Private Equity Deal Teams and the Discipline to Win

Lloyd Metz: [00:00:00] Get ready to peer behind the curtain of the private equity universe with each episode of Best But Never Final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together we'll navigate the corridors of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

Let's go.

Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd. How are you guys?

Lloyd Metz: Good. Good to see you guys.

Doug McCormick: I'm good. Good.

Sean Mooney: It's good to get the band back together. I've missed you guys. I'm ready to have another conversation that is going to be incredibly insightful here. On this one we've been talking about, we think about the syllabus of private equity that we've been going through over time.

[00:01:00] What's one of the areas that we think is incredibly important and maybe under discussed and where we came out, what we think would be a great topic would be talking about: what makes a deal team effective and excellent at their job in this incredibly difficult kind of dynamic, fast moving, unstructured kind of world that you all live in?

How does that sound?

Lloyd Metz: That's a good one.

Doug McCormick: Sounds great.

Sean Mooney: All right, let's hit it. And maybe just to set the stage first, what we'll do is we'll just set, we'll just talk about what are the roles, how do teams get assigned, how do you mix them together to get a better outcome? And then we'll really dig into talking about like what makes them good individually together.

So Lloyd, can you just set the stage and tell us what are the key roles in a typical middle or lower middle market deal team within a private equity firm in terms of titles and what they do?

Lloyd Metz: Got it. So let's start with the Associate. [00:02:00] There's usually an Associate on every deal team, sometimes two, depending on how large the transaction is and how much work there is to do.

We've talked about this in previous episodes, but they're the pointy end of most analysis, modeling, gathering information out of diligence, data sites, et cetera, producing work, product memos, et cetera. Then there's usually a VP or Principal. Sometimes senior Associate, depending on the structure of a given firm, that VP is the linchpin of most deal teams.

They are responsible for coordinating the work of the Associate Quality Control. They tend to manage many of the third party diligence service providers, whether that's insurance, brokerage, or the accountants for Q of E or what have you. Then there's usually a Principal and/or MD Partner. Sometimes there may be two [00:03:00] or one of each that are the senior leadership of the team, usually responsible for the structuring of the deal, decisions around valuation, decisions around work, streams of diligence,

interacting with the investment banker, if there is one across the table representing the seller, or direct relations and communications and negotiations with the selling business owner, that founder, that CEO, as well as working with the lawyers and the lenders. Sometimes the VPs can do that. Sometimes the MD or Principal may do the work with the financing, working with the lenders and the credit agreement.

But that at a high level is generally how deal teams are built up. Did I miss anything, Doug?

Doug McCormick: I don't think you missed anything, but I think I'll offer up a couple comments. I generally agree with the way you describe it for us, there's fungibility in terms of [00:04:00] is it an Associate versus an Analyst versus a BP versus a Principal.

It's like top, middle and bottom as you think about like the level of resources and who's responsible for what. So we generally think about it as three man deal teams. You've got a Partner, an MD, you've got somebody that's a VP or Principal, and then you've got a Junior resource. And I agree with your allocation of the workload.

A couple distinctions, at least the way we think about it. I think the deal team structure can be different when it's what I'm going to call thesis development stage versus deal execution phase. And so a lot of times we have small deal teams, like maybe two people or one person, thinking about a market and a thesis and trying to develop an idea that we want to chase, and then when it gets at traction, we'll add more people to it.

So that'd be one. And then the second is, I think we often think about the deal team, including either an Operating Partner or an Executive Partner. And for us, what that means is the Operating Partner is someone that's got [00:05:00] relevant operating expertise to the business we're looking at. The Executive Partner is usually somebody that has industry expertise relative to the situation, and so we try to get them on that team and capability set as well.

Lloyd Metz: You bring up some good points, Doug and don't disagree at all. We have a similar approach with the thesis development. Oftentimes our portfolio operations colleagues are involved at that stage for sure. And then usually, and we'll get to this probably later in this conversation, when you get a bit closer to leaning in to pursue an opportunity, we usually bring in our portfolio operations colleagues and then we start assembling from our network, the executives, once we've developed some conviction and make the decision to lean in, to really go hard to pursue an opportunity.

That's generally when we pull them in.

Doug McCormick: Sometimes we'll have an Associate and an Analyst on a deal, but I always find if you [00:06:00] put two people that are the same tenor, I think it gets a little bit hard because you forget who's doing what, and are they coordinating who's managing who. For us, it's usually pretty linear in terms of seniority in a way where everybody's very clear on the accountability and what part of the transaction they're working on.

Sean Mooney: If each deal is a ship, you've got a captain and then you've got the first maid and then you've got some support level to keep that thing moving from NDA to send IOI to LOI to ultimately closing the deal and making sure it's either progressing forward or sailing around storms, and getting to the ultimate destination you want to get to.

So how's that metaphor? Pretty good. Right?

Doug McCormick: Perfect.

Sean Mooney: Good. Perfect. I just came up with it. So let's talk about this. So now you got a deal that comes in, and let's presume in this case the Partner didn't assign it, it came in through a biz dev resource, or somehow it just shows up at your firm in an unallocated or assigned way.

How do you, in, in your firms, go about assigning a deal to a Partner to captain and champion? [00:07:00]

Doug McCormick: This can be an interesting dynamic because it's like, if there's something that comes across the firm's purview that is really interesting is it can be a feeding frenzy. Like who's got the angle, who looked at it?

Why should you look at it? Et cetera. For us, people have generally developed capabilities based on various deals in the past, or experiences with business models in a way that it's usually pretty easy to say, "Hey, this probably goes to this person because they've done a lot in pick your end market or pick your business model type."

So we don't have that much overlap where there's a lot of jump ball, but I think you've got to also evaluate capacity. And so a lot of times it'll be like, who's got time to take a look at it? And I think some of these are like, it's a free market, right? So who spent time on the book who really wants to step up and say, "I want to champion this because I think it's really interesting."

So I think it's incumbent on like the managing directors or the Partners to say, "I should be doing this deal because, or I should be looking at this because I'm interested in it, passionate about it, [00:08:00] and here's my thesis."

Lloyd Metz: You raise a really interesting point and the typical approach, Sean, a lot of firms take is okay, who's worked on similar companies or situations in this market, or as Doug described, business model, or if you've been working on a particular thesis or an industry or market subsegment.

That's usually where the opportunities flow to. What Doug, I think is interesting, what you raise is, a new approach to staffing is who's most passionate about this opportunity, and not just because they like the industry, but because they see the opportunity and are energized by the opportunity that this particular company presents.

Like that's a good case to let that person, let him or her run with this opportunity and see if you can make the case.

Doug McCormick: We're small enough. So I've got four what we consider deal leads, right? So folks that are autonomous [00:09:00] and have done this for long enough that they in some ways run their own little business, right?

And I want them to be allocating their time based on what they think is most interesting. And so I think that is good to let it bubble up in terms of what do they want to run after, what do they think is relevant? And the only time I think that you've really got to coordinate is we try to have a call once a week or once every other week where we're talking about anything that's come in the last couple weeks so that everybody is aware of what everybody has seen.

So it's not like something was being pursued for two months and nobody knew about it except for the guy who got the book. There's good transparency about what the available market is, if you will, and then people select into it.

Lloyd Metz: Yeah, I think that's right. But again, the point that we're talking about what makes for a good deal team, having someone or multiple members of a deal team who are excited about an opportunity and see the potential of that opportunity, that I think is almost [00:10:00] critical.

That's a almost a got to have in terms of a great deal team.

Sean Mooney: So from what I'm hearing, essentially what you are doing is you have people that are maybe more thematically aligned and then the first measure is that a deal will come in and it probably first goes to that more thematically aligned person.

You also consider capacity. If that person is like hot and like there's two deals coming off to close, or two exits going on at the same time, you might say, "Okay, we're going to, we like this deal. It's an HCI or an ICV deal. We still want to do it. So maybe we'll bring in someone who's adjacent within the deal, lead parts of your group," but you're also looking for them to have some passion in that particular deal, have an angle in mind, and some sort of insights that you want to see them leaning in and championing and saying, "Give me the ball." Versus like just throwing it to them.

Doug McCormick: Yes. Because let's remember, 5% of the deals that come in the shop, people are actually going to spend substantive time on, right? So like, we just disqualified 95 deals when there's not a [00:11:00] champion that's evolved or emerged organically.

Sean Mooney: The fill rate is quite low. If you look at the whole funnel, you're going to look at a hundred deals to do a couple, right? Or probably even less than that these days.

Doug McCormick: Just one more point, I've got to say that I also think, let's acknowledge there's valuable R&D that happens by looking at deals when you know you're not going to run hard at it, but because it's something that you have expertise or experience in, it informs your underwriting on other things. And so we have a lot of guys that'll say, "Hey, I don't think this is something I really want to try to win, but I want to be in the game, because I think I'm going to learn things that are relevant for my practice."

Lloyd Metz: That's another good point Doug and I think good practices, and it sounds like you all do it, make that deal lead or deal team declare their intentions.

Because human nature, there are going to be moments where maybe folks do have capacity and they just feel like they need to chase a deal or look at a deal or an investment opportunity or something. You have to [00:12:00] fight those urges, right? And so if it is, declare your intentions with this. Is it to learn something?

Is it to build a relationship with a CEO or family or founder or whatever? Make that deal team member declare it and stick to it.

Sean Mooney: I can always see where our conversation's going to go a little bit. As you think about what makes people effective, and some of the themes we can talk about a little later is,

for these deal teams, they have to be assertive, they have to have clarity of intentions. They have to be incessantly curious, right? It's like, "Hey, I don't know if this is our deal, but I want to learn about it. let me spend some time."

Lloyd Metz: This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm, focused on partnering with family and founder owned manufacturing, service, and distribution companies. ICV Partners, an innovative private equity firm supporting management teams of leading companies at the lower end of the middle market. And BluWave, [00:13:00] the business builders network connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point, and on time due diligence and value creation needs.

Now back to the episode.

Sean Mooney: Someone's been assigned to this deal. And likely they've almost like grabbed the ball and said, "I'm going to run with this." Now you do that. How does that Partner then go about assembling the rest of the team? And as a framing, many PE firms, not all like this, but many of the PE firms, the VPs and the Associates are mostly in some sort of pool or sub pool and are used across deals.

They're not aligned specifically to one Partner. Some firms do it that way, but most of them are going to have some sort of flexibility in that staffing. If we're going to assume that structure, how does then the PE firm go about assigning people to work with that Partner on each specific deal that's getting moved [00:14:00] forward in your funnels?

Lloyd Metz: I guess it's ultimately a function of how large is your firm. If your firm is meaningfully large, dozens of people on the investment team, there's often a staffer, someone playing that role to coordinate which VPs have capacity and which ones don't. At our firm, we're pretty small, similar in size with Doug's firm, you often go to the Associate who might have been working with you on that investment thesis or that VP who was working with you on that investment thesis or the VP or Associate who went down the path to use Doug's example on a company that you were looking to learn.

Now another opportunity comes up that you're really excited about. You might want to grab that same team so that you don't have to get up the learning curve again, right? You can keep leveraging that experience from that opportunity that you pursued in order to learn. [00:15:00] So oftentimes it, it happens that way.

Doug McCormick: I agree. We try to like leverage the existing experiences of the teams in a way that it'll be obvious when the deal comes in and hopefully it's obvious. It's more likely going to be this subset of the firm because they've got experience that's relevant. We have a, what I'm going to just call a Partners meeting every week and it's very quick.

It's like 15 to 30 minutes and everybody rifles through what they have going on for the week. What I really find happens though, is when you hear about what the other Partners are doing, it helps you get a sense of the capacity of the rest of the teams that they're working with.

And so this is when that conversation will also morph into a little bit of a staffing discussion because as things are bought and sold you people free up and the capacity changes and it's easy to just adjust with that on the fly.

Sean Mooney: One, there's always capacity. Your job can get incredibly intense at different periods of time, and there's sometimes there's just not enough hours in the day.

There's maybe [00:16:00] thematic exposure, so maybe they've worked on this theme before and there's familiarity. How do you all also think about mixing maybe subset specialties and skills, personalities, cultural overlap? How does that go into the equation?

Doug McCormick: Yeah, that's a hard one. Not hard, but like a Rubik's cube.

You hit on a couple of the things that I think people should be thinking about. It's competency, it's capacity, it's personality, and let's call it specialty. And so competency, let's just acknowledge people have different strengths and weaknesses, and not everybody is equal at any level in the firm.

Like you may have one DP that's better than another, and so you try to round out the team based on competencies. Capacity we talked about. That's always important, but I would tell you like I think it's a mistake to make suboptimal staffing decisions around short term capacity constraints. Like you're going to own this thing for five years, right?

You want the right deal team on it. That's going to have the best relevant value creation playbook [00:17:00] plan. So I think you've got to find ways to be creative about creating capacity. Personality, I think is a really big one. And I think it's on from my perspective, two things. One, what is the risk appetite of the individuals?

And when you put those individuals together, what is their collective risk appetite? We have individuals in our shop, that are more risk-averse and always thinking about managing downside. And we have other guys that are more focused on, "Hey, I'm not worried about the downside, because if I get the upside right, I'm going to be compensated."

And so, having a team that has got somebody that's on the brake and somebody that's on the gas is an interesting one. And then the specialty is back to the point of you have expertise in an end market or a business model that's relevant for whatever that staffing is.

Lloyd Metz: I think in our firm and in some other firms, some of that brake/gas dynamic can come from the outside. If you're in a small enough firm and you know the personalities and makeup of the teams as a Senior Partner, you [00:18:00] can exercise some of that nudging to step on the gas a little bit and encourage people to lean in that way, or vice versa. If they're all gas, no brake.

You can weigh in and say, "What about this? What about that? Dig deeper into this, make sure it's not an issue." So some of that can come from the outside as well. But again, it depends on the makeup and nature of the firm, but it's absolutely an important consideration.

Doug McCormick: So Lloyd, I think there's an interesting question we think about on this staffing, which relates to, I can make the following two arguments.

One argument is: when a team of three, like a deal team of three has worked together once or twice or three times, they get good at knowing each other what you need, how you work together, and they get reps together, which I think you could say, "Okay, there's value to that because we know where we did poorly last time versus well, and we can correct it."

The flip side of it is mixing up teams, I think creates more [00:19:00] homogeneity about who's learned what and who's good at what and how we do things the HCI way. I think there's like pollenization that happens there. That's interesting. I'm mixed on that. There's a healthy mix of changing deal teams up, so you work with different people and learn how the rest of the firm does stuff.

I think it's healthy, but I do think there's efficiency garnered when the same team's worked on multiple deals together.

Lloyd Metz: No, that's right. And striking that balance is more art than science. It's absolutely true that you need to mix up the deal teams for that cross pollenization as you put it. So you absolutely have to do that more than zero times, right?

But exactly where that right balance is, that's judgment.

Doug McCormick: Hey Lloyd, what if people just don't like each other? That never happens. That never happens.

Sean Mooney: A room full of type-A alphas. No way,

Lloyd Metz: Sean. That's a whole other episode.

Sean Mooney: That's another episode. I've [00:20:00] never seen that happen in private equity!

Doug McCormick: I will say like, I think the same way we talked about thesis, there should be like a free market of who's passionate about it. I think team selection is a free market sometimes, right? Like there's a little bit of recruiting that goes on where the senior guy's like, "Hey, do you got capacity?" And if it's interesting, people will find a way to have capacity if they like working with that person and they think it's a good opportunity.

Sean Mooney: I think those are all spot on. And so my experience is exactly that. Where in a perfect world you perfectly level the capacity. You do these things, but at the end of the day, if you've worked with this VP and it's really, if you're a Partner you probably care more about the VP and then the VPs care about their Associates they've worked with.

But you get familiarity, I think is a really good thread where they can read your mind and they know the next step, they know your process. But at the end of the day, that VP's probably also like, because they're more experienced by the other Partners. And so more often than not, like you said, in a free market, we were also negotiating and trading with each other.

"Hey, can I have this person on my deal? And you'll get them on the [00:21:00] next one." Because everyone's constrained. I don't call them, I had my favorites, but maybe. And then the VP certainly had their favorites. Like no one wanted the brand new Associate. They wanted the one who's just getting ready to go to business school, but before they got in,

so they're still working hard. And so the reality is there's a lot of complexity in your world. There's high stakes, there's more work than it could ever be done in 24 hours. And so it's probably managed chaos to a certain degree.

Lloyd Metz: I'll throw out there Sean and Doug, for your consideration, some other factors, because I think in constructing your deal team, you'd want to make sure there's, and we've touched on it a little bit, trust, right? So familiarity is a component that builds trust. You want teams that are good communicators with each other. I think that's important to have on a deal team, good communications.

And then intellectual honesty is also super [00:22:00] important, I think, to have on a deal team. And so if you're intentional and explicit about those three things, that also colors who you pull onto and who you recruit onto your team. So in addition to capacity and capability, specialty and personality, that personality piece is that Associate or is that VP

intellectually honest? Are they going to be clear-eyed? Do we, do I, do they, us together as a deal team, trust each other enough so that if the Associate finds something or the VP finds something that's not as positive or could be a deal breaker or red flag, can I trust that they will speak up and say something?

We can talk about that later, but those are the real world elements that I think you also are trying to solve for with some of your staffing decisions.

Sean Mooney: Let's maybe get into to that and bring our conversation forward. And so when we think about your world, and this is a technical term, there are [00:23:00] a bajillion things that have to happen in between signing a non-disclosure agreement and then closing a deal. And just to set the stage for our listeners, if you're less exposed to this, you know the phase gates are: you're going to sign an NDA. You're going to see a confidential information memorandum next, which is called a sim. If you like that you're going to dig in and you're going to sign an indication of interest, which would then get you to a management meeting if you're one of the top kind of 10 most interested and highest value or most compelling people.

That world then gets further compelled down to a letter of intent after you do your management meetings and do several more weeks of work. From there, they're going to pick anyone from one to four parties to go to the finish line and sign a purchase agreement, and then the first one to sign closes and you've spent millions of dollars, and then you have heart palpitations and say, "Let's go," and wire the fund. So there's a lot that goes on between that. We're not going to go through those steps for part of this, but there's a lot of activity. There's [00:24:00] different roles that happen throughout these phase gates. And during that whole process, it's almost like a hunger games of funnel where deals are, you're either told no or you say no, and the funnel gets lower and lower, and then a deal comes out the other end.

And so with that is the framing. Let's now dig in about what makes a good deal team, and maybe we can talk about it individually through the roles, but then how they work together through that gauntlet of 59 different things that happen in a pretty quick, fast moving pace.

Doug McCormick: Wow.

Sean Mooney: How's that going to tee up?

Doug McCormick: I'm taking notes there.

Lloyd Metz: That's like one of those Ohtani home runs, right? Like way out of the park on that one. Goodness. I'll start it this way, Sean.

Yeah. There's the bajillion steps to getting a deal done from start to finish, but when you're in diligence, at least an approach that I think it makes sense to take is [00:25:00] what do you do

to identify the deal breakers, the red flags? Because I think you want to identify those early and upfront so that you're not spending a lot more time, and as you said, millions of dollars in diligence and legal fees, et cetera, to find out that there was a deal breaking issue down the road, when you're under exclusivity or right before you close. You don't want to find it out then, you want to find it out early.

And I think that's where the trust and the intellectual honesty come into play, is that Associate VP and even the deal Partner intellectually honest with the facts that they see, and then intellectually honest with themselves, and can they trust one another so that if they do find a red flag in a deal breaker, are they going to raise their hand and say, "I think we've got a problem."

I think we need to rethink our thesis, or maybe it doesn't apply to [00:26:00] this company, or maybe this company isn't as competitive in the marketplace as we thought, or pricing or product quality or whatever the factor may be. Does that deal team have enough trust and intellectual honesty to raise a red flag?

Right? Because Doug, you're right, you only spend time on like 5% of the opportunities. We've got an opportunity we're leaning in on it. Human nature may be reluctant to throw the challenge flag and say, "I don't know if we should move forward."

Doug McCormick: Yeah. I think you bring up a number of interesting points there.

So I'm trying to use a framework that addresses how Sean described the activity. So how I'm thinking about it is the deal team should be doing a couple things over the course of this evaluation period. One is driving a process that produces information. Managing your accountants, your legal teams, whatever diligence streams, your market studies.

I believe that process should be articulated by the Partner, executed by the VP or the Principal, because the [00:27:00] Partner should be articulating the process because they have a clear view of what the red flags are that they want to understand, or what the investment committee thresholds will be that will be required to get this done.

So it starts with clear understanding of like, "What am I actually trying to prove or disprove?" That results in this process, the kind of middle person should be the keeper of driving that process. That process in my mind, does two things. It allows the Junior team members, the VP and the Associate to collect a bunch of data and synthesize the data in a way that the team can analyze the data.

And then based on that, I think people make decisions about what it's telling them. For me, very simply, that's a helpful way to think about where each person is playing. Partner defines the process which results in the work streams. The Junior team collects and synthesizes it. The whole team assesses it.

And then I think ultimately Partner investment committee or the whole firm evaluates what the implications are [00:28:00] of the findings.

Sean Mooney: If we break this down and try to bring it to life, and I'm going to ask you think about all the Associates you've had at your firms. If you could describe the best one or the amalgamous one, how would you describe that best one? The precursors: they're really good at Excel. They know double entry accounting. They can run, build the three statement model. They can do all the proficiencies, the table stakes of like just capabilities. But how would you describe the traits of the best Associate that you ever saw?

Doug McCormick: So we're caveating it with hard work and competency are a given, right?

I think the number one thing that the best Associates do is they figure out a way to deprioritize the things that don't matter, which allows them to overinvest and really nail the things that do. And I think one of the hardest parts of the business is getting back to first principles. What really matters and I think is, especially as a [00:29:00] Junior person, you're inundated with so much information.

I think processes do that by design, right? Let me hide the problems in so much information that you get lost in it. For me, it's people that can simplify.

Lloyd Metz: The Associates that I think have been the best know-how to synthesize the information and figure out the 'so whats?' And raise it to the attention of the deal Partner or the VP.

Doug McCormick: Since we're talking about exceptional, I think the professional and social maturity to

play up in a way that they are viewed as a resource to the counterparties, right? So the best Junior team members, because they are so in the numbers, because they are really good at identifying what's important, management teams start to value that, and that creates this great bond across organizations where like you're in the know, it's collaborative.

They get a lot better outcomes from the teams they're working with.

Lloyd Metz: [00:30:00] For my second I'll underscore Doug's attribute and just add on the EQ, the social skills to work with not only your deal team members, but your portfolio company or future portfolio company team members. As you're going through diligence, that goes a really long way.

If you can develop that dynamic and that trust that Doug's describing, if you can just on a human level bond with the CFO or the Comptroller or the Head of Sales, or whoever it is you're talking to during diligence, that the future portfolio company, you learn some things, you learn some nuance, you learn some inside baseball as it relates to that company, and you bring it back to the VP and bring it back to the MD.

That's how you get exceptional Associate status in my view.

Sean Mooney: I think that's spot on as well. And I'd add maybe a couple, and one of them is just the very basics of the job. They have to be detail oriented and they've got to check their work. [00:31:00] And so that was always the thing that would drive me insane was when you'd get something and there were just landmines in all of analysis as I'm a vice president, I'm coming up, and then you bring it to the investment committee and they see all the errors immediately that I missed.

And so it's like someone check your work, like don't bring it, we'd always say like, "Print it out, bring it to your desk, spend five minutes with it before you even show it to me. I guarantee you, you're going to catch 10 things." It's like the red car theory: if you're looking for them, you're going to find them.

And so it's like someone who's detail oriented, just check your work. It's the basics. But that's always where careers were ruined early because they couldn't do that. And then building on your thing is like, you want someone who's curious, you want them to ask lots of questions, but yet they don't have to be self-motivated to figure stuff out themselves.

And solution oriented. You would get Associates who'd come to you and say, they'd ask all the questions, which was great because it's an apprenticeship business. But when they would always ask, "What should I do next?" The thing that I would really encourage them is like, "What do you propose? What do you recommend we should do?

And what are the three things you considered?" [00:32:00] And so those people who would be curious, who would understand that they should ask the questions, but then also you could tell they have another level of judgment and intellect because they're saying, "This is what I'd recommend to do, given what we know here."

And if they show that demonstration of maturity in early age, they're like, "Kid, you're going to be promoted to VP real soon and we're going to do everything we can to keep you from going to business school." Is that like a fair observation?

Lloyd Metz: Absolutely. Showing the maturity and the awareness, the curiosity, the intellect, all the things you described to start to understand what that next level up job role entails.

And starting to think along those lines of a VP. That's the hallmark of a great Associate. Somebody's ready for VP and the same for VP. If they start to understand what matters to MDs, how to think like an MD, how to think about the issues an MD or Partner are tackling or trying to address that gets them [00:33:00] high marks and early promotion.

So, agree with what you're saying.

Sean Mooney: So let's now go to VP. So the wunderkind made it through and it's just that easy, right? They have to be good at like 50 things. It's like an Associate, which is really hard, and then they make it to VP. What would be now the most amazing, you could look in your mind's eye right now and you think about them.

We don't want to name names because we don't want flattery. We don't want to flatter these people. That's not part of the private equity way, so let's think about that person and what comes to mind, like, "Oh, this was the best VP I've ever had."

Doug McCormick: Take all the attributes we talked about and that all resides in this person, right?

Except now they've been doing it for a couple years and they're older. To me, it's at the beginning of transitioning to sales and management. And when I say management, it's management of external resources and management of internal resources, which includes things like, it's not just tasking, but it's mentoring, teaching, but it's that management process.

And then I think it's, when I say selling, I really mean persuasion, and that could be [00:34:00] sellers, that could be external parties, that could be internal.

Lloyd Metz: An exceptional VP begins to exercise judgment in many of their interactions with the portfolio company and with third parties, and they start to make decisions.

So to your example, Sean, they identify an issue. They don't come to you and say, "Here's the issue." You rhetorically ask the question, "What would you do?" And they have an answer. They take that next step. Just in their own head, exercise a judgment. "I'm going to make a call, I'm going to make this proposal, I'm going to suggest this deal structure.

I'm going to suggest this valuation range, or this provision in the credit agreement," whatever. And they know enough to know that it's a judgment that if they happen to get it wrong, it isn't indelible, it's not permanent, it can be reversed, but they start to exercise judgment.

Sean Mooney: From what I'm hearing is they've demonstrated the capacity in their earlier job to be a doer.

Now they have to [00:35:00] be a manager and be able to get multiple streams done with and through other people. So they've got to train up these Associates and they've got to be able to manage their parties. And then now they've also got to have the ability to persuade others to accomplish goals. And really start to have enough responsibility in decision making authority.

That judgment is incredibly important. Is that kind of the synopsis?

Lloyd Metz: Yes. It's a hard job.

Sean Mooney: That's where you see so many people off-ramp in the business, or at least I did, and that's probably right about when I was about to get fired at one of the people I worked with because it starts moving fast. It's like the first time you got up, put on the varsity sports team in high school, it starts moving so quickly.

And what you need is people who can overcome adversity at that level. And also I would say it's just the capacity to find another gear and do more, because you still have to be a player and a coach and you've got to find time [00:36:00] to like get to that next level in the hours that don't seem to be humanly available.

And so it's like, are you self-motivated to do an incredibly hard job and then do more? And that was always the big jump that I would see is like a lot of people could do it, they could even maybe demonstrate their ability to manage people, but could they do the extra that was required to get over the peak of an exceptionally steep path up?

As we move along, you think about this conceptually, you see a good pool of VPs, the new Partners that are coming up. If you think about someone who becomes a really excellent Junior Partner, what makes them excellent? Why do they get invited into this round table of fellow people who've gone through this exceptionally challenging, but also exciting mentorship to get to a really important seat at this highly credentialed table.

Lloyd Metz: When you're thinking about that seat, as you put it, Sean, can they execute, can they get [00:37:00] investments across the finish line is one part. Also important is can they generate ideas? Can they generate opportunities for the firm? You need both. Particularly at a smaller firm, you often are doing both.

As firms get larger, you'll have a more developed business development group that does a lot of the sourcing of deals, but you still need to have confidence that that up and coming Partner, when they see an opportunity, has reasonable judgment, has reasonable pattern recognition, has reasonable lowercase 'a' analytical tools to say, "You know what, that's an opportunity we should spend time on," versus, "No, that's an opportunity we should pass on."

So those two aspects to me, are the most important hallmarks for the next rung of promotion or the next role on a deal team [00:38:00] to be that deal team leader.

Doug McCormick: I think Partners have an ability to create. And Lloyd, it's what you were talking about where I see a lot of folks that are super talented and it's almost the farmer hunter analogy where if there's a lot of work to do in the firm, they could prosecute that work very well and they can be very capable, but they're not great at going out and creating an opportunity that can be a revenue generating activity for the firm.

They're good at like prosecuting the needs of the activities. But that's not the same as driving business. So that's point one. Point two is just this bias for action. I don't care how good you are if you don't go make something happen, and that's both when you own the business, but in getting into the business, that's not a Partner-level kind of skillset in my mind.

And then I think you've got to acknowledge like the business is structured such that intellect is very valuable because at the end of the day we are allocators of capital and all that really matters is the quality of your decision making. A lot of things we talked [00:39:00] about is how you get to good decisions, but some people are just like really good at having it,

whether it's an instinct or a discipline, or the ability to process a whole lot of disparate information and get to a better answer than most, that is heavily rewarded. It's almost like you can create the processes that are as robust as possible to consistently drive good answers. And then some people just have a knack of, they're just better than everybody else.

And so I think this is where the intellect really can be deployed in a way that can be a huge value creation for the firm.

Sean Mooney: It was always really interesting. So as I'm thinking about what you were saying, it's, you continue to build this like layer cake. You have to be all the other things before you have to be able expertly be able to say, "Is this a good company

that we have a vision to turn into a great company that's going to enable us to pay a market clearing price and a competitive process?" So can you envision what the art of the possible is? And I think we've talked about this previously too, like now EQ becomes really important. because a lot of [00:40:00] times, a lot of people who can crank and execute and say how much to pay for a company, but not many who can then also go and sell the seller and say, "Here's why we are the best Partner for you," which matters.

Right? That's really hard to do. And then the other thing that I've seen a lot of people struggle with is now you're also have to be a really good negotiator. The whole legal process is a completely different game. There's a hundred things you could argue about, and there's only five that matters.

Can you trade the three that you really want for the two that you don't? And then just say "No" to your attorney who's fighting on everything possible to get one more hour of fees going. And do you have all that wherewithal to tie that into value? Where do you trade? Where do you go? Where do you hold, where do you fold?

Those type of things are really hard.

Lloyd Metz: I'm glad you brought that up, Sean. That is a big part of what makes a deal team great and effective is keeping their eye on the prize of getting the investment across the finish line and closed, staying [00:41:00] commercial, and therefore knowing how to manage the accountants, the lawyers and consultants, or whoever else you have on your service team, knowing how to tell them "Enough," or "I don't care," or "Stop," "We're good," or "Speed up, you've got three weeks. I know I agreed to four weeks to finish your work. We got three. I don't want to hear excuses." Right? So you know how to manage those parties because they can mess things up. To be honest, if you don't manage them right, they can irritate,

grate on the nerves of the founder or that leader's team on the sell side, or irritate the bankers or whomever, irritate the opposing law firm, for example. And that's not constructive to getting a deal done. And so you have to know how to manage them, and that is quietly part of the negotiation dynamic [00:42:00] of getting a deal across the finish line,

right? I know I'll be hearing from some of my law firm friends with those comments.

Sean Mooney: As I think back on the whole process of getting to that, it's like, how does anyone do that? It's a tremendously tough climb, and it's a fascinating climb the whole way. But once you get there, it's holy mackerel. And then you've got to stay there.

And one thing I'd love to get your perspectives on is, I never really appreciated this until I started then getting to the point where I was championing the sale of portfolio companies with our investment bankers that we would select. One of the criteria we'd always look for is like, you've got to explain who do you think the buyers are, why they are who you know there.

And one of the things that I would always get from them, and we would then subsequently ask for them, is that really good bankers would say, "Hey, this is your buyer. They lost on our last auction. And the Partner has not done a deal in two years and he is our huckleberry and so we're going to get this to him [00:43:00] first because he's feeling huge pressure to show that he can get a deal done."

And so what I didn't really fully appreciate then is there's so much three dimensional chess going. On the other side they're looking for signals of where they can exploit kind of judgment, you know what we talked about in the earlier parts of the conversation. So how do you even protect yourself and that as you're a Partner in making sure that it's easy to see ghosts, but it's also like "I've got to get a deal done at all costs."

But at the end of the day, in your business, like you all win together, you fail together because unless you're generating greater than 8% annual returns for the long-term average of the stock market for more than a decade doesn't matter, right? You've wasted your time. So how do you think about that?

As a Partner where you've got, I finally realized like, "Man, I've got people even like playing on my tendencies from outside of the firm," and it's the ultimate chess game.

Doug McCormick: I'm a little bit cynical of that level of the fidelity that some of those banks say they have with the buying community. So I think it sounds [00:44:00] good when they're pitching you, I'm not so sure it accomplishes what we want to accomplish, so, but I'm in total agreement with you.

Like we try to be disciplined about saying like, day one after you do the deal. Let's talk about what the end state is and what the businesses look like to attract the maximum number of buyers. And we try to start crafting that story and usually a year or two into it, we actually try to get a bank or two who would be a likely seller of the business who has a practice that's relevant, get them under NDA, have them come in for a day and present to them what the business is and how we see it, and have them react.

And I think that's a great way for them to pitch their capabilities, but for also for them to give us some constructive feedback about what they're seeing in the marketplace. And then I think it's all about the broad process. Because I continually am surprised at the outcomes versus the expectations going in.

Sean Mooney: I think that's totally appropriate. And actually when I think about that person got far into the process, but another one beat him as like. And that person wasn't even on our short list of the groups [00:45:00] that we thought would win. The great thing, the way that you all have constructed your businesses as well, is it's a team sport.

And what you have as the ultimate arbiter of whether or not you're going to do something where you all collectively win, is the investment committee. And so you have protections in place even when there are tendencies, and humans are humans. You've got these layers of protection that help you go through a really tricky process quickly, but also confidently to make sure.

Doug McCormick: That's a great point, right? because that's the organization that should be talking about their Partner that hasn't done a deal and what the risks are, what the incentives are that could be influencing behavior. Right?

Lloyd Metz: Exactly. And so self-awareness I think is a critical trait attribute skill to have as an investor.

And so the ability to be honest, put oneself in the mirror. And say, "Hey, I'm that Partner. I haven't done a deal in two years. I'm probably leaning toward saying [00:46:00] 'Yes' to everything. How do I get some counterbalance? How do I get some objectivity?" Right? So do I get it from staffing my deal teams with someone who may be more straightforward, or maybe it's someone who I haven't done a deal with.

If you're self-aware enough, you can start to address it through that staffing of the deal team, kind of like we were talking about earlier in the show. Otherwise it does come from the IC.

Sean Mooney: Yeah. Know thyself. You all have a very exciting but tough business. You'd be good in a lot of stuff.

Lloyd Metz: A lot of trial and error.

Sean Mooney: So I think, in this episode we've covered a lot of what makes these teams amazing during the deal process. I think there's going to be another episode that's like what makes that PE team amazing during the next part equally, if not more so important, is the value creation process after you own the company, but maybe to set the stage for a future conversation.

You've closed the deal, the wires have flown, you own the company, now you're Partnering with the team. [00:47:00] What happens next? Are those same teams involved? What does the next, the rest of the story and kind of a setting the stage perspective look like?

Doug McCormick: From my perspective, the team that did the deal has invested heavily for the last 3 months to 12 months sometimes on getting to know the industry, the business, and the players inside the business. And so like you've got to put yourself in a position where you can leverage all of that capability set. And then we had talked that sometimes the teams expand when we think about what we're trying to accomplish.

It's not just getting the deal done, it's the value creation playbook. So how are you bringing in Executive Partners, Operating Partners, and other resources, as part of the collective team here to execute on the thesis?

Lloyd Metz: That's absolutely right. There's got to be an organized and intentional incorporation of those folks into the diligence process pre-close, post-close. You really want to avoid the deal team that's executing close the deal, throwing all of their learnings and [00:48:00] deliverables from diligence, throw it over the wall to your Operating Executive and your Operating Partners to start crafting the value creation plan. You lose a lot of context, you lose a lot of learnings and nuance.

So there needs to be a very clear and repeatable incorporation of those members once you get to post-close.

Sean Mooney: I think the way that you're doing it makes a ton of intuitive sense. And some of the things we're trying to see is where people will break it up, where the deal teams just do the deals,

and then the ops team takes over and just does the ops. And as I was thinking about, as you're talking about in some of the themes, we've talked about accountability and curiosity and this kind of overcoming things. In some ways, I think about it, it creates some dangerous incentives if the deal team's job is just to buy and then the ops team just inherits this thing.

Because then you're just going to buy lots of stuff and then hope you can turn something into something more, and either side, if they're not working together, you don't have that accountability. [00:49:00] And as we all know, the easiest thing in the world to do is win an auction if you're just willing to keep on paying.

So that insight in terms of how both of your firms do it is exactly spot on. It's like, if you're going to make the bed, you are going to sleep in it and turn it into something even better. So once again, gentlemen, a really awesome conversation with all sorts of things that I wish I knew before. So, I appreciate you pulling back the curtain and sharing how the world works in the land of private equity.

Lloyd Metz: Thanks, Sean. Thanks, Doug. That was a lot of fun.

Doug McCormick: Yeah, fun conversation guys. Thank you.

A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies, by partnering with family and founder owned manufacturing, services, and distribution companies. Learn more at HCIEquity.com.

ICV Partners, an innovative lower middle market private equity firm, supporting management teams of leading companies at the [00:50:00] lower end of the middle market. Learn more about ICV at ICVPartners.com.

And finally, BluWave, the business builders' network, connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point, and on time due diligence and value creation needs. Learn more about BluWave at BluWave.net. For further information on HCI, ICV, and BluWave, and relevant topics discussed here in the episode, please see the episode notes for links.

Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting, and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein. No representations, warranties, financial, legal, tax, or other advice are made herein. Consult your advisors regarding any topics discussed during this episode.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.