Private Equity's Reflection and Foresight: A New Year of Opportunities

[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." Learn the inner workings of private equity and how top business builders shape, transform, and innovate companies to their peak potential. 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.

[00:00:37] Let's go.

[00:00:43] Sean Mooney: We have another great episode today where we're going to be talking about a lot of the things that happen kind of at the year-end within the private equity and business world, how you take in what happened and how we start looking forward. So Lloyd and Doug, I'm very excited to be here with you today to talk about some great topics.

[00:01:04] How are you guys? Great. Thanks.

[00:01:07] Lloyd Metz: Hey Doug. Hey Sean. Happy

[00:01:09] Sean Mooney: New Year. Alright, this is a meaty topic. We were talking in advance about this, that we might hear some introspection, which is always scary, at least for me. And so this will be fun to dive right into. And so this is an episode just for context, everyone, that we're recording right at the beginning of a new year.

[00:01:30] And whenever you have a new year, it's this kind of great moment where we get to think about what happened, we talked about, and what's going on. And maybe with that in mind, Lloyd, to kick things off, I'd be curious, as you think about this last year, what are some of the things that you kind of think about both from a business and or professional perspective?

[00:01:55] Lloyd Metz: Yeah, that's a good question, Sean. You can't help but think about just what went well and what didn't go so well in the past year, 2023. And what do you want to course-correct for in 2024? I am still on this multi-year journey, to be honest, to get better with time management. Second, how to separate what I'll say signal from noise, how to get away from the distractions. Whether it's emails, your phone, or the small, nagging, sometimes urgent tasks, right, that distract you, just how to manage all that better, right? Push it away, delegate it, avoid it so you can focus on the things that matter most. Still working on that.

[00:02:53] Sean Mooney: Life's a journey, not a destination. That's for sure. That's for sure, Lloyd. I think that's amazing, trying to find that signal from the noise and take more time to see the world as it is. What are some of the ways that you're maybe doing that? And maybe some of your perspectives from a family, a personal perspective, et cetera, or in business as well.

[00:03:19] Lloyd Metz: Yeah. So every morning I pray, meditate, gratitude every morning before my feet hit the floor, coming out of bed, and at the end of the year, I try to amp that up even more. And so then a lot of time away from my phone, a lot of time away from my computer. I'm trying to be mindful and present with my family. So spend a lot of family time, whether it's being silly or being outdoors or just being together. And spend a lot of time at the end of the year doing that. Grateful for my family, grateful for my partners, grateful for friends that have become family. So spent a lot of time at the end of the year thinking about those folks, meditating, praying on those folks. And quite honestly, I have two daughters watching them reconnect and bond and be sisters that actually brought me a lot of joy.

[00:04:13] Sean Mooney: I think that's amazing. And I love the fact that every day you start with gratitude and meditation as well. I try to do that every day and I'm not great at it. It's amazing how hard it is to find 10 to 15 minutes, but it's also wonders how big of an impact it makes when I do take the time to do it.

[00:04:34] Lloyd Metz: Now, Sean, you have your email letter, things you wish you had known. And sometimes you highlight or bring attention to services or products that you think are pretty neat. I got one for you. It's some of these wellness and mindfulness habits gamified. It's called Whole Life Challenge. And my family's done it. My family's done it a couple of times. You can do it with a large group, multiple families, your extended family, siblings, cousins, whatever you want to do. And it's a diet, sleep, mindfulness, activity, hydration, like it's gamified. It's pretty cool.

[00:05:16] Sean Mooney: That is really cool. I'm going to check that out. And it sounds much better than the gamified improvement version I once used called StickK. You guys ever see that? There was a Yale professor who came up with this. He realized that negatives are more conducive to change than positives. And so I don't even know if it's still around, but I did it once when I was at a prior PE firm, we would have weight loss challenges every year. And what happens is if you don't meet your goal, it makes a donation that it automatically pulls from your credit card to some sort of organization that you're diametrically opposed to. I lost the most that I've ever lost in my life, but it caused me also the most irritation. Okay, so

[00:06:00] Doug McCormick: Sean, it's always a problem if you have a weight loss competition every year. That in and of itself is indicative of a problem.

[00:06:18] Sean Mooney: So Doug, I'd be curious, how about yourself? How have you thought about kind of last year?

[00:06:22] Doug McCormick: Yes. So first of all, as I reflect on Lloyd's comments, once again, he makes me look so shallow. He's in the Zen mode, you know, got control of himself, and I feel like I'm the duck in the pond, just plowing away underwater, trying to keep my head above water. But I would say, listen, I've been at this for going on 20-some-odd years and every year I'm thankful and amazed that it was different, demanding, and always challenging. And like every year is an opportunity for learning. And I just think we're all so blessed to be in businesses where that's the case, like, where the problems are interesting, when you solve them, it's rewarding, and I'm always just amazed and grateful at the quality of the people that I get to interact with, whether it be on the HCI team or the portfolio companies. And I think to me, one of the things that's so great about our business is you keep score with wins and losses in terms of performance investment returns, but you actually see real tangible progress in team development and business development. And that's just such a gift. So I think that's on a professional basis about what keeps me coming back every year. I come back from Christmas, having a little time away, motivated to get back after it. And on a personal basis, I would say I'm in this life stage that's a lot of fun, which is I'm empty nesting and my kids are adulting. And candidly, I think they're more fun as adults than they were as kids a lot of times. And I think I'm a better dad for adult kids than I was for kid kids, maybe. And so I think I had two of the best vacations in my life this past year, and that was not because of the locations, but because it was family and kids and we were doing fun stuff without a lot of arguments. So it's a good year.

[00:08:08] Sean Mooney: That is phenomenal. And I definitely hear you. And maybe this is something that we share is like when the kids become real people, then the conversations are funny and it's really been exciting to watch their senses of humor develop and I find myself cracking up now at what they say. I was like, that was actually really good.

[00:08:28] Doug McCormick: So I'm going to get myself into trouble here, but like I'll share a story, which is my kids will call my wife and they'll say, "Hey, ask dad this." And she's like, "What do you mean ask dad this? I have an opinion and I've been taking care of you and the primary caregiver for the last two decades." And they want my opinion on certain matters and it drives her crazy. And it's tremendously gratifying for me, although it gets me into trouble.

[00:08:52] Sean Mooney: So you're back. Yeah, that's exactly how you're in the game, but I'm still regularly told. So yeah, no.

[00:09:01] Lloyd Metz: So, so Doug, I guess I did go off on a personal angle, on professionally, I am really, really grateful every year that we get to do what we do. And Doug, you tapped into that. I think the entrepreneurs and the business builders and the business owners that we are privileged to meet and work with. That's just amazing to me. And it really is a gift and a blessing. And quite honestly, I think it gives us a unique perspective on the real economy and a unique perspective on our country. You see people from Alabama, Texas, Wisconsin, Illinois, Long Island, New York, wherever these companies are that we invest in, in the size of the company and the workforce, the people that they hire, the people that they employ, you see, I think, a better, closer, more accurate representation of our country and our economy. And I think that's a real—I don't know—it gets me fired up every year and it's just the truth. Right? Sometimes I watch the news and I'm like, that's not really kind of spot on accurate. Right? A lot of things are happening. Innovation, real hardworking, industrious folks. We get to see that at the companies we are privileged to invest with and work with. I don't know what you think, Doug, but that's kind of how I feel about it.

[00:10:39] Doug McCormick: No, listen, so I think to be an investor, you have to be an optimist. So I'm an optimist by nature. Having said that, I totally agree with you. Like we get the opportunity to see what I think is like the best of the American dream or American promise in action. People taking risk and sweat equity to go build something that they're proud of. And when you see that dream realized, it's just—it's inspiring. Absolutely.

[00:11:07] Sean Mooney: I think it's the types of companies that you're investing in. These are small and mid-sized businesses that are more on Main Street than Wall Street. And so I think the vantage that you all get is like, you get to see the front lines, like what's happening. Absolutely. And that's lost. And you're talking about separating signal from noise. I think that's lost by the time everything gets aggregated up to a news clip. Yep.

[00:11:31] Lloyd Metz: A hundred percent. Agree with that.

[00:11:35] This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm focused on partnering with family and founder-owned manufacturing, service, and distribution companies. ICV Partners, an innovative private equity firm supporting management teams of leading companies at the lower end of the middle market. And BluWave, the business builder's 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.

[00:12:17] Sean Mooney: So, it's interesting as I hear what you all are saying and kind of think about the lens that I looked at through 2023 as well. It's like, it's really, I find it really hard. And I don't know if you had the same thing, but I'm always looking forward and it's always what's next, what's next, what's next, where's the next waypoint. And I had a really interesting conversation with a friend of mine from college that I had lost touch with, and he'd written a book. And the book was really about this kind of experience he had. He had this unimaginable tragedy where he lost his son in a skiing accident. Just completely awful where this you couldn't even imagine it happened. It just, he had this awful accident and he was the prototypical person like us. He was just like on the hamster wheel of life and going from waypoint to waypoint. And he's just like, "Man, life goes by in a flash and then something changes and then your whole world changes and you can't even imagine it." And so we started talking about this hamster wheel and this power of choice and having empathy, but also this idea of like pause, like just take a breath. And that's one of the hardest things I have is like I'm not good at smelling the roses. And so the conversation I had just kind of made me pause in a way I hadn't done in probably a long time and I start looking around and there's this book that I gave everyone on our team this year. It's called "The Boy, the Mole, the Fox and the Horse." And it's just this great book. And in one of the scenes is where the little child is looking for and says, "Look how far we have to go." Which is a hundred percent how I always view the world. It's like, look how far we have to go. Like we have got so far to go. And then the horse says, "Yeah, but look how far you've come." And that, as I thought about it this year, I was like, "Whoa, the world's going by quickly. My daughter is 16. She's going to be going to college soon. And I've had this horrific like flu shot thing that wrecked my whole immune system. And then, so I'm thinking about like, but I've overcome a lot of that. And then, so as I looked about this year, not only is like thinking my family was like, wow, I've got this great family. And I didn't suddenly they're the kids are 16 and 13, but I got to take a breath and, and, and look at it. So I did a lot of that in December. And then, and then the same thing, just looking at, at BluWave here, after being on this year hamster wheel and private equity. And then having the craze to build something, I just looked around and I was like, we have this amazing, smart, hardworking kind of young team that does stuff that no one said you could do. And I just had this really strong sense of pride. And so I, that's kind of how I, I, I dared probably more so than I had done in prior years to actually pause and take a breath and look to the left and right. And that, that made a big, Sean, just, just

[00:15:22] Doug McCormick: one, one reaction to one of the things you're bringing up, you talk about the pausing and taking the breath, but I also think there's a, a challenge in today's environment, which is creating like the white space just to be alone with yourself. And I'm, I'm horrible at this because like I hop in the car and the radio is on or, news is on. I, if I'm in, I'm in the house alone, I generally have the TV on somewhere and I'm always just consuming that, whatever that stimulus is. as opposed to being alone with my thoughts. And so like, being purposeful about trying to isolate yourself and be bored, if you will, and see what, see what actually comes into your mind and, and, chew on that for a while. It's a very, it's becoming a, a, a real skill set, I think.

[00:15:59] Lloyd Metz: Yeah. I encourage, I encourage Doug, do as much of that as you can. Sean, do as much of that as you can. I picked up running several years ago and I intentionally don't run with headphones, music, podcast, or anything else so I can be alone with my thoughts and literally will just that's the, that's the biggest benefit to running. I actually get now. I hate it. I actually hate running, but I do it because of that, time with my own thought love it.

[00:16:35] Sean Mooney: I think that's another great observation because one of the things that I I started doing in the morning. It's not fun in the winter. But do just kind of do a quick walk in the morning to kick off the day, not only to get light in your eyes, which, is really good, just physiologically, but it's amazing. The same thing I took the headphones out, all these really good ideas start coming to your, to your head. And one of the life hacks I learned actually was from a friend of ours and a PE investor in town named Tim Schulte at a firm called Council Capital. And he goes, yeah, I get all these ideas, but they're in and out. And he goes, so he has he has the voice memo button front and center on his iPhone. And as soon as they come and he just records it and it's like two buttons. And so I started doing that and I've actually, I've changed it a little bit, but it's like, it's on those walks. It's amazing what comes to my head, much to the chagrin of everyone at our company, because now I have all sorts of ideas, but it is like, to your point, it's like all this stuff comes when you, when you reduce the noise. So I think that's phenomenal, observations. So maybe with this in mind, I'd be curious. So we, if we've kind of gone through this pause, on the personal side, I'd be curious to see, Doug and Lloyd, what are some of the approaches that you all take from a business perspective? Like, how do you synthesize that everything happens in a given year within your organizations and your portfolio companies and what do you do?

[00:17:47] Doug McCormick: Honestly, when you ask that question, I, it occurred to me, I don't really have a formal plan for this. And so that's probably a whiff. But, but I think there are some natural things that happen. planning, maybe it's in our firm or private equity in general that kind of force you to take inventory. And so what I've found to be super helpful is, you've got year-end evals. And so for us, it's CEOs at the businesses, HCI investment professionals.

[00:18:27] I subject myself to a 360 and that's a really interesting mosaic because you get an assessment of 15 to 20 different businesses that are all kind of rolling up into some kind of common themes and common issues that people are struggling with. So I find, I think that's one interesting input.

[00:18:43] And I think in many cases, the things that you're commenting to CEOs or portfolio team members are a reflection of the environment with which they're working. The second one for me is just the simple budgeting process. And to me, it's less about the micro of the budget, but you get 16 different perspectives about what's actually happening in their markets.

[00:19:04] And you begin to see some interesting themes around inflation or supply chain normalization or labor availability, for example. On an external perspective, I always find these year-end summaries that investment bankers put together super fascinating for me because in our business, I think we are paid to be so deep and narrow.

[00:19:27] Sometimes it's really helpful to see the investment bankers' thoughts about the market more broadly. And then on a humbling basis, you go and look at your personal investment portfolio and reflect on the year, which was supposed to be a horrendously bad year and the market's up 25 percent this year.

[00:19:44] And so I think that forces you to acknowledge where we are on inflation, recession, or what have you and then Sean, most of all, I follow this organization called BluWave and they have these year-end assessments that are just super exciting.

[00:19:58] Sean Mooney: I appreciate that. So Lloyd, how about you? What do you do after you read the wisdom from BluWave's amalgamation of what you guys do is great?

[00:20:10] Lloyd Metz: So, we started thinking about 2024, probably September, October. So our firm has its annual retreat, just our internal firm retreat in September.

[00:20:25] And that's where we set our intentions for the upcoming year. And so we start thinking about our portfolio companies, our investment strategy, actions, liquidity generation, whatever it is, we start talking about that in mid-September. And so our minds start orienting toward 2024 almost four months ago, so that being said, we have plans that we are pursuing. Investment areas that we're excited about in 2024. We stated our intentions back in September, so we're going after those companies trying to reach out to them directly, develop relationships with executives, go to trade shows, so our calendars are

[00:21:16] already booked, our dance cards are almost already booked for the first half of the year. The companies that we already own, we try as best as we can to pull that budgeting process that Doug was talking about into October, November. So that they can start the year Jan 1 with clear direction and a clear budget of what they're trying to accomplish.

[00:21:38] We don't always succeed; sometimes final budgets leak into January, unfortunately, but that's how we organize, that's how I organize my activities to start the year. And quite honestly, we start mapping out second quarter, third quarter activities because there is a bit of seasonality to the private equity and M&A business throughout the year in terms of when companies tend to want to find capital partners or companies are available

[00:22:16] Sean Mooney: for sale.

[00:22:18] I think that's spot-on, and I'm really glad to hear that some of your budgets aren't completely done yet in January, as I'm thinking Arthur, ours isn't quite done yet.

[00:22:31] Doug McCormick: So that makes me feel, hey, we can get you a budget tomorrow, Sean. It may not be good, but we can get you a

[00:22:35] Sean Mooney: budget tomorrow. Yeah, I've seen the first budget. It's not the budget. We're doing a little more 'dare to be great' on the next. That's right. So I think that's great. And I think those make total sense.

[00:22:48] And I think we, now like the lens that I now have, probably following some similar things, but now having to be almost like the approach that says, if I were one of your portcos. We do the budgeting thing. It's a, you would be chastising me right now if I were in your portfolio about not getting it done.

[00:23:05] But one of the things that I think we did that I found really valuable that we kind of just kind of winged it when we were starting was this whole idea of like, how do you get the insights from the entire company, but in a scalable way. And when we were five to 10 people, we would just sit around this big table we had and we would map out all the core things about us.

[00:23:27] And then, but we knew the idea was like, well, eventually we're going to be approaching 50 people like we are today. And that's not going to be scalable. And so we kind of came up with this system where we've been doing it every year, where we include the entire company in our planning process through a series of survey questions.

[00:23:48] And it's things about like understanding that we're all aligned on our core purpose and where we should choose to compete, our biggest opportunities and obstacles, the resources we need, professional goals, what the leadership team can do to support their success and we get all of that from the company.

[00:24:05] We track it, how it changes every year and then what we do is we get everyone in the room and now we have to go to like an offsite space and everyone, you kind of like call on people for each topic and it's been a really cool way of not only making sure that people are aligned with where we're going.

[00:24:24] But also getting buy-in to where we're going next. And then also making them feel like they're part of the process, but also understanding when we're starting to lose calibration, as the messaging getting through. And then, so that's been one of the best things that we've done in a way that can in a scalable way involve the entire company.

[00:24:46] And I'll tell you a lot of our best ideas that we've activated come from those, every year. And it's a way that we found is actually scalable. And then the only other life hack that we found was, every year we would assign the leadership team to go through like the droves of responses and then distill them.

[00:25:05] We found out that our internal private instance of ChatGPT is absolutely awesome at distilling survey results. So you put them in there, make sure it's a private one, but it does an amazing job, man, this saves us hours and you still have to read through them all. So a little life hack is you guys are doing survey work for like DOC for your portcos.

[00:25:30] Lloyd Metz: Got it. Thanks for

[00:25:31] Sean Mooney: that. That's a great tip. Yeah. So that was, I don't know anything else, but that was something that kind of a life hack we figured out. So let's turn the page to 2024. So you've got your budgets. How do you kind of kick off the year? And then maybe what we'll do is we'll get into after this kind of, what are some of the themes that you're really, kind of major themes you're pushing forward or looking at this year.

[00:25:53]

[00:25:53] Doug McCormick: I think this, the whole process that you guys just described, we all had different tactics to get it done, but it's kind of the self-assessment and then the goal setting for the following year. To me, one of the most important things is finding ways to create accountability about what we've decided.

[00:26:09] And for me, the big whiff is if you do this budget process, and then you just compare yourself to budget for the next four quarters. For two reasons, one, I think it's a helpful form of accountability to compare to budget, but there are so many things that happen in the business that are outside of the budget in terms of strategic planning, building organizational capabilities.

[00:26:31] And so we also try to get our teams to outline. Okay. What are the strategic initiatives called our strategic roadmap that we're going to execute against this year? So at the end of '24, okay, we're going to measure ourselves financially. How do we perform? And then strategically, how have we built a better business?

[00:26:48] How have we positioned ourselves for exit? How have we progressed on our succession planning? Some of those things that don't get reflected in a budget I think are super important.

[00:27:01] Sean Mooney: And Doug on that, like, I'd be curious and that's the age-old challenge. You got the budget.

[00:27:07] And then when you start deviating from that, like, what is your approach to that with your kind of business leaders?

[00:27:14] Doug McCormick: Yeah, so, we have a budget process that the portfolio companies kind of own and then, we provide input, but everybody has their own vernacular about how they describe things.

[00:27:23] We talk about an end state a lot and we talk about our strategic roadmap to get to the end state. And so, in my mind, these are questions of duration. Like the forecast or the budget is about what's happening in the next 12 months. How do I see the market and our ability to deliver against it?

[00:27:39] And the end state is what's the business look like that we're trying to position for sale. And the strategic roadmap is, what are the key things we're going to do to achieve that end state? And so it could be things like, what's our IT strategy or what's our go-to-market strategy. And it's things that have a different duration but also don't necessarily get reflected in the P&L.

[00:28:00] Sean Mooney: How about you, Lloyd?

[00:28:01] Lloyd Metz: Yeah, I guess the thing I have on my mind as we enter 2024 is I think there's still a lot of uncertainty. Just economically, in terms of things that, shoes that could drop, additional shoes that could drop. And so, as I think about our portfolio company budgets, and the assumptions that underlie those budgets, I'm trying to get our teams to think about how could they be wrong.

[00:28:31] And if they are wrong, is it, I could be wrong in both directions, right down or up relative to whatever the revenue assumptions or the cost assumptions. And to what magnitude and how can you react or respond some of our companies have budgets where the, I don't want to get too statistical, but the risk is kind of asymmetric.

[00:28:57] It may be up skewed or maybe skewed down to the negative. And so how can they flex their cost structure if demand turns out to be purely lower than they're assuming. Some of our companies actually have the other problem, which is if they're wrong, they're going to be overwhelmed with demand and therefore, how do you satisfy that demand profitably and build capacity quick enough to catch it, right? So it's those kinds of conversations. I'm trying to encourage our leadership teams to think about as they enter 2024. I tend not to spend a whole lot of time thinking about macro matters, but going into '24, I am sensitive to the sentiment of a lot of the large corporate buyers or customers that are the customers to the companies we invest in and their sentiment does matter. And so I'm kind of missing Byron Wien's ten surprises for the year, the late great Byron Wien, but trying to figure out where we could get blindsided in 2024 is actually front and center in my mind right now.

[00:30:15] Sean Mooney: I'd be curious, what are some of the macro measures that you all are looking at in terms of just understanding the cycle, or is it, and I'm sure it probably differs for you individually. Are there any measures that you all look at that show you at least, here's how the health of the big picture?

[00:30:35] Doug McCormick: Yeah, I'm just kind of reflecting on Lloyd's comments there. So I think what I would say more than most years this kind of bifurcation in the logic between tell me what the economy is like, and I'll tell you what my forecast looks like is a really, really big question. A lot of times we have, we're more grounded.

[00:30:53] But I guess the counter to that is, is I think about the context for putting capital to work. I think my general view is there is a fair amount of volatility or risk in the system, if you will, but look at the public markets, up 25%. I think that implies investors generally are saying.

[00:31:17] We've successfully navigated inflation. It's coming down. We've avoided a hard landing, maybe a soft landing. And so to me, it feels like a reasonably constructive time to get dollars to work, but it's always hard, right? Hard to finance, hard to diligence, hard to figure out what normalized earnings are. And so I guess I've just, as I think about how you're looking at the world, I think I see it similarly.

[00:31:39] Although I'm a little more bullish about how can I use that uncertainty to create

[00:31:44] Lloyd Metz: opportunity?

[00:31:48] Oh, absolutely. Yeah. The uncertainty on making new investments absolutely works in your favor. To a large degree for a lot of companies. And so we're just trying to make sure we figure out. For our current portfolio, and then for new investments. Are there any particular catalysts or particular?

[00:32:10] Disconnects between perception and what we believe to be the future reality, right? That's the fun part of what we

[00:32:19] Doug McCormick: do, right, Doug? Well, and so it's interesting, in my mind two, two things that I've been spending some cycles on trying to think through is you think about what's changed fundamentally over the last decade.

[00:32:31] To me, there are maybe two that are worth noting, first of all, I think, I do think we're on the backside of taming inflation, but I also think that the low-cost interest rate environment that we've experienced for the last decade, up to 2022 is gone maybe forever. Certainly not coming back anytime soon for a lot of reasons.

[00:32:50] I think more restrictive trade, bigger deficits inflationary policy. So like, what's that overall cap rate, I think is a really interesting question. And then I think while the economy is stable, I think growth rates may be coming down, productivity coming down. So like, where do you find growth? I think is, is, is a question that's going to be harder and harder.

[00:33:11] As we think about trying to underwrite, like what's a reasonable market growth, is it, two or three times GDP and what's GDP going to be to me, I'm, short-term optimistic about like where we are relative to a recession, but a little bit long-term. Pessimistic around cap rate and growth rate.

[00:33:32] It's an

[00:33:32] Sean Mooney: interesting observation there. And one of the things is, just trying to get a handle on the, looking many years forward is you think about, since 2000, one of the biggest wins behind the global economic sail has been China. And so we've been able with low interest rates and to fuel for the last 15 years, anyways, for 16 years.

[00:33:55] Very strong economic growth with no inflation because China was deflationary. Now China is matured and you're seeing global decoupling. And so now that China is starting to deal with kind of growing up issues. And you're seeing kind of globalization kind of decoupling and you're having diversified supply chains, it'll be really interesting because it's, it was in some ways a once in a generation.

[00:34:21] , economic shift where you could have high growth and low inflation and, and robust economic. Policy

[00:34:30] Lloyd Metz: and Sean, you highlight a couple of things, both you and Doug highlight a couple of things that. , you're talking about themes that we're super excited about. We're very active in transportation and logistics because of this.

[00:34:44] Decoupling and nearshoring and reshoring and. Rerouting. As if you read the newspapers, right? Rerouting of supply lines. So, we're, we're trying to find more opportunities to invest in transportation logistics as well as, the global sort of decoupling, we're, we're, we're pretty keen on finding more opportunities that.

[00:35:06] Involve what we, what we're. Labeling enterprise risk management services just broadly. So we're, we're pretty keen on that. So some, some of our companies are. Benefiting from a lot of the growing global tensions and, that that was a call we made a couple of years ago to try to lean into that.

[00:35:25] Sean Mooney: So I think that's a really interesting, , and, and prescient call that, that, that you all made, right?

[00:35:32] The world is, is, is always changing, but it's just got a lot more complex. And now it used to be, it used to be only China. And then, then it was China plus one. And a lot of places it's China zero. And and, and you see, because China's not low cost anymore. So now you're building supply chains through Southeast Asia.

[00:35:51] In Mexico, etc. So it'll be it'll be really interesting. And I think that sounds like a very smart play because it's all got to get and it's not getting easier.

[00:36:00] Lloyd Metz: We'll see about that. Sean, you know, blind squirrels and broken clocks, right?

[00:36:07] Sean Mooney: So Doug, how about you? What are maybe some of the themes that you're looking into as you point your crystal ball to, yeah, I

[00:36:14] Doug McCormick: think, if you buy the premise that growth is going to be hard to come by, but you can create opportunity given some of the uncertainty, I think consolidation strategies have a lot of merit because I can drive growth through acquisition and I can buy reasonably.

[00:36:30] I also like that those strategies allow you to deploy capital, not just once on the front end and then exit five years later; you're dollar-cost averaging the entire time. So I think that's an interesting way to navigate this environment. And we're spending a lot of time in what I would characterize as micro-market consolidations, right?

[00:36:51] So, trying to build a platform of 30 but doing it through 30 acquisitions, of a couple of million bucks a pop, so that's a prevalent tool. I would say not necessarily a strategy. We're finding markets where that high fragmentation exists where that strategy can be applied. Just in terms of other things on my mind that I think are worth thinking about, we talked a lot about economic risks.

[00:37:20] I don't, and we kind of touched on it, but I think geopolitical risk, in a more traditional sense, like conflict, is at a level that I haven't seen in my adult life before. And so, and more, I think, harder to predict and more multifaceted, not just China, but what's going on in Eastern Europe, what's going on in Israel.

[00:37:40] And I think that's one of those things that it's a little bit black swan, where it's very hard to think about how to incorporate those risks into a financial model. And then the other one that I'm just really perplexed by, and it doesn't have direct implications for our investment strategy, but what is happening in the commercial real estate market, I think is probably one of the biggest points of dislocation that I can think of.

[00:38:03] As you think about the perfect storm of significant investment running up into the pandemic. So lots of capital freshly allocated at high values. Dramatic change in capital availability and interest rates and then combined with a change in behavior about how people use space given remote work environments.

[00:38:22] And what's interesting to me is that's a correction that's gonna play out over multi-year as opposed to like a crash. But, but seems to be one of the most, kind of, from a magnitude perspective, biggest clouds out there from, from where I sit.

[00:38:42] Sean Mooney: I think those are really interesting observations and, as we were looking at the economy next year, the three things that we had as our big wild cards to watch out for are the commercial real estate industry, particularly as you think about contagion with the banking system.

[00:39:03] Because there's, I haven't really totally seen the maturation ladder of debt, but most commercial real estate investors are probably not going out much more than five years. So there's a lot that's going to be coming due. Geopolitical risk front and center. We could, we have, we have strife in Eastern Europe, the Middle East, and Asia.

[00:39:26] So just most of the world. And then, and then, and then oil and gas, which is related to all this too, or like inflation can come back real quick, and largely related to geopolitical risk. But, from the optimistic side though, one of the things that we're really a beneficiary of is the opportunity to work with the best business builders in the world like HCI and ICV and that, through the thousands of projects that we're kind of equipping and matching for you and your portcos, it paints pictures.

[00:39:59] And so when we've been looking at the macroeconomic data and the microdata that we see from private equity, it paints a pretty compelling picture that we're at the bottom of a cycle. And, and I think Doug, to your point, we're going to be, I don't think this 15-year Bernanke and free money cycle is going to go on for at least multiple cycles when everyone forgets again, but we'll be on a six to eight-year cycle.

[00:40:26] It's always hardest when it's worse, but it's getting better because, so when we look at the data, inflation is less than half, GDP is up five quarters in a row. Consumer sentiment remains strong. Consumer debt is high, but also savings are very high. And then, and so we look at things are getting better than worse within all of the noise, you separate the signal from the noise.

[00:40:47] And then when we look at what PE is doing, the private equity industry, study after study does best when times are worst. And when we take the picture of all of what you're doing, what we saw in the second half of the year, the PE industry at large, investing heavily in people all the way down to the mid-levels, not just making changes, but investing in expanding the organization, but also growth.

[00:41:09] And so in prior cycles, it was more about safety and security. Now we're seeing the industry starting to hit the gas. And you all kind of take activity a year ahead of almost anyone. And then the last thing we see is the robots are predicting the bottom. The markets, 75 percent of these are AI-driven algorithms of the flow.

[00:41:30] So our robot, our future robot overlords are also saying it's, let's go. So that's kind of what we're seeing going into this coming year.

[00:41:41] Lloyd Metz: I was with you, Sean, up until that last point.

[00:41:44] Sean Mooney: Don't sleep on our robot overlords. I try to be polite to them and nice to them. And that was the last one.

[00:41:51] Yeah,

[00:41:51] Doug McCormick: Sean, last time back there, I would say, I think I've been amazed at how resilient the economy has been. And I think you can, one of my theories or my thesis is you can't really compare our economy, market valuations, or previous kinds of recession and growth environments based on history because the composition of what American business looks like is so different and the tools we have to navigate it so different.

[00:42:20] Like imagine how we would navigate in a pandemic when you didn't have all this information technology to know where your supply chain was and what the demand profile looks like. I'm just fascinated and I'm really impressed with how well the world, but the U.S. has navigated this disruption of COVID.

[00:42:39] It's been really, really impressive.

[00:42:44] Sean Mooney: A hundred percent. And it's certainly leading the world, right? In terms of recovery. And part of it is because we're able to sell things to ourselves and we're largely energy independent as well. And we're a beneficiary of two huge oceans on each side of us with really good neighbors to the north and south.

[00:43:00] So I think it's a really good point. The only other thing I'd love to get your and Sean on, Sean, don't,

[00:43:06] Lloyd Metz: don't forget the third coast. Which one's that, that's the Gulf Coast. Don't get those folks upset with you. Now,

[00:43:15] Sean Mooney: that's a good point. No disrespect. I'm in a landlocked state of Tennessee, so I don't think about those

[00:43:20] Lloyd Metz: folks.

[00:43:21] No, you well, that's where all the growth is. It's true. I'm

[00:43:24] Sean Mooney: telling you it's true. It's all about, it's all about the Cumberland. That's what, that's what I think about. The last thing maybe to wrap this up, that I'd love to just get perspectives on is in it's, it's the tiresome topic, but important topic of, I think we're on the cusp of the biggest technological shift, certainly since the advent of the modern internet in 1995 with these AI tools.

[00:43:52] And it's, I think, having a profound impact on every company in that one right now is kind of pie in the sky platitudes, but it's very quickly shifting, just like the internet did, if you remember 1995, there was like, you'd get an MBA in the internet, and there were internet groups. And, and, and just right now, it was like, Hey, it's quickly shifting to tactics.

[00:44:17] It's a tactic that makes things more efficient and enhances your decision-making skills. And so, but this is going to be, I do think at the risk of lofty platitudes, is going to be one of the biggest shifts that we've seen certainly since the mid-nineties, but maybe ever in terms of a wave of efficiency that probably for the first time, mostly disrupts white-collar labor versus blue-collar.

[00:44:41] And so how are you all thinking about that going into this year and, and how it can impact really any company?

[00:44:50] Lloyd Metz: So Sean, we just had our CEO retreat in December. It's usually two or three weeks before Christmas, depending on how Christmas falls. And AI was a big topic that we were talking to our CEOs about, but the overarching theme of the CEO retreat was how to future-proof your company.

[00:45:12] And again, our companies are small, whatever. 50 million in revenues to 200, 250 million in revenues on a goalpost. The bigger focus in my mind for 2024 is how do you get those companies ready? And a lot of the companies in many of their functions and many of their departments actually don't have efficient processes yet.

[00:45:43] Even if you're with the abacus calculators, a pencil and paper, the first thing you got to do is get your process right. And so too many companies, small and globally scaled make the mistake of putting technology overlays on an inefficient process. So you actually don't get the efficiency benefits that you would expect.

[00:46:10] And I think AI runs the risk of that same behavior. So for our companies, we're really pushing them. Let's look at our process. Let's streamline our process. And then let's start to harness technology and make it faster, more efficient, take the labor content out or whatever it is. But that's what we're focused on now.

[00:46:36] Sean Mooney: I think that's a really good point, and it was interesting looking at last year. If we look at the large data, from just the pattern composition from PE firms, every call would start with AI and 90 percent of them ended with, we're going to clean our data first and organize it. Because data, if you don't do that, you can't do anything.

[00:46:57] Then it's like, we're going to visualize it so we can understand where we need to improve our processes. Then maybe we'll do, you'll get into analytics. And then we'll do AI next year. And so we've seen this surge of foundational activity that exactly you're talking about to set the stage versus just like AI everywhere.

[00:47:15] Lloyd Metz: A single data lake or data pool or whatever people are calling it. A lot of our companies don't even have that right. Stuff is still isolated in different servers or spreadsheets or whatever else. So that's what we're pushing hard.

[00:47:32] Doug McCormick: First of all, I totally agree with how you guys are thinking about it in terms of one of the big sea change areas for people to be focused on, by definition, we're focused on these relatively fragmented, small, competitive markets, big markets, but small competitors.

[00:47:48] And so I think our view is incrementalism is the right strategy, right? Just do something because you learn a lot as you're trying things and iterating, and then the second is, it's okay to be a giant among midgets, right? And so in our part of the market, in many cases, our competition isn't that sophisticated.

[00:48:08] And so for us to be competent where we still have a lot of room for improvement, but it is a competitive advantage.

[00:48:17] Sean Mooney: I mean, it's really interesting just from the vantage here. I mean, at our core, it's a little bit different because really we're a data business and the data enables us to make the world a much smaller place quickly and excellently, but we're a database, everything comes down to data. And so we had been investing pretty heavily in getting, from day one, just structuring the data, keeping it clean, knowing Alexa was going to be really smart.

[00:48:41] And so what we've found is, going to an earlier conversation, one, if you do that journey, it helps you understand not only what happened and why it happened really well. And that's one of the hardest things as a business, just to get that far, what happened, why it happened, but it's really helping us so far as we've knocked those off is selling what will happen.

[00:49:02] And this idea that we talked about early in the budget, like how do you bend space and time going forward to make it the way you want it to happen because you're going to know what's going to happen in the future. And so if you get on that journey, it can have at least for us profound effects because we're able to see further and further ahead.

[00:49:18] And sometimes that's scary because you're like, oh my god, we're going to slow down, but we used to not know you're going to slow down until a month later. And the only other thing I think that we found and once again this is just being a beneficiary of working with all these groups like you all were able to do like the Walmart form of innovation where we're like, Oh, yeah, we're gonna do that too to ourselves. And so we use ourselves on ourselves. And the thing that we found is, we had all these AI experts come in and the LLMs, they're overblown, but they're kind of almost as good as like a first-year college graduate for a lot.

[00:49:55] And so the first thing we did with everyone on the team is they all had to read "Who Moved My Cheese." Which is this great book about change and the world's going to change. It's just going to change. And so we've kind of, we've been pushing them. It's like, you're going to change. Like you're going to have robots reporting to you.

[00:50:11] You still need, it's still not even co-pilot. You're the pilot, but on your plane with you is this really helpful assistant. And so what we've done is very purposely constrained this year. New entry-level hiring, and we've given everyone an LLM. And on certain parts of our business, we have these proprietary AI engines that do stuff.

[00:50:35] And what they're finding is they're using them and they're getting about the same productivity as a 22-year-old new grad. They can do a first draft. That first draft needs to be rewritten. It needs to be tweaked. You got to tell them to do this thing. But it's been having a lot of impact, a profound impact across marketing, across operations, across tech coding development. And so we're seeing a surge in productivity and you're seeing it in places that are very forward-looking, like Facebook, where they cut a huge amount of their staff and they still grew what, 20, 30%. And so that's going to be the big thing.

[00:51:11] I think that everyone has to do, particularly new, newer college students right now is spend the time to get to know how to use an LLM. So that you can come in ready to go and say, I'm not just going to do what the 22-year-old did. I'm going to do what your 24-year-olds do who are using outlines. So that's the big sea change that I get scared about.

[00:51:30] But also excited

[00:51:31] Lloyd Metz: about. No, that's definitely something we ought to talk about because from a policy perspective or just a hiring at your company perspective. So for the example you gave with BluWave, so does that mean you're going to hire laterals who are whatever, two or three years out of college now?

[00:51:50] As the entry point for BluWave, and if so, where do those folks, when they're 22, get the experience, the know-how, the savoir-faire, so that they can join BluWave, right? So, I think folks gotta think it through a few more steps, life is like chess, not

[00:52:11] Sean Mooney: checkers. 100%. And what we think is if you get a first-mover advantage and you embrace that someone's moved the cheese earlier, we're going to be able to hire plenty of people that just go through the normal track.

[00:52:25] It's just all the other people who are late to the game are going to be great training grounds for us. Yes. And so what we want to do, you think about chess, not checkers, like we're playing three to five moves ahead on this. And we're doing it right now. The world's changing. Let's just get over it. Let the tears dry, but we're going to make the change now.

[00:52:43] And then the people who join our company are going to be very hot commodities because they're going to be already ahead of the game because they've embraced change and they know it's coming. And that's at least the plan. I mean, we'll see, like this is a grand experiment this year, but so far right out of the gate, we're seeing really good results.

[00:53:01] Very cool. It's really scary though. Right. So it's like what you said, it's like, we think it'll work, but we're going to AB test it and we're going to go left and right and left, right. And hit the gas and hit the brakes. It's like the OODA loops, if you're familiar with that, with big,

[00:53:14] Lloyd Metz: big fan of that concept,

[00:53:17] Sean Mooney: it's like, just take a step forward.

[00:53:19] So we'll see. I don't know that we'll get it right per se, but that's something that every company should be thinking about and can, and it's going to happen eventually, so why not do it now? Great insights.

[00:53:31] Lloyd Metz: Good stuff.

[00:53:33] Sean Mooney: I'll get off my soapbox.

[00:53:35] Lloyd Metz: We like you, Sean. That's like,

[00:53:37] Sean Mooney: yeah, yeah.

[00:53:38] I didn't go to West Point, so I can't get the full like, serve the world. But, I

[00:53:42] Doug McCormick: don't even have a comeback for that.

[00:53:43] Sean Mooney: It's like, it's like, 30 years ago, taking the bait. Alright, this was an amazing conversation. I learned a lot.

[00:53:53] I've got copious notes that I'm going to liberally borrow from both of you all. So thanks to Doug and Lloyd for once again, sharing a lot of your wisdom that I will, once again, borrow. Lots of fun, Sean.

[00:54:05] Lloyd Metz: Thanks, John. A lot of fun.

[00:54:06] Doug McCormick: Thanks, Doug. Appreciate it, guys. Go get them. Talk to y'all later.

[00:54:14] 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 private equity firm supporting management teams of leading companies at the lower end of the middle market.

[00:54:41] Learn more at icvpartners.com. And finally, BluWave, the business builder's 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 in the episode, please see the episode notes.

[00:55:10] Sean Mooney: The views and opinions expressed in this program are those of the individuals and do not necessarily reflect the views or positions of any entities they represent. Moreover, no investment advice is given herein.

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.