The Future of Private Equity: Innovation, Transformation, and Leadership

[00:00:00] Sean Mooney: Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real time trends. I'm Sean Mooney, BluWave's founder and CEO. In this special episode, we're going to have a conversation about the future of private equity, where it's going, and who's leading the charge.

[00:00:24] Enjoy.

[00:00:34] Today, we're going to have a really special episode where we're going to talk about the future of private equity. how the industry is innovating and evolving for success in the days ahead, and who we think some of the players are that are really kind of setting the pace. I'm really excited about this one.

[00:00:51] It's something that we have the privilege of having a pretty good vantage on, in that We are really fortunate to be able to work with hundreds of PE firms who are the best business builders in the world, and there are thousands of portfolio companies. From this vantage, we get to see how they're taking action and playing chess, not checkers, to position themselves, their stakeholders, their portfolio company partners, their communities for future success.

[00:01:16] Let's jump into what we're seeing that's differentiated, and hopefully this gives Not only investors a good benchmark, but also the portfolio companies, the people that are hoping to partner with PE firms, what you should be looking for, et cetera. And maybe to set the stage a little bit, our insights that we're going to talk about, these major themes that we see are equipped by literally thousands of projects that PE firms are coming to us with.

[00:01:40] And so we get a look into how they're doing things, and we get to see how that changes over time and evolves over time. And it's frankly kind of also coupled with the fact that I was really lucky to have almost 20 years in private equity and got to learn a lot then. And then the combination with a basis of understanding of how the industry works, and times these thousands of projects kind of gives me at least what I think is a pretty good insight into what's happening and how that's changing over time.

[00:02:06] And what we see from all these thousands of data points that cascade over time kind of brings us to four major themes that we've seen evolve and be differential in private equity. And I'll give you a kind of a quick headline for each of them, and then we'll drill down on each one of them individually.

[00:02:24] So the first one is proactive due diligence. And this is where top private equity firms are not only doing confirmatory due diligence, the trust but verify kind of stuff, but they're also equipping their future value creation plans for creating value right out of the gates, not waiting to see, it's having a strong hypothesis about what comes next.

[00:02:42] The second theme that we've really kind of seen come out time and time again is this idea of transformative value creation. And we're seeing PE firms partner with their portfolio company leaders to not just optimize companies but literally transform them. The third theme that we've seen evolve is what we're calling modern private equity firm operations.

[00:03:03] This is this understanding that top private equity firms are increasingly running their private equity firms like their portfolio companies and less like partnerships of past. And then the last theme that we've seen really evolve over the last multiple years is that leading private equity firms appreciate the notion of corporate citizenship.

[00:03:23] And it's this idea of giving back creates value, not only for your communities and your stakeholders, but also for the PE firms themselves. And so let's break down each of these themes. The first one that we mentioned a moment ago is this idea of proactive due diligence. And what does this mean? This is the idea that you're not just doing trust, but verifying when I started in PE a long, long time ago in a galaxy far, far away, it was this idea that normally we would say the seller would make representations.

[00:03:54] And we would use really capable third parties to test and see if those representations are true. So our numbers are these numbers, our market is this market size, our customers say this about us, and we would check and say, is this true? Yes, yes, yes. Okay, great. Well, that's not enough anymore because there's this idea of kind of supplying demand that's econ 101 trumping the PE industry, where if you just know what everyone else knows, eventually the surplus gets skimmed.

[00:04:21] If you all can kind of maybe channel your econ one on one classes from a long time ago, you'll appreciate that, right? As there's more and more demand for similar supply of companies, eventually the purchase prices go up, the returns go down until you get into the intersection of perfect competition at the intersection of supply and demand.

[00:04:39] And so what private equity firms are saying, no, we're going to change the dynamic, we're going to understand what the sellers are saying is true, but we're also going to understand. What else the company can do that no one else knows about and that enables them to kind of bend the supply and demand curve such that there's surplus that remains for the buyers of the companies.

[00:04:59] How that translates into action is we see the best of the best private equity firms really using specialists. Who understand alpha who know everything about the industry already so that they're not giving a kind of generalist insights that are probably already conducted by the cell side resources that have been presented to the buyers of companies in a competitive process.

[00:05:20] Because of their specialized expertise in making decisions to be better in fewer areas, they have deeper knowledge bases that then translates into identifying future opportunities and maybe debunking some of the reps that otherwise were pretty well covered up. And so, that's one of the first things we see is like, use specialists.

[00:05:39] We live in a world of peeling the onion back further and further in order to get true insights. The other thing that we see from this proactive due diligence perspective is that they're very purposefully identifying these value creation opportunities that are in addition to what's in the CIM, and they're building those into a value creation plan.

[00:06:00] Before they even close the deal. So it's not waiting until they close the deal to figure it out. They already know what they're going to do before they even get to a point where they're sending wires to the seller. And what that enables them to do is then compete in a competitive process, kind of what I said before, where they've bent supply and demand curves, they've created surplus, so they can bid and win in an aggressive, competitive, multi PE firm and strategic process.

[00:06:27] and still have surplus to still win and get great IRRs. And so this is a little bit Econ 101 y in this part of the conversation, but they're creating surplus where everyone else, if you don't have that, it's whoever's willing to accept the lowest IRR. And that just doesn't work anymore. And so many of the really great PE firms that we work with get that.

[00:06:45] And so that's kind of the first notion of proactive due diligence. What very naturally follows from there is this theme that we noted earlier around transformative value creation. Top private equity firms, A, are talking about their value creation plans as we noted before they even closed the deal these days.

[00:07:04] And so they're having conversations like, here's what we're going to do. Are we aligned? And if we're aligned, then let's go. But once they close the deal, Then it's hit the gas. They understand that IRR, Internal Rate of Turn, MOIC, Multiple of Invested Capital, and DPI, Distribution to Paid in Capital, it's a game about transformation at speed.

[00:07:23] And so they get going immediately after the start. They're bringing in their resources that can be used. usually are experts in whatever they need. They've got their internal ops teams that are in there, the internals ops teams that are really at this point using these expert third party resources and managing them so they get transformation at scale and speed across the entire portfolio companies versus maybe one or two at a time.

[00:07:49] And they're moving very, very quickly with confidence. And that's incredibly important. You can't just move fast without confidence, and you can't be confident and go slow. They're using the word and in getting things done together. in a kind of symbiotic motion. It's a symphony at speed at three quarters of the pace kind of a thing.

[00:08:10] And so that's another really important aspect to what's going on is the private equity firms. They're not demurring anymore. They're probably looking a lot more like Danaher these days as they kind of evolve, but they're able to do so by using a combination of really excellent deal teams, biz dev teams, There are ops teams that they have, their human capital teams that they have, and then a cadre of third party resources that they're able to parachute in, get them in, get the process going, learn the thing quickly, so you're not taking years and years to figure something out in your own time, bring in an expert, and then what they do, candidly, is they get those third parties out there and they get an add back when they sell, because it's not a full time cost, and so you're not getting stuck kind of building permanent costs for one time needs.

[00:08:55] And so it's a really kind of clever approach. And it's something certainly that we see every day because we're the industry standard equipper of those resources for these business builders. And what's kind of been fun to watch is it's not only the private equity firms that use this now. Now the family companies come in or the public companies like, can we use this stuff too?

[00:09:12] And you're saying, sure you can, of course, but what we really are really fortunate to see is that the private equity firm uses both their internal and external resources. Change these kind of caterpillars into butterflies. Hey, as a quick interlude, this is Sean here. Wanted to address one quick question that we regularly get.

[00:09:34] We often get people who show up at our website, call our account executives and say, Hey, I'm not private equity. Can I still use BluWave to get connected with resources? And the short answer is yes. Even though we're mostly and largely used by Hundreds of private equity firms, thousands of their portfolio company leaders.

[00:09:51] Every day we get calls from every day top proactive business leaders at public companies, independent companies, family companies. So absolutely you can use this as well. If you want to use the exact same resources that are trusted and being deployed and perfectly calibrated for your business needs, give us a call.

[00:10:09] Visit our website at BluWave. net. Thanks. Back to the episode.

[00:10:17] So the next big kind of theme that we noted at the beginning of this conversation is this whole idea of modern PE firm operations. The business of private equity is turning into a business. We've been saying this for years and years. At this point, private equity firms are running themselves more like portfolio companies and less like kind of the partnerships have passed.

[00:10:39] They're in a business. It's too competitive not to. It's interesting. So we have a lot of conversations as we're talking about this. Increasingly and steadily equipping private equity firms with resources for themselves. And this kind of a naturally evolved this way where it used to be, if you're working with a PE firm, they always wanted a third party that was really good with private equity firms.

[00:11:02] And now kind of this conversations that we have, they're like, yeah, we want someone who gets PE, but we want someone who's doing this for companies so we can treat ourselves like a company. And I think that's one of the best. Kind of evolutions in private equity that's occurred as they view themselves.

[00:11:17] It's like, no, we're an operating company that invests versus an investment company works with operating companies. And so it's kind of both. It's a really good evolution. So in addition to the past of PE, when I started in PE a long, long time ago, they're still really good at the strategic stuff, the deal making expertise, the deal sourcing But they've brought in all these additional kind of specialized resources.

[00:11:48] So private equity firms think about them now they have sales and marketing sales. That's their BD teams that are sourcing deals, the product they're essentially involved with. Many of them increasingly now have marketing directors. I think going forward, brand formation is going to be one of the most important things in private equity because the capital is no longer differentiated.

[00:12:09] There's tons of capital out there. And so just like your portfolio company or a portfolio company, the private equity firms are forming brands so that when they show up at a management meeting, the sellers of these businesses know what they stand for because there's a brand that kind of sums up who they are and what they do and what they're different at and excellent at.

[00:12:29] And large cap PE has already pretty much done that. Now we're seeing it really grow in middle and lower middle market PE for reasons that make a ton of sense. And so they have sales and marketing. They have internal and external operational capabilities. These are led by the operating teams that they have and built out.

[00:12:47] In different PE firms are all playing in different ways. Some are doing kind of generalist CEOs and some of them are doing specialist functional level experts. Some of them are using kind of ecosystem managers who work with all the third parties and almost all of them are using third parties throughout the entire process as these force multipliers and kind of the metaphor that I use and thought about as PE was evolving is that Private equity firms in many ways are architects and general contractors and engineers.

[00:13:15] They're building these great things. They have the plans. They have many of the capabilities in house, but to get it done, they can't know the tile guy or the landscaper or the cabinet person to use a building metaphor. And so they outsource this through trusted third parties. And that was, really kind of the catalyst that got me thinking about BluWave, is I needed all these third parties and why not put them all in this one magical place.

[00:13:38] And so they have their ops people internal and external. They also, one of the most exciting things is they brought in human capital expertise, AKA HR. They call it human capital because in their view, it's more about making an investment in people and growing them versus human resources sometimes has this connotation of consuming a resource.

[00:13:59] I'll give credit to that really elegant explanation by Joelle Marquis from Arsenal, who we had on another episode, who started off in human capital. And really explain why it's called that and how it's a good thing. It's an investment. And so that's another really great evolution. One of the most recent evolutions and kind of the business of the modern PE firm has been heavy embracement of data analytics and increasingly AI.

[00:14:25] And so we're seeing data scientists show up within the management companies of so many private equity firms now. They're in addition to Excel, which is this great kind a pilot project tool. Microsoft Excel, that you can do anything in a very kind of customized way, but they're also now using things like Python and SQL and Sigma and Hex, and they're bringing in Snowflake to hold the data, and then now what they're really doing is activating AI to help them synthesize information faster.

[00:14:55] At the end of the day, AI is not calling the shots, but it helps them go through information faster and get more perspectives, and they, at the end of the day, couple all of that information. They get through all their tools and make a human based judgment decision, which is really important, and I wouldn't worry about the robots taking over too quickly in that side of the game because it's just too complex, and it's going to remain that way for a long time.

[00:15:18] And so that's really what we're seeing. Many of the key themes in modern PE that the top pay firms are really embracing, and it's exciting to see.

[00:15:29] Commercial: Today's episode is brought to you by BluWave building a business is hard. Top third parties can help you create value with speed and certainty, but it's difficult to know who's best.

[00:15:38] That's why you need the business builders network visit BluWave at B L U W A V E. net to learn more and start a project today.

[00:15:50] Sean Mooney: The last kind of theme that we've seen time and time again is this notion of corporate citizenship. The best of the best PE firms are focused on what they do for return on investments, but they're also focusing on what they do for the world and know that they're not mutually exclusive. And so this means PE firms are conducting all sorts of things that contribute to the success of their communities and extended stakeholders.

[00:16:16] Case in points include well beyond What private equity already does very well and things like governance, but they're purposely focusing on things like employee engagement. So Alpine does great work in that regard. Almost all of them these days give employee ownership stakes within the teams that they invest in and KKR has really made this kind of program have a bright light shined on and the value that it can create.

[00:16:41] So huge credit to them for showing what a lot of PE is doing, including themselves. And they're also doing things like creating emergency employee safety nets. Blue Point Capital does a great job at that. They're creating meaningful volunteering efforts where they're getting their communities to come in and help build houses like Hidden Harbor in Florida does a great job here.

[00:17:00] So the list goes on and on and on. But there's just so much of this where the PE firms also appreciate that there's value in IRR and value in giving back to the community and they're kind of one in the same. One of the things we do almost every month for the hundreds of PE firms that we work with Is we'll get invited into a teaching session and we'll talk about these themes and really credit to the PE firms that we work with because they want to know like, how can we get better?

[00:17:27] And through this kind of thematic lens that we have, we're able to share these things. And a way that we, over the last few years, have kind of further making this available to anyone that's interested is we created a program called the Top Private Equity Innovators. And what this does is, it looks at these themes, we have a selection committee that reviews pretty much the entirety of private equity, and at the end of the day, we recognize the top 2 percent of PE according to the criteria that we just discussed.

[00:18:01] But we take it even further as part of this analysis one. It's really important. This is a absolutely no cost to participate in the program. No revenue is made by BluWave in the program. It includes customers and non customers. And our selection committee then goes even further by coupling the analysis that we do across the landscape with more than 75 different data factors and 400, 000 data points.

[00:18:29] So this is a pretty intensive exercise that we go through, and at the end of the day it gives us a really good kind of cadre of private equity firms that are setting the stage in the industry, at least through the process that we go through. And so if you'd like to learn more about this and see some tangible examples of how PE firms are innovating across these criteria, and I think you'll pretty consistently see how these themes are really, really activated in real life.

[00:18:56] I'd encourage you to just take a look at our website. BluWave. net. B L U W A V E. And you can see kind of the firms that are setting the stage and a lot of examples of exactly how they're doing it. So give our website a look and I think you'll get a good sense for how this is playing out in real life if you're interested.

[00:19:25] That's all we have for today. Please continue to look for the Karma School of Business podcast anywhere you find your favorite podcasts. We truly appreciate your support. If you like what you hear, please follow 5 Star Rate. Review and share this is a free way to support the show and it really helps us when you do this So thank you in advance In the meantime, if you want to be connected with the world's best in class, private equity trade, professional service providers, independent consultants, interim executives that are deployed and trusted by the best business builders in the world, including many hundreds of private equity firms and thousands of portfolio companies, And you can do the same whether or not you're in the PE world.

[00:20:03] Give us a call or visit our website at BluWave. net. That's B L U W A V E and we'll support your success. Onward.

Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.