get a lot of really smart investors and they see something else that's interesting over here, that might not be exactly what we do today, but. But it sure looks like we can make a lot of money doing that. And they get away from that repeatable model, those moats, those types of results have tended to end not as well for most investors, is that you're getting outside of your sweet spot. You're doing things that are not core to the business. Sometimes they do well and they become another extensible leg of the business. But often if you're doing things where you are not the expert because it's not your repeatable model and you're competing with people that are the expert in that space, if you win, that may imply that you paid too much and. Or it may be difficult to win. Or if you do win and have the asset, you may not have the same kinds of abilities to add value to that particular asset that you do the things that are in your sweet spot or in your core. So I would say the single biggest challenge in the industry has been having folks focus on their repeatable model and say with 80% of my resources, I am going to do that and execute upon it. And if some of the interesting things come by that's fine, but I need to keep that in the right proportion in order to make sure that I'm generating the returns that my LPs expect.

Really staying focused.

Staying focused.

I know we're getting close to time here. I gotta ask, what's the craziest thing you've seen in M and A?

The craziest thing I've seen in M and A, or at least one of the most surprising things, was during one of these hyper capital velocity cycles we were talking about. It was 2006 or 2007, I can't remember when. And this was when the advent of the club deal came about, which were two or three or four. In some cases, as many as six GPs would come together because none of them had a big enough fund by themselves to write a check. But if they pooled their money, they could actually go buy a big public company, take it private. And I remember I was doing a phone call and three GPs had gotten on the call. They wanted to talk about taking a big asset private. I said, okay, that's great. What's the investment thesis? And I would say for the next 40 seconds, there was complete silence on the other end of the phone. And I began to realize that, that these GPS had not even discussed amongst themselves what the investment thesis was. It was much more. We have a lot of money and we can do a deal in my mind, versus we know what we're going to do with this company. And this was a multibillion dollar take private. That was one of the wildest things I ever heard, was to realize that people got all excited that they had enough money to do a deal. Very smart people. But then we had them on the phone and it's, what are you going to do with this asset? And I got silence for about a good 40 seconds there. And at the end of that 40 seconds of silence, the comment I got back from one of them was, that's our next discussion.

So that's pretty crazy.

Sometimes when the capital velocity cycle really gets going there, the deal fever can take root in certain quarters.

Real deal fever. Because the theme of the podcast is you got to build a good investment thesis and stay focused on it.

It is, and it's actually hard to do. We talk about it like it's the simplest thing in the world to do. But this was. This is. The private equity business has been for most of its existence a pretty undefined industry. Like, it's not like, this is where you play, this is where you don't play. This is so and so's pool over here. This is your pool over there. It's not set up that way. There are no rules set up. Very challenging. And it's only really been in the last few years where that specialized knowledge and that angle has just become so important for generating alpha that you've got to have it. And by definition, if you're becoming more specialized, you're closing down the aperture of things that you're looking at because you know these spaces over here and how they behave. But that means there's a whole bunch of other spaces that you don't know and someone else does know because they're investing in those subsectors the same way you're investing in your subsectors. I think it's been a healthy thing overall that this specialization in the industry makes it more possible to earn differentiated returns while continuing to pay competitive prices. It's also forced the discipline of sticking to your knitting by defining what the heck your knitting is and what it isn't in a more specific way.

Still so easy to get Deal happy. Deal fever it is.

We see these capital acceleration cycles. We just saw it prior to 2022.

Dude. This has been a great conversation. I appreciate taking the time helping me become a better M and A scientist.

It's been a real pleasure chatting with you and I appreciate you having me on the show.

Fellow M and A scientists, you got this far. You're my family. Like, I love to hear from you. I appreciate feedback, topic ideas, criticism. That's how I learned to get better at this. Reach out to Me probably on LinkedIn is the best way to get a hold of me. Till next time. Here's to the deal.

Thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post. Add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and a function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.