Private Equity Reflections and Preparations for the Hustle Ahead

[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.

Let's go.

[00:00:37] Sean Mooney: It's great to be back again with Lloyd and Doug. Gentlemen. How are you?

[00:00:42] Lloyd Metz: Hey guys. Good. Doing well. Thanks for asking.

[00:00:46] Sean Mooney: Hello. Hello. All right. Well, we have, I think another awesome episode here today. And it's one that's on the minds of a lot of people in, I think, the world, but particularly in business. And it's really what happens in the world of private equity during summer and the mid year.

So what we're going to do here is just take a little bit of time to explain how the private equity world changes during summer or doesn't, and a little bit about just checking in what we're up to personally. As you try to be kind of a human and reload for the second half stretch. And we'll talk a little bit about what happens the rest of the year.

I don't think a lot of people realize unless you're in private equity, it's a pretty seasonal business. There are chapters to the story each year. They're quite recurring. And so we'll get into some of that. And obviously there's kind of black swans that fly left and right and up and down every day.

There's a repetition of seasonality that occurs. So we'll talk about some of that. Does that sound like a good plan? Absolutely. Good plan. Alright, so let's kick it off. First of all, let's talk about What is summer like in private equity and maybe how does it differ from the spring and the fall?

[00:01:59] Lloyd Metz: I'll just speak for myself.

I can't speak for some of my other peers and colleagues who are at different firms, but I'm having a good summer so far. My older daughter is in college. She came home for the summer. So the band is back together. So from a family personal perspective, having the family all back together, seeing my two daughters kind of reconnect as sisters, that's been pretty cool.

Yeah. Cool. I gotta tell you, that's been the highlight of my summer so far. Now, on the work front, we're busy refinancing companies, working on portfolio issues, launching initiatives. Right? Because when you think about it, you're just now getting your June results, so you have your first half of the year results, and if you're ahead of plan, you're trying to figure

Even exceed where you are now, if you're below plan, you're trying to figure out how to get back on track. And if you're on plan, you want to make sure you don't fall off a plan and you kind of keep things going for the rest of the year. You're also thinking about in the back half of the year to your point, Sean, about seasonality.

There's a fair amount of deal flow opportunities, companies looking for capital companies for sale that come up after Labor Day. And so you're starting to get ready to pursue those businesses, call it July, August. And so you can get quite busy on new deal activity as well. We're also trying to close a couple of efforts, companies that we started pursuing in May, June.

We're trying to bring those to resolution, hopefully sign up new investments in the next month or so and close them out by August. So summer is a lot busier, at least. From where I sit, then you might otherwise think you're not taking a lot of time off and hanging out by the pool for a couple of months.

That, that's not happening

[00:04:05] Sean Mooney: here. So no bonbons and caviar.

[00:04:07] Doug McCormick: So Lloyd, I heard a lot about the work stuff in there, but let's get back to the family. So your eldest daughter comes home, the band's back together. And so have you guys done vacation yet? Are you getting ready to go on vacation?

[00:04:17] Lloyd Metz: Honestly, this year is gonna be tough.

Not our traditional, whatever, one week vacation sort of plan. We're taking some long weekends and we're taking, honestly, just evenings during the week, just walking around the neighborhood, getting dinner together, going for walks or that kind of family time, that's. As good or sometimes better than a proper vacation.

[00:04:43] Doug McCormick: So Lloyd, clearly you've managed your family better than mine. My situation is that vacation is an enticement for my kids to spend time with.

[00:04:53] Lloyd Metz: So Doug, I get that. That's what winter break vacation over the Christmas, New Year's holiday. That's what that's for.

[00:05:01] Sean Mooney: So Doug, how about you? What are you up to this summer?

How's kind of the craze and the motion and commotion of a summer from your lens?

[00:05:08] Doug McCormick: Let's talk personal stuff first. So I've got two mid twenties, late twenties kids, and so I do think the vacations, the feel has become very different, because they're young adults, and so we kind of try to find a cool place to hang out for a week or two, and just make it available to them, and they kind of show up when they can, and they leave when they can.

That's so much fun these days, because like, you get to relive, that age with them and it doesn't feel like a parenting relationship near as much as it does almost like a friendship relationship. So that's fun and it's an interesting way to check in. It just reminds me how fast life moves at that age, how much they learn, how much they change in the matter of one vacation.

That was fun. We spent about a week in Martha's Vineyard this year. We had done Nantucket last summer. That's part of the summer and then my wife and I go try to after all that. And so we're going to spend A week out in Utah here later in the summer. So that's the personal stuff. And when I'm on vacation, I got to read a good John Grisham legal intrigue thriller, whodunit, or a James Patterson.

And I love those books just cause they're so easy to put up. You pick them up, put them up. You can read whenever at your leisure. So that's kind of a nice way to unplug. So that's kind of the personal on the professional. Lloyd, I think you and I are the same, which is like, we're always crying wolf, we're always busy.

I think a lot of that self inflicted probably, but we've got a lot going on and some of it's a byproduct of our strategy, but because we're doing consolidation, there's always something in market we're looking at, but across the portfolio right now, we've got nine things under letter of intent and of those nine, all of them are out on acquisitions, which I think is telling just in the context of where the market is and where the activity is, at least for us.

That's keeping us busy.

[00:07:04] Sean Mooney: That's a great kind of summary of what summer is like in PE and that there's always portfolio work to be done. That's the one constant. There's never enough time to get the most out of the portfolio companies and kind of help them along. And then what the difference is, is the deal market tends to slow down a little bit in the summer.

And it doesn't go away, but it slows down. And for those maybe not as involved in private equity, there's kind of two big seasons. It's always something going on in the new deal market. But there's like, after February, March, when the year end numbers are done, there's a big batch of deals that come to market.

And that stretches through to completion, maybe kind of May, June. And then people start reloading. They start seeing where their portfolio companies are. The second season kind of starts coming to market maybe mid August through September so they can get everything done by year end. And then there's sometimes more of a traditional long in between.

And that lets people take just a moment, gather your breath, and recharge for the sprint ahead. The bigger of the two sprints is almost always in that August through December sprint. Is that kind of a fair way to define it?

[00:08:23] Doug McCormick: It certainly is for me. I know when I was a little kid and even back in college, right after Labor Day, you're back in school and I get that pit in my stomach cause I know I'm going to be working hard.

I get that now. Post Labor Day, like. The light's on and they know it's game on for the rest of the year and it's just a mad dash.

[00:08:41] Lloyd Metz: It's not just a personal feeling, Doug. That's the actual facts of the matter, right? Because you look at Labor Day and you can literally count the days before, as a practical matter, the year ends, right?

You have a bunch of holidays after Labor Day that take up some time, and then people start traveling for the holidays, depending on what part of the country and how the holidays fall during the year, so you don't get all of December, right? It's not just a feeling in your stomach. It's an actual factual thing.

So that's why you start getting prepped and ready in August to go hard after Labor Day.

[00:09:24] Doug McCormick: So I think there's another interesting seasonal aspect of the business in some ways around the portfolio cycle. And at least what I see is you get the deal cycle and then you overlay on top of that. Q4 is a lot about year end reviews, compensation, human capital stuff.

And then for us, Q1 is a lot about, okay, how do we operationalize the budget for the year? So I find Q2 and Q3, As kind of really interesting times to be a little more offensive, less linear in thinking because you're kind of like, I got the plan for the year done. I'm not worried about year end comp and evaluations.

And so it's like, how do I build a business? How do I think about the big projects that are going to really drive the business over the course of the next couple of years? I like Q2, Q3.

[00:10:14] Lloyd Metz: You raise an interesting point that it almost points to a little bit of a, what's your philosophy around approaching portfolio company initiatives?

Yeah. Because you can think, you can plan, you can talk and discuss, but at some point, I think, you need to let your leadership team do and get out of their way, and oftentimes that's the second and third quarter, and sometime toward the end of the third quarter, you start prepping for the next year's budget planning process.

I think it's healthy for both the private equity firm, but more importantly, for the portfolio company that you let the leadership team do their jobs. And I agree with you like that second quarter, maybe even if you can get it done earlier, give them March all the way through. The better part of September to actually go execute, go do, go hire, go grow, go whatever it is, right?

[00:11:13] Doug McCormick: So, Lloyd, you're basically saying the longer I'm away from our portfolio companies, the better they do because the more time they have to actually get work done, and so I should just stay away, right?

[00:11:23] Lloyd Metz: I don't know if I would take it quite that far, Doug. All I'm suggesting is not just you, but me and others, like you have to give some space and time for your Management partners to do their job.

And sometimes you just got to get out of their way and let players make plays.

[00:11:42] Doug McCormick: Totally agree. So let's hear about Sean's exciting summer plan. Yeah, you beat

[00:11:46] Lloyd Metz: me to it.

[00:11:48] Sean Mooney: Oh yeah. It's been bonbons and caviar all summer for me. Just kind of kicking back. It's really interesting as I think about kind of life in PE, and then life as an entrepreneur, and then also overlaying the growth of my kids and growing up.

And so, A, when PE, when it's particularly younger, you're just constantly working. You're trying to prove. And vacations for me is like a VP where they would start at noon, because I'm on calls all morning. And then usually once a vacation, I get on a plane and fly and see a company. That's And then as I was a partner that eased up a little bit but not so much the good news is as an entrepreneur there's less for neticism going on from every direction and so I have a greater ability to plan or I could never plan before when I was in your shoes because you still look at deals in the summer and you can never control that if you get a management seat you're gone.

That didn't matter because the bankers are telling you when it was. So now I can at least carve off some time. And then from a kid's standpoint, I'm a little bit behind you all in that I have a rising senior and a rising freshman. So we have everyone coming, coming into that home stretch. And we're at that point in our lives where we realize, Oh my gosh, we're going to be empty nesters pretty soon.

And so. I'd say the learning potential of the trips and the cultural imposition has gotten better . So before I was like, let's go to Florida and sit on a beach and everything. Now we're like, oh my gosh, these kids have never been to Europe. You know, so we, they don't think, we never take 'em to museums when we go on things.

So we took our summer and we went to London and Amsterdam and it was. A lot of broccoli with cheese on it, meaning like museums and culture and like trying to teach these kids to be real human beings. And by the way, I probably needed it as much as they did. Does that kind of resonate?

[00:13:42] Doug McCormick: Good for you. Those sound like vacations that the kids not only had a good time on, but they'll remember for the rest of their lives.

[00:13:48] Sean Mooney: That's 100 percent right. And then trying to move from the neglectful father of their youth into one who's actually active. And so I'm trying to like totally. redeem myself in these last swing through our house here as I was the young, hard charging, kind of aspiring P. E. professional where it was work, work, work, now I'm trying to be present in their lives and Get a little bit of credit for it.

So they don't resent me in an older age in their life. Well,

[00:14:15] Lloyd Metz: that's the hope. That's the hope, Sean. No guarantees on that one.

[00:14:19] Sean Mooney: Yeah. 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 own 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.

Now back to the episode.

[00:15:01] Doug McCormick: And so, Sean, as you think about like the seasonality, we talked about the seasonality of the deal business. My assumption is though your business pretty closely tracks that because you're ramping up with diligence assignments as people are trying to get things done. Is that right?

[00:15:13] Sean Mooney: It's interesting. So the diligence phase, strangely enough, it's been picking up a lot because I think the deal market is recovering and it's picking up from kind of a low level of activity.

So we've seen diligence activity in ways we haven't seen in like two years. I think it's 30 percent plus up year over year. The value creation stuff. It's really busy, kind of first quarter, second quarter, third quarter, and the deal stuff really picks up kind of the end of the third and the fourth quarter.

So for us, we're always busy, but just in different phases of the deal. And right now also is the time where hope becomes less of a strategy with a lot of the P firms we work with, meaning that I used to call it my three board meeting problem when I was in PE, where you would have one board meeting, you need to identify the issue, you And say, here's what we need to do to fix it.

The second board meeting, like you want to see serious progress. If it's not like getting resolved by the third board meeting, changes had to be made. And so really around this time of year was where we see a lot of changing of recruiting needs and interim needs because the June numbers have come in.

There hasn't been progress made. The first board meeting was the December board meeting. The March board meeting comes in and they're like, team, we got to really make progress or we don't have a choice. We have to do something. And then the March kind of comes in that way. And then June, they're like, all right, we've got to do something.

And then it's at this point in the year where I think a lot of our clients realize that. We have to do something. We have a fiduciary duty here. And if we don't have the team that can do it, we have to make changes. So we get lots of calls for really specialized high grade recruiters and really kind of private equity grade interim executives who are kind of the best of the best so they can keep momentum going.

That's the big change for us in this time of season is like, that's when that phone really starts ringing. And then just as an entrepreneur, it's more of a unilateral focus versus like when I was a PA, you're voting at like 10 portfolio companies and 15 deals that you're looking at any one time. Now it's just knowing that I've got to keep this business growing at a high growth rate always because you can never not be growing.

And so there's that constant pressure that you feel really around one topic. Right. Even though the summer is relatively slower, you've got to be year over year growing substantially versus your benchmarks from the prior year. So as a business, you know, leader and CEO, I constantly feel that pressure to be growing meaningfully above the comparable period in the prior year.

So there's really no let up. It's just a singular focus.

[00:17:52] Lloyd Metz: Do you take the summer then to do some thinking or planning or recalibrate what you're doing during the year?

[00:18:01] Sean Mooney: Yes and no. You always like to say you want to be working, was it working on the business versus in the business and that whole thing where you want to think strategically.

I think the reality is you're constantly in a game of triage between tactics and strategy. I mean, we have a strategy that we're working towards, but I constantly find as a business like we're tweaking things. You're A, B testing, you're testing to see what works and then you're doing more of that within tactical tilts.

The big strategic thrusts really start in probably September, October as we start doing our next year planning. And so really we're still executing pretty substantially on the plan that we're trying to achieve this year, but we're not being beholden to it. There are things that we know are not working and by mid year you say, all right, that's not working.

We're doing a change. And so for in our business, We've seen some things that didn't happen like we thought we would, and we're taking some pretty meaningful action in certain places in the business to kind of shore that up. And so it's almost like a game of whack a mole, where you get something right, and then another thing pops up.

You got to do another one. Your guiding light is still more tactically on what your one year plan was, but we're still not taking an eye necessarily off our three and five year plan, if that makes sense. So. I'd love to say it's much more pure and poetic, but it's always kind of organized triage.

[00:19:26] Lloyd Metz: Got it.

[00:19:27] Sean Mooney: Is that kind of consistent with how you see it in both your lives and, and also your portfolio companies or how does that maybe differ?

[00:19:33] Lloyd Metz: Finding time to think and to pull your head up and to look ahead and try to figure out whether it's with respect to a portfolio company, whether it's respect to, um, Going after investments and building your investment pipeline or people development issues at your own firm.

Finding the time to just kind of step back and think, plan. That's hard. You have to be intentional about making that time and space and a lot of times when I do get time during the summer, whatever, July, August. That's when I try to do it. I'm a paper guy, so I still keep pads of paper nearby to jot down ideas that I want to go unpack or flesh out more, or goals for the back half of the year, or start thinking about 20 next for a portfolio company or what have you.

So that after Labor Day, your plan of action, your mind space. Your thoughts, your ideas are organized as best you can and you're ready to do something about it.

[00:20:39] Doug McCormick: Your comment around, are you working in the business or on the business? I think when it gets really busy, it's increasingly hard to not be working in the business, right?

So especially when there's like a lot of deal activity, I feel like it's important to be engaged and close enough to it that you can have a real informed opinion. The worst is being far from it and having an opinion, right? So you've got to do the work to be. In the flow and be a good thought partner for your deal team members.

I find the time in the summer, because it's a little bit more controlled in terms of there's less things that you have to do reactively around supporting deal activity. If you're disciplined, you can use that time to be working on the business.

[00:21:22] Sean Mooney: One trick and Lloyd, you and I were actually just talking about this before the shows, just like side conversation.

As humans and we're talking about like every once in a while you find yourself where you see a calendar and you see space and you go, Oh my goodness, I've got like an hour and a half open what I'll find myself doing you think about find those moments to think. Is I will then immediately jump on my calendar and I'll just put hold so no one else can put something into my calendar and use that as like this moment of silence to kind of do things.

I don't know if you guys do the same, but it's a rare circumstance. When I do that, it's just like a moment of glee.

[00:22:01] Doug McCormick: I have a general policy where if there's time available, I try to make myself accessible and people would just block in time, but that's dangerous because like next thing you know, like your whole week just got eaten up if you're not careful.

So there's that balance.

[00:22:14] Sean Mooney: And the other sad reality, I don't know if you do this, but in a perfect world, I'd be able to find time and block time, and there's those calendaring methods where you put all the blocks. I, in reality, don't do that, but I aspire someday, maybe. The reality, when I find time to think, it's on the weekends, and I try to be present with the family, but I also try to go on a long walk or get on the treadmill or something.

I'm doing infrared sauna lately, which is like half torture, half like exhilaration. Which I highly recommend. And then the other time I really think is I'm a great thinker at two in the morning staring at the ceiling. I've tried for years and now I'm just coming to accept it.

[00:22:55] Doug McCormick: Good stuff. I like that. Okay.

[00:22:59] Sean Mooney: So I think we've covered kind of like the beauty of summer is it, even though it's not always perfect, you get just a little bit of breath, you reconnect with your family. There's always value creation going on, but the deal market's a little slower. Almost by design within the industry, kind of a natural sequence of events.

But you're starting to toe the line and you realize that the race is about to start in the biggest way. This is the biggest of the races that you have each year in kind of that post labor day world. And so as you think through changing from summer into fall, what really happens next and when does it happen next?

When does this next race begin? How do you think about what happens from kind of like after July through the rest of the year?

[00:23:46] Lloyd Metz: Yeah. And we can talk about that in general. I don't know what you guys think, how you want to approach it, but this is 2024. And so the back half of the year is not the same as other years, right?

There's an election in November in case y'all hadn't heard, right? And so this is going to be a bit unusual, I think, of a year, perhaps. And I guess that's the question is, does that matter? How will it affect animal spirits, as the economists like to say, or how's it going to affect market behavior, lenders, bankers, business owners?

That's I think a question that's starting to run through people's heads this summer.

[00:24:32] Sean Mooney: There's a lot of noise, particularly in this. Period of time that could probably keep all of us up looking at the ceiling at 2 a. m. In terms of, as you point out, the economy and the election cycle. And then just like, will there be capacity for the service providers?

Because they've all kind of wound down on the New Deal side because there hasn't been volume like they used to have. Are the debt markets, are they going to be back? I think there's a lot of things that could cause influence and impact on a normal deal cycle that you are looking at. And we can maybe go into that more, but in kind of a traditional steady state where you maybe take that impact along, generally what kind of happens, particularly I think from the deal side of the market.

[00:25:20] Lloyd Metz: Well, one of the things that you mentioned is Sean, you mentioned lenders. I think right now lenders are open for business for sure. I'm surprised at how willing lenders are to lend to companies that are at the smaller end of the range that we look at, three and a half, four, four and a half times debt to EBITDA in terms of a leverage level.

And the spread, the cost of debt has come down meaningfully enough, right? Where not too long ago last year for lower middle market companies. Spreads over SOFR of 600, 650, 700 were not uncommon. We just refinanced a business with a 375 basis point spread over SOFR. We're getting offers with consistently 400, 450.

It's not going to be the lenders that are standing in the way of getting deals done, or at least at this moment. Hopefully that doesn't change September, October into November, but right now they're Really open for business and enthusiastic. I don't know what you're seeing, Doug. You said you have nine LOIs, so you must see some of this.

[00:26:36] Doug McCormick: I generally feel like it's easy to compare the last cycle and think it's going to replicate itself. And so in my mind, we had COVID, which resulted in an abrupt shutdown of the market. And then Once people figured out like that we could navigate that and interest rates were so low, it became a tremendously robust market.

And then we had a real shock to the system when inflation got so bad and so it ground to a halt. And I kind of feel like we're in an environment now where it's going to just continually heal. The deal market is healing and it's getting more robust, but it's not going to be like that vertical up. And especially in the context of all the uncertainty, I always try to ask myself, as you think about like the election cycle, how does that change your underwriting behavior?

To me, the name of the game is what parts of the market or what parts of your mandate can you make bets that aren't heavily influenced by the One outcome or the other, because to me that parties are offering pretty stark differences in vision that if you're in certain industries, they can have a dramatically different trajectory.

And so to me, those parts of the market are just kind of off limits, but there's 80 percent of the economy where probably not going to be impacted meaningfully either way.

[00:27:58] Sean Mooney: I think those are really good points in terms of framing what's coming up. And the debt market one is something I'd love to kind of double tap on as well in that.

Everyone's had their eye on the Federal Reserve. Are they going to lower rates by 25 basis points, maybe 50? And great. I think that'll be more of a symbolic move by the central bank. If they do it this year, I think they will looking at inflation coming down now. The really important point as you think about the rejuvenation of the deal market, Lloyd, that you made is that the private equity industry has received its stimulus, meaning that the debt markets, the direct lending that support the deal ecosystem, they were pretty much shut down or very inefficient as early as the beginning of this year.

Now it's come down by 300 basis points and the multiples of leverage are one to two points higher. So you think about adding wind to the sales of PE, the PE industry has received. It's stimulus not from the Fed, but from market forces associated with direct lenders who have gotten comfortable with the economy and the risks ahead.

That's something that I think is going to be a huge empower to Doug, to your point, I think you're right. We're going to see a recovery of the deal market, not a tidal wave. As we look at our 2Q private equity insights report, which just basically distills all the project data, we're a hundred percent seeing kind of the bottoming out in the recovery in the deal market.

And so the second quarter of 2022, we saw a 39. 1 percent increase in due diligence project requests, which is a really good leading indicator. Lloyd and Doug, that's when you guys are spending money. It's not the teaser that comes across and everyone peels the onion back one layer and you realize it's rotten inside and you throw it away.

This is where they're like, no, we're going to spend like hundreds of thousands if not millions of dollars on these things. And so that kind of uptick is pretty striking. And then when we look at the fact that we've got seven quarters of GDP growth good enough, we've got inflation going from 9. 1 percent to 3%.

So we're getting into the twos, which gets us back to like 2016 17 kind of level inflation, like in mid twos to high twos. And then unemployment actually kind of intuitively is better because it's higher. You know, the labor markets were so overheated there. Now, I guess if you went from a 2021, they're at 3.

9%. They'd been as low as 3. 4%. Now they're at 4. 1%. And that's kind of where you need to be to have a healthy labor market to actually also help inflation. So I think the preconditions are here for a better deal market that will increasingly get better, but not title. Is that kind of similar to what you all say?

[00:30:45] Lloyd Metz: That's fair. Not looking to debate your Goldilocks economy description, but In the short term for this year, that's probably more likely than not. And so if you're trying to sell a company, it's probably a good setup. If you're trying to buy a company, that's probably a good setup. And what's out of your control is if everybody else is feeling the same way, do a lot of people come back after Labor Day, trying to get deals done all by year end, And then you got to worry about, can I keep the attention of my attorney or my accountants or my due diligence service providers?

But that's a high class problem to have. Usually you figure that one out.

[00:31:32] Sean Mooney: When do you know, like when did the teasers start coming in? And for those new, teaser is like a one to two, maybe three page teaser. Open document that describes a company. Are you interested? And we're, we'll send you a big hundred page deck if you are.

So like, when does that earliest indication start coming in where you're going to start saying, okay, the deal market looks like it's going to be back or backer

[00:31:56] Lloyd Metz: more back.

[00:31:57] Sean Mooney: Yeah.

[00:31:59] Lloyd Metz: What are you seeing, Doug? It feels to me like they're coming in late July into August.

[00:32:06] Doug McCormick: If you're going to

[00:32:06] Lloyd Metz: launch

[00:32:06] Doug McCormick: a deal shortly after Labor Day, you're probably lining up potential buyers and people that are pre qualifying here in August.

I think we're seeing that activity. Hard to say how it translates into transactions, but I certainly think there's a fair amount of pent up demand and, to Sean's comments, a reasonable environment to transact.

[00:32:29] Sean Mooney: And that makes sense to me as well. And it jives with kind of how we see the flow. We typically start getting calls like two to three weeks after you get the deck.

And so if it's a teaser and then three weeks later you get the deck and then people start getting serious. And so what we typically see is people want to like fully launch by Labor Day. So you have time to get a deal done by year end, which is just kind of a natural benchmark. And that changes, particularly if there's tax uncertainty in the next year, then everyone races to Gates.

We don't really have that this year. If you think about it, going back to vacation, the best way I've been able to figure it out is most of the East Coast schools start right around Labor Day or after. And so a lot of the East Coast people take these vacations, particularly in the Northeast in August.

And so it's not a great time to size it because the biggest kind of epicenter of private equity is in the Northeast. There's also Chicago and the West Coast. And DC, but the biggest epicenter is there. And so you don't want to necessarily launch a deal while everyone's on vacation, but you can get the teasers going and then everyone's back and running right after they're recharged.

That's at least the best I could figure out over time.

[00:33:41] Lloyd Metz: That lines up with a lot of my experience in the years where. We were taking family vacations for a week, sometimes two, lots of memories of having those early calls with colleagues, bankers, and even companies in August, trying to get ahead of things.

All

[00:34:00] Sean Mooney: right. So what happens just from here on out? So you get the teaser. Here, this is probably a. Whole different episode, but in terms of the CliffsNotes, you get the teaser, then how does the rest of the year unfold, really for both you from the deal side, but also what you're doing with your porcos?

[00:34:18] Doug McCormick: So Sean, I guess just from a deal side, The teaser is basically an opportunity to prequalify buyers, right?

So you give a little bit of information, none of the too sensitive, create an opportunity for them to ask a few questions. And if they're interested, then they sign an on disclosure agreement. Then you get the book that you referenced, which comes out in a lot of formats. It used to be a book. Now it's more of a PowerPoint or slide deck often.

And that's the basis upon which people do work to either get some kind of preliminary interaction with management or. The base upon which they talk to the banker and submit some kind of indication, indications turn into a down select of some kind that then results in more access to the management team, often in the form of like a management presentation.

And then that usually takes folks into some kind of substantive diligence period that results in an LOI. And so that whole process really can take kind of four months, which is kind of the genesis of how we think about like labor data, closing a transaction before the calendar you're in.

[00:35:20] Sean Mooney: And you've got.

Many of these going on at once, right? Because it's 1 percent at best chance that a deal goes from teaser to close.

[00:35:29] Doug McCormick: Yeah. As you know, you talk about that sequence, there's a lot of investment in resources and firm resources and external resources to figure out if this is a deal that's a good fit for you.

So I think the name of the game for all of us is really aggressive triage. How do you force yourself to either get conviction and decide you're going to spend money? And you've got a decent chance of winning given your assessment of the competitive dynamic versus let it go. And I think that's a really, it's a core competency of any firm is thinking how to manage that process.

And, you know, we talked a lot about being in the business or working in the business or on the business. This is a really interesting part of like firm management because I think deals will take a life of their own if you're not careful. And you just get momentum, you're hanging around, and the next thing you know, you spent a fair amount of money and time without having conviction on, like, is this something I really want to own?

So it's a really interesting part of the business.

[00:36:24] Lloyd Metz: Doug, I think you bring up a great point there, which I personally am trying to get better at and subscribe to no matter what time of year. But I think for this mid year, and as you're approaching this wave of deals, as you described it, Sean, around Labor Day, I think having that mindset is actually even more important, particularly this year where you just need to decide, am I going for owning this business or investing in this business or not?

Because not only is it a use of time and resources, but it's using time and resources in a more crowded part of the year. So that arguably makes it make less sense. I could easily see someone at a firm stepping into Labor Day and saying, if I'm just lukewarm on the set of opportunities in front of me, I'll fold my hand and go back to working on my portfolio companies and make sure that 2025 budget's as good as it can be and product development and Salesforce hiring or whatever it is you need to do at your portfolio company, work on that rather than pursuing a mediocre deal.

[00:37:34] Sean Mooney: It seems to me like, and as I reflect back, that you can always fill 25 hours a day on your portfolio, right? It's something that's always time well spent. And then when you get the, particularly the fall deal rush, everyone goes into overtime and you're at flex capacity because you're looking and trying to make deals happen, but you still have the portfolio things that you can and should work on.

And so I used to, like, literally just tell my wife and kids, like, all right, I'll see you in the last week of December. So like the negligent father, because it was just so frenetic and the pace, and it's been, I think, a little quieter the last couple of years, but I think we're getting back into that more prototypical kind of craze.

In a good way, right? Because that shows that the health of the economy and the deal market is kind of recovered. So, what about the portfolio companies? Like, what do they start doing in the second half of the year? How do you start thinking of them? How do they move from Enabling the plan to executing and then what happens kind of next during this next second half push

[00:38:35] Doug McCormick: one thing I would say about the seasonality.

I think it's more pronounced for bigger assets that are banked by institutional bankers were often doing these consolidation strategies. Many of our targets are smaller and so I find less amplitude in that seasonality in that part of the market. So. In some ways, I'd say our consolidation platforms kind of level loaded throughout the year in terms of that on acquisitions, because we're engaging directly with an entrepreneur, we're pitching them that they should join the team, and so it doesn't seem to follow that cycle exactly.

But having said that, you know, bigger assets, the bigger you get, the more you're likely to play in processes that are likely aligned with the seasonality we talked about. So I think our platforms will be disproportionately busy here this fall in the context of the M& A. And I do think And as you think about like some of the risks that we talk about and not really risks, but like uncertainties around the election and the political climate.

To me, I talked about isolating parts of the market that aren't impacted by that outcome. Being an acquirer with an existing platform, I think gives you a little bit of stability in a way that you're probably better positioned to underwrite some of that volatility.

[00:39:49] Sean Mooney: I think that's an excellent point in that there's kind of the investment bank deal market, but then within consolidations, it's kind of a level loading.

And even that's probably more so even just the lower middle market where you have founder owners that aren't kind of managing unless there's a tax scare like we saw a couple cycles before and then everyone runs to the gates. I think in Canada you saw a lot of that earlier in this year and last year.

So your portcos, the one thing I'd say is they kind of get in, when you get them into like next year planning, do they start kind of like winding down the big strategic lifts And hopefully having executed at certain point in time. How do you think about that? Or is that just always going on?

[00:40:30] Doug McCormick: Lloyd and I have had this conversation before.

I think his team is more disciplined around this. I find we always try to do. Next year planning toward the back half of this year, and it gets crowded out because everybody's so focused on finishing up the year and trying to get everything accomplished. We had hoped to in the calendar year, and so it's almost like we get started on the planning and it rolls over into next year.

And my realistic goal is that we try to approve the budget in the Q1 board meeting where you've got two months of performance under your belt, something like

[00:41:01] Lloyd Metz: that. We've definitely talked about that, Doug, and I think it's best practice if you can get the budget planning to happen in October, November, so that you get it finalized and come Jan one, all your strategies, all your tactics, all your alignment is set and ready to go.

But Doug's right. Most portfolio company teams are trying to finish strong. And so they're focused on execution in September, October, November, and depending on the business, you can even make up ground in December if you need to, or if people are trying to beat budget and. Max out their bonus opportunities.

That's what folks are trying to do. And so budget planning for the next year definitely gets crowded out and that's a tension. I'm still trying to figure out how to get that right. But that's usually what port codes are doing third and fourth quarter.

[00:42:02] Sean Mooney: And in full candor, I'll also from the seat of previously being in your seat, we're like, We got to get it all done by December because if you have a plan, you should be working against your plan in January, not constantly being able to kind of game it and update it.

And then what I found out in real life as well is it's just so much going on. You're racing to get everything you can done for the year. And so I'll profess that our 2024 plan was not marked final by December 31st.

[00:42:34] Lloyd Metz: I get that, but I just wonder, right? Just think about it a little differently. If instead of finalizing your current year plan in February or March of the current year, giving you nine or ten months to actually hit the plan, which leads to that rushed, hurried feeling, what if you just Actually got it done in November, December, and now you have a full 12 months to achieve and work and execute against your plan.

Just a thought, right?

[00:43:05] Doug McCormick: Hey, Sean, I don't want to work for Lloyd. Yeah, I know what you're talking

[00:43:09] Lloyd Metz: about.

[00:43:09] Doug McCormick: He's difficult.

[00:43:10] Sean Mooney: He's not letting me, like, squirm out of this one. I'm trying. I'm trying to help you help yourself. Just give

[00:43:17] Lloyd Metz: yourself more time to actually,

[00:43:19] Sean Mooney: I'm stuck working in the business here, Lloyd, we're not working on it, we're not in.

[00:43:24] Doug McCormick: No big deal. And he says it with a smile. You know.

[00:43:30] Sean Mooney: That makes a lot of sense. And what I'll say is also just from the vantage here is like, so we'll get all the, like, the diligence requests will start coming kind of in mass, pretty in certainly starting in really mass in September. And then things from the new deal side start slowing down maybe as a mirror as to what's happening broader in the industry.

The diligent stuff goes to, like, real quiet by mid December, because I feel like you're not in action, things aren't going, other than the real late streams. And then, as does, frankly, the value creation activity, because at some point you're kind of like, You've done and started what you're going to do.

Everything else, really on both sides, is finishing strong and executing on what's already in motion. So not a lot of new stuff starts in mid November through December. It's about crossing the finish line as fast as possible. We at BluWave here get reasonably quiet actually in December and that's probably when we do a whole lot of catch up on our plan that we will submit to Lloyd by December 31st this year.

There you go. I thought

[00:44:35] Lloyd Metz: I said October, November.

[00:44:38] Sean Mooney: Dang it. Alright, how about the 15th of December? We'll negotiate. I think we have covered kind of the mid year check in. It's good that I think all of us have found an answer. In the industry, probably found a little moment of time to recharge, take a breath, but we're all looking at that starting line and kind of lacing up our shoes and ready to run.

So, in the meantime, this is your time, Doug, I know you're a rosé drinker, start loading that up, rosé all day, a little bit more. Where

[00:45:11] Doug McCormick: did that come

[00:45:12] Sean Mooney: from?

[00:45:12] Lloyd Metz: Is it

[00:45:15] Doug McCormick: my camo shirt that gave you that?

[00:45:18] Sean Mooney: It is, it is. Speaking from someone who used to live in Darien, Connecticut. There's an all year rosé season there, so no offense to my friends at Darien.

I, too, am a rosé drinker. So another great episode, gentlemen. Thank you so much for sharing the insights.

[00:45:37] Lloyd Metz: Thanks. This was a lot of fun.

[00:45:39] Doug McCormick: Go get them guys. Good stuff. 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 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 during the episode, please see the episode notes for links.

[00:46:44] 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.