Private Equity's Response to Economic Shifts: Insights from Rob Brown

[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.

[00:00:36] Sean Mooney: So I am very excited to be here by Three amazing people this time. And so of course, as usual, we have the ones and onlys of Lloyd and Doug. So thanks for joining us here.

[00:00:50] Doug McCormick: Hey, Sean. Good to be back.

[00:00:52] Sean Mooney: And today we have a special guest. So we're very fortunate and pleased to be joined by Rob Brown, who's the chief executive officer of Lincoln International, one of the premier, premier global investment banks in the world.

We're really pleased and lucky to have you to share some perspectives today. So thanks for joining us, Sarah.

[00:01:10] Rob Brown: Happy to be with you guys.

[00:01:11] Sean Mooney: To set the stage for the episode today, we're going to start off by going a little bit through the Wayback Machine, how the industry has evolved through all of our experiences, and I think we overlap quite a bit.

And then we're going to talk about maybe some of the lessons that Rob has learned and we've learned similarly since kind of this COVID era commenced in 2020 and some of the things that were maybe were going to happen that are rippling through today, just now. And then we're going to talk about what's going on through the balance of the year.

All right, let's hit it. So Maybe one of the things I'd love to kick off here, Rob, is to get your perspective from the lens that you've had running one of the top investment banks in the world and seeing a lot of this from a front row seat. How have you seen kind of the intertwined world of private equity and investment banking change really since the early 2000s?

[00:02:09] Rob Brown: It's interesting. And just reflecting on that topic from our earlier conversations, it's changed in so many ways that It's kind of interesting where to start. I'll give up a little bit of perspective. Lincoln started in 1996. So just a few years before 2000, really our whole strategy at the time was we were doing a hundred percent corporate divestitures and we got very lucky and we started our firm at a time when private equity was moving from kind of a cottage industry in the late 80s and early 90s when the returns were being published on some of these funds and the wealth that was being created.

Everybody wanted to be a private equity investor. And so all these funds get formed at the same time we form our fund in firms that nobody had ever heard of, like Audax Private Equity, like HIG, like Sun, like today, household names in the private equity world. And we end up selling the bulk of these corporate orphans that we had been mandated on.

To the private equity world. And we weren't the smartest guys around, but we were smart enough to say, wait a minute, we've sold these businesses to these investors that are going to have to sell these businesses. We probably should stay in front of them. So we really grew up with private equity. We grew up with middle market or however you want to call it private equity.

We were formed when a lot of those funds were formed. One of the observations where I sit today. Is if I go back to the two thousands or even the late nineties and even early two thousands, there was kind of a view, well, if you can't find a great strategic, your backup is a private equity group, right?

And the strategics were the highest payers of businesses. They had synergies and management teams didn't want to go with private equity. They viewed them as they had this barbarians at the gate view of private equity, and if I fast forward to where we are today. Most management teams want to go with private equity.

They almost flip their strategic have to be at a premium in a lot of cases, not to go with another investor, that's going to be their partner and that's going to allow management to roll in. And that's going to have much better aligned incentives. And there's a whole lot that happened between then and now, I think as an asset class and as an industry.

I think what time has proven over the last 25 years is that private equity creates more growth, more wealth in the economy than the public equities or even privately held businesses. So I think the asset class has proven to be a great place to invest in, but a great place that management teams want to work with because they feel they can align incentives and participate more in the upside.

And so I think that's been a major change. Another thing that's interesting, and I remember these conversations in the early two thousands, a ton of private equity groups would not buy from other private equity groups. They're like, well, why would I buy from another private equity group? They've taken all the growth.

They've taken all the juice out of the business. Well, you couldn't survive as a private group today if you weren't open to that. And part of that is I think the maturation, the specialization, the sophistication of both the private equity world and the investment banking world. Right. Where. As specialization strategies started to form, people started focusing on various sizes, the market, various corners of the market and types of businesses.

There was people that only wanted to buy high growth businesses and people that wanted to buy more special situations or turnaround where you've evolved to a point where there's businesses we've worked on that have traded five times among different private equity groups and everybody has done well and made a great return in what that's required.

I think as. Investors have become more specialized in the private equity world. Their advisors have to be more specialized. I think if you go back to the 2000s, early 2000s, late 1990s, the bulge bracket firms had industry groups and specialty groups, but the private capital markets from the middle market, they didn't have it.

They weren't expected to have it. It wasn't needed. And so I think that's been a major, major change. And both the investing side of the world and the advising side of the world. And I think the other change is having to think global, even as a smaller firm, we kind of leapfrogged some of our larger competitors to be truly global.

We did an analysis in probably 2000, 2001 that I think in 1975, Goldman Sachs had one investment banking office in the world, it was only in New York. Right. And in the late seventies, eighties and early nineties, the public investment banks, the public advisors were under pressure to be global. And we made a bet that that was going to come to our market with the advent of technology and information sharing that every industry, every company was going to have to have a strategy to be global or sell to somebody that was, it was going to be harder and harder to just be a local player.

And so I think that's the other thing that you've seen is that investors and advisors, when people work with us, they want to make sure that we can access every investor, every pocket of capital, every buyer globally. And if you don't have the right people in the right markets, it's hard for us to.

Deliver on that. So there's probably many other ways that I could summarize that, but I think those are three really macro and material ways that I think the deal ecosystem has evolved.

[00:07:12] Doug McCormick: We talk a lot about transformational growth and this power of compounding over long periods of time, you're probably be a little bit humble, but like your growth story is probably one of the.

Most amazing stories that I'm aware of. So if you could just put it into context, you started in 1996. Like how big is the organization today? And most of that, I guess some acquisition growth, but a lot of that's just organic growth following those powerful trends you mentioned.

[00:07:38] Rob Brown: We started in 1996. There was four people.

I joined several months after that and was the seventh employee. Today we have over a thousand people. And for an advisory only firm, we've got 20 offices in 16 countries. And. We're really built around four main product groups. We've got mergers and acquisitions, our capital advisory group, which is mostly private debt placement.

We have our private funds advisory group that we hired the team from UBS, which is fundraising for private equity and private debt, and then we have our valuation and opinions group, but that's tied into our business. They're the number one provider of portfolio valuations for private equity and private debt funds.

And to put some of that in context in 2023 and 2022. We were the number one advisor in the world for private equity exits of any size, just in terms of number of transactions. So we truly have built a global franchise and really focused around being the best advisor in the private capital markets. And we like that space.

I think the bulge brackets like it too, because if you look at the private capital markets, they're six times larger than the public markets. They're growing faster and they're less cyclical. That's why Goldman Sachs, I think created their cross markets group, which It's had some success, some failure, but I think where we play has been realized as a place people want to play.

And we have had great growth. And as you point out, the vast majority of that has been organic. We've done a couple of small acquisitions along the way. We got into Europe with an acquisition in Germany at Peter's Associates. We bought a company several years ago and our tech practice called Spurrier Capital Partners, which really helped us in the software space in the US.

I think as we've grown acquisitions are going to become a bigger part of our strategy because you know to move the needle you have to look at it but it's really been built organically and I think it's really rooted in a decision we made really early on when we decided to start the firm. Really two decisions.

One is we wanted to grow something. We wanted to build something that was bigger than us. We didn't want to name it after any of us. We wanted to name it after something that stood for something greater than us and We then said, okay, if we want to grow something, how are we going to do it? Even to this day, if I look at all of our competitors, all of them been around decades longer than us, and yet we've outgrown many of them.

And what we did is we kind of looked around and we said, there's some great competitors in our market. Are we smarter than they are? We said, no, they're really smart people. We can say we're as smart and maybe we're smarter in certain areas and they're smarter in other areas. Do we pay more than those people?

No. Do we work in more interesting transactions in those firms? No. So we sat back and said, well, how can we differentiate ourselves? How can we really grow something? And what we really focused on was culture. We said, we're in an industry that's not known for a great culture, right? People move around a lot.

They'll move for just a little bit more money. And we very early on said, Hey, if we could build something that focuses on attracting, retaining, engaging people for the longterm. Everything else will follow, the clients will follow, the deals will follow, the wealth will follow, and to this day, as CEO and our whole management team, the senior management, we spend a lot of time balancing growth versus culture, because you don't want to grow so fast that you lose what made you special, but yet what we found is growth is such an important part of our culture because we have a belief that the best people Want to join a growing platform.

They want to know there's white space. They want to know they can have impact on growing something. And that becomes kind of a virtuous cycle because the more you're growing, the better talent you can attract, the better talent you can attract, the more you can grow. We're not managed to maximize profitability.

The firms that hire and fire in droves when the market's hot or not, those are firms managed for profitability. There's nothing wrong with that. We just think, Over the long term, being managed for growth and creating white space, it allows you to keep talent for the longer term, but you can't get away from a culture that's rooted in being collaborative, respect and open mindedness.

It started with acknowledging that culture is going to be our most guarded asset. So you have to have buy in that, hey, that's going to be a key part of how we think about this. And it's not new, right? Peter Drucker said culture eats strategy for breakfast. I think he's right. Right? If you look at our strategy versus our competitors strategies, they probably look more alike.

If you look at our culture versus our competitors cultures, that's where you really tend to see deviation. And when we were seven people in one office or 20 people in one office, you could kind of manage by walking around. You could acknowledge behavior that was consistent with your culture and rewarded.

You could see behavior that was not consistent with your culture. And correct it. The challenge became when you then start saying, well, we're going to have multiple industry groups and we're going to have multiple offices and we're going to be global and we're going to have different product groups. So we got to a point probably 15 years ago where we said, listen, if this is going to be an asset, there's three things we have to do.

We have to define it at a granular level. We have to measure against it and we have to manage to it. And we have a culture document that's 60 pages long. Now, some of the pages have one word on them. It's a PowerPoint presentation. And I was at a seminar in Boston around the same time. And somebody was speaking about the importance of culture in professional service organizations.

And they said, Oh, if you want to see a great culture document, go online and find the Netflix culture document. So I went and found it. It's 90 pages long or 85 or 90 pages long. And our culture is very different than theirs, but it was a document that every employee could wrap their mind around what they said was, we're going to send this to every employee.

This is the culture we expect to be held up to. And if we're not held up to it, let us know. We did the same thing. I think if you're going to think about culture, you got to think about values first, because I think values are the foundation of any culture. What are the things you value or you want to value, or you want our people to value and be held accountable to, and then you can get into behaviors that support those values.

I think those two things together become a culture because we had had some success already. We're like, what is the culture that's gotten us here? And let's now really take the time to define the elements of it that have been unique. So we did that. And about every four or five years, we go back and look at that.

And there's things you tweak. There's things that become more important. There's things that maybe you de emphasize what's never changed or the values. So we have that. We send that to employee every year. And then we have a third party that comes in every year and does our engagement survey. And we are firm believers.

That engagement is a proxy for culture where the pockets of the organization were engagements high. We're living up to our cultural promise where we see it falling off. We're not right. And as an organization of our size, every year there's going to be pockets where you see that falling off. We have the same third party come in and they do focus groups.

One year it was associates in one of our office. We had the same, this 30 party comes in, in the focus group, you find out in 10 minutes what the issue is. Right. And then you say, okay, we got to fix this. And it's not punitive. It's like Nirvana. You can keep getting closer and closer to it without achieving it.

So we just determined we have to institutionalize how we define it. Measure against it and manage to it, and it's a constant challenge. It never goes away, right? You can't ever say, well, this is our culture and we can just rest on it.

[00:14:49] Lloyd Metz: This episode is brought to you by HCI Equity Partners, a lower middle market private equity firm, focused on partnering with family and founder owned manufacturing service and distribution company 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.

[00:15:32] Sean Mooney: It's interesting. What you're sharing here, Rob, because I think all of us who've been in the broader investment banking, private equity world over the last 20 years would say, it's not necessarily a culture first world, right? It's an outcomes first world. And it's not to say that that's not resident, but to have that kind of mentality is still really quite unique, particularly if you go back to when you really started leaning into it.

I think the industry is making headways more recently. I'd love to use this as a framework to kind of do an exploration through maybe the last 15 years, since after 2008, and then frame this in a context for how that culture actually helped you get through the kind of the COVID work to set the stage before we go to COVID.

What happened? I mean, so it used to be that there was a recession every six to eight years, right? And then we had the great recession. And then a gentleman named Ben Bernanke came in and said, Oh, the way you get through these cycles, there's lots of liquidity and. Don't let a void happen and let's just put the gas on and then I think someone forgot to take their foot off the gas These policies never stopped they're supposed to be transitory And so what was your perspective in terms of maybe what happened over this kind of 15 year?

megacycle and what it set the stage for before we got to kovat and then let's talk about how kind of your culture played a Role in it getting you through

[00:16:55] Rob Brown: Those are the right topics. And interestingly, and we were talking about how private equity has evolved and we all remember this, right? When the great recession hit all the articles of the golden age of private equity is over, right?

So they'll never raise money like this. They'll never be this active in the M and a marketing and it's over. And those predictions could not have been more wrong. Now, part of that is what you said, right? When capital is essentially free, right. For a long period of time, it allows. Investors who are using leverage be really competitive with investors who are not using leverage.

It also, I think when money's too free for too long, it results in exuberant behavior as Bernanke.

[00:17:36] Sean Mooney: Irrational exuberance. Irrational exuberance. Yes, that is exactly

[00:17:40] Rob Brown: the word I was looking for, but he created that when things are too free for too long, they're taken for granted. I think what was interesting was coming out of the global recession from a Lincoln perspective, We came out of that and said, we have to diversify our business, right?

We can't go through another downturn being only M and a, and this focused on industrials. We started the firm, largely industrials as Lloyd will remember, because he's known us a long, long time. And we said, you know what, we need to diversify to be more relevant to our core product base of private equity.

And we need to diversify within our M and a business to be much more diversified across all sectors of the economy. And two of our biggest investments coming out of that were in technology and healthcare. So for us, that was kind of our internal, I'll get to why that decision was a really good one when we get to COVID and beyond.

Even to this day, I think that diversification has paid off, but we kind of came out of that very cautious and processes looked a little different coming out of that. You're not going to do these broad processes. You're going to try to have these bespoke deals. Then what started happening, though, as you started getting into 2016, 17, 18, is because the capital multiples were rising, the economy was improving, capital was cheap, we started seeing the hold period start to compress, right?

Where traditionally it's okay, someone's going to own that for five years, they're going to drive, it's going to take them five years to execute on their investment thesis. And if we go to market earlier than that, people are going to be like, why are you selling now? Well, all of that kind of slowly eroded where you were seeing businesses flip in 18 to 24 months.

And the new buyers didn't bat an eye. They were like, okay, yeah, we understand we're doing the same thing over here. So I think it created this velocity of transactions that got to an unsustainable level. Right. And actually I think we're at right now. I think we're recalibrating. Yes, we're recalibrating a bit on value because the cost of capital has gone up, but we're also recalibrating on.

Hold periods. That's been a little bit of the muted M and a market we've had to your point after six or seven years that you kind of expect it to end, you kind of expect, okay, things heat up and there's a recession and then they slowly heat up again and then there's a recession. And I do believe in 2019 and 20, there were signs that, Hey, we're probably going to have an economic pullback here.

And we were probably heading into what was going to look like a normal recession, not the global financial crisis. And then COVID hit and COVID was, I mean, in the month of May, 2020, we did not close one transaction globally that hadn't happened in 15 years where we didn't have a month. So the world was ending and how long is this going to end?

And I'll pause there for a minute. Cause the other question you had was how did we get through COVID? I think we got through it really, really well based on two things. One, The investment we've made in culture and a big part of our culture is this concept of social capital. The more we know each other's people, not just coworkers, not just colleagues, but really know each other, their backgrounds, their story, their people.

And you have to invest in events. You have to invest in things that get people to know that the more you know each other's people, the more people are connected to the firm and and the better you serve your clients, right? Because you really, you work better as a team. So when COVID happened, we had to move overnight to a remote work environment.

We had the personal relationships to get us through that. The hardest thing was onboarding new people, quite frankly, during COVID, that didn't get a chance to immerse themselves in who we were in our culture. That was hard. And I think the other hard thing was the peer to peer learning when associates and analysts are here and they're working next to each other and just staying late at night, they're learning from each other.

That was really hard to replicate. We lost something in training, despite us doing more formal training than we'd ever done during COVID. But I think The over communication approach we took it paid off. I think the other thing that paid off is we didn't panic We almost panic when we're not closing any deals and you're getting to May and June of 2020, and you don't know where this is going.

And we start seeing our competitors doing big layoffs and making big changes. And we didn't do that. We actually, what we did is our valuation business was doing really well. There were some other elements. We kind of repurposed people and said, listen, let's not do anything rash. Let's see what happens.

And so when that market started bouncing back at the end of 2020, we We didn't lay off one person and we ended up taking share coming out of that because most of our competitors, there was a knee jerk reaction of, Oh my gosh, the world is ending. It's never going to be the same. And then when 2020 hit and we basically had kind of two years of deals in one year, those same firms were scrambling to hire people back and hire new people.

We were also hiring people because if I was really smart, if I really had foresight, when my competitors were firing during COVID, I would hire them. My knees were shaking a little bit, just not letting anybody go. So I think those two decisions. Really helped us have step function growth coming out of that down.

And we've had step function growth coming out of every downturn because we've always decided, Hey, now we have time to pursue some initiatives that we haven't had in the past. Whenever there's a shakeup in the market talent that isn't normally available, becomes available. It's some of what we're doing right now in this muted M& A market.

But I think we were heading towards a recession, COVID hit, the central governments, and no fault of their own, like no one had ever seen it. They pumped trillions of dollars into the global economy that propped things up. It delayed what was probably normally going to happen. And interestingly, and we'll see, we'll see what's going on in the market right now, but it could be that the soft landing gets pulled off here, right?

Interest rates go up. Employment comes down a little. The economy cools off a little. We'll see. We've got people in their mid 30s who've never lived through a slow market like we've been in for the last couple of years, right? And there's just a psychology of that, that they have to

[00:23:36] Doug McCormick: get used to. You mentioned that you had these two elements that really served you well, the social capital aspect and the learning aspect.

What's interesting to me is how in a environment where remote work is more acceptable, how you really perpetuate the values of those two things and how that's allowed you to continue to differentiate or is it an obsolescing kind

[00:23:58] Rob Brown: of asset of the firm? I joke with people like we all went remote overnight, right?

We didn't have a choice and getting back to what we've done since the industrial revolution like be together and work. Everyone's talked about and had to deal with and how do we do it? I think what you're getting at is part of a culture is being together, right? And yet I think what our people showed us during COVID is they can be really productive remote.

I think what gets lost is we were productive during COVID remotely because we all knew each other. If you want to grow and you want to onboard new people, actually being together and immersing them in that culture and having them feel connected to the firm is incredibly important. So we made the decision.

To have people in the office four days a week, right? Friday is an optional day and that's in the U. S. It's a little different in the global offices, but it's largely kind of followed. And we actually made that decision earlier than most firms. And in fact, I think many of our competitors at this day are only three days a week.

But I think what we've also shown is, listen, we don't take attendance. If somebody needs to be home for something or they need a mental health day or like it's fine But I think we've also wanted to create a view of hey being together is important It's not that we don't trust you to get the work done.

It's not that you've proven you can be productive Remotely for us culture is so important that We didn't want to take the risk of deteriorating that asset by creating an environment where over time people didn't need to be here. And I also think, as I said, it worked because we all knew each other. As you're onboarding, we've got 70 new analysts and associates starting this summer.

If they were all starting in a more remote environment, I don't think we'd onboard them and get them on the path we wanted to get them on. Super insightful. Really interesting. Thanks.

[00:25:44] Sean Mooney: One of the things I'd love to maybe double tap on here is you think about culture, how you got through it. What kind of led you to make that call early?

Was there like a siloing, a degradation that you felt? How did you kind of get the conviction to say, we're going to bring people back sooner? And then what did you see happen once you did that?

[00:26:05] Rob Brown: It's a really good question. There was two things that hit us hard. One I mentioned that. We underestimated the peer to peer learning, right?

We had all this great training during COVID or when we were remote and we were like, we got to over communicate. We've got to, but what you just can't replace is the associate or the analyst that gets an email from somebody saying, Hey, can you do this for me? And they stand up and say, Hey, Brown just asked me to do this.

I've never done this. And the person that QB, Oh, I did that for him last week. Let me show you how to do it. Here's where it is. Here's what happens. That just can't happen when people are in their apartments or at their home. So for us. That peer to peer learning and the onboarding of people, it just kind of hit us hard and we tried some different things before we got to where we wanted to go to.

We originally said, okay, we're going to start with three days a week and it's going to be your group choose the three days that actually doesn't work because you don't create the critical mass in the office then for the days you want them in. So then we went to Tuesday, Wednesday, Thursday, but then we started realizing Well, junior people, when they come in, they want to be with senior people.

And the senior people are generally in on Mondays, because that's the day you kind of get ready for the week. You're planning your schedule. And so then we went to Monday, Tuesday, Thursday, and everybody knew when we did that Wednesday was coming. We signaled really hard and we did that for a few months.

And then we basically just said, Hey, it's going to be four days a week. And what's interesting now. So I live downtown. I live close to the office here in Chicago, and I love coming on a Friday so I get more done than any other day. There is a ton of people coming into the office on Friday and they don't need to be here.

They could be anywhere they want and there is a sense of camaraderie and they realize they're more productive here. And, you know, again, if, if, if somebody has something going on during the week, they can work from home that day. I think there's just a greater flexibility, even on the days we expect you in.

And if it's not abused, what we have is working, right? Because there is that balance of someone saying, well, didn't I show you? I could be really productive working from anywhere. Why are you making me come in? And us saying, I'm gonna sound like my dad's like, trust me. It's good for you. You don't like it, but you're going to look back and be happy.

And what's really interesting. I have four daughters in their twenties. I've got 29, 26, 25 and 23. And I had one daughter who's firm. They were in five days a week. And another daughter was totally remote. And just started realizing I'm miserable. I'm not developing any relationships.

I'm not learning. And she recently left. She went to take a job at PwC. She's a tech consultant. And one of the reasons she went there is there's more in person in face time. So even I was seeing with my kids, who's having the more fulfilling career and is feeling connected. And who's feeling like this is just like a job, not a career.

And I think that being in the office and connecting with your coworkers, it's a big part of that.

[00:28:48] Sean Mooney: You said a number of things there that kind of really hit home. You talked about you could, that apprenticeship and the importance of it. And as you think about the human beings have been a tribal species for literally thousands and thousands of years.

And then for two or three, we were broken into these little boxes or one in some cases. So I, in a very private equity kind of way, was feeling the same thing, the teetering of the wings here in the culture kind of breaking apart, which is really important to our company. And I just started counting. I was like, how many times a day did people stop by my office to ask a quick question?

And it was at least five times a day. And then I just started counting how many times my little Teams button turned on and people would start pinging, and it was pretty much zero. And so the thing where I really got conviction was, okay, five times five, that's 25, 25 times four, that's 100, 100 times 12, that's 1, 200 teaching moments and apprenticeship moments that just went away.

[00:29:40] Rob Brown: More happening. Even the apprenticeship stuff that You do a conference call with the client, right? And the senior person might lead that conference call. And then that conference call ends. Like if you're all in a room together, it's, Hey, you asked this, or they said this, why'd you do this? Like there's this kind of post mortem learning.

In the zoom world, when we were remote, there was no postmortem. There was none of that small talk learning that just happens naturally. If you're together,

[00:30:08] Sean Mooney: I totally agree. And the other thing that really resonate with me is this point that if you're a younger professional, particularly in investment banking and in private equity, but really any business laps around the track and access to those, you know, and your senior executives really matters and can be impactful in your career.

And if you've got senior level people who are in the office on Friday, that is a huge advantage if you show up and see those people then. Because even our office, virtual Monday through Thursday, those who want to come in on Friday, and it's kind of a growing amount of people, and they get unbelievable access to me, not that I'm like a hard person to get a hold of, it's just the craze.

They can be there just because we're in the same office and I'll buy lunch for people who are coming on Fridays. That kind of access, if you're younger, I think advice and your point there is so good. It's like, it's going to be differentially advantageous if you can come during those times when fewer people.

[00:31:03] Rob Brown: Yeah. But you bring also up a good point. Your senior people have to come in too. This isn't just about junior people coming, right? Because I think what people that are early on in their careers want, and they want to spend time with people that are successful in the field that they've chosen. They want to learn from them.

We had some senior bankers. We had to remind of that.

[00:31:21] Sean Mooney: And I think that's another good point. It's like in particular, in these models where it's apprenticeship, you have to have the, someone who's the seasoned person to apprentice right after the vaccines came out is when we came back. And when we brought everyone back, it was like our values, our teamwork, good integrity, growth, and winning.

It's like, it is such a competitive advantage. If you are in person, and I was just talking to him, he's like, I hope anyone who aspires to compete against us someday goes fully virtual and stays fully virtual.

[00:31:50] Rob Brown: I also just think of some of the personal relationships I had. I started my career at Pricewaterhouse, and I've got friends from this day from my start class, because we were in the bullpen together and we went through these experiences together.

I feel sorry for some of these kids for no fault of their own. They're just not going to have that, right? Cause some of these big professional service organizations, Oh, great. We don't need real estate anymore. Everybody can work from home and we'll just get rid of all our real estate. I live with my daughter.

She couldn't go in an office if she wanted to.

[00:32:17] Sean Mooney: Little by little, it seems to be coming back. And it doesn't mean that's the only way for everyone, but for those who are particularly in businesses like yours and Lloyd's and Doug's, it makes so much sense, at least in my mind. The last topic I'd love to just double tap on before we get into kind of what's the rest of the year is looking at is a point that you made in terms of Taking advantage of downturns and kind of running towards the storm when finding opportunities.

Others are kind of circling the wagon and putting on parkas. Can you talk a little bit about whether it's this most recent kind of, I'll call it a downturn because I think in a lot of the economy it was and has been, or even previous downturns.

[00:32:54] Rob Brown: Private equity M& A over the course of the last two years Is down over 50%.

It's a serious downturn if your business is M& A with private equity. So we did two things, right? At the peak of the market in 2021, everyone's jumping. And it wasn't for lack of trying, admittedly, right? We didn't hire that many lateral senior people. We hired some, but it was a crazy market, the peak of the market.

And we were so busy just keeping up with the deals we had. We didn't focus on it as much. Year to date, we've hired more MDs in the last eight month period than we've hired in any eight month period in our history. By a lot. And so I think we've made the view of, Hey, now's a good time to bring on really good senior talent because things are going to turn around.

So we are investing in talent when others are not. And the other thing we did is we have leapfrogged our competition with an AI tool. We worked with McKinsey for over a year. We've just rolled this out. It is allowing us to knowledge, share and summarize and scrape our data in a way that no one else is doing.

And so we invested several million dollars and yes, that's going to hit our bottom line and our profits going to take a hit this year. Absolutely. For all these things, right? We're giving guarantees for people to come over. We're investing in technology. These are investments that are going to. Really help us grow going forward and it gets to being managed for profitability or managed for growth, right?

We're managed for growth. So if you're managed for growth, now's an interesting time to attract talent. Cause when there's disruption in the market, the best talent lifts their head up and says, Hey, maybe I should think about something else. And we've taken advantage of that. And we've also had some time to really think about a key part of our culture is collaboration and knowledge sharing.

And I think if you're going to do that, you have to have a culture that defines it, you have to have processes and you have to have some technology and this AI tool that we call it link L I N C. It's kind of a play on Lincoln and linking all of us together better. It's game changing.

[00:34:53] Doug McCormick: And is that really about creating a repository about the various things that each deal team has learned on a process about customer interactions?

Tell me a little bit about what that tool

[00:35:01] Rob Brown: does. So what we did a little over a year ago, I formed an AI committee to say, listen, we're a knowledge based business. AI is going to affect every business, but I think it's going to affect knowledge based businesses more because it's a core of what we do. So we formed this committee and.

What this committee initially did was they came up with, what do they think the use cases for AI in our business that are going to be most impactful? And they came up with nine of them, nine different use cases. Some of them were client facing, some of them were internal facing. And then we sat down and said, well, how do we prioritize these?

What are the ones that would be most impactful? Because one of the things I wanted them to do is I want to pick. One or two, three at the most of these create a tool that does these really, really well. So we can kind of get by. And then we can think about the other five, six, seven use cases. So the three use cases that we came up with, one was an easy one to create a safe GPT environment where we could actually put a wall around it, teach our people how to use that, but be able to put confidential information in it where it never gets outside.

The other two was one was, All of our data, all of our deals, all of our pitches, our SIPs, our SIMs, the analyses we put together, like The ability to search those in a natural language processing perspective where you could just say, Hey, give me a summary of health care service tracks where it'll pull up a summary of it and then it'll cite everything or you could say, find me a great slide on customer concentration, right?

I got a deal I'm working on where I really want to find a way so you can search by the deck. You can search by the slide, but you can also search by topics and just say, okay. What's everything we have on this topic globally. So if our Italian office is working on something that's really relevant to the people in our San Francisco office, they're not just going to know, like, we're going to knowledge share better.

So that was use case two was we call kind of the Lincoln library. It's all of our data. We had to tag it in a different way. We had to think about how do we teach pale to prompt. And then the third use case. Is we've basically for every deal we're working on, you ingest the data for that deal and you create an AI page.

So all the data, then you can search. And basically our assumption is that all of the buyers we're showing to, we're going to start doing those with the data. We send them, we better have those answers before they do. And so it's creating the ability to analyze data in a much more sophisticated way through artificial intelligence.

Those have been kind of the first three use cases. And I'm giving you kind of the high level elements of what we're doing, but there's a bunch of other use cases that as we continue to refine these, we're going to roll it out.

[00:37:37] Sean Mooney: As I'm listening to this, Rob, it sounds like you're running the business of investment banking, like a private equity portfolio company and the Warren Buffett way, when others are fearful, you're being greedy, you're taking moves, you're investing ahead, even though it's not the clearest of picture, it's this kind of idea like the Buffalo, right?

When there's a storm, every other animal kind of like hunkers down. The buffalo goes straight into the storm and through it, knowing you're going to get out before everyone else. And so what I'm hearing things are these kind of great, kind of proactive moves while everyone else is kind of slowing down.

You get these late step, Moves forward.

[00:38:15] Rob Brown: One of the things that's allowed us to do that though, interestingly, is the fact that we really focused our business on private equity, because one of the things we started thinking about was, Hey, we cover private equity in a really sophisticated way. We have a private equity coverage team of very senior bankers, and their job is to know everything that's going on at that private equity group, where can we add value, where should we spend our time?

Where should we not spend our time? And then tracking specific companies, tracking them for sale, tracking them for a recap. We're really data driven. We know we win between 35 and 40 percent of what we track, right? So we just know that. And so I think once you have a share with private equity as an advisor, it gives you visibility in an industry.

That's usually a lumpy project based business, but we know the groups we cover and we know the assets we cover. We know we're going to win 35 percent of them. We may be a few quarters off and we always track by earliest pitch date. When do we think they're going to sell? So I think what's also allowed us to have the confidence to invest is that We don't have recurring revenue in the traditional sense, but we have visibility.

We know it's given us confidence to invest because as long as we have great people that can give great advice and we're investing in the platform to lever them the best they can, those win rates of the assets we're tracking and the value that's going to be there. And that gives us confidence to say, Hey, we may be off a bit.

We thought things were going to close Q2 this year, and they're going to close Q1 next year, Q2 next year. That's okay. We know they have to transact. And so. I think if you are doing what we're doing and you're not, you don't have that visibility, you're not serving the private equity market, I think it's a lot harder to invest, which is why I think you see a lot of boutiques get to kind of that 50 person level and they never grow beyond that because they're like, I don't know where the next deal is coming from.

The principals are all doing pretty well. I don't want to take the leap. We've taken that leap and we've found that investing in downturns. Has allowed us to take step function market share. We did it in a one, we did it in a way we did it in 20 and we're going to do it again.

[00:40:14] Sean Mooney: It's a good thing to emulate.

Certainly. Also, if you listen to the private equity firms who are listening to this is the AI tools, the things that you're doing are also pretty relevant in terms of like the business of private equity, just as the business of investment banking.

[00:40:27] Rob Brown: Well, that was our fear that if private equity gets these AI tools for what we do, they're going to be asking us questions about the businesses we're selling.

We're going to be like, I don't know, how did you come up with that question? That was literally, I was driven by fear on that point.

[00:40:39] Sean Mooney: Fear is a good motivator I found. Only the paranoid survive. Maybe as we wrap up our conversation and bring it home here, Rob, I'd love to hear what's your perspective on what the rest of 2024 looks like as you kind of, Head into kind of the post labor day sprint to your end.

[00:40:58] Rob Brown: Maybe I'll start with what I thought 2024 was going to look like when we set our budget in January. And then I can get into what I think today. The market really started to downturn mid 2022, right? Interest rates went up and there was a chill. And if you take ourselves back to December, last year, January, this year, inflation was starting to come under control.

Everyone's talking about the soft landing. There was talks of a rate cut in March. Which I know seems crazy now. And so we really, I think our hope was, Hey, this M and a market has to snap back, you saw it snap back when it took a five month pause in COVID. And we're looking at the data. There's something like nearly a trillion dollars of assets sitting in funds over seven years old.

And I think we really felt that there was going to be a more exponential recovery in the M and a market in 2024. That hasn't happened. We're going to have growth this year after two years of a bit of a contraction. Part of that's been our diversification strategy. Our bog business is a fantastic grower.

Capital advisory is up because people are doing recaps right now because they're not as comfortable selling. So, and even our M and a business has slightly improved, but we're not seeing the snapback. We're still in the slow part of this recovery. And I think part of that is we are seeing bid ask spreads get closer.

So the things that are coming to market now. There's more of a willingness to transact wherever the market is. Last year, people were going, well, I'm going to test the market. And then when they didn't get the value, they want it. They just pulled it off the market. There's more conviction to get stuff done.

But in terms of that snap back, we haven't seen it. Maybe it starts at the end of the year, obviously, as we're getting later in the year, the odds of that snapping back in a material way to affect our revenues probably becomes less likely. But I do think it is coming right. If you think about the debt markets are really, really liquid.

Now, the bid ask spreads are getting closer, not withstanding the jitteriness over the overall economy this week in the public markets, the economic data is still really, really strong. And the pressure to return capital. I mean, private equity exists to put money to work, to return. Capital do its investors and raise new funds, right?

They can only sit on the sidelines so long. I think we feel like it's coming. We do these private market conferences and we get about a thousand private equity groups show up and we've done for the last 18 months, the consensus has been, it's going to be better six months from now, it's like free beer tomorrow.

And the last one we did in June, the consensus was we expect a better market six months from now. Eventually that prediction is going to be right. I do think that, you know, we're in the middle of a recalibration, right? We're in a recalibration on value. We're in a recalibration on holding periods. I think we are closer to the end of that recalibration than the beginning.

It's very hard to predict with certainty when that's going to happen. But if you asked me to bet, I would say it's going to happen sometime in 2025.

[00:43:57] Sean Mooney: And I love that perspective. I think it's spot on first and that kind of going back to the early part of our conversation on 2008, like people love to look through the world as this kind of binary.

Lens of never again, 2008 private equities, never coming back again. And then people are never returning to work again, lo and behold. Right. But we come back something different in between. And once again, they're like, Oh, the M and a markets are never coming back again. Nature finds a way. And whenever there's enough inertia, enough reason for being it'll happen.

And there's enough.

[00:44:32] Rob Brown: The other thing I didn't mention, I think it should be mentioned is the public equity markets have been fantastic. A lot of these public CEOs. They're trading at multiples. They can't justify with just organic growth. They got to go out and buy some companies and grow. They have to grow.

And so there are all these factors that say this should get better. And I published some recently on like the psychology of a rate cut. I don't think a small rate cut is going to make businesses more valuable, but I do think it will change the psychology where someone will say, okay, now it's okay to sell, I may get the same value that I would get today.

But if I sell it after the rate cut, I'm going to feel like I sold in a better market. I do think there is some psychology to that, that we'll see what happens. I think it's highly likely there's a rate cut in September. And is that the impetus for people to say, okay, now things are trending in a way where I want to transact.

I don't know. I think it's more symbolic than real. I think you're going to have to see a series of rate cuts to really start seeing the cost of capital be reflected in valuations.

[00:45:33] Sean Mooney: I think it's a great point. And so often you need a catalyst to get the reaction going. Private equity got 300 bips just in the competitive dynamics of the debt markets this year from SOFR 700 to SOFR 400, but you get that extra little oomph that says, you know what, it's going to be okay from the Fed.

That could really get things going.

[00:45:51] Rob Brown: The debt markets are really liquid and the covenant light stuff is back. And they're frustrated because they can't, in some ways it was kind of simple and that the institutional investors said, Oh boy, the risk return on debt looks a lot better than equity. We're going to flush into these debt funds.

And so these debt funds now have all this capital they want to put to work there, which at some point that's going to fuel private equity.

[00:46:13] Sean Mooney: I think absolutely. There's a wonderful saying I've been saying too often lately, this phrase, this too shall pass. And that refers to both. The good times and the bad times, they both pass.

And I think everyone's been in the kind of the bad times. And I think everything you're sharing shows this too shall pass. And life is a continuum of ups and downs. And it seems like we're going back to the ups.

[00:46:34] Rob Brown: We're all old enough on this call to know that, right? We've lived through downturns. We've lived through friends and family members being laid off and have it like you have people are 35 years old, right?

every bonus was bigger than the year before every stock they've ever bought has gone up every job they've interviewed for they've gotten like There is a recalibration of okay, and we're all products of our experiences. You can't get away from that But if you came into the workforce in 2010 or 2011, I mean it was hats and horns for you know, 13 years

[00:47:05] Sean Mooney: All right.

Well, this has been You A really, I think, wonderful and insightful conversation, Rob.

[00:47:11] Doug McCormick: Yeah, Rob, we talk a lot about the impact of culture and human capital as a strategic asset. And I think you guys at Lincoln were way ahead of that trend, which is great to see. Congrats.

[00:47:23] Rob Brown: Thank you. We looked and say, where can we differentiate ourselves?

One of the things that's made Lincoln great is this entrepreneurial spirit, like thinking like entrepreneurs. And what I worry about now, we've had a level of success. I don't want to be the safe place to work. Yeah. I want to make sure we're still attracting those people that are entrepreneurial. You become a product of your own success on that.

We can't lose that. I always want people thinking here like we're the underdog, but that concept of entrepreneurialism and being an organization that allows people to take risks and doesn't punish people for mistakes, right? That's what you need to be. And sometimes you get to a size where you, it feels great to have policies and procedures for everything.

But what you end up doing is thwarting what made you great, which is an entrepreneurial spirit.

[00:48:07] Sean Mooney: One hundred percent. So Rob, I think that's a great point to end on. Not only like I said, the business of investment banking, the business of private equity, but just the business of business, it's an amazing mentality to have, that's going to get this kind of catalyst to reaction going again for the next six to eight year growth cycle.

I'm not saying 15, I think it's up, up and away.

[00:48:29] Rob Brown: I really appreciate you guys having me on and the conversation overall.

[00:48:35] Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing 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. com. For further information on HCI, ICD, and BluWave, and relevant topics discussed here in the episode, please see the episode notes or links.

[00:49:36] 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.