Elements of Value in Private Equity (Part II): More Insights from Top Business Builders

[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 episode, we have another one of these really special compilations where we put together the answers that we often ask the amazing business builders and private equity from this podcast about what some of the elements of value that they look for in a company that are either resident or more importantly, could or should be resident when.

[00:00:41] They consider investment. So this is another episode that's akin to an MBA class on what top business builders are looking for when they're considering making big, meaningful investments in companies. And so by extension, if you're a CEO, a CFO, a founder, or another investor, these are some really good things to add to your arsenal in terms of what you can and should look for when either making investments or building value within companies.

[00:01:08] These episodes are personally among my favorites as I copy paste the lessons learned from these discussions on the Karma School of Business podcast into our own business at BluWave. So enjoy.

[00:01:25] First up, We have Susan So, Chief of Capital Formation and Investor Relations at GrowthCurve, shares her personal yardstick.

[00:01:36] Susan Soh: One of the things that I think sets GrowthCurve apart, and we focus in the middle market space, is that we are looking for data rich businesses, and I'll tell you what that means, that are growth oriented. And so, typically, These are actually good middle market businesses, but have access to a lot of operational data and they don't know what to do with it.

[00:01:56] We look for businesses that have strong organic growth rate, maybe even could be a double digit growth rate business, but it's in a industry that is only 4%, 5%, but it's growing. So we like leaders there. We always look for businesses that are cashflow positive, despite the fact that we focus on financial tech info services and healthcare.

[00:02:20] You will find a lot of that, but we are looking for typically the category leaders or a category killer in a growing market. A lot of other firms will do the same thing, but the distinguishing fact for us is it needs to be a business. Despite all of these that has a lot of the data, but they're just not using it and they don't even realize the value.

[00:02:40] So very often when we meet with a team, and this is particularly when we first started, they're like, what do you mean? I'm like, yeah, of course we're collecting longitudinal data and all this other stuff, like healthcare, we get claims data, but there's no value in it. Right? It's an 835, 837. So what are you talking about?

[00:02:55] But that's our secret sauce because we recognize the value in that and what we can do with it. By applying the tools of AI and digital transformation to really grow businesses. So we do look for these things when we're looking at a business. A lot of times people will come to us and say, I have a ton of data and it's just transactional data.

[00:03:14] It can't really help drive a business initiative. They don't own the data and we're like, you're a great business. You're going to be better in somebody else's hands, right? We need to know we can do something with it. That's typically what we're looking for. That's sort of the first step of what could be a growth curve opportunity.

[00:03:34] Okay, what are you doing with the data, right? For us, we want to know that businesses we're looking at very often may have to make large decisions at scale, but they can be improved using data science or AI or machine learning, but they're not doing it. They're doing it manually, they're using heuristics.

[00:03:51] They're using simple Excel, when actually the tools out there on the AI machine learning front can absolutely help to not just increase efficiency, but also more importantly, actually help to grow certain revenues or new markets. We need to know that they exist for us to be able to lay foundation for a lot of the growth initiatives.

[00:04:10] And then also we look for businesses that have a lot of scale, because they need to be large enough to benefit from this approach, which is why we don't do venture, we don't They can't be too, too big because then we're not going to add value, which is why we really do focus right in the middle market spot.

[00:04:24] Sean Mooney: I love that perspective on a number of fronts. In one, if I go back to my prior life, I was co leading our information data and analytics practice at the P firm. And we always had this saying we would in some ways look in a similar way from probably more of a good to great or a great to greater buyout perspective for like lower middle market firms.

[00:04:46] And what we would say is we would look for same thing data assets like where's your data factory and more often than not, kind of what you're explaining is they had ingredients that were kind of sitting on the shelf and in themselves, those ingredients aren't worth that much. A lot of people just think the data itself, Oh, we have this data, we're going to sell it like no. Data is flour, it's eggs, it's sugar.

[00:05:07] And itself, if you're not mixing them and making cakes with it, it's not that great, but if you turn it and use it to power decisions or products and those types of things, then it tastes really good. Yes.

[00:05:19] Susan Soh: When done together properly,

[00:05:21] Sean Mooney: when you know how to make it in the same vein, the way that you're thinking, like, so resonates with us here.

[00:05:27] And when people ask me what business we are. I will very often say we're a data business. They're like, what do you mean? I'm like, well, data powers everything we do. It's all captured. It improves your ability to make higher expected value decisions. It powers workflows. It powers decision making. It gamifies your business.

[00:05:47] all those type of things. So everything you said there kind of like makes me smile ear to ear.

[00:05:51] Susan Soh: Yeah. I mean, think about it. So much of what we do can be informed better if you have the data and you actually look at it and evaluate it, right? A lot of times you Probably, especially as, I don't need to say how old I am, but you know, as I've gotten older and have had more experience with, with many of us, you have a sense, right?

[00:06:14] Like, okay, based on my prior experience, this is what I would expect in this scenario. But now we have the data, if you've been collecting it, and now we have the tools that are out there that can evaluate this. It just makes your life easier. It also proves whether you were right or wrong, right? And so that should help to inform better decisions going forward.

[00:06:33] Sean Mooney: Next up, Corey Eaves, Partner and Head of Portfolio Operations at BayPine, shares what he looks for in companies.

[00:06:43] Cory Eaves: I wish I had like a catchy mnemonic or something to remember this by, but I don't. I guess I would just also skip over all the financial metrics. Everyone looks at Market size and growth rates and profit. And so, and so those are a little bit of table stakes for me. It's a couple of things to maybe go to the next level.

[00:07:00] One is I know this sounds very straightforward, but it's just the leadership of the business. I think in almost every industry or all the investments I've worked on in my career, there's just no question in my mind that the caliber of the leadership of the business is what really makes or breaks these things.

[00:07:19] I say that even having spent most of my career as the tech guy. You'd say I'd start with tech, but it's not where I start. I mean, I think it really does come down to leadership. And so one of the things we always look at, I always look at is, you know, what does the team like and who's there? And if you have a thesis about the business or the product and the management's not quite right, then are there ways that you can augment management or make changes that get you where you want to be?

[00:07:44] That's a big one. A second one is what I think of a little bit. It's just like the clarity of their strategy. Is this a business that's got. Eight different irons in the fire and you can't quite tell what they're focused on or is a business where they've got a really clear mission. They've got a really clear set of ideas of what it takes to win that idea of just focus and clarity and strategy is a super important one.

[00:08:07] And then maybe the last one I throw out is what I think of for a lot of the businesses I work on is sort of a product orientation. A lot of companies I find, you know, they sort of start out life where they're doing. Uh, projects or customer things, totally normal. Like they're doing whatever it will take to win, but they're basically doing things one off from one customer to the next customer with the next.

[00:08:33] And there's this sort of maturation where companies sort of figure out how to productize that, how to build something that's repeatable. And that's usually the unlock to a big scale boost in the company. So for me, it's a little bit trying to work out where are they on that journey? Are they still scrappy and doing everything they can win to every single customer, or are they a little more mature in how they're thinking about go to market?

[00:08:57] So those are a couple of things I think about.

[00:09:00] Sean Mooney: I think those are all completely spot on. They resonate with me on many levels and particularly. When I was in PE, I had a reasonably similar yardstick, but then when I went through the journey here, doing a startup, and then you realize in some ways. That hustle stuff, you got to do it at the beginning.

[00:09:18] But as soon as you start becoming quite a, quite a real company is what I say here, it's like, everyone are coming to like, we're coming to real companies. So everyone is like, you got to find that focus, that precision, that intensity of purpose and do it with really good people. And particularly in, in the areas that you spent time previously, I'm sure you'd see a lot of that where they maybe started off as this fast growing startup, but if they don't narrow the aperture of their lens a little bit and be more purposeful.

[00:09:44] They probably risk stalling out as they're senting.

[00:09:47] Cory Eaves: I think that's right. I think it just gets really hard to scale that. I mean, I worked on a business at my last place. I won't name the business, but they were selling it to the pharmaceutical industry and they had a handful of very large customers and.

[00:09:58] Each customer that they won was a huge contract to win, but it also resulted in months or years of effort for every single customer. And like, that's just not a model that scales very well. Right. So I think that transition is one of the exact things we were helping them work through.

[00:10:15] Sean Mooney: And what you shared, they're just kind of universal maxims, not only for tech companies, but business.

[00:10:21] And so I really like how you tease that out. And I'm curious a little bit, maybe to go on one. Vertical down. And when you think about leadership, what are some of the elements of leadership that you see that say, this is a good team, or this is a good leader that we can grow with here?

[00:10:40] Cory Eaves: I've worked in a business.

[00:10:42] Actually just closed a couple of weeks ago here at Bay pine. And we were getting into the management team and it came out that the head of sales was the CEO's son in law at the business and the CEO actually over time had fired him and replaced him. And I thought to myself, first of all, that must make for some interesting holiday conversations when he's replaced them, but I was also pretty impressed Here was an entrepreneur who had.

[00:11:09] The foresight to make the tough changes in his management team that he needed to make. Right. And I think that's always something I try and think about how they do that. I also think again, in growing or small organizations, a lot of times you see an organization structure that's really built around a lot of the people and personalities in the business.

[00:11:28] And that's another one of those maturation things where you can kind of watch companies get more intentional, more thoughtful about division of labor and the people that they bring in. Yeah. And then maybe again, the last one I'll throw out, I'll kind of put my tech hat on for a little bit is where does the tech leadership sit in the organization is the CEO, the kind of guy or girl that thinks about the product and is driving it is that reside with maybe a CTO, a chief technology officer in the business.

[00:11:55] It's not a great sign. If you look around and the technology team is reporting in a level down, or there's one person who has 10 different functions, including it or something like that, from a tech and product perspective, that's a. Big signal in the business too.

[00:12:12] Commercial: Today's episode is brought to you by BluWave.

[00:12:14] 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. 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.

[00:12:31] Sean Mooney: Next up, Jessica Ginsburg, managing director with LFM Capital shares her perspectives on elements of value in companies.

[00:12:41] Jessica Ginsberg: Number one, what is the company's moat? You know, what is this company doing better or differently than everybody else? We can see it often in their margin profile, but yet it can look really different from company to company. Sometimes it's a unique distribution strategy. Sometimes it's patented products.

[00:13:01] Sometimes, you know, it's just a better mousetrap. The second thing is growth. We like to see companies that have multiple growth levers. It can't just be a roll up strategy. We have to see an opportunity to grow footprint, broaden the channel, add new products and on and on and on. The more levers that we can identify, the more excited we are.

[00:13:24] And then to be able to sit down with management and really prioritize. Where are we going? How fast? How hard are we pushing? Let's get aligned and then let's do it. Finally, and this is really the most important one and also, you know, sometimes the hardest one to figure out. Why are we the right buyer?

[00:13:40] What can we do specifically to unlock that company's potential? Our money is as green as the next guy's, right? But it really comes down to who we know, what we know, and where we've been. Industry experience, operating experience, our network. What can we bring to the

[00:13:58] Sean Mooney: table? I love your perspective there, Jessica, and one maybe area I'd love to delve a little deeper on is this concept of a moat.

[00:14:05] People talk about that a lot, like, oh, what are your competitive barriers to entry, etc. But that can mean a lot of things, so as you think from a manufacturing context, like, what do you think, like, creates moats?

[00:14:16] Jessica Ginsberg: Yeah, I mean, it can be a lot of different things to be honest. What's interesting is all we do is manufacturing, right?

[00:14:22] So the kind of quick assumption is that moat better be something that they're doing, you know, on the floor, it's a manufacturing process. That's not always the case. Sometimes it's how you're selling. We own a business called ShopSaber outside of Minneapolis. They make CNC router tables and plasma tables.

[00:14:37] And their sales strategy had always been, and I would say even like before social media was cool, you know, they had this cult following on YouTube and they would make these videos and they had this sort of personality. Router Bob was his name and he would make these videos that would show people how cool the products were.

[00:14:53] And so yes, the products are incredible and they make the products in the most amazing way. But we were so impressed by that strategy and how they had just gained this, you know, cult like following over the years that that was a huge attraction to us about that business and just looking at it and saying, you know, how can we grow this and build on this?

[00:15:12] So I guess that's one example, but it can look a whole lot of different ways.

[00:15:16] Sean Mooney: Yeah. No, I think that very often it's the little things that people don't notice. We all know there's this concept of flywheels in business and everyone thinks it's like from the outside, Oh, it's one thing. Right. But it's a bunch of little things that in sequence create these and creating a cult following is in some ways the biggest identifier of a passionate user base and good luck displacing those people.

[00:15:37] Jessica Ginsberg: Yep. Yep. Nope. That's exactly right.

[00:15:39] Sean Mooney: As long as you don't change the color or, you know, the product or something like that. And the other thing I really loved what you said was this whole concept of. Are you the right buyer? Because so much of the art of PE today is transformation. It's not financial leveraging.

[00:15:53] It's not kind of buy low, sell high. It's how do you fundamentally create value in the business? Right.

[00:15:59] Jessica Ginsberg: And for us, so much of that is fit. So much of that is, can I look the seller in the eye and trust that this person's going to do what they say they're going to do. We're going to do what we say they're going to do.

[00:16:12] And we've walked away from deals on that basis. Like we just don't trust these people. Great business. Don't trust these people. So it is huge for us.

[00:16:21] Sean Mooney: Now, Troy Phillips, partner with BPOC shares his two cents on what to look for in a business.

[00:16:30] Troy Phillips: There's obviously a whole battery of work you do around diligence to get under the covers and you make sure you are buying a good business. But I think there's kind of three shortcuts or quick items that we look at to think about is it a business worth really spending time on and digging in, you know, our firm only invests in healthcare.

[00:16:50] With that, compliance is important in every business, but it's especially important in health care. Compliance with laws, billing, practices, licensing, all the things you have to do. It's a pretty good barometer of how good the business is operationally. They have a really strong compliance program, passing audits, they're collecting their money.

[00:17:11] That shows that the management team is paying attention to the details. Because you can't get paid, Medicare is going to fine you if you are making mistakes, if you're not doing things the right way. So compliance is in many ways the best barometer of how strong operationally a business is. Second, most of the businesses we invest in are founder owned and managed still.

[00:17:33] And we are usually the first institutional capital. And so the management team usually has a breadth of experiences. We don't need everyone on the team, but we do look for certain members of that team to have had bigger company experience. There's nothing scarier than waking up and realizing that your management team is running the biggest business they've ever run every day.

[00:17:55] We like them to know what scale looks like, how to scale a business. And again, that doesn't need to be everyone, but we need a few members on the team that have that experience. And then probably the third is looking at their customer base. And in healthcare, that could mean payers as much as referral sources or patients.

[00:18:14] But if they're working with UnitedHealthcare, Blue Cross Blue Shield, and Aetna, Cigna, or if they're, you know, working with big manufacturers and they're a vendor, uh, as vendors, you feel pretty good. Big companies work with quality organizations. They have a way to assess who they want to work with and They don't make mistakes that often So those are really sort of the shortcuts that when you're looking at a SIP that comes across your desk And you can pretty quickly say okay robust compliance program management team with some big scale experience and logos that you recognize Those are kind of shortcuts to say, Hey, okay, this goes in the pile.

[00:18:52] We're going to spend some time on.

[00:18:53] Sean Mooney: I love that in some ways, Troy, I think you just gave like a masterclass that kind of cut to the chase, you know, save your money on the NBA, do that too. But it's this whole idea of like, does the company get the details? Do they know the most basic elements of their business and the foundation of what's going to make them successful?

[00:19:11] They have a really good team, not only for where they are, But a few steps down the chessboard, as you think about multiple ahead, are they going to know how to go there without doing it for the first time? And then lastly, do they have great customers who are going to say, yeah, this is a good company, give those three things welcome to the masterclass of business.

[00:19:28] I think that's a great example for any business builder who is going to be thinking about how they build a company that's built to last and be exceptional or go from good to great. Those are really good notions that I think everyone should think about.

[00:19:43] Troy Phillips: Completely agree.

[00:19:46] Sean Mooney: Hey, as a quick interlude, this is Sean here.

[00:19:48] I wanted to address one quick question that we regularly get. 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.

[00:20:09] 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.

[00:20:25] Give us a call. Visit our website at BluWave. net. Thanks. Back to the episode.

[00:20:33] Last, but certainly not least in this episode, we have Joe McIlhattan and Ami Mehta, Principals with Periscope Equity. When they talk about how they individually and collectively look for elements of value in the businesses that they invest in.

[00:20:50] Joe McIlhattan: We're really focused on strong value propositions. Where we can see something that's durable, has a tangible ROI, is repeatable, and every time it delivers to the customer, they know that they're getting a value on the service they're purchasing. And beyond that, we're focused on the team. As many private equity firms will probably resonate with, we don't need a full executive team day one, but we do need people we can rely on to keep the business moving forward.

[00:21:17] And it really helps to have a strong bench of junior talent that you can count on for that future growth. It's really hard to work from scratch. And if that's the durability side, that's kind of the check the box, make sure that the return is going to be stable. On the upside, we're really focused on the talent engine and the potential for technology.

[00:21:39] I can let Ami expand on, on both of those.

[00:21:42] Ami Mehta: This is an area that the rationale for being at Periscope is having the opportunity to collaborate around these kind of discussions. Right. And so from a talent engine perspective, that can be executive level on building and understanding who our team is at the platform in current state.

[00:22:01] What are the goals for our founder CEO? Sometimes it's not maintaining that role. What are the capability sets? How do we build around that founder CEO and match that build to our thesis that we articulated and have come up with in understanding the platform? So it's both executive and it's also, these are people driven businesses.

[00:22:19] So as Joe mentioned, the durability of understanding how the workflows work inside the companies, where do we have single threaded reliabilities? Where do we need to expand our investment in our people? Whether it be a process perspective, a particular sector of focus, a particular capability. So we'll look to kind of sharpen the pencils around that early on.

[00:22:42] From a tech enablement perspective, it comes in a variety of flavors and the type of businesses we invest in. These are not software businesses where there's an active product roadmap or one that needs to be developed and you invest in that and off you go. We deploy modern digital transformation. The elements of that are infrastructure, boring things like ERP systems, any other systems that we need to bring on that ties into the scalability and durability of our assets.

[00:23:10] Things around customer experience and CX, those kind of investments are important to develop from a technology perspective. Exciting areas of automation, although I will say the automation realities inside our businesses are not sometimes the most forefront of AI. Great. Right. They're more taking large stacks of paper as we have a few of our businesses and automating certain elements are very critical areas that alleviate workload that create more efficiency and things like that.

[00:23:41] We talk a lot about data and insights. How do we use data from an internal perspective to drive performance? KPIs, but also from a customer facing perspective. How do we demonstrate our value to our customers from a data perspective? How do we bring our data and collect better data to translate to better outcomes for our customers?

[00:24:02] So that tech enablement, that roadmap looks different at every one of our companies, but it has these elements. And at entry and evaluating a platform, we're looking for opportunities like that. And if there's zero, is there potential for that? Which is the case at some of our platforms as well, where we start with nothing.

[00:24:19] Sean Mooney: I really like what both of you shared there. And one, much as we read in the news every day, that it's AI, AI, AI, chat, GPT, perplexity, grok, you know, blah, blah, blah. We seem to get more and more calls every day for people. And so your point about how the people on the team, and it's not just the CEO, it's everyone, it's this holistic system that makes these companies work.

[00:24:44] And I think that's really important because the people are not going away. There's going to be changes. And I think everyone's got to embrace that. And it's going to embrace certain parts of organizations more than others, but still it's the people that are making these businesses move, and it's a huge part of what's impressive about things that your firm does.

[00:25:00] That's all we have for today. I want to give special thanks to Susan, Corey, Jessica, Troy, Ami, and Joe for sharing their really profound insights into how business builders are looking at creating value in their own companies. And by extension, how you should too. If you'd like to learn more about any of the previous guests, please see the episode notes for links, including links to their prior podcasts, which I highly recommend you listen to in the meantime, please continue to look for the Karma school business podcast, anywhere you find your favorite podcasts.

[00:25:33] We truly appreciate your support. If you like what you hear. Please follow five 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. Thank you in advance. 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 and trusted by the best business builders in the world.

[00:25:57] including hundreds of private equity firms and thousands of their portfolio companies. And you can do the same. 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.