The Future of Private Equity Fundraising with Brian Bank from Kirkland and Ellis

[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, Blueways founder and CEO. In this episode, we have a very insightful conversation with Brian Bank, a strategy and client relations executive with Kirkland and Nells. Enjoy. I'm super excited to be back with repeat guest and my friend, Brian Bank, Brian, great to be with you

[00:00:43] Brian Bank: Hey, Sean. Thanks for having me.

[00:00:44] Sean Mooney: Absolutely. So for a little bit of context, we've had Brian on before. You can learn more about his backstory in episode five, but to give you just a little bit of background on Brian, he's going to be too modest, so I'll pat him on his back himself here. But so Brian has a really, really fascinating background within the private equity ecosystem in that he's been a limited partner. He's been a placement agent. And he's also now a senior strategy and client relations executive providing really, really kind of high level business advice within the ecosystem of the largest law firm in the world, Kirkland and Ellis. And so if you think about Kirkland and Ellis, I think most people in private equity are familiar with them as kind of the industry standard leading provider of legal services and advice to the private equity industry. But if you think about where Brian sits, he sits in the fund formation practice where they have over 600 attorneys alone in this practice. They have more than a thousand general partner slash private equity clients. And they've been part of raising more than 2 trillion of capital since 2020. So that's a mouthful. I'll take a breath. Ah, that's a lot, but this is going to be a really interesting episode because there's some really kind of tectonic shifts going on, not only in the world, but in the private equity landscape. And so we're going to pick Brian's brain on the state of the fundraising market, how emerging managers are faring, some of the latest on continuation funds and secondaries. This whole concept of ESG, and then what's happening in the limited partner and annual meetings and kind of some of the fundraising processes in this fundamentally different post COVID era. How does that sound? That's a list of really good topics, Brian.

[00:02:32] Brian Bank: Sounds great.

[00:02:33] Sean Mooney: 100%. Let's jump into it. So anytime you get together with a lot of Dare I say even alternative asset class people, one of the topics that almost immediately comes up is fundraising. The world has gone through a washing machine of kind of on off, on off, on off, not only in life and business, but also in kind of fundraising. So Brian, can you share a little bit from your perspective with this really, really unique vantage and perch? What's going on with fundraising and specifically as it relates to the private equity world right now.

[00:03:12] Brian Bank: Yeah, thanks, Sean. I mean, I think the reality is, is that everyone is reading dooms day scenarios and reports about year over year fundraising declining precipitously across private capital, recent reports came out summarizing last year. And I think if you take a look through not rose colored lenses, but through realistic lenses. Numbers are down, but at the 30, 000 foot view, it's still the second or third best year of fundraising ever. The two year number, 22 and 23 combined, is the second largest number of amount of capital raised within private equity. I think if we look at sub asset classes, there are some that are challenged. Venture is down precipitously. In fact, actually down significantly where PE is down, I think less than 10 percent on a dollar basis. The number of funds that have closed is certainly lower than it has been in the past. The number of emerging managers that have successfully gotten through the market is down significantly. The numbers are somewhat skewed based on the size of funds being raised. I think 50 percent of all capital raised. Came from the largest 15, 20 funds out there. So it is a very barbell approach to fundraising. That said, it's important to remember that LPs do want to deploy capital. They are obviously thinking about their own jobs, rationalizing and justifying what they do on a day to day basis, and they'd love to deploy capital and write commitment checks to GPs. The challenge. As I'm sure we'll talk about is that liquidity and the inability to write those checks. Until there's been more liquidity coming into their LP offers, frankly, that they can then turn around and recommit to other GPs.

[00:05:03] Sean Mooney: I think you shared a number of interesting things there. What you're portraying is exactly consistent with what we see through the lens of these hundreds of P firms that are coming to us for project needs. And, One of the things that we're seeing is, there's still some really, really good PE firms, particularly in the lower and the middle market, that have been having a hard time fundraising. Why do you think that is, and is that loosening up at all?

[00:05:32] Brian Bank: It is loosening up. We're seeing more funds getting to the finish line, and that finish line, it's important to note, is Target or above target people will ultimately close their fundraisers after a certain period of time, either driven off of their LPA limitations of timeline, or just they've had enough, they've been at it for too long, but overall, I think the market is improving the mid market, the lower mid market has had the highest success from a fundraising perspective, but again, it is a bit of a tale of. Those who have and those who've never had. And I think LPs are being much more selective. I think they are more sophisticated. I think they are rationalizing the number of relationships that they are going to maintain. And unfortunately, for a lot of emerging managers and other GPs, many managers are launching multiple strategies and multiple funds simultaneously. So when you're an LP and you're rationalizing the number of relationships you're going to have, It's easier, frankly, to commit to multiple funds from the same manager than go across multiple managers. So I think the mid market is a great space to be in. And again, what that definition is really varies. I mean, when I started my career in this industry. 25 years ago, mid market was a billion dollars was like the high end of the mid market. Now, obviously that's not even a starting point. And we're seeing emerging managers coming out with a billion dollars on the car. And I think there were eight funds in the market presently targeting over 20 billion from the target fund size perspective, clearly not the market. But that definition has evolved pretty dramatically over the last 20, 25 years.

[00:07:13] Sean Mooney: Those are really good points. And one observation I'd love to test on you is. In any kind of topsy turvy time, in some ways, particularly risk averse people, which allocators are, right? They want a diversified, uncorrelated return that's going to be as steady and predictable as possible. You kind of seek safety and displacement more so when there's choppy waters. And so we saw a lot of the big, uh, Pension funds endowment saying, you know what, no one ever gets in trouble for going with KKR and Blackstone and Carlisle. And my sense is, is the market opens up as we're seeing it open up, they're going to go back to also where the returns are, where the alpha is, which is in the middle of the lower market. Traditionally.

[00:07:57] Brian Bank: I think that's right. I mean, I think when you think about, I mean, a lot of the advice I give our clients and I speak to several hundred clients a year for Kirkland, it's really a understanding of the LP psychology. So an LP is generally. Underpaid or not necessarily directly aligned from a compensation perspective with the results of the GPs. So for them, it's reputation. It's their ability to find their next job and it's not looking silly. Internally are the primary drivers for them when they're making investment decisions. And. To justify why they make a commitment to one GP versus another is often a very thin line. And to your point, you're never going to get fired for committing to an established fund. And it's even one step further in that you're not raising a concern about the existing GPs by not deploying to those funds. Stated another way, if you're a GP coming back to market with fund five, if you say no to fund five, it immediately raises the question, what's wrong with funds for three and two, you're going to put yourself under the microscope of your constituency, your investment committee, and your leadership. So again, as someone who doesn't want to stand out, doesn't want to rock the boat, it's easier just to say yes. That said, The returns do show that emerging managers funds one, two, and three smaller, lower mid market mid market funds do have historically better returns. And it makes sense. There's better alignment. The individuals are driven. They are in most cases, putting an over concentration of their net worth into this entity and into this launch. So they're really, really focused. More so, unfortunately, than when they were part of a larger, more established organization. So Again, I think the lower mid market and the mid market is a great place. Emerging managers are fantastic to work with. You can have a direct influence as an LP. You can see co investment. You can have a lot of other benefits that you don't necessarily get when you're investing even a 25, 50 million commitment to a 15, 10 billion fund. So there's a lot of advantages, not even speaking to some of the liquidity opportunities, right? When you're. Investing in a huge GP, the number of exit opportunities is somewhat limited, but when you're working with a smaller enterprise value company, there's obviously M& A, there's corporate acquisition, there's the IPO market, there are a lot of different options, sponsor to sponsor transactions, et cetera, that, again, historically have boosted returns and boosted liquidity.

[00:10:44] Sean Mooney: I think you raised a couple interesting points there, Brian. One, The things that you just shared here align with my experience. So when I was starting from private equity, I was drawn to the lower middle market because they were like race boats and you could turn them on a dime. You could go left. You could go right. You could go fast. You could hit the brakes. You also didn't displace a lot of water. Tough times, right? And so as you think about the choppy weather we've had over the last four years, the big firms, they've got multiple asset classes. They kind of are able to just kind of plow through it. They're going to be able to keep their teams in place. They have so much, they're like real companies and the smaller firms, the emerging firms, they just can't wait as much. And so I'm curious to get your perspective where you're seeing. Whether it's a lower middle market firm that is in between firms or an emerging manager where you can kind of be on the sidelines for 12 to 24 months, but not much. What are you seeing them do? They're not getting the number that's on the front of the offering memo. What are their alternatives? What are the approaches that you're seeing them to kind of keep moving forward?

[00:11:51] Brian Bank: No, it's a great question. I mean a lot of emerging managers have been kind of hibernating for the last 18 to 24 months waiting for the markets to improve. And I think what ended up happening. Is they've recognized that the market hasn't frankly improved for emerging managers and it's time to come out and figure out an alternative to a formal fundraise. These processes can last for years and they do. And you see GPs, particularly emerging managers spending 24 months technically pre marketing until they get to that first close. So to answer your question, we're seeing a lot more individuals going out making investments into companies. It's independent sponsors, frankly. So they've had multiple conversations. They've been in the market for multiple years. The market isn't great for closing a closed ended vehicle. So what we advise a lot of our clients to do is to make investments, make two or three investments. I advise clients on this all the time. Make sure that they fit Exactly the description that they've been trying to fundraise against for the last 24 months, ensure frankly, that the documentation and the legalese allows them to roll those investments into a closed ended fund within a certain time period and offer co invest to the investors to assist you in getting across the finish line on these one off transactions. So in a best case scenario, you've made three investments, let's say in a 18 month time period. You've raised that capital from a handful of good institutional investors who evaluated you and your process and your team while making that co invest have hopefully agreed to roll those investments into a closed ended vehicle, and then stapled a more significant commitment. To that closed ended vehicle. So you've got an LP base, you've got a track record, you've demonstrated a pipeline, you've demonstrated an ability to execute against that pipeline, and you've literally opened the kimono to your process, to a larger universe of LPs than otherwise would have been the case. It's the equivalent of getting a job from a job. You're much better off sharing your story. The danger is veering outside of the fairway. If you've been marketing your fund as being a. Billion dollar target with enterprise values of 150 million at most. And the first few deals you're showing in your sourcing are significantly greater than that. It doesn't show the discipline and it can concern LPs that you're veering too far away from what you've shared. We have seen situations where LPs that had made a commitment based on a certain size, second guess, those commitments. Based on what the investment looks like, what the types of deals they're looking at, and it can leave a negative taste in the LP's mouth. I've backed out of commitments when I was on the LP side, but this point over 20 years ago with a lot less graze in my beard, based on the fund outgrowing the size and the strategy that they marketed.

[00:14:52] Sean Mooney: That's really smart advice. Consistent with what I'm seeing here. And you think about when a market is maturing like private equity has, specialization is needed for alpha. And I think a lot of particularly, and this is probably more of the older line PE folks where I always had this great quote from Oscar Wilde that I love where he would say, I can resist everything but temptation. So it's like, don't be Oscar Wilde, like stick to your focus area, demonstrate that you can Execute on the thesis that you're going to be going to investors for in LPs are just like private equity investors. They're all from Missouri. It's the show me state. So like, show them that you can do it. And then you can also keep the engine moving. You can do deal by deal. And we're seeing a lot of really capable P. E. Professionals be quite successful in some of them, by the way, they don't know if they're going back.

[00:15:46] Brian Bank: No, that's right. I mean, you can definitely be more successful as an individual in certain situations. The economics can be fantastic. I mean, I think it's again, important to remember from the LP's perspective, they want to deploy the capital. They're eager for these emerging managers to succeed. So if it's. Demonstrating that you can do this as an independent sponsor. Is it structuring it in such a way that makes sense down the road, you're going to be coming back to market with a partially baked fund, and it's always better from an LP's perspective to know what they're investing in. And it's also important to remember from the LP's perspective that they want to see liquidity coming out as well. So a best scenario, and we had a client who came full circle. Literally made an investment and had an outsized return during their fundraise. And again, as these fundraisers take longer and longer, it's not out of the question to see that happening more frequently. That's a situation where you're going to end up having a very successful fund raise number two, as opposed to that first fundraising in this scenario. And in fact, I can think of another where they actually closed the fund quickly. Because they wanted to go out and raise a larger number with better terms, because at this point they were a pretty hot commodity and LPs faced that perception of limited availability and wanted to get in. They had FOMO if you were missing out.

[00:17:14] Sean Mooney: So you can create that kind of scarcity and that urgency by showing a couple, this is what it's going to look like, who wants in, and cause them to kind of run in afterwards. I think that's another smart approach.

[00:17:25] Brian Bank: It's important, especially when you're in the market for a long time and you've been sharing your story to realize the number of GPs that a typical institutional LP talks to. And you may have had a meeting with an LP, they probably don't remember the detail of that earlier meeting. It could be a different team member. It could be someone who's had 10 meetings with lower mid market, mid market buyout firms in the prior two weeks. So again, It's really important. It's the same that I'll share with you later in this conversation regarding annual meetings. It's very risky to assume that your audience knows you and your strategy and your story, even if you've met with them multiple times.

[00:18:07] Sean Mooney: We have at least identified more than 6, 000 private equity firms in the U. S. and Canada. It just shows the maturation of the industry, and that's both funded in people who are working in kind of this deal by deal, independent sponsor capacity.

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[00:18:42] Sean Mooney: Before we move on, I want to get your perspective. I think a lot of this is not even a function of just the evolution of the PE industry as much as it is liquidity and what's called the denominator effect. And it seems like they're kind of going through this kind of like sine curve. It's the denominator effect. Oh, no, it's liquidity. And now it's denominator effect. Can you talk a little bit about what has happened in just a quick course through when the public markets crashed, then it was, A denominator effect. And then it was liquidity. Now it's denominator again. So walk us through kind of what you saw there and what might be coming forward. So just people think about even the addressable capital that may be available for, or investment into a PE firm or an individual deal.

[00:19:26] Brian Bank: Yeah, no, it's a great question. I mean, I always termed it the dreaded denominator effect. And it applies to a balanced portfolio that has. Limitations or parameters around allocations across the multiple asset classes. So mathematically when one asset devalues, another asset will increase in value. And if there's a firm policy and guideline with regards to allocation percentages, this can be problematic. 2008, it was very dramatic when the public markets crashed and we had the global financial crisis. As a result of the significant precipitous decline in the public markets, LP allocations to private equity was across the industry out of balance. As a result, in fact, in certain ways, it could have been one of the leading factors that led to the launch of the secondaries industry where big institutions needed to move multi billion dollar portfolios to get rid of this denominator effect in balance. The last few years, obviously, since COVID, I mean, the public markets, I think we can agree, have been on a pretty good run, even with COVID and some early bumps. We're at close to 39, 000 right now for the Dow. Overall, public markets have maintained their value. Unfortunately, as we also know, those of us who were involved in the real estate industry, Interest rates have gone up. So a good balanced portfolio will include a fixed income. When interest rates go up, as you know, value of fixed income goes down. Now, again, we have a different cause of the denominator causing people to either reevaluate what those limitations and guidelines are for their allocations or hold back on new commitments to certain asset classes. It could be real estate. It could be public equities. It could be private equity. Based on this fixed income decline. I think right now people have grown comfortable understanding that fixed income is where it is. Some large institutions have adjusted their allocation mix, but I think there is a concern. And again, I don't want to be a foreboding person and bearer of concern, but we still haven't seen the global real estate market get marked the market yet. Okay. And obviously the commercial real estate market in major cities, like where I sit, San Francisco, will have an impact on that real estate portfolio across the industry, which could theoretically lead to a different cause of the denominator effect, which in this liquidity starved private equity environment that we're sitting in will not be positive. Is yet another of the four or five elements that are causing this headwind to private equity overall that limit liquidity.

[00:22:23] Sean Mooney: That's a really good observation. It's not recognized by certainly a lot of people where you say the world works as a system that's all pretty much interrelated. And so private equity, let's just go put some numbers to it. And so let's say you, you're like a huge state pension fund and you have a hundred billion dollars to put to work and you're going to say, you know what, 80 percent of what we're going to do are going to be in like public debt, public equity. We're going to put 20 percent into alternatives, which is private equity and venture capital and maybe private equity real estate. And let's say your private equity stays the same, and let's say that's 20 percent of your allocation. And so you're still, you know, a hundred billion still worth 20 billion. But suddenly let's say you've got a 10 percent decrease in the rest of your portfolio. Your private equity portfolio is still the same, but everything else is now lower. So now that private equity portfolio is 25%. of your portfolio. They didn't change at all, but everything else did. But if you're a large allocator, you have to keep things in relative allocations and buckets vis a vis each other. So suddenly you're saying, all right, no more private equity, even though you're the one that's performing, you're out of luck because the others are down. And I can't have more than these buckets because, you know, thank you, Columbia business school. You got to keep all these things in different relative allocations and rebalance over time. Is that a fair way to kind of describe it?

[00:23:47] Brian Bank: Absolutely. And then, I mean, again, private equity is not a well understood asset class in general. The J curve being something that people still don't understand, and nor, frankly, should the broader public understand it. But it's public money. A lot of this money comes from the public pensions, the CalPERS of the world, the CalSTRS, the teachers retirement funds, etc. So when there are dips, It's meaningful and it's highly publicized and state CFOs or other elected officials who oversee this are under the microscope. So it's really challenging. I mean, I grew up in Maryland. I drove across that bridge that got taken out by the ship hundreds of times over the course of my life. Unfortunately, one of the owners of the shipping company is a private equity firm. So interestingly, I don't know, I haven't taken a look. It's not one of my clients, but I'd be curious to know whether any of the Maryland state pension plans. Are actually invested in this gp That owns the ship that took out the bridge. My point is that you know these high profile events I mean the newtown massacre what 10 12 years ago is another example Private equity firm owned the manufacturer of the gun that was used at that horrible situation

[00:25:00] Sean Mooney: Yeah, the industry gets blamed for the outliers And if we're going to be fair as I look at this The denominator effect strikes me as kind of a silly thing. The one asset that's overperforming gets penalized, where I think there is a critique for private equity. is the liquidity effect. And so the private equity industry, if you look at it, the age of their portfolios are getting older and older and older because the private equity industry very rationally understands that they can only sell that asset once. And so they're like, let's let things settle down a little bit and let this thing grow a little more. And then we're going to sell it because we have the luxury of time. What that's caused though, is the LPs are used to having money coming back regularly. If the LP wants to reinvest in that private equity firm again, they need cash and they need to have it come back on a somewhat predictable basis. And it hasn't been. And so I think the other big question that people are really thinking through is the thing that private equity firms in general as a whole can impact is the ability to provide liquidity by exiting their holdings now, whether or not each firm is going to act rationally in their best interest and say, we're not going to sell if they were able to understand as a whole, it makes sense that they need to. That would probably make sense, but it just hasn't been happening and probably won't until the market gets better, which it looks like it kind of is.

[00:26:21] Brian Bank: Yeah, but it's interesting, Sean. I mean, exactly what you just described is one of the contributing factors to the growth of the secondary industry. So, 2005, 2006. I put a portfolio of assets into the secondary market at the time. It was in a very nascent industry. You were essentially selling assets. You didn't want the perception in the market was there's an issue with it. It's a used car sale. And over the last, I'd say 20 years, it's really evolved into a portfolio rationalization mechanism and tool. I referenced it earlier during the global financial crisis, 2008. Okay. Very large, very good institutional investors. We're putting large, good portfolios into the secondary market. There's a debate, how big the secondary market's going to grow. And some are projecting it to be as big as a trillion dollar business inside 10 years. And whether it's a trillion dollars, whether it's 500 billion dollars. It will grow pretty dramatically. And what's interesting about the secondary growth is the number of different categories or solutions that now fall under the secondary market definition, one of which being continuation funds or continuation vehicles, which does speak specifically to what you just referenced, which is early liquidity or liquidity for an asset that otherwise wouldn't have liquidity. And it's a really unique, interesting tool where a GP can go back to the market, go back to their LP base and essentially reset the clock on some of their better assets. Continuation vehicles are generally utilized for marquee assets within a portfolio. So every GP, when you were a GP, you hated having to sell an asset based on the timing of the fund. You've hit the end of the fund life. You're 11. You've already had a one year extension and it's time to sell. And this could be a phenomenal asset could be an asset that was the last investment you made at the end of the investment period. And the last thing you want to do is sell it. So a continuation fund basically is giving the GP the opportunity to take these marquee assets, buy them from themselves, get a third party, multiple external valuations to make sure that the price is fair and appropriate. They go to their LPs and they offer them the choice. Exit your position, roll your position or a balance of the two. And what it does is it resets the economics for the GP, but more importantly, it gives the GP the option to hold this asset, which is a fantastic to a better harvest period. What's interesting is people consider this a artificial transaction. The reality is it's a. Sponsor to sponsor transaction, like any other exit, it's just the same sponsor. And what's interesting is I heard one of the very senior investment bankers who's focused on the space speak recently, and he highlighted, and they're the group that does more banking on these transactions than anyone else. The average transaction value is over a three X. So here in a very. Challenged liquidity market. They are approaching LPs and saying, look, here's a three X outcome. You can either hold it, you can flip it, you can do a balance of the two. But as a result, I think they are creating liquidity. It's becoming something that's well understood among the LP community. And look, I was an LP for 17 years. I understand LPs don't like having something forced upon them. Most LPAs now have this as a possibility. I mean, the LPAs do put in language that gives the flexibility for the GP. But at the end of the day, I think LPs are understanding the value, understanding the rationale. If they sit back and think about it, in most situations, it's a logical next step for the GP, particularly in this environment.

[00:30:17] Sean Mooney: I think it's a great point that you bring up. And candidly, I think it's one of the best evolutions of the industry. Cause you pointed out when I was a GP. Um, you would build these companies and you have this portfolio and, but every three to five years you got to be back fundraising and then all the investment committee sits around the table and you're saying, which one of our favorites do we sell? Because the LPs rightfully so are from Missouri. Show us, show us it's really worth that. And so you sell your best company that has probably the best length to it and everyone would just get like this sick to your stomach feeling. But that's how the rules worked. And if you think about the expansion and the maturation of any industry, it's liquidity and secondary options that kind of go hand in hand in the success of those. And what a continuation vehicle allows is for you to offer optionality to your limited partners. As a GP, it's very fair to say, you know what, I can take an asset and I can take it from 1 And that's a 40 percent IRR, but it doesn't produce a nickel of what is 40 cents? You know, 40 cents doesn't do anything for you. Or I could take that one and turn it into five. If you want your 40 cents, take it. Cause we understand there's liquidity issues, but if you want to see that one go to 5 over another period of time, let's keep on going with this.

[00:31:37] Brian Bank: Yeah. It's interesting also, I mean, it's still not that well understood in the community and in the market. I've had multiple conversations recently with very experienced, very Established GPs that just frankly have never thought about doing and they sit down and talk through the mechanics, talk through the benefits. And again, as a former LP, I'm fully appreciative. Encourage the participation of the LPAC. Pick up the phone and call one of your two or three closest relationships on the LPAC. And I would be surprised if those individuals are not familiar and are not comfortable with the utilization of a continuation vehicle. Because again, in this arid, to put it mildly, liquidity ocean we've been in, This has been a very useful tool to provide that liquidity. And again, back to my earlier comment, LPs want to deploy capital. LPs want to be busy. LPs want to encourage the continued growth of this industry. So if a continuation fund gives them an opportunity to take more capital and find a new emerging manager, or even just deploy it back to existings, that's a positive from my perspective.

[00:32:46] Sean Mooney: Yeah. If I put my LP hat on, I think that's a good thing. Like I can get the cash now if I want it, or I can continue running. I like the word or I can do this or that. I don't want to be as told as it. And, and you think about like decisions thrust upon LPs. When that asset is sold by the LP, they don't have a choice in that either. It's just, you'd have no choice. It's just, the money's coming back.

[00:33:06] Brian Bank: But again, LPs are making commitments into blind pools. I mean, this is a leap of faith that you're committing capital to a group of individuals who by definition know more about what they're investing in than you do. So not to say that. Again, it should be thrown at LPs without thought and without engagement of their LPACs and their LPs. To a certain point, this is also part of that model. Where you are losing some control over your invested capital.

[00:33:36] Sean Mooney: My sense on this tool is kind of what we talked about, these kinds of outliers and exceptions. This is more of a tool for the exceptions where you want to keep your really, really good one and keep going. But ultimately when you're getting to the point where you want to fully monetize, the best measure to get everything is going to be that competitive auction. That's going to get it a fully tested basis. But for these outlier exceptional ones where, you know, there's a long way to go, why wouldn't you use it?

[00:34:02] Brian Bank: Absolutely. Again, it's optionality. And again, it's also just a function of the maturation of the industry.

[00:34:08] Sean Mooney: Brian, let's turn the page here and talk about a concept that is and has and will gain steam in not only large corporate America, but also the private equity world, a concept that's known as ESG, Environmental Social Governance. It's really probably an extension of earlier concept that we're particularly being embraced in Europe, as well as at large consumer facing companies, that was once called CSR, corporate social responsibility. And so this is a concept that I think particularly up until the peak of the market, maybe 2022, maybe even pre COVID was really, really gaining steam. It's since kind of, I think. Probably. Lost a little bit of momentum. It's absolutely still part of the world and it may be, you know, for a variety of reason we can get into, but talk to us about why is ESG part of the private equity world, the larger alternative world, the larger public markets when what's happening there most recently?

[00:35:12] Brian Bank: Well, I mean, I think it's a function, again, of maturation of the industry and the growth and breadth of private equity ownership of companies. And the idea here is corporate responsibility. I think we're seeing a lot of negative press related to ESG simply because of the terminology and the emphasis on those elements, right? Calling it an environmental focused fund or a socially focused fund, governance focused fund, or someone who's a hundred percent dedicated to these three issues. But the reality is. It's a formalization, if you will, of responsible investment strategies. So is it beneficial to a company to ensure that there's no toxic waste, that their employees are treated well, that there's no risks at a factory of injury, that there's A diverse workforce, that there's a diverse leadership on the energy side, that there's a greater emphasis on cleaner energy technologies. I don't care what side of the political aisle you sit. I think people though generally appreciate responsible investing and the. Recent last say 10 years of data reflects that companies that do have this emphasis or at least participation conceptually and responsible investing have better returns and better outcome better because companies that are buying them will pay a premium For a company that they know that they don't have to clean up toxic issues. They don't have Lawsuits related to liabilities related to the employees, whether it's safety, whether it's diversity, whatever the case may be on the energy side. We all know that globally non carbon based power sources will be increasing in the next 20, 30, 40 years. Clearly they're not increasing at the pace that early energy enthusiasts claimed they would. Nonetheless, all we need to do is look out the window and see the number of EV cars, the number of solar. installations, the solar parking lots at high schools and junior high schools and public facilities to know that we're moving in that direction. I think there's a delicate balance from a political perspective, not overemphasizing it, not being so extreme on either direction that it's going to offend the people that are involved in the investment decision and the oversight of those investments. And I think we're seeing pretty direct responses on both sides of that debate. The number of states that have written into law limitations and restrictions on committing to funds that are stating an imbalance to ESG is problematic, right? We're seeing quite a bit of that. I don't know what the number is, but it's, it's greater than 20, 25 states that have written that in. On the other end of the spectrum, we're seeing divestment. University of Michigan's perfect example that is divested. Every investment is trying to divest every commitment into a GP that does traditional E& P, carbon based investments. So we're seeing both sides of the spectrum. And again, I, we don't want to judge what's right, what's wrong. I think responsible investing is something that every GP needs to think about. In my seat, advising GPs from a strategic perspective, whether they're launching, whether they're an established firm, it's problematic when you still see the gender and diversity imbalance, particularly in marketing materials, in annual meeting presentations. We're not in the 1950s anymore, and the fact is, is that percentage of non-white male professionals is still way too low for where we are today in 2024. It's gonna take a very long process and a very focused process, I think, to bring more non-white males into the industry. But again, when you look at 80 percent of the websites of GPs, it doesn't show that level of diversity, that level of gender and ethnic diversity that frankly should.

[00:39:26] Sean Mooney: Thousand percent. And when I first learned about this concept, it was more than 10 years ago as it was gaining steam. And I remember we were raising a private equity fund. And we got what's called a DDQ, for if you don't know, due diligence questionnaire, and asking about ourselves and we, we got for the first time a question that says, what is your ESG policy? And then I immediately Googled, what is ESG?

[00:39:52] Brian Bank: Right, right.

[00:39:53] Sean Mooney: It was from a European LP. And then when I looked at it, I go, Oh, man, where are we doing all this stuff? We didn't know we had columns to put it in. In some ways, people would think there's valor in this, but it's in some ways, discretion isn't always a better part of valor in that, like none of us ever wanted to publicize it because we thought it would be kind of like untoward to like pat ourselves on our back. It's just, you do it because it's good for business. And then it blew up. We started this top private equity innovators program where we recognize really good P firms One of them is this whole concept that is, you know, we'll talk about how it's getting rebranded, but this corporate citizenship thing where doing good for the world and doing good for business are not mutually exclusive and they're often very quite aligned. And where I think ESG maybe came off the rails a little bit was it got politicized. And it's starting to line up with different constituencies, and it became kind of a topic that wasn't necessarily a legitimate talk to be had, but it was just another hot button that ended up in someone's kind of polarized agenda. And so what we're seeing at least is the P firms are still committed to making progress on this, but they're probably going to start calling it something a little bit different, but doing the same thing.

[00:41:08] Brian Bank: I think they do need to change the terminology. I think I hate to use the term every ESG investor leader agrees with that. They think that it can't be bundled again because it means so many different things for so many different people. But again, there also needs to be some reasonableness to the process and to this element. Right. So I was recently at a responsible investors conference and. A complaint was related to some of the HR related questions in the DDQs, asking questions, down to the portfolio level of the demographic of the employees. And the reality was this DDQ, which was a very formalized DDQ, raised questions that are illegal from Uh, labor relations perspective, you're not allowed to ask about someone's gender or their, I don't even know what the questions are, but the fact is, is that it was borderline, if not completely violating. These types of components and with the rationale is so far over the other side, it's just. De legitimizes the entire industry.

[00:42:18] Sean Mooney: The good news is we're still seeing that flywheel spinning and gaining momentum. To mix a metaphor that probably makes no sense is like, but the pendulum is coming back to a little bit of normal. And what we see from the groups that are in this innovator program is. They're deeply committed to it in a practical way that makes real differences versus buying like carbon credits. that if anyone's really been into that world, it's a little questionable. So let's make real change across diversity, against equity, inclusion, governance has always been a strong point. And every PE firm, if nothing else out of selfish altruism understands that anytime they can eliminate waste in a process, that's good for everyone.

[00:43:03] Brian Bank: Right? These firms are highlighting their in house operations experts and working with firms like yours to find individuals who have that experience. And this is yet another demonstration of that.

[00:43:16] Sean Mooney: 100%. So, let's bring our topic here to some of the really interesting things that have evolved not only from the maturation of the industry, but kind of in a post COVID world. And maybe the first thing I'd love to get your opinion or your perspective on. Is the process of fundraising and maybe I'll just give a perspective from kind of like the pre covid world That was a 100 in person thing that involved lots of miles and numerous pairs of shoes and generally Short meetings and long travel periods. How has this evolved? in the post covid

[00:43:56] Brian Bank: Huge budgets outlays for both the gp as well as the gp paying for the placement agents travel budgets You I mean, I think this is a perfect example. The fact that we're having, and I default to every meeting now to zoom is probably the most tangible innovation. And at this point, it's hard to use the word innovation, but adjustment in the fundraising universe. So what does that really mean? It means that multiple rounds of meetings are now done virtually. I talked to LPs about this frequently. For the most part, the in person. Now, wait till the very end. The in person meeting is that final check the box that the GP actually has an office. I'm meeting multiple people in person. We're having that personal connection. We're really getting to know each other, but by that point, there have probably been two or three Zoom meetings. The zoom meeting is also different in that it allows the LP to incorporate more members of their team. Historically, the GP would come when I was on the LP side, the GP would show up, would be two or three members of the GP team. Maybe one or two LPs from the entity. Today we can have eight, 10 different LPs in the room. We could have the entire investment committee. We can have the entire PE team and it can be far more inclusive. It's easier to schedule because again, you're not dealing with travel. You're not dealing with who's in the office. Who's not in the office. Frankly, it doesn't matter as long as you can have a good calendaring system that shows who's available at a certain time, you could have eight or nine people on that meeting. It is always going to be harder to connect, to stand out in a very crowded fundraising market, to differentiate in a highly undifferentiated industry. Right? I mean, we could have a thousand PE firms with bankers coming out of the big banks, people coming out of the big firms. It's like Harvard can fill every class with valedictorians who played the violin and were captain of the baseball teams. So how do you connect? What do you do to really create that relationship with the LP, particularly when it's virtual? I advise my clients to be very thoughtful about that. How to ensure that all members of the GP are engaged, are paying attention. They're not putting their zooms on hold or going to the picture and they're not rolling their eyes when their partners are speaking and they're actually showing a close relationship with their team as opposed to being individuals. Obviously, getting to an in person meeting is the ultimate goal, and this sounds silly to even have to say, but if you're pitching a remote LP, it means a ton to go to their location. If you go to Juneau to meet with Alaska Permanent, it means a lot. It means more if that's in January. It's the same with if you're going up to Ithaca, New York to visit with Cornell or wherever, the more remote. I have a friend who runs. Uh, a program in middle of nowhere, Colorado. And he told me that specifically when people show up, it means that they care. It means that they want their money and it's a better way to spend time together. All that said, 75 percent of the meetings, if not more are via zoom are virtual. So you need to think about what that actually means as a fundraising GP. Is your technology adequate? Is your connectivity adequate? Do you have a gig of speed? At your home office, what is your background? I had a client that would give pitch meetings in their home office. Unfortunately, their home office looked like the game of thrones palace room. And, you know, again, when you're pitching a public pension, where the guy's making less than the value of the desk and the bookshelf, you need to be aware of what your background is. You need to be humble. You need to not be. overly ostentatious. It's little things. It's making sure that the audio works, making sure that you've got a high definition camera, that if you want to share a screen, you know how to do it. If your partner is speaking, you're paying attention, you're adding to what they say, you're laughing, you're reacting. There's a whole learning curve related to the online fundraising. And it now is. Moving into the online annual meetings as well.

[00:48:27] Sean Mooney: Yeah. And maybe before we get into the annual meetings, I really want to delve into that. I want to put a pin in a couple of things you said that are really important resonated. And one, I'm very glad to hear about the idea that you can do zoom meetings early on, because I think all of us have experiences where you're trying to raise the next fund and someone has to do the flight to Europe or some other faraway place. And you do a red eye, you get there in the middle of the morning and the person forgot to tell you they're not there.

[00:49:00] Brian Bank: It's even more simple than that. You know, you go to New York, God forbid on a Monday, no one's in the office or a Friday. No one's in the office.

[00:49:06] Sean Mooney: What I really thought was interesting is also not only was someone like whoever put their finger on their nose last had to go, but we could only send one person because our job is we had to be in different cities every day. And that person just burned two or three days. Our job is to be at investing and assessing and monitoring and building value. And we got to go to Europe for three days. And you're like, Oh, and then they're not there. And now you're digging out, but we can only send one person. And now what this new world has opened up is you can have your whole team there and you can do it from the airport Marriott, which is great. But then I also loved your point. Like if you're going to do it, do it well and portray yourself and have your pitch as a team down, have the background with your logos. That's professional have lighting, know what your messaging is going to do, just like your portfolio companies. When they go to sell themselves. Very often we P firms call us saying, Hey, we want you to coach our teams. We have multiple groups that will coach teams. Like here's how you sell yourself. Well, I think P firm should use those same groups, but they never call us for it.

[00:50:03] Brian Bank: No, that's right. I coach, I advise. We did actually for a while had a service where we would do a tech audit for our clients of their zoom and virtual persona for technologies. But again, I mean, when you think about it from an LPs perspective, This is a GP who's asking for a commitment based on the strength of their operational improvements they're providing to their portfolio. We are experts in improving and giving advice to companies. They need to drink their own Kool Aid. They need to understand that it's more important to show that same level of detail internally. That's the same, that applies to presentation decks, right? I mean, when I see any typo, any kind of grammatical error or even appearance error in a presentation, I have to highlight it to my clients because again, I mean, it sounds minuscule, it sounds completely minute, but the fact is, is that attention to detail could lead to missing a number in an Excel spreadsheet. That turns a return or a projection completely upside down. And LPs notice that. LPs are only looking for reasons to say no as opposed to reasons to say yes. Because again, they don't want to have to answer a question or be called out by their colleagues and say, I don't know, or you're right, and I missed it. So every minute detail needs to be paid attention to.

[00:51:31] Sean Mooney: I think that's another great point. And one other thing I'll just double tap on that I really liked, and for any sports fans out there, a lot of, I think, people in the world are sports fans. I always felt like there's always these big shifts and changes, and so, like, you think about the NCAA, right? It used to be, my Hoyas, you'd have a seven footer, you know, go Patrick Ewing, he'd back to the hoop, and then he'd just kind of throw it over his shoulder, and he'd score 20 points every game, or whatever it was. And then, what happened is everyone went to three pointers. And everyone's doing three pointers, and it's these kind of more smaller, wafier kind of people who are fast, but everyone shoots three pointers. And they're all built like that. So the whole world went that way, but then you're watching this last NCAA tournament. Suddenly there's these seven footers that are just camping two feet from the hoop. And they're just pushing these, like, you know, lighter people right out of the

[00:52:19] Brian Bank: 300 pounders from NC state.

[00:52:20] Sean Mooney: Yeah, exactly. And it works. And so now everyone's going to the zoom meetings, but guess what? A little hustle. If you want to differentiate yourself, go to Juneau, go to Ithaca,

[00:52:32] Brian Bank: do anything that differentiates. There was a great story during COVID when things started opening up and a friend of mine who was a placement agent had a client who rented a Winnebago and they drove around the East Coast as a team. And so the three GPs were in this Winnebago and would go to parking lots, parking lots, parking lots to meet with LP prospects. It was so differentiating and so memorable. And also showed that the team got along when you really look under the hood. No pun intended. I mean, you see three people who are driving up and down the coast. In fact, it was only, wasn't even up and down the coast. I think they put something insane, like 15, 20, 000 miles on this. Sprinter van visiting with LPs where the LPs would meet and they weren't going to the office. So they'd go to the parking lot at the closest Starbucks, whatever, anything that helps you stand out, I think is going to take you a very long way in this fundraising.

[00:53:24] Sean Mooney: I love that example. Show who you are and live it and do it and stand out there. Don't do what everyone else does because that play gets neutralized really quick in sports and in private equity. And maybe that's a good segue for kind of our last topic. Let's talk about annual meetings. And this is the one that's driven me insane for private equity for years. To put the cliche here, 90 percent of everyone I know who did management meetings, they would do it at one of the university clubs in Chicago or New York or Boston that are kind of hoity toity, a little stodgy. And every one of them would have this. No matter where you were, they had this one chicken dish with the little bone that popped up. And it was like, everyone had that. So the joke is, well, did you have the white sauce or the brown sauce? And everyone's just like, get me out of here. But that's how it was done because there really wasn't an expectation and that's what you did. So what's your perspective on that, Brian?

[00:54:24] Brian Bank: I couldn't agree with you more. And differentiating your annual meeting is going to be critical. I think in this challenge fundraising market, people, Want to go to fun meetings. They want to be with people they enjoy being with. When the Delta from a returns perspective is so narrow and the differentiation between firms is so narrow, it ends up being a people business. It's always been a people business, but more importantly, it helps you remember the GP, right? So if I think back on the 300 anal meetings, I've attended the ones that stand out the best to me are the ones that weren't in a hotel ballroom serving the salmon or the chicken with the little bones sticking out. It's. At portfolio companies, it's tours, it's unique locations, it's fun speakers, it's incredibly challenging for some strategies to hold a exciting, dynamic, engaging meeting. I mean, if you're a growth equity fund, that's investing in Sass businesses, a morning of presentations on Sass will literally put anyone to sleep, including the GPs. So how do you mitigate that? How do you make it fun? Hold the meeting somewhere else. Don't hold it in a room without windows. If you're in Chicago, spend the money and rent that balcony overlooking Wrigley. Take them to a Chicago deep dish pizza place. In San Francisco, take a bus. Don't have the meeting at the Four Seasons and force people to eat at the Four Seasons. Take them to Chinatown. Take them to something in Boston so you can have clam chowder and lobster rolls. Just something that's memorable. I've been to a few dozen meetings at stadiums, basketball stadiums, football stadiums. It's something different. I've been in annual meetings overseas, US GPs that host their meetings overseas. And again, when you think about an annual meeting, from my perspective, there are a few outcomes that are the goals of the meeting. And it's not just to check the box that the LPA requires you to have a meeting. It's one sharing information about the portfolio. That's a given. Two. It's. Validating the LPs decision to commit to your fund by exposing them to more members of your team and members of the team who are well spoken and knowledgeable. And then third is give LPs the opportunity to bond with each other, learn from each other and mingle with each other. And then of course, fourth, if you're fundraising, make it memorable, make it fun, make it something that they look forward to so that when they think back on the 100 GP meetings that they've had in the last 12 months, this one stands out and that's the same approach actually I take to schwag. I mean, people are like, Oh, do we have to give schwag away? I'm like, absolutely you don't. But if you could put something that's in front of them on their desk, they're going to remember that they're going to remember that they were given a Yeti mug that has your logo because it's sitting on their desk. Think about something that a, LP could use travel packs, a battery pack. I mean, none of us need any more vests, but if it's something that could be on your desk, something that can be behind your desk, something that again, reminds you of this GP when very little else reminds you of the GP, it's a win.

[00:57:49] Sean Mooney: It's so important that you're sharing that. Cause one of the things that I've been harping on in the industry is the idea that private equity firms. need to be better about showing their humanity. in wrapping that into a brand. And I don't mean in kind of like the consumer y scent or kind of push, it's like what do you stand for and how do you live that and how do you convey publicly who you are in communicating that and not just thinking that we got to keep our heads down and discretion is the better part of valor. And part of that is these experiences. We're all in a human business. Dare to show that side of yourselves. And to your point, like it doesn't have to be some ritzy, lavish thing. It's taken to Lou Malnati's in Chicago, or a deep dish pizzing tour. You can go to Gino's and Lou's and all these other ones and show them your town and your experience and dare to make it a human experience as part of. You're a relationship in your partnerships that you have get into Winnebago and go around town. It's like those little things that show you're a real person because your numbers are going to speak for themselves.

[00:58:56] Brian Bank: I mean, when I was an LP, I inherited, I'm not a real estate expert. I inherited a real estate private equity portfolio and had to, we had 20 different commitments over the course of a few years. The one group that I absolutely remember in detail. Was a group that had their annual meeting in a third city where they took us on property tours. And literally I know what their strategy was based on them, taking me to two or three of their properties, walk us through the improvements. And to this day, I can remember exactly what the properties are. I could explain this GP in particular. It's the same with some of my PE clients. If you can go to a factory, if you can go to the location of an investment, there's no reason that an annual meeting needs to be in the city that's the headquarters of the GP. As long as it's not a difficult place to get to. I think it's reasonable to have it in another city, have it in the city where there's a portfolio company, give them a tour, take them something differently. I have a client who's had their annual meeting in the same hotel ballroom since inception, and it's just painful. And they know it's painful. They've asked me how to improve it. And we've slowly been getting them out of that location. We've slowly been encouraging them to do different food options. But again, we've got contractual limitations based on the hood. Like, okay, look, You can afford it. Renegotiate, do something differently. One point that was also worth mentioning is once you had a certain size as GP, there's also an expectation. That the LP assumes like I'm paying you a point and a half of management fees and you've got 15 billion under management or 10 billion under management. It should be a nice event. It should have a good speaker. It should have X, Y, and Z. So once you get to a certain level of AUM, you need to actually think about it. You need to take the planning out of the hands of the admin or the IR person. Who's done it historically and bring in a professional, bring in an event planner. One of the things that we haven't talked about is the virtual element to it too. Virtual annual meetings are going to be part of the process now also. Recording them in some capacity, broadcasting them in some capacity. Again, the benefit is multiple members of the LP community can watch at the same time. It's also something that can be cut and spliced and put into your data room as part of your due diligence. Package, it does add a regulatory component to it. That needs to be thought through. You need to talk to regulatory council to think about how you do save it and how long you need to save it because it's technically treated as a marketing item, like an advertisement. But that said, you need to do more than just have a camera videotaping or broadcasting the presentation if you want it to be effective.

[01:01:55] Sean Mooney: Great point. Thank you. The business of private equity is turning into a business. And if you're going to have these events doing great, do them just like your portfolio company, what you'd expect of them, turn that lens inward. And you're going to have people in person make an experience, but you're also going to people virtually make sure they have as great of an experience as possible. And that stands out particularly when 80 percent of the other firms are doing what they did 20 years ago.

[01:02:18] Brian Bank: Absolutely right. Make sure you do it carefully. There's nothing worse than overspending being overly. Generous being egregious, particularly if you have public investors, if you've got a public investor and they've got a budget on what they can and can't spend on a hotel, don't have your annual meeting at the Mandarin Oriental Manhattan for 1200 bucks a night. Be very cognizant of the limitations. Don't give 250 worth of swag when a public investor who makes up 20 percent of your commitments can take 25 worth of swag. Again, it's all part of this just thoughtfulness. And again, It shouldn't be in the hands of an IRS and it shouldn't be in the hands of a office manager, an admin, which to your point, probably 75, 80 percent of the GPs out there do.

[01:03:06] Sean Mooney: And to your point, it doesn't have to be lavish, but it can be memorable. And so. We're seeing a lot of our clients show up here and having annual meetings in Nashville, and they'll go and they'll get a bunch of singer songwriters, and they'll do a songwriters round, and they'll let people go take them to a recording studio and record a song that they all kind of make up in a group, and it's not expensive, but it's memorable, and they'll rent out Pat Martin's barbecue and have everyone go there and line up and grab their barbecue with a great band playing. None of that's expensive, but to your point, I really love what you're saying to do something memorable.

[01:03:40] Brian Bank: I was talking to an LP the other day and he was saying that one of the GPs for their annual meeting did a restaurant. So instead of being locked in one restaurant, they literally had 10 restaurants identified and they brought groups of 20 people for each course. And they rotated. So literally they were wandering around the central area and they were able to do it. But I mean, again, compare that to that darned piece of chicken with the one bone white sauce brown sauce in a city that's known for its great cuisine.

[01:04:09] Sean Mooney: 100%. Brian, I really want to thank you for spending the time sharing really, really unique perspectives that you are one of the few people in the world have this vantage and this perch to see. I've learned all sorts of things I wish I knew before. So thank you. Thank you. Thank you.

[01:04:26] Brian Bank: Thank you. I really appreciate being on. And again, congrats on the growth of your podcast and the successes of BluWave. It's fantastic.

[01:04:35] Sean Mooney: 100%. Thanks so much for your kind words and looking forward to see you in person soon. That's all we have for today. Special thanks to Brian for joining. If you'd like to learn more about Brian Bank and Kirkland Ellis, check Please see the episode notes for links. 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. Five star rate, review, and share. It really helps us when you do this, so thank you in advance. As a measure of gratitude, we're also making donations to Feeding America and their related associations for each five star review we receive in your podcast platform of choice. So thanks again. In the meantime If you want to be connected with the world's best in class, private equity grade, professional service providers, independent consultants, interim executives that are deployed by the best business builders in the world, 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.