Private Equity in 2025: Diligence and Value Creation Trends

[00:00:00] Lloyd Metz: 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.

[00:00:30] Let's go.

[00:00:36] Sean Mooney: It is great to be back with Lloyd and Doug. Doug and Lloyd. How are you guys?

[00:00:41] Lloyd Metz: Good, sir. How about you? Pretty good. Fighting a little seasonal allergy, but I'll sound a little nasally. But other than that, pretty good spring is sprung.

[00:00:51] Sean Mooney: I had heard someone in a prior conversation with kind of all the noise in the world that was talking about, it's a dog eat dog world, and I'm wearing milk bone underwear right now, so, wow.

[00:01:04] Two points If, if our listeners can remember what famous TV show character. From the eighties came up with that line.

[00:01:12] Lloyd Metz: Just put it in the, the LinkedIn when the episode drops, right?

[00:01:16] Sean Mooney: We'll add it to the notes. We'll give a hint. His name is Norm. Okay. That's a big

[00:01:21] Lloyd Metz: hint, Sean. That's a big hint.

[00:01:23] Sean Mooney: That's still not gonna hit with most of the audience, so

[00:01:26] Lloyd Metz: Well, what, let's see, let's see.

[00:01:28] You sit in a pretty unique position at Blue. Part of reason why we working with colleagues, you have a lot of. The trends that are currently underway with private equity, right? And maybe even some of your non-private equity clients. What are you seeing in terms of what people are doing? What services are they asking you to help them find?

[00:01:53] What are you seeing at BluWave?

[00:01:55] Sean Mooney: It's a great question. I always kind of pinch myself. It's pretty fascinating here because you get to see thousands of kind of projects coming in from literally the best business builders in the world. So you all right. So it's a case study a day, and we're always like, every week we'll go through and we'll look at all the patterns and see how they change from time to time.

[00:02:15] And at the quarterly period we then pull the lens way up and we take all of the project activity and we turn 'em into charts and are able to tell the stories of the best business builders. And so this is kind of like the really, like the key pivot point of one of the, I think most exciting times in commercial history.

[00:02:34] So, yeah, I'd love to talk about this and similarly see what you all are seeing. And so maybe I'd suggest Lloyd and Doug, what do you think about, maybe we break it up by what's happening in kind of due diligence, which is the kind of the assessment phase, and then value creation once you own the business, what people are doing, kind of the cutting edge.

[00:02:52] Doug McCormick: I think that'd be awesome. And also just maybe a commentary on how you think about markets, whether it be an end market or a business model, and how activity levels are. Being influenced by the current turmoil.

[00:03:06] Sean Mooney: And maybe what we'll do is it's gonna be interesting even to break it up before April 2nd, 2025 and after.

[00:03:13] And so I think there's some kind of new world prior world stuff and a kind of a pause in between this really quickly turning into kind of a sigh and I get back to action versus kind of like a fetal position kind of thing.

[00:03:26] Lloyd Metz: Interesting. And then I would love to also hear your perspective, Sean, because you've been in the business for some time.

[00:03:32] Backing away from just the current period we're in, how have some of these diligence approaches and value creation approaches, what have you seen the trend be over several years? If you can even remember pre covid, that'd be helpful. I'd be curious to hear that.

[00:03:48] Sean Mooney: Yeah, absolutely. And so maybe what we can do is just kind of set the stage and so if.

[00:03:55] The business, I'd have to pull up maybe some of the prior data, but I can anecdotally kind of remember going back to 2018, maybe 55% of the projects that people would call us for were about value creation versus due diligence. And so what we do is we frame every request from a PE firm. Is this for due diligence before you make the investment or is it for value creation?

[00:04:19] So what you're gonna do after, and if you draw kind of a statistical line. Let's say it was 55% was value creation in 2018, kind of prior to covid in a seemingly a world of a far, far away, right? You know, a long time ago today, if we looked at our first quarter, 2025 data, 75% of the projects were value creation.

[00:04:42] And so the biggest trend in PE, I think reflects the competitive intensity of the industry in that there's more private equity out there competing for the same supply of deals. And so you could either accept lower returns or what we really see is people say we're gonna do more to create value. And so if I were to go back to my prior self when I was in pe in the early innings, like in the early two thousands, my value creation plan was upgrade the accounting system and add a salesperson and maybe do a Q of E.

[00:05:13] And it's just light year is different from that now. And every year it's more and more and more. I think that's why one of the big reasons why private equity is such a huge driver of the economy right now because it's compelled to do innovation in ways it never was, and now that it has huge kind of societal benefits for our economy.

[00:05:31] Doug McCormick: One question, I'm just curious, as you think about it over time, so obviously big focus on value creation, is most of that work coming right up front when sponsors are doing a deal or are you seeing that. Accommodating of exit sponsors are kind of digging back in and doing resets at year three or four because they realize they're gonna be in for the long haul.

[00:05:53] Sean Mooney: Yeah, I think it's yes and yes. And so one, and we can talk about this. I think so much of diligence today is about informing the value creation plan. So it used to be, I would, my former self kind of trust, but verify the seller would make these representations. We would hire very capable people to help us say, yes, this is true, or this is not true.

[00:06:12] Like. Your, my investment thesis was really like true or not true, or not true or not, and then you'd make a decision. Today what we're seeing is that the tools that are being used are about, is it true trust but verify, and now what can we do that no one else thinks or knows you can do to create alpha, create incremental value beyond what people ordinarily can see and understand.

[00:06:34] And so one, they're building it in. Two, we see PE firms take action right out of the gates. It used to be we would kind of let people ease in and then you would kind of make sure you understood the business. So people are launching because in a three to five year hold, you gotta almost like it used to be to a kitchen or a bathroom, and now you're reading into the whole house.

[00:06:53] You gotta get so much done now. And then I think what we see, and you see a lot of that right now as holds have been extended around three or four years. If the business isn't what it needs to be. Then it's a whole new application saying, okay, we're gonna have to do things differently 'cause we're not just gonna accept kind of mediocrity.

[00:07:14] We're in the excellence business and we're gonna will this company to get there. And more often than not, you all do get it there, but there's a kind of a mid cycle if they're not gonna get there, where we see everyone redoubling down and there's been a lot of that the last couple years.

[00:07:28] Lloyd Metz: Sean, just curious, do you actually get to see any of the results?

[00:07:35] Your clients.

[00:07:37] Sean Mooney: So we're really careful about confidentiality. The way that it happens is a PE firm comes to us and we take them through a scorecarding process to help really frame their need. We feed this into an AI engine that is really pretty cool. It's, it's doing a whole lot of things that at work in concert with our humans, we've created kind of more of a cyborg than a person or a robot.

[00:07:58] They gotta work together. But what's really key to that is we will get quals from the service providers that delineate the outcomes from all of these things that they're doing on behalf of the industry. And so not only do we see kind of what the capabilities are from the service providers, but we understand like how they're actually tangibly driving outcomes.

[00:08:19] Now, we might not tie it exactly back or certainly share that from a like a disclosure perspective. You are in the outcomes business. So that's something that we're in as well, is knowing the consciousness of the service providers before you call us. So we know that they're really good at this subset of this subset of this need, this industry within this budget, within this timeframe with these people who did it, and here's what the outcome was.

[00:08:43] So we do, and that's what informs the matches that we make in kind of like this hyper fast process.

[00:08:50] Lloyd Metz: Is that an answer to it? What I was wondering, and I don't know if Doug, you have any perspective on this, but I was intrigued by your comment, Sean, that year three or four, if the company's not where it needs to be, meaning we haven't been able to exit, it must be mediocre or is likely to be mediocre, so we need to do something more.

[00:09:10] That comment struck me and so that's what prompted my question. Just do you have any visibility into seeing what services, what areas, what functions? Your clients are targeting in years three and four to get those sort of middling performing companies leveled up?

[00:09:31] Sean Mooney: It's a really good question. I've never done this study on it.

[00:09:34] We should though. I'll put that as a use case for us later. It's like, what are people doing? But we can tie everything to everything. But anecdotally, I can tell you, and maybe let's work towards that and it might be better as like, let's kind of go through the process. And then we can talk about like what do people do in years 3, 4, 5?

[00:09:51] And because there are some things Absolutely. That they do. Maybe what I'd say is, let's start with due diligence. The Holy Trinity of private equity diligence has always been, we're gonna do a quality of earnings. We're gonna test the accounting, we're going to look at the insurance, and then we're gonna do legal.

[00:10:06] Right? And so that's always been the big three. And so I don't know that we need to touch those. Then two of the things that used to be firmly in the, not must have, but kind of high need to have, and now kind of compulsory category coming up are tech diligence and market studies, commercial due diligence.

[00:10:29] If we take the tech diligence, what it used to be, when I would use it back in the day, it was someone go in there, make sure we're paying for the right Microsoft licenses, and that there's like. Antivirus software on the computer, and please tell me there's not a server and a overheated closet. So that was kind of what it is.

[00:10:50] And by now, I think most companies have kind of transitioned to the cloud or will, and really it's, yes. Are they compliant with the software obligations that they've had? It's, yes. They don't have a server in the closet anymore. And really what it's moved towards is do they have software? Almost every company does.

[00:11:10] If they do have software, is it organized and notated and secure? And can they legally use it if they've kind of patchwork, quilted all these software that's available on different boards and then suddenly they're not allowed to use it. So people are looking at that in a different way because software's everywhere.

[00:11:26] Two, cybersecurity is much more intense for good reason, right? That's wipe out risk now. And then three, what's coming up very quickly and here now is what are our data assets? Are they secure? And if they're secure, are they able to be visualized? If they're able to be visualized, are we analyzing them? And then what can we do from an AI application standpoint to drive synthesis speed and efficiencies?

[00:11:49] So the AI streams are being brought in very rapidly and often now we're getting into the trust, but verified because everyone now says they're an AI business. No, I think you're a business. Like, no, we're an.

[00:12:06] Doug McCormick: In many cases, it's really an opportunity assessment where people are saying, here's the business model. What is the art of the possible in terms of how I may employ AI to dramatically change an outcome there? Is that the way I think about it,

[00:12:18] Sean Mooney: it's a hundred percent. It's a little bit of both, right?

[00:12:21] Because they also wanna see are the foundations there? Is the stuff we have protected, and if you can't protect the house, then why have it two? It's like, do they have the data organized? Because if you don't have your data organized and you're not maintaining it like a machine. Then it's garbage in, garbage out, and you can't do any of this really cool stuff.

[00:12:37] And that's the unsexy stuff that no one wants to deal with, particularly in most organizations. But if you're not maintaining your, whether it's your marketing data, your sales data, your product, your SKUs, you can't do any of the fun stuff that gets started to get really kind of put to really cool kind of applications right now.

[00:12:54] And then it's like, okay, now what can we do to build an alpha, oh, you have a call center? Well, we can really drive savings. Most people are these days are kind of keeping even the number of people they have in their call center, but they're saying instead of a 10 minute wait time, it's a ten second wait time.

[00:13:10] So our customer satisfaction's going way up. As we grow though, we don't have to add any more people to our call center. Some people say you don't even need to have it anymore. So it's embracing kind of where the world's going. But you're right, it's opportunity identification as much as like. You have the basics in place.

[00:13:27] This episode is brought to you today 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, 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.

[00:14:01] Now back to the episode.

[00:14:05] Lloyd Metz: Yeah, the, the commercial diligence. You're right. It has been a, a mainstay of diligence over time. We've always tried to push harder to get more opportunity assessment and value creation opportunities identified in the commercial diligence work that we've commissioned. And so just always curious about what's the state of the art in commercial diligence today versus five years ago versus 10 years ago.

[00:14:35] Sean Mooney: And we define commercial diligence. There's a number of components, and please kind of dial me in here, but first it's what is the size of the market that this company plays in? And most people will get a deck from an investment banker that says they participate in a $50 trillion market that is growing 50% per year.

[00:14:54] And you're like, what? No. Well, what about the part that, well, actually, they serve a $20 million segment that's flat. And so it's using these really excellent market strategy firms that can say what is actually the market they serve? How big is it and what is it really growing at that's addressable for this company, not just the total possible market.

[00:15:16] And that's probably where a lot of it kind of began and end several years ago. What's the size of the market? And then where it progressed was, okay, how does our company play in that market? What is their market share? Then how has that been changing over time? Because really what matters also is like, are you getting market share?

[00:15:32] Are you losing market share? Are you accelerating in that or are you decelerating in that? So much of the story is told there and now that's kind of part of the story as well that people have been doing for a while. And then what you say is, well, the next kind of module that you add on top of that is like, well, what do our customers really think?

[00:15:48] And so they'll add a voice of the customer study where you're calling 50 customers. And then you can get a real good sense of, do the customers like this company, are they gonna do more business with them? Are they gonna do less business with them? Are they gonna churn? What do they want? Do you have the ability to increase prices?

[00:16:03] Are you gonna have to decrease prices? In some ways, I think that's the most valuable part of all of it. It's like, what do your customers think about this company? But then that starts informing what's coming up next is people are building and what's our growth strategy? Can you validate that the company can grow the way that they're saying they're growing in these markets?

[00:16:21] And then most importantly, what are some of the ways that we can grow this company that no one knows about? That gives us edge, right? We're now looking at this platform and Acme investment Bankers are selling as a 10% growth company. We actually know it's gonna be a 20% growth company, so I can pay a market clearing price.

[00:16:39] Well, fundamentally, I'm paying less than everyone else. No one else knows it. I've created Alpha, and so that's where I think the Edge is like now. It's the real thing is like what can this company be versus what it is.

[00:16:50] Doug McCormick: Yeah, Sean, I think back to your point about like parts of diligence that are table stakes and then parts of diligence that are cutting edge and evolving.

[00:16:57] I think that one you just highlighted in terms of what it can be. I think everybody's always has the thesis around that, but I think very few people are actually investing the hard dollars to have the tangible plan. By the time we close, people talk about the hundred day plan, the six month plan, but it's kind hard to be informed enough about the industry and the business to have that all baked day one.

[00:17:19] But I do think that's like kind of the next frontier of where people are spending time. It's also the one that's the hardest to underwrite and the one that's hardest to drive accountability with the team and both investment team and management team, because then you gotta operate in a world that's changing rapidly and it's hard to figure out like where, where does attribution reside?

[00:17:38] But I agree with you. I think that's really exciting and compelling.

[00:17:42] Sean Mooney: Yeah, and I think where a lot of this is going, there's, we would talk about the a hundred day plan, but I think really are coming up. We need a thousand day plan. What are we gonna do for the first three years? But I think to your point, Doug, it's a really good one in that this is our strong hypothesis.

[00:17:55] What's gonna work, we're gonna hit the gas, but we're also prepared to do lefts and rights and break and gas and break. It's kind of like the OODA loops that we've talked about with Colonel John Boyd. Right? It's like you're gonna constantly being the, going through this observation orientation decision action loop, but we're heading outta the gates fast.

[00:18:13] But I still think it's like, as you look back on this, probably like every deal I did when I was in PE and you know, even here, like every time I dare to look back, we get to where we thought we'd be for very different reasons than our original hypothesis was. But it's like you gotta, you're taking that first step and we're gonna be going.

[00:18:29] I think that's part of it is like, it used to take me six months to get to that point after we owned it and it's like, how do you move that six months forward and all the lessons learned. So that by the time you're at two years, you're really where you would've been. Maybe it was two and a half years.

[00:18:43] Now you're there at two years. It's this kind of speed of alpha per hour kind of concept that people are thinking about. The only other life hack I'll say on the market study thing, beware of like the big name generalist or just the generalist in general, because what happens now in the investment banking world is they hire a sell side market study group that's included in the data room.

[00:19:04] That sell side group goes to one of two expert networks, maybe three. Those two or three expert networks all get the same people. And so they get the experts from like three or four of the same people. And then a private equity firm will hire the generalist buy-side group that then calls those exact same expert networks who then talk to the exact same three to five experts to inform the deck.

[00:19:27] And so what everyone gets is they think they're getting alpha, but they're getting beta. If you take it down to the primary sources, they're often the same. Really look for the groups that like live and breathe in those areas and are like in the strategics boardrooms or maybe had done the buy side or the sell side study for that company four years ago.

[00:19:44] And they can see Doug, to your point, like how it really turned out. And so that's what you really want is like you constantly in search of alpha. You don't want what the market gets. You want that extra edge. And so that would be just the only kind of like little nugget I've learned from the seat here is like, oh, that's what's really happening once you see behind the curtain and see who Oz is.

[00:20:03] Doug McCormick: I wanna deep dive on that just a little bit. A couple things. First of all, I generally feel like the market studies are kind of static documents and they're, they do a good job of like, okay, what's the market, what's the demand driver, who the competition is? But to me it's kind of like I'm struggling to figure out how I would see Alpha in that report that really meaningfully influences the way I behave.

[00:20:28] To me, alphas more like everybody else projected. But it did. Why something very different. And I'd be surprised that like the big shops are actually basing a lot of their observations on a couple of network experts. I was hoping there was a better, better source of information, better thinking.

[00:20:48] Lloyd Metz: Well, to that point, Doug, Sean, you mentioned a voice of customer work and calling 50 customers.

[00:20:54] I've seen a lot of proposals that are not calling anywhere near 50 customers. It's 10 or 12, and so unclear how some of these consulting firms are getting a broad enough survey, whether it's through expert networks to develop their industry market insights or voice of customer work. You're right, there is a material risk that you wind up landing on the same quote, unquote experts for both the buy and sell side.

[00:21:20] Sean Mooney: When you see eight to 10, they're calling the same two expert networks on both sides, to your point. So, and I think that's the thing that people have to get comfortable with. You have to be prepared to spend a little more to get that, like deeper customer insight. And then the other thing I ask for is like, we did this in, in the prior world too.

[00:21:36] 'cause we had more of a consulting background. It's like, tell me, you wanna see the notes that the associates took from those calls, like the actual raw primary data. And so that's another thing that you can ask for to get more of a feel for the data for your teams, like what's really going on there. And like you don't want to have it distilled into a directionally correct line that shows up in a pretty PowerPoint.

[00:21:57] That's another thing that's like, how do you just get more sense for it? But the other thing is like so often they just will do the study on the existing addressable markets, but he put it to him as part of this voice of the customer as part of this other work. We're the adjacent markets where we have some anchor of existing customers and or existing products versus new and new on the other side that we can move to the right or left on without making a huge leap of faith.

[00:22:24] Lloyd Metz: That's right, where you have the right to play and the right to earn that business. The good reports with the voice of customer address that I've seen, not as often as I'd like, but a voice of customer report where it's. Are they happy, engaged, almost like promoters, like the net promoter score, or are they reluctant customers?

[00:22:47] Right. They're disgruntled. They're less than thrilled. So if they were given a better alternative, they take it in a heartbeat. Right. That has also been a useful in some of this voice of customer. I rather have both in a report I commission.

[00:23:02] Sean Mooney: I think it's absolutely right and and hold 'em accountable for that.

[00:23:05] And so much is about setting the expectations. Like here's what I want and what I need as part of this product. In some ways, the squeaky wheel gets the grease, right? You gotta say, this is exactly what I want. So I think that's a great point. So that's a product that's I think becoming very, very standard, but even it is evolving a lot.

[00:23:24] Right? The other thing I would even say to that is like, I used to way back in the days when I had brown hair. And not too long ago, like you would go to these places that would give you these high level syndicated reports. You'd pay like a thousand bucks for this report. Like as a vp, I would, and then I'm looking for this one chart to go on our deck, and then you realize the whole report is so disappointing and I just have this one chart to show for it.

[00:23:48] I think so much of this now is like the deep research products that are coming out of chat. GPT and Gemini are gonna really displace those groups, and so I wouldn't make an investment on it. Those early work streams where you're paying a thousand bucks to the, with the companies we need just to get a crummy chart, I think that starts going away and then you, you'll finally test it later when you have more conviction and you hire the commercial diligence groups where judgment is really key.

[00:24:15] I do think like some of the earlier streams, while you're gaining conviction where the stakes aren't quite as high yet, you're gonna be able to use some of these large language model tools to really accelerate what you're doing and then also even kind of save you some bucks. I don't know why I would trust it though, like when I'm getting ready to stroke a multimillion dollar check.

[00:24:33] Buying a company though.

[00:24:34] Doug McCormick: Yeah. Great way to get started though.

[00:24:36] Sean Mooney: Yeah. And so it'll be like your associates best friends, right? And then, but then you gotta trust by verified stuff. Don't enter into a binding LOI. And then the only other thing I would bring up that's really cool and diligence that is very different now than pre covid is the concept of digital due diligence.

[00:24:54] And this captures things that no other product does. So what they're doing is it's usually a group that used to be, or has a, maybe like a superhero version of like a digital advertising agency where they can kind of move quickly. And what they're doing is they're looking at all the digital signals of both your target and their competitors.

[00:25:15] And this is your website traffic, looking at measures of leads. Looking at who's buying paid search. It's a huge thing. So many people do not know they have huge competitors in their market and they know that because they're paying Google a bajillion dollars and they're starting to edge in and really encroach on your, your target and they don't even know it.

[00:25:36] And then out of those leading to conversions to the website, are they staying time in their website? Are they bouncing? The whole world used to be sales was 80% and marketing was 20%. That's gotten flip in so many industries now, and so will tell. By the time a customer calls your companies, now they're down to their final two.

[00:25:54] And so you've gotta really understand what's going on in the digital world. And this is particularly important with a B2C or a B two, many B company. 'cause then you can even do like local analysis, anything multi-location, residential services. But even, I just think any company can benefit from these.

[00:26:13] They're not that expensive. You can kind of buy 'em in a modular way. It tells you something that is so critical to where the world already is and is going that none of those other products will tell you.

[00:26:24] Lloyd Metz: That's a good suggestion. And just reflecting on some of our portfolio companies, some of the newer ones and some of the ones that have been in portfolio a few years, we've gotten a lot better at the digital diligence, the tech diligence, the systems diligence, ERP implementation, and then next level we have to get.

[00:26:44] Folks on the page with organizing their data, right? Because otherwise you aren't able to take advantage of some of these neat tools. Yep.

[00:26:52] Sean Mooney: And I think the other thing that's gonna happen in PE with the organizing the data, we're increasingly seeing people either train up their associates or get someone on staff who understands things like SQL and Python.

[00:27:04] I'm sure you're seeing this in some ways, what sellers are doing is just putting so much data because it's requested, but it's almost overwhelming. And you just can't cut through it with Excel as easily. And so we'll see groups that will either kind of rent a data visualization group to just go into the data room and cut it all into pieces form or get someone on the team who can really just make use of it, visualize it, run more advanced statistical analysis.

[00:27:29] That's another area where I think the future of kind of like deal teams are going. Say

[00:27:33] Lloyd Metz: more about that. What? What do you mean They have a data visualization person go into the data room and cut it up into chunks. What does that mean?

[00:27:42] Sean Mooney: Yeah, so particularly with customer and product, the classic unit volume, revenue, profitability by customer, right?

[00:27:51] Product by segment. There's more and more and more data that's getting dumped into data rooms, and so they'll get someone like, Hey, can you come in and just really do some very quick. Advanced churn statistics cohort growth analyses, lifetime value of the customer, customer acquisition cost, and really kind of cut through this data in a really kind of beautiful way.

[00:28:12] But not only give me the answer, but show me what it looks like. 'cause so often, like the trends in a, even as simple as like Power BI or Tableau, they really pop off so much, at least to me. You can see things very quickly and then you say, well, look at that part, and then you pull the onion back and then not look at that.

[00:28:30] And then now it's like, now run a regression and show me if there's actually a correlation associated with this trend that I'm seeing. So I think data science is another big thing that you can lean into to get. It used to be more like you can just look at the pictures. Now you can have a number that says, yeah, this is correlated with that.

[00:28:47] Does that make sense?

[00:28:48] Lloyd Metz: Yeah. I thought that's what associates were for though. No. Yeah. True.

[00:28:53] Sean Mooney: But they've learned Excel. They haven't learned SQL and Python. It's interesting here, so we have one of our. Data analytics folks here just teach tons of people SQL in our company. And so particularly unlike marketing, so they can start querying our databases and doing itself in parts because we had like a line out the door from our BI lead.

[00:29:11] And so if you kind of like teach in the fish a little bit, and my sense is that's, that's a bridge, so as I even hear myself talk about it, a lot of this will just be, you're gonna be able to. Hey, tell me if there's any correlation here in this data set and it'll do it itself. And that stuff is just coming out like right now.

[00:29:28] Maybe we talked about the office of the CFO later. There's some really, really cool stuff that's coming up.

[00:29:34] Doug McCormick: Hey, Sean, as you think about like this evolution that you're kind of outlining, I'm curious, and we had Michael Allen on last episode talking about his view on the

[00:29:46] are. Spending money on trying to figure out what is gonna happen in a situation like that versus the implications of what is happening, which are manifesting themselves in in operational needs.

[00:29:58] Sean Mooney: It's a really good question. What I would say is, we've seen waves of this before, and so Trump won. We saw a lot of people go from China, one to China, plus one to many, even where we're going to China, zero.

[00:30:11] And so I think a lot of people have kind of taken action on this. To a certain degree during the first go around of Trump, second Trump go around. Starting last year, we started seeing a lot of demand for procurement groups. People could come in and say, where are our supply chains in China in particular?

[00:30:28] How do we start moving it even further away? What we saw this last go around is I don't think anyone really foresaw how broad it was going to be. People thought they were safe in Vietnam and Cambodia and Thailand for their supply chains, or even in India. And then that kind of got thrown off the table.

[00:30:46] So now we're getting tons of demand for really sophisticated groups that specialize in tariffs. They're forming war rooms, and we're gonna move you here. We have an advanced notice as to where these treaties we think are gonna be formed. We're gonna do things like bonded warehouses, so there's things that you can kind of buy time on.

[00:31:04] You put your products in bonded warehouses. You don't have to pay tariffs until they actually leave the warehouse. There's things that you can set up. Free trade zones. So if you have something that comes into the US is not sold in the US but you, then you sell it to Europe, you don't have to pay the tariffs.

[00:31:18] So there are tactics that our people are implementing if they haven't already, that will kind of futureproof them a little bit. And then right now everyone is spending tons of money, like on logistics groups. Now we gotta move all this stuff. And by the way, the Panama Canal isn't exactly a sure thing these days either.

[00:31:36] So what's our plan B if that becomes politicized more? And then the flip side to all of this that we've talked about previously is if you have a manufacturing facility and your supply chain has been fortified, the world's your oyster. So they're all getting sold out. And so they're like, how do I create more capacity without having to buy a bunch of equipment?

[00:31:58] So like the Lean six Sigma groups that can kind of U-shape sell and, and do single piece flow and really kind of create something out of nothing by just reorganizing the way you do things. They're starting to get busy on the same side, we're seeing, okay, how do we get our sales teams ready to sell this out?

[00:32:16] So Salesforce effectiveness groups are being used right now. And then as everyone can appreciate, the pricing strategy groups are getting used like crazy again, where we have to decide, okay, can we pass through these tariffs? And Doug, I think some of the points that you made in some of our pre obvious conversations, well, do we actually wanna lower prices and just take all the share?

[00:32:35] You know, that's like the real provocative, like how do you turn this into opportunity?

[00:32:39] Doug McCormick: I. And it sounds like at this point people are rapidly already moving into execution phase. It's like you're gonna need to be able to have the capabilities to navigate volatility regardless of how the volatility manifests itself.

[00:32:50] So people are moving in those capabilities. Interesting.

[00:32:54] Sean Mooney: It's real interesting. So every time we see a period like this disruptive, it's, and we've talked about the OODA loops before. I think it's just such an elegantly simple concept. We always see like a period of pause. And in Covid it was like three weeks.

[00:33:08] From my perspective as like a white knuckler. 'cause like we just went to zero, we like bounced off the bottom and then people came roaring back on pe And then the SVB kind of the walk on the banks occurred and it got really quiet. But this time it was like maybe two weeks. So with the tariffs it was one week, it got really quiet and then everyone like, so our volumes and the activity levels are pretty much exactly where they were before April 2nd.

[00:33:37] I think there's this, just this really strong bias to action in your worlds where it's like, we're gonna take a look, we're gonna form a hypothesis, we're gonna take action. We're not gonna just go running in the tunnels and see if it's a train or a light at the end, but we're gonna get it. And then we're just gonna move forward.

[00:33:52] Be like, be a buffalo, like go through the storm. So I've mixed like seven metaphors there. Lloyd low. Yeah, you kind of did actually

[00:33:59] Lloyd Metz: I was, I was keeping track. I I was writing them down. I think we

[00:34:01] Sean Mooney: gotta do a metaphor account.

[00:34:04] Lloyd Metz: I got a couple more in me Buffalo's through the storm. I still like that one.

[00:34:09] Sean Mooney: We hired a new CFO recently and he's bringing all new metaphors for me.

[00:34:12] So like, I'm feeling refreshed.

[00:34:14] Doug McCormick: Let's go down that path just a little bit. The c

[00:34:20] but also like how.

[00:34:23] Sean Mooney: Well, let's talk about that. When you say diligence, what do you mean? In terms of the office of the CFO,

[00:34:28] Doug McCormick: how much overlap is there? Like a lot of times we see the CFO is not head of m and a or at least head of the finance function. That's like coordinating financing the deal, facilitating the diligence so that they can report the financials, et cetera.

[00:34:42] Sean Mooney: It's great question. So maybe earlier in the time, the idea was we're gonna put in one of three well-known ERP systems, NetSuite. Sage plus one right in our port coast. And it was the idea that NetSuite, these systems of record, were gonna be kind of these conveyors of truth. And what I think a lot of us have found is that they're really good.

[00:35:08] They're built to be rigid because structure and safety and security are of paramount importance. But a lot of stuff just gets kind of like stuck inside them. And so the first thing is, is you go about not only diligence, but also. I think insights is there's these add-on tools that are emerging. We're actually trying two of them at the same time right now, and in a subsequent episode I can tell you how they go.

[00:35:31] What we're finding out is what they're enabling us to have, as you think about it from terms of your portfolio companies, is we essentially right now have the data room at our fingers tip and ready to hit go, and infinitely kind of iterate when you get the same question 50 different times at the push of a button.

[00:35:50] And it just goes into NetSuite. And we actually move NetSuite and other data into Snowflake, which is just a broader relational database that has APIs into every system you have. So we have all our information in one, and then this system's able to pull it out, and then we can do kind of infinite iterations for either future diligence requests on someone who hopes to invest in us.

[00:36:12] But really just to drive our business, I just go to our CFO and say, Hey, can you do me this? And then like 10 seconds later, it's like, boop. Whoa, how'd you do that? And now he's daring to actually train me to do it. I'm like, oh, I don't know about that. That's gonna be trouble. I'm gonna make bad decisions.

[00:36:27] But what's coming up right next to this is automated fp and a, so you can query it. And so you have the data, you can iterate it, and then you can ask a questions like, Hey, give me the MDNA. And they'll go, oh, your revenue went up because of this customer and that customer, and your expenses were up this because of that.

[00:36:44] But actually, this thing went down. This is the second one we're trialing right now. Damned if it doesn't work. And so what does that mean for us? The modestly to moderately expensive fp and a person in our budget for later this year is no longer in our budget. We were talking with our team today. It's like our office of the CFO team will probably be the same size when we're four times bigger.

[00:37:06] Lloyd Metz: I was gonna ask you, Sean, how large is your office of the CFO organization Today?

[00:37:12] Sean Mooney: The team is about five A-C-F-O-A controller, two rev people. Really for us, that's the complexity of us, one on each side of our ecosystem. And then we have a staff account. And so the more interesting thing is you think about revenue, where our business is complex 'cause we're interfacing with all these different groups that our business is powered like a marketplace where we get a percentage of the economic of a transaction.

[00:37:36] And so we have all these different ways that we could be paid or paid. And so we're putting in a tool right now. That is able to look at every different type of invoice or MSA or any kind of way that they agree to the agreement that they have with their customers. And through ai it ingests the whole thing.

[00:37:54] And to me it's like magic. Our CFO can tell you how it works. It is able to put everything into our exact way. We want to have it added into our ERP system and it's, I think we're saving 80 hours a week.

[00:38:07] Lloyd Metz: It's crazy. How long did it take you to. Develop that feature or is it purely off the shelf?

[00:38:14] Sean Mooney: It's off the shelf and it's about a month to implement it, maybe two.

[00:38:18] And so it takes some work. It's not plug and play, but it, you think about the most complex part of our business was made outta magic. Now that's not to say you just let it, you still have to check it and you have to do the work. It was like the, the reading of the contract, the reading of our terms, the putting it into our ERP system, then checking it, everything in advance of the checking, it has been eliminated.

[00:38:45] We're about as complex of environments as you can get, and so for most companies where you have like reams and reams of people doing that by hand still today, that's a huge opportunity. And particularly like you all, they're investing in lower middle market companies that are more like race boats.

[00:39:01] You're gonna be able to grow your businesses, whether it's in your office of CFO, or whether it's in your other elements of your business, at a fraction of the cost of resource that they were before. That's why the companies that dare to run towards this stuff, the world's your oyster because like you're gonna need so much less input for each unit of output that you're attacking.

[00:39:22] Lloyd Metz: Those are great examples. Thank you.

[00:39:30] Doug McCormick: Having a business that's kind of forward leaning technology solutions based and it's been a journey for you, how do guys like Lloyd and I develop that skill set amongst our finance teams at the portfolio companies, which are generally in a very, a much more, I'll speak for myself, main street focused type businesses.

[00:39:49] How do you think about upskilling those talents and support that evolution?

[00:39:55] Sean Mooney: I think for you all where there's a will, there's a way, and I think part of the biggest thing that's gonna be required for you all is probably more prescription of like, we need to do this and change management at the portfolio company levels.

[00:40:09] Because if they don't do it, they're gonna be inherently uncompetitive with the rest of those who do. On the flip side, if they do do it, they're gonna have an edge over everyone. We were just talking about this internally and it's like, how does this happen? It's like part of you just have to have the will.

[00:40:23] To do it. People don't like change, but we gotta run towards it, otherwise we're gonna be left behind. And so the conversations we've had in our company is like, this is supernaturally exciting or existentially scary, depending on how you react to it. It's a bit of like exhilaration and terror all at once.

[00:40:42] And so what we've chosen to do is, we talked about this before. Every new person who joins our team that reads, who Moved My Cheese, it's great book. Every year the whole company reads it together and we talk about. The world is changing and we can either change ahead of it and go get the cheese when it's moved and get fat and happy, which I'm really good at, the fat and happy part, or we can resist it.

[00:41:03] And so I think for you all, the biggest thing is you gotta impart upon your own teams how important this is. And then you can candidly send 'em to us and we'll just stitch 'em up with all the stuff we're skunk working on ourselves. And so I'm in like real life empowered to do all the fun stuff I wish I could do when I was in your seats.

[00:41:21] Because I just constantly like meddle and play with us in terms of like the cool things that we can do. I dunno if that resonates at all.

[00:41:28] Lloyd Metz: It does. It does. It does for me. I'm gonna take you up on what I thought I heard was an offer in that statement. Yeah, no, a hundred percent take you up on that.

[00:41:38] Sean Mooney: We don't need to like squirrel away all this stuff.

[00:41:41] It's so exciting. This is the way I think about it and if you have software teams, it's so exciting. And we've just added some new things. And you have to have ability by the way too. Like what you'll see on these things is like, you're gonna add it in, it's not gonna work. You're gonna take it off. And so we've done that part of it.

[00:41:57] We've been training ourselves with building these AI engines. Like I never really appreciated soccer growing up in Texas, but some ways what I've learned is like the art of like the past back, so you can go and score a goal. And so we've gotten comfortable also. It's like, oh, that didn't work. Take that out.

[00:42:12] Now try again with more knowledge. And that does work. And so. Even one of the tools that we're using in our office, the CFO, we brought in one and the other one's like, well, this is better. And so what we had really have to be also thoughtful about is your contract strategy and these tools so that you can get out of 'em.

[00:42:27] You're not forever locked into, don't lock in anything more than a year and then you try something else. 'cause the period of innovation is so rapid right now. We were going through our data on just in the last month, we have doubled the productivity of our tech dev team. And in the last week we're putting in tools that are allowing us to do literally in minutes, which used to take us weeks and months.

[00:42:49] Lloyd Metz: Wow. Your in-house software developers. Yeah, and our AI team.

[00:42:54] Doug McCormick: So Sean, if I go back to just like the broad diligence discussion we started having, I'm curious how you think about ROI broadly. So there's a couple different ways we could think about that. If you were saying you had precious dollars. What's the highest ROI opportunities that you see out there for sponsors when as they evaluate the portfolio of activities and it's not always, uh, highest ROI wins because sometimes it's risk adjusted.

[00:43:19] What do you see as the things that, like, these may be incremental returns, but they always knock out a solid double, and so I, I highly recommend them. Do you have any broad guidance for people?

[00:43:30] Sean Mooney: By far, the highest, ROI, the cheapest investment, the biggest return is making sure every one of your employees have access to something like.

[00:43:37] Chat, GPT teams, which won't train on your data, they have protections built in, I think it's like 20 bucks a month or something like that. That gives everyone an agent to be an assistant for everyone of your team members, like hands down, number one, ROI. Even from just like writing parts of your decks.

[00:43:54] That whole blank page phenomenon is just like you can't sleep on that. The next thing that I would say within diligence within certain cohorts that I would add for sure is the digital diligence. Particularly with a company where there's large end of products, large end of customers where there's a lot of complexity where you can get a good sense for what's going on.

[00:44:15] And then what I would say is try it and just buy like the smaller modules, the good ones will sell it a la carte. You don't have to do the whole thing like do the I'm from Missouri and try it part. Then the last thing I'd say is like, if you're doing commercial diligence, invest in that next part. Give us our growth strategy that we can hit on.

[00:44:32] The other thing I would do is like take some of your precocious associates who have either have done data science before or knows a little bit to have 'em play with the large data sets and just try to put 'em up in something like Hex, which is a really cool, flexible tool where you can start seeing the power of the visualization stuff.

[00:44:52] You don't have to go and get the PhD data science person at the out of the gates.

[00:44:58] Lloyd Metz: Especially that last part. Yeah, that's great. This has been super helpful, Sean. Thank you for the tutorial. I've taken a lot of notes on this. Lord,

[00:45:08] Doug McCormick: I don't know how you feel about this, but you know, I always feel like the private equity industry is always moving quickly and evolving, and I think that's true, and I think Sean, in some ways you're on the tip of that spear.

[00:45:17] And so as I think about the pace and evolution of what you're seeing, I think that's a precursor to what will come down the.

[00:45:25] Sean Mooney: The only other thing I'd add, like if you think about, we talked about the diligence, like where's the highest ROI for your value creation for your portos? I would say the same thing about chat GPT.

[00:45:34] Don't sleep on security. You don't want 'em putting stuff in there. Even though they say it'll be fine, I still am paranoid on those things. So if you use like chat GPT teams where they explicitly contractually say they won't do it, you can feel it safe. But really the big ROI for your companies right now, particularly the traditional economies are getting started, don't have 'em sleep on.

[00:45:55] Their data strategy, meaning like get your data organized, clean, get it into something like Snowflake, which is really cheap, and then just visualize it for particularly like your sales and marketing teams, put their KPIs up there and show it to everyone. You'll see them get real competitive real fast, and the beauty is you can also then bring that data back to your PE firm and you can see in real time how your pocos are doing.

[00:46:18] And so everyone's talking about the really super like neural networky stuff. The best ROI is like, get the lowest level chat GPTs. You can get some amazing stuff just on YouTube to train up or your Instagram that'll teach you how to do the prompt libraries and then just visualize and gamify your business to do that, and you'll be ahead of like 90% of the people.

[00:46:40] You don't have to like do something too crazy.

[00:46:43] Lloyd Metz: Yeah, that's definitely something to go do. Now I'm fired up. Thank you, Sean.

[00:46:48] Sean Mooney: Yeah, and, and a few guys or other people. I want the people to do the easy button. At the risk of doing a plug, which I don't intend this to be like, there are groups that are really good, that are affordable by lower middle market firms that can get you up the curve super fast.

[00:47:04] So you can spend time on Google, you can ask Chat, EBTI. I wouldn't trust it on that. Or you can just call us and we're free to use. And so there's a lot of exciting stuff. The key thing for everyone is you gotta take that first step. And the next one. Next one. Otherwise, then you're like, oh, we're way behind you.

[00:47:20] Keep up at least by making that first step and then it's real easy to turn it into a jog after that.

[00:47:25] Doug McCormick: Well, Sean, appreciate you sharing. You carried the load on this episode for sure, but it was fun for Lloyd and I to pepper you with questions. So thanks for the discussion.

[00:47:33] Lloyd Metz: Yeah, I'm not sure you were expecting that when you started today, but, uh, no, I certainly enjoyed it.

[00:47:39] Sean Mooney: It was fun. As you, as you all know, I love to tinker with things and so this stuff is like. These are all gadgets that like warm my soul, so I appreciate the opportunity to get all excited, like a little kid talking about 'em.

[00:47:49] Lloyd Metz: Thanks a lot, Sean. Thanks Doug. Good stuff, buddy. Thanks guys.

[00:47:55] Doug McCormick: 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 a.

[00:48:08] Services and distribution companies. Learn more@hciequity.com. ICV Partners an innovative, lower middle market private equity firm supporting management teams of leading companies at the lower end of the middle market. Learn more about IC v@icbpartners.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.

[00:48:42] Learn more about BluWave@BluWave.net. For further information on H-C-I-I-C-V and BluWave and relevant topics discussed during the episode, please see the episode notes or links.

[00:48:56] 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.

[00:49:07] 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.