November 14, 2024 • 38 mins
In this inaugural episode of The Private Equity Experience (PEX), we're taking the first step in exploring the world of private equity. We'll introduce its role in today's business landscape and explain how it's become a valuable option for small businesses.
Whether you're a founder considering private equity for growth capital or personal liquidity or simply curious about how private equity compares to venture capital, this episode provides a great starting point.
We'll cover the basics of private equity, including leveraged buyouts and assets under management, to give you a solid foundation in this crucial part of the global economy.
We'll give you a clear understanding of private equity firms, how they manage investments, and the importance of transparency and due diligence in PE transactions. You'll also get an introduction to how private equity funds are structured and how they aim to increase value through operational and financial efficiencies.
Links Mentioned:
Timestamps:
0:00 - Introduction to the podcast and hosts
2:01 - Emily's background and experience with private equity
3:51 - Ed's background and experience in private equity-backed businesses
6:41 - Rory's background in financial services and private equity
8:44 - What is private equity, and what gap does it fill in the market?
10:33 - Historical context of private equity's development
14:07 - Explanation of assets under management (AUM) in private equity
15:32 - Definition of leveraged buyout (LBO)
18:10 - Major players in the private equity space
19:45 - Explanation of limited partners (LPs) and where PE firms get capital
23:52 - How private equity firms make money (management fees and carried interest)
28:17 - Reasons why founders might consider private equity funding
32:39 - Different types of private equity firms and their focus areas
33:49 - Who is not a good fit for private equity funding
35:32 - How private equity differs from venture capital and other types of investors
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🎙 Podcast – Strategies, PE 101 & witty banter
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🛠 Resources – Free templates, guides, tools
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Who Are We?
Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).
Through the Private Equity Experience Podcast, our book On‑Ramp to Exit, and a library of free tools and templates, we share real‑world stories, practical strategies, and insider insights to help you navigate every stage of the PE journey — whether you’re leading a portfolio company, joining a deal team, considering PE, or just PE‑curious.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
if you spent 15 years of yourlife grinding away, um, to build
(00:04):
your business.
You want to reap the benefits ofthat in some way.
Um, so you could either sellyour entire company altogether
to maybe a strategic buyer and,you know, be done with it and
move on, or you can sell amajority of your business to a
private equity fund at a valueyou think, and they agree on or
vice versa, uh, is fair.
And so you can take some moneyoff the table and start building
(00:27):
that big house or buying thatMaserati or whatever Welcome to
the Private Equity ExperiencePodcast.
Your backstage pass to thestrategies, stories, and secrets
that drive value in the PEuniverse.
No filters, no fluff, juststraight talk and expert
(00:50):
insights to help you navigatethe private equity world with
confidence.
And now your hosts, Ed Barton,Rory Liebhardt, and Emily
Sander.
And here we go.
Our inaugural episode of thePrivate Equity Experience
podcast.
(01:11):
I am Emily Sander and I'm joinedby my illustrious co hosts and
co authors Ed Barton and RoyLiebhardt.
This Episode is going to bequick intros from us.
So, you know, who you're hearingfrom, and then we're kind of
going to do just a privateequity one on one, get the lay
of the land, get the foundationthat we can build off of from
(01:31):
there.
So by the end of this episode,you will know at a high level,
what private equity is, what itis not, who the major players
are and how a PE firm makestheir money.
So that can, that's what you canexpect from this episode.
So first off, let's do lightninground intros and introduce
ourselves as it pertains toprivate equity, and then maybe
(01:54):
do like a fun fact, memorablemoment, or something like that.
So I'll go first.
Um, my name is Emily Sander.
I started my corporate career.
At large companies likeMicrosoft and Amazon, I was a
tester for the original Kindledevice, so the e reader, when
that was a brand new thing in07.
(02:16):
And then I worked for a seriesof small to medium private
equity backed businesses.
And those were all pretty muchin technology based businesses,
and so I got opportunities inleadership roles and grew my
career from there, and itculminated in a role as chief of
staff for a digital marketingcompany, and that company was,
um, backed by a P.
(02:38):
E.
firm that I had previouslyworked for, and they had called
the C.
E.
O.
And myself back into theirinvestment In 2021, I started my
full time coaching practice andhave built that up.
And because I was a chief ofstaff and I have coaching
credentials, I specialize incoaching for chiefs of staff,
(02:59):
for their principals, forexecutives, and companies who
are looking to set that role up.
So that's what I do full time.
I also do podcasts and writebooks.
And that is me.
My memorable moment My memorablemoment is mid career.
I was at a board meeting andsomeone was like, Emily, uh, you
(03:19):
know how to build aninternational client management
team from scratch.
Right.
In my head.
I was like, no, no, I don't.
But out loud, I was like, yes.
Yes, I guess I can.
And I went back to my desk and IGoogled how to build an
international client managementteam.
That was before chat GPT too.
(03:40):
So it was even harder.
You had to figure that out.
Um, so that was my memorablemoment and that was in a PE
backed, uh, board situation.
Go Hawks.
So I'm the old person in thegroup, um, had a chance to work
with, oh yes, had a chance towork with, uh, both Rory and
Emily at multiple BE backed, um,companies and overlapped with
(04:04):
all three of us overlapped atone, uh, two, That was, uh,
backed by, uh, Primus Capitalback in, uh, the early 2010s.
Um, but I've spent most of thelast 25 years of my career in
private equity backed businessesas a chief executive officer,
chief operating officer, chieffinancial officer, and then
interim chief technologyofficer.
Chief revenue officer.
(04:25):
So I've pretty much done, ifit's got a officer chief
attached to it, I've managed tomanage to, uh, sit in those, sit
in those seats.
Um, I've worked with four, uh,different private equity firms,
uh, over that period of time,um, both working at the kind of
at the PE level, uh, as a kindof a.
CFO in residence with some oftheir portfolio companies, as
(04:48):
well as being picked up anddropped into companies that
usually needed a little bit ofhelp and guidance and direction,
have spent You know, the, thebulk of my career in, in, uh,
financial services or financialservices related companies.
Although I had a stint inrestaurants, I had a stint, uh,
in, uh, again, with Emily anddigital marketing.
(05:10):
So, you know, the, the privateequity world, uh, can be pretty
varied and, uh, they invest inpretty much anything that has a
chance to make money and, uh,kind of, you know, History, uh,
history lesson.
I, I was, uh, involved in a, ina situation where we were
getting, uh, deposed.
(05:31):
So there was a, there was alawsuit, um, uh, amongst, uh, a
number of folks in the, uh, inthe investment.
Um, so it was a pretty stickysituation.
And you might've been involved.
And, uh, I actually, mydeposition was used as a
training film for, uh, for amajor, a major law firm, um, on
how to answer the questionsconsistently and not get rattled
(05:54):
under pressure.
So I, I'm kind of proud of that.
I subsequently, um, kind of funfact related to that, um,
because of the, that, thatlawsuit and the kind of the.
period I was in, in my career, Iactually went back to law
school, um, in my thirties.
Um, and that subsequently haspassed, have passed the bar
exam, have now admitted topractice.
Um, and I spend most of mycurrent time working as a chief
(06:18):
financial officer or doingconsulting and tax consulting
work and tax attorney work, um,for folks in the Pacific
Northwest.
And just for the record, What doall the letters behind your name
stand for?
Um, I spent way too much timestudying for tests.
That's what they stand for.
Okay.
(06:39):
Uh, Rory.
Yes.
Uh, Rory Liebhardt.
Uh, I'm a Pisces.
No, I'm kidding.
Um, I like long walks on thebeach.
Yeah, exactly.
Uh, boy, yeah, I've been infinancial services for 20 years,
both as an asset manager, aswell as an executive operator
and kind of many points inbetween.
(07:00):
If I were to typecast myself,I'd probably be, um, identified
as a CFO for small to mediumsized private equity backed
companies like Ed.
I've, I've worked for fourdifferent, uh, private equity,
um, sponsors through theiroperating company.
Um, you know, cumulatively beeninvolved with about a dozen or,
you know, transactions, about abillion dollars in transactions.
(07:22):
And fun fact, I suppose youcould call it, maybe at the time
it wasn't as fun for me, but,um, you know, I've sold the same
business three times.
And actually that was the pointmaybe about almost 20 months ago
now, where I decided to kind ofpull the plug on, um, for the
moment anyway, you know, beingan executive in operating
business and started doing a lotof, um, consulting for
(07:43):
businesses and, you know, AndI'm working as more of a
fractional CFO.
So I've had a lot of coolexposure to early stage
businesses, family offices,manufacturing companies, and,
you know, a lot of differentpoints in between.
So, you know, I, I met Ed andEmily, um, met you guys.
Speaking of first, third person,whatever, um, you know, long
time ago, I known Ed for 20years now, Ed's been a mentor,
(08:05):
friend, confidant, all of thethings in between in my career.
And, you know, thanks to Emily,we've kind of come together
again as a, as a unit and said,Hey, let's put something out to
the world, uh, about privateequity and our experience
cumulatively in it, and just,um, You know, really excited to
be sharing that with the world.
Beautiful.
All right.
So now the listener knows who,who they're talking to here.
(08:29):
PE 101, like lay of the land.
Part of my brain was like, what,what was there before private
equity?
So in other words, what gap wasit filling?
What role does it play in theeconomy or in the market?
Yeah, I mean, I'll speak realhigh level.
Um, it's kind of in the name,right?
It's, you know, for sources offunding for any business you
(08:54):
look to outside Capital a lot oftimes.
So, you know, whether it's abank to lend you money or it's
issuing stock for the public,like you, me, and millions of
others to buy little slices ofthe company.
You know, those are the two thatmost people think about, but
private equity, uh, sits in aspot that is what the name
implies.
These are private companiestaking private, uh, positions in
(09:18):
your company, um, and partneringwith you to help you grow your
business.
In large part.
Yeah.
A lot of historically, a lot of,you know, if you go back a
hundred years or so, um, whichis really private equity has
been around a long time.
Yeah.
Um, but if you go back a hundredyears or so, so right around
the, the great depression andthe stock market crash, um, you,
(09:39):
you built a business one of twoways you either, you know, went
friends and family and had, youknow, family money and you
raised money at the local rotaryand, and, The Masonic temple and
all that other stuff and kind ofpulled in and did the kind of
did the bootstrap where you wentpublic and there was really
nothing in the middle.
(09:59):
Um, you, you basically were apublic company or you were a
closely held family business.
Um, once we kind of transitionedpast the second world war into,
um, Kind of into a, a much more,uh, a much more diverse economy,
there was a need, as Rory said,for the, for the, to raise this
capital.
(10:20):
Um, and it was too big, um, for,you know, the, the friends and
family thing and going publichas become, you know, over time
has become incredibly expensive,incredibly difficult to maintain
compliance.
Um, so a lot of times lawyersinvolved, man, too many damn,
it's, it's definitely that plustoo much.
Yeah.
(10:40):
Too many, uh, too manyregulators too.
Um, but you, you go back, you goback into the eighties.
And really that was when privateequity really started taking
off.
So prior to the, prior to theeighties whole LBO thing that
people think of.
Right.
You could, you could, A lot ofyou had a lot of small public
companies.
Yeah.
I mean there was a ton of smallpublic companies in the American
Stock Exchange was popular andstuff like that in the, in the
(11:02):
eighties.
All of a sudden you saw, youstarted seeing these, these big
aggregators like KKR pull in.
Uh, which is Colbert, Kravitz,Roberts.
They started pulling in a lot ofinstitutional money and going,
we can get a better returnbecause these public companies
aren't really well, aren'treally well run.
And so we're going to take themprivate.
We're going to buy all thestock.
We're going to take themprivate.
We're going to put debt on,we're going to try and optimize
(11:24):
their, their, um, Theiroperations.
And that started at like thesebig companies, like, like RJR
and Abisko.
And, and that same model overtime really started working its
way down into the, into the midmarket, especially as, you know,
you start looking at like the,the stock market.
Uh, issues around, you know,2000 or so, and you had Sarbanes
(11:47):
Oxley come in, which really madebeing a public company very
expensive.
And private equity has, hasbecome the primary way to raise
capital, um, for small, midsized business.
So let's, let's pause there.
So private equity is for abusiness who wants or needs
outside funding.
Traditionally, it was fromfamily and friends, or you went
(12:08):
public.
Private equity offers.
Another option.
Okay.
And this has been around likefirst private equity firm was
when.
I think the first, like, I thinkthe one that people think of as
the first private equity dealwas way back in like 1946 with
J.
(12:28):
H.
Whitney and Company and, andthat was, that was kind of the
impetus and, you know, the, therun up started in the 70s.
Okay.
And so that became much more ofa bigger part of our global
economy.
Now there's 4,000, 5,000 privateequity firms globally,$5
trillion of assets undermanagement, which we'll talk
about later about assets undermanagement.
(12:49):
But if you wanna think aboutthat in terms of like
comparables, that's the GDP ofJapan and a lot of other
countries in this world.
So it is foundational now,really.
So, you know, hence the reasonwhy.
More information needs to beshared with the world about this
environment because it's, it'shere to stay.
(13:09):
And, and it's, it's a really,um, I would say, you know,
macroeconomically it's notcyclical.
It's there all the time, asopposed to, you know, stock
markets ebb and flow.
Private equity is always there.
And I think the likelihood thata company goes with private
equity versus going public ismuch higher.
(13:31):
So if you're listening to thisand you're a founder or you're
on a leadership team, thechances that you will be
involved in with private equityin some way is much greater than
you going public with an IPO.
Yeah, I would totally agree withthat.
Far greater.
Yeah.
That was about saying you're,you're likely to, even if you do
go public with an IPO, you'relikely to stage through private
equity or venture capital to getthere.
(13:51):
Yeah.
Okay.
Okay.
And then you mentioned it, Roy.
So, um, assets under management,which is an acronym, AUM, we'll
use over and over again, uh,means what briefly, and then
what is the number that the, theprivate equity kind of footprint
represents today?
So private, I'll start with asecond question first.
It's so big.
I mean, five to 10 trillion ofassets under management,
(14:14):
depending on how you measure it,but assets under management
simply means The dollars thatthese private equity funds have
to invest in businesses andother So assets being businesses
primarily, but there's alsoportfolios of loans and things
like that, that could beconsidered investments for
(14:35):
private equity funds.
Okay.
So like the money under theirmanagement, under their control,
like running through the privateequity ecosystem is four to 5
trillion with a T dollars today.
Think about it.
Like if you're, you know, backwhen I was young, I got like a 5
allowance probably till I waslike 14, actually.
So I was.
Not a very savvy negotiator withmy parents, but if I'm walking
(14:58):
around on Saturday with fivebucks in my pocket, that's my
assets under management.
I don't own any other stuff.
But that cash that I have tospend on comic books or baseball
cards or whatever it may havebeen, that's my assets under
management.
And how I invest that, you know,I hope to get a return on it.
I was not a very good investor,so I bought that kind of crap
and it was pretty muchdepreciated to zero at the
(15:20):
beginning.
So, but yeah, I've learned a lotsince then.
I am a professional now, but youknow, Okay, beautiful, beautiful
explanation.
Uh, Another acronym got thrownout, LBO.
Is that important to cover now?
Why not?
Ed, you want to take that one?
Yeah, sure.
So LBO is leveraged buyout.
And so that's what happens whena private equity firm takes a
(15:42):
look at a company and says,we're going to buy the company.
Um, and The sellers of thecompany generally will get cash.
Um, however, the buyer of thecompany, instead of writing a
check for let's say a hundredmillion dollars, writes a check
for 25 million and borrows 75million from either other
institutional investors, banks,um, or issues bonds, and then
(16:05):
they utilize the cashflow fromthe business to pay off that
debt to service that debt.
And so as a result, they get,they get to control a hundred
million dollar asset with alink.
25 million of equity and therest of it is leveraged and they
bought it out, thereforeleverage buyout.
Yeah.
Okay.
Yeah.
All right.
Leverage equals debt in terms ofuse of capital.
(16:28):
And I think that one of thethings that is associated with
leverage slash debt is justrisk, right?
If you put all of your own moneyinto something, you can kind of
control the payback timeframeand kind of how much and things
like that.
But if you take on debt from abank or another.
Private credit fund or howeveryou want to do that.
You know, you're on their terms.
You have to agree to theirtimelines and their required
(16:50):
returns.
In most cases that works outwell, if you put, if you're, if
you're the private equity groupand you put down a small sliver,
as Ed said, you get the benefitof the whole asset, well, once
you pay off these, Clown banksand private credit funds, then
everything's there for you.
So that would have been a sweetdeal.
However, if things don't go asplanned and you have these
(17:11):
obligations to your bank or yourother credit provider, your debt
provider, that's where thingscan get pretty hairy.
So therefore, you know, when youthink about LBOs, that's how
people associate it, they thinkabout that as like, Ooh.
Private equity, super risky, allthis, that, and the other thing,
that's what they're associatingthat with.
Okay.
All right.
So we've got PE firms are a wayto get money into a business.
(17:36):
They've been around since theforties.
They really took off in theseventies.
They now represent whattechnically term is like a crap
ton of money in the market.
Uh, and there's this thingcalled, uh, LBO, which is kind
of representative of just howyou structure debt and how you
structure I'm going to betalking about how to get into
different deals and how you caninfuse capital in there, which
(17:56):
we'll get into in otherepisodes.
But that's one example of that.
Uh, as you mentioned, like KKR,who are some big players in this
space?
Like when you say, okay, in thePE world, here's like your big
boys or here's, you know, thedifferent types of PE firms you
can have.
I mean, I would tend to, there'slike Rory said, there's,
there's.
Thousands of PE firms now.
Um, but KKR, uh, is probablythe, they're like the cutting
(18:22):
edge foundational, um, Kind ofprototypical firm.
Um, but you've got, I mean, I'mjust thinking there's, I, I've
got so many kind of runningthrough my head.
and the challenge is you used tohave a very, you know, obvious
split between like, this is aprivate equity, you know, Firm.
This is an investment bank.
This is a, but now like theinvestment banks have their own
(18:44):
private equity firms or funds,and so it's all starting to get
kind of mishmashed together.
Um, but you know, theBlackstones, the KKRs, uh, you
know, Rory and I both workedwith Lone Star funds.
Who's a huge, um, huge, uh,private equity firm, uh, three
headed dog.
I remember at night, I used tojoke about that one, but yeah,
(19:06):
Apollo Cerberus, uh, you know,Ares, man.
I mean, there's, there's a lotof them out there.
And when we're talking about thebiggest ones, we're talking
about, you know, uh, four or 500billion under management.
And so, you know, maybe the nextquestion is, well, where the
hell do they get all thatcapital?
Right.
So When you think about privateequity funds, they're just like
(19:30):
other businesses that requirecapital to go do the things they
do.
It just so happens that privateequity funds are existing to
make investments.
So the folks that, that's, thatthey serve to make those
investments tend to be calledlimited partners, LPs.
You'll hear that a lot.
You'll see that a lot.
What is an LP?
Well, an LP is, is a typicallyan institutional investor.
(19:54):
What's an institutionalinvestor?
It's usually a, a very largefund, um, of could be, um,
retirement funds from a pension.
Could be sovereign wealth funds,could be university endowments,
insurance, uh, conglomeratesreally what it is is it's these
massive amounts of capital outthere that we as consumers or
(20:17):
individuals usually pay into,we're paying into a retire or
we're like accumulating in aretirement plan, social
security, whatever kind of stufflike, so that all that money all
needs to get invested somehow.
Otherwise, as you.
Is time passes the value of thatdollar that's sitting there goes
down with inflation, right?
So they need to keep making areturn on that money.
So where do you put it?
(20:38):
Well, they put most of theirmoney just like most people into
public public equities Some verysafe bonds and other other
things like that, but they haveallocated To alternative
investments, private equity, aswell as other things sit in this
world of alternativeinvestments, typically.
So these, these large endowmentsand university pension funds
(21:01):
and, and sovereign wealth funds,they allocate money to private
equity.
And so that's where privateequity gets their capital.
They invest that capital onbehalf of those LPs.
And they return profits to thoseLPs, which then in turn,
theoretically funds theretirement of teachers and
pensioners and, you know, um,government officials and
(21:23):
sovereign wealth funds andwherever else it's going out of
the sovereign wealth funds too.
We don't know.
Um, but that's kind of, that'skind of how it works.
It's, it's basically just followthe money around.
It's it's money is going throughvarious points.
To come back with a littleextra, but that extra is being
made off of somebody else andredistributed basically.
(21:43):
Yeah.
So we have a chart on this inour book on ramp to exit, but
there's like the middle level,which is kind of the PE firm
level.
And then above that would be theLP.
So limited partners that Roryjust mentioned.
And like to think about that ina real example, it might be, you
mentioned pension funds.
So a pension fund will make, youknow, a dozen investments for,
(22:04):
you know, A series of decades,right?
Cause they're talking aboutdecades and decades and decades.
You're, you're looking atdecades long obligations to your
pensioners.
You know, a relatively smallpercentage of their investments
will be to private equity, uh,funds because that's riskier.
And so they're like, we're notgoing to put our whole thing and
less liquid.
Exactly.
That's key right there.
(22:25):
What Ed said.
Well, we want some kind ofalternative, maybe some more
aggressive.
We want higher returns.
Yeah.
portfolio that it does.
So maybe like sub 10%, like sub5 percent even will be allocated
to private equity investment.
So they will fund the privateequity firms, which in turn, so
that's, so LPs on the top layer,PE firms in the middle, and then
(22:47):
below that are these portfoliocompanies or what most people
would think of as like companiesor businesses.
Yeah.
Yeah.
That are saying, yes, I want totake that private equity funding
because I need external or Iwant external funding.
And that's kind of like thecircle of life, Simba, for the
PE world.
So in terms of how a PE firmmakes money, I think that that's
(23:09):
important to understand.
So we have the LPs on the top,the middle level or layer is PE
firms.
And then we have, um, likethese, they're called funds.
So what normal people think ofas companies or businesses, a PE
firm will group them in likegroups of like 10 to 15
companies and call that fundone, and then they'll have, you
(23:31):
know, like fund two with 10companies and fund three, and
we'll talk about how that, thatworks.
But basically those companiesgrouped in those funds are on
that third bottom.
layer.
And so how a PE firm makes moneyis they get some on both ends,
right?
So maybe someone, Ed, can youtalk through like they get a
management fee for the LPs andall that stuff?
(23:52):
Yeah.
So, so the LP essentially isutilizing the private equity The
private equity management teamas a efficiency to make these
investments.
So private equity managers areexperts in finding undervalued
assets, negotiating these deals,unlocking value, structuring
balance sheets.
And so, and it's difficult.
(24:13):
They're sifting through.
If you're sitting in a privateequity firm, you're sifting
through potentially dozens ofdeals a day to try and find ones
that fit your investment thesis.
So the.
The folks at the, the upper end,the, uh, uh, institutional
investors go, look, I'll pay yougenerally around 2 percent of
(24:33):
the money I'm investing with youevery year for you to do that
for you to kind of sift throughall this stuff, find these
investments, manage theseinvestments for me, just like
you would pay, um, if you weregetting a managed kind of
managed fund to Edward Jones orsomething.
So that's the, the, the.
These guys up here at theinstitutional level are really
happy.
It's a good deal for them to paythat 2 percent or so management
(24:54):
fee on the assets every year tohave those private equity
experts go through a veryinefficient market in a private
space and find the best dealsand sift through those deals.
Now, the other side of that is,and I'm not going to talk about,
you know, kind of the, themanagement fees coming into, um,
The private equity firm rightnow, I'll just start with the
(25:16):
private equity firm, then goesand invests in these, these
companies and the companies aremanaged.
By the private equity firm.
And in a number of ways, there'soperational efficiencies that
they look to unlock and there'sfinancial efficiencies that they
look to unlock.
That strategy goes, they go inwith a strategy.
I know we'll talk about this alot more, but they go in with a
(25:37):
strategy that when they'rebuying into that business, they
know how they're going to,they've got a plan on how
they're going to get back out ofit and how they're going to
unlock value.
Always, every time that valuethat they unlock, Okay.
So let's say they, they unlock ahundred million dollars of
additional value.
They send that the initialinvestment back to that
institutional investor and go,thank you for your a hundred
million dollars.
(25:57):
We've now made you 200 million.
We're going to send you back 180million.
And we're going to keep 20percent for ourselves of the, of
the ops.
So we're going to keep 20million.
So now they've made 2 percentfor just kind of managing that
investment over time.
And then they get 20%.
And again, this is roughly someare higher, some are lower.
It depends on the, the, thefund, the 20 percent of the
(26:21):
profit.
So now on that a hundred, ahundred million dollars that was
invested by the, by the, uh, Theinstitutional investor, they
might've gotten 2 percent peryear.
So they got, you know, 10million, um, on that, um, for a
five year hold.
And then they got another 20million on the investment and
the original investor got 180million.
Everybody's happy, not a badgig.
(26:43):
No.
So institutional investor equalslimited partner.
Yes.
Yep.
Okay.
So on that top layer,institutional investor or LP,
and in between like that toplayer and the PE firm, there's
like a little cycle of moneythat's happening, which is 2
percent and then in between thesurrounding air, you know,
nothing big, just a couplemillion here, a couple million
(27:06):
dollars on a Apollo size phone.
And then in between the middlelayer, which is the PE firm and
the Lower bottom level, which isthe companies in those funds.
There's a little money loophappening there, which is the go
ahead, Ed, which is, yeah, so,so, Some private equity firms,
(27:26):
I've worked for private equityfirms that both do this and some
that do not.
Um, but there's private equityfirms that will also charge the,
the operating company amanagement fee too.
So they, they get a little bitof money coming in from the
operating company to manage it.
They get a little bit of moneycoming in from the, from the,
uh, the LPs to manage the money.
So they're getting it on bothends.
(27:47):
And then when they sell.
They get generally 20 percent ofthe profit, so they get, so they
get, you know, but that'stransactional.
So that's only going to happengenerally once during the course
of the, the investment.
Okay.
So that's high level how a PEfirm makes money.
Yep.
Okay.
Um, so then Rory, what are somereasons why a founder Or
(28:11):
original founders would evenconsider private equity.
you know, a lot of times itcomes down to it's reached a
point in its life cycle, thefounders probably bootstrapped
the business up to a certainpoint.
And, you know, the businessitself at that very moment,
isn't generating enough.
Free cash to make biggerinvestments, to grow, grow more.
(28:34):
Maybe they don't have access totraditional debt markets, et
cetera.
Um, so they need outsideinvestment.
So that's, that's place and goalso another reason why a
founder might take on a partner.
Maybe they want to, uh, they,they want to monetize some of
what they've built rightfully.
So, you know, if you spent 15years of your life grinding
(28:55):
away, um, to build yourbusiness.
You want to reap the benefits ofthat in some way.
Um, so you could either sellyour entire company altogether
to maybe a strategic buyer and,you know, be done with it and
move on, or you can sell amajority of your business to a
private equity fund at a valueyou think, and they agree on or
vice versa, uh, is fair.
(29:17):
And so you can take some moneyoff the table and start building
that big house or buying thatMaserati or whatever.
Um, but it's a way to, it's away to realize some of that
investment without going throughthe rigmarole of.
Um, taking a company publicbecause that could, you could,
you could be dead on arrival ifyou do that wrong and time that
wrong, you know, so.
(29:38):
oftentimes it is a great deal,uh, for.
Relatively little friction to goget more capital, right?
Even if you have a veryfundamentally sound business,
taking your company public is amassive endeavor.
It's extremely costly.
And it, you know, it is notalways a given private equity in
(30:01):
my experience.
Uh, the ones that I've workedfor are oftentimes very flexible
in how they get a deal done.
Um, so there's, I would say if Iwere to wrap it up, it's
potentially the easiest, um,avenue of those three.
To get deal done basically.
And so again, why would you wantto get a deal done?
(30:22):
One, you just need more money togrow your business.
You have a new product or a newstrategy or new geography you're
trying to get your solutioninto.
It takes a lot of dough to hirethe people, to build the
technology stack, to managethrough the compliance and all
that kind of stuff.
Um, you need money to do that.
And so if you don't otherwisehave the means to do that
(30:43):
through your current business,you need outside money to,
again, like I said, you know,some, some founders want to take
money off the table by that.
I mean, you know, get, get paidfor what they've built and doing
that through selling to aprivate group.
Is probably again, the path ofleast resistance to doing it.
(31:04):
Now, again, we'll talk moreabout what that means.
Once you do lock arms with yourpartners, but, um, but, you
know, getting to the point II've been through a lot of
private equity deals and, andsometimes they can be pretty
straightforward, believe it ornot, so, you know, Okay.
Those are some reasons why youwould engage with a PE firm.
(31:25):
Ed, any, anything else to add?
Well, I think the, the other,the other piece is you do run
into a situation where it's, youknow, could be a family owned
business or closely heldbusiness and partners are no
longer getting along.
So you need to be able to, uh,make a transition, make a
transition, um, of one or moreof the partners that founders of
(31:45):
the business, um, been in thatsituation before.
And also, um, you've gotsituations where I forgot.
It's not all rainbows andunicorns.
You know, it's, so there's adistress, there's a distress
side of this too.
And there's private equity firmsthat specialize in distress
where they, you've gotsituations like that.
Um, you got situations wherefounder founder may, uh, need to
(32:05):
get liquid because they've got afamily situation or they're a
divorce or, or, um, an illnessor death.
Um, and so private equity firms,as Rory said, it's a very low
friction, uh, comparatively and.
Quick to close comparatively.
And so they could come in andkind of provide that liquidity
to founders, founders, families,um, could save the business in
(32:28):
some cases, if there's a needfor additional equity, but the
business has, you know, a futureahead of it.
And so there's the distress sideof private equity as well.
And that's a pretty lucrativepiece of that business.
Actually, that's a great point.
Um, it's worth talking aboutthat.
Not all private equities are thesame, right?
Like you have private equitygroups that focus purely on
(32:48):
technology and, um, let's callit, you know, services
businesses.
And you have others that onlydeal in industrial and
manufacturing type businesses,and furthermore, Like Lone Star
Funds, I'll go out and say it,you know, who we've worked with,
they, they look for a lot oftimes, um, financial services,
(33:09):
but undervalued or, or sort ofdistressed scenarios, you know,
so they build their business inwhat they do best.
And again, these private equityfirms are made of human beings.
You know, every human being hastheir own core competency and
the things that they are good atand they're knowledgeable for.
So, they build these businessesaround people and then double
(33:32):
down on the emphasis of wherethey put their money based on
that.
So Okay.
Okay, my second to last questionis If Who would not be a good
fit for private equity?
So if someone's listening andit's like, look, if you want to
maintain a lifestyle business,if you want to maintain control,
like who is just this You'reyou're hit, you just did on two
of the big ones.
(33:52):
So if you're, if you're goinginto a PE back deal, um, A
couple, a couple of companiesthat should not be not be
looking at it is if you're toosmall, um, and you know, by too
small, I'm saying, you know,equity value under 10 million.
Um, you're probably going to betoo small for private equity.
Uh, you know, there's, you'regoing to have to go, you know,
(34:12):
to hit the Elks Lodge and pass ahat around a church, um, to, to
raise additional capital.
That's still friends and family.
Um, If you, if you want to runyour business as a lifestyle
business and you've gotten usedto making, you know, a million,
million and a half a year,working 35 hours a week, it
ain't going to be that wayanymore.
And if that's what you'relooking for, you'd best exit.
Um, if you're going to goprivate equity and you know, the
(34:34):
other, the other piece where itisn't good is.
And we'll talk, I know we'lltalk about this more is if
you've got a problem and you'retrying to sell out from in front
of that problem.
And you don't think the privateequity guys are going to find
that problem.
Um, they're going to find thatproblem during diligence.
They've generally seen it all.
And if they don't find it duringdiligence, they're going to find
(34:55):
it after diligence.
And so if you're, if you'retrying to get out and you're not
being transparent about what thebusiness's opportunities and
challenges are, that's going tobe a bad fit ultimately for that
private equity partner in you.
Yeah, well said, you know, firstand foremost, if you're a fan of
total control of your business.
(35:16):
And you're not willing to seethat private equity ain't for
you.
All right.
What is private equity not?
So Ed, you mentioned, youalluded to this just a second
ago with VC, but just what arethe things that private equity
gets confused with?
We want to clarify.
Yeah.
So, so venture capital, um, andI'll, and I'll use the example.
(35:36):
Um, venture capitalists lookfor, you know, 20X, 30X returns
and they expect 10 percent oftheir stuff to hit.
Private equity looks for 20percent returns and expects 90
percent of it to hit.
So you're, you've got adifferent risk profile that
those, that those two types ofinvestors are, are looking for.
And so if you're a high riskkind of early stage business,
(35:57):
that's rocket ship to the moon,you're probably not a private
equity.
You're probably a venturecapital as a candidate.
Um, The other thing that privateequity is not is generally a
passive investor.
Um, private equity is, islooking for ways to either
operationally or financiallyenhance the value of that
business through efficiencies.
(36:18):
And that's where they're, that'swhere they're going to bring
their expertise in.
And, you know, so if you'reexpecting someone who's just
going to hand you a big checkand walk away and, you know,
come back five years later, thatain't going to happen.
They're not that they're,they're an active partner in the
business.
That's the angel investment seedround action.
That's not right.
Yeah.
Yeah.
(36:38):
Yeah.
Yeah.
Well said.
I mean, um, yeah, it's, it's, itjust, it comes down to really
what you're used to and how muchyou control and ultimately, you
know, how, how much honestly,from what I've observed and
experienced.
How much you're willing to kindof put your ego aside and move
(37:02):
your business forward with apartner.
Because again, oftentimes theprivate equity groups see things
beyond what the founder sees inyour business.
And they want to work with thatfounder and the management team
to even potentially pivot thebusiness in a way that everyone
thinks can make a lot of money,but sometimes if it's.
(37:23):
Not the right chemistry ordynamic off the, off the jump
that that's going to be aproblematic road.
Um, and I think that thefounder, uh, generally controls
that destiny on how they respondto change and the input of
others, if you will.
Yeah, I think that's a good noteto leave on because the whole
(37:44):
premise of this is it can be,when it's set up well, it can be
a win, win, win scenario.
Oh yeah.
Everyone can hit home runs.
Life changing.
It can be lucrative.
Uh, you can win.
The PE firm can win.
Your customers can win.
So when it's done right, um, it,it can be, um, a great move to
make.
And part of why we're doing thispodcast is just to arm you with
that knowledge.
(38:04):
So, you know.
What's going on, eyes wide open,what, what you're getting into.
So, um, we'll call that a wrapfor our first episode, but, um,
there's, that was literally justthe tip of the iceberg, the very
tippy top of the pyramid type ofthing.
So we're going to expand on, um,all of these topics and more,
and just make sure that you haveeverything you need.
(38:26):
To, to make an informeddecision.
And right now we're planning onevery other week podcast.
So it'll drop every other week.
But if you, um, like what youheard here or want to hear more
and learn more about this, thenhit subscribe.
So you don't miss an episode andwe will catch you next time on
the private equity experiencepodcast.
(38:51):
If you enjoyed today's episode,please like, share, and
subscribe wherever you get yourpodcasts.
if you spent 15 years of yourlife grinding away, um, to build
(00:04):
your business.
You want to reap the benefits ofthat in some way.
Um, so you could either sellyour entire company altogether
to maybe a strategic buyer and,you know, be done with it and
move on, or you can sell amajority of your business to a
private equity fund at a valueyou think, and they agree on or
vice versa, uh, is fair.
And so you can take some moneyoff the table and start building
(00:27):
that big house or buying thatMaserati or whatever Welcome to
the Private Equity ExperiencePodcast.
Your backstage pass to thestrategies, stories, and secrets
that drive value in the PEuniverse.
No filters, no fluff, juststraight talk and expert
(00:50):
insights to help you navigatethe private equity world with
confidence.
And now your hosts, Ed Barton,Rory Liebhardt, and Emily
Sander.
And here we go.
Our inaugural episode of thePrivate Equity Experience
podcast.
(01:11):
I am Emily Sander and I'm joinedby my illustrious co hosts and
co authors Ed Barton and RoyLiebhardt.
This Episode is going to bequick intros from us.
So, you know, who you're hearingfrom, and then we're kind of
going to do just a privateequity one on one, get the lay
of the land, get the foundationthat we can build off of from
(01:31):
there.
So by the end of this episode,you will know at a high level,
what private equity is, what itis not, who the major players
are and how a PE firm makestheir money.
So that can, that's what you canexpect from this episode.
So first off, let's do lightninground intros and introduce
ourselves as it pertains toprivate equity, and then maybe
(01:54):
do like a fun fact, memorablemoment, or something like that.
So I'll go first.
Um, my name is Emily Sander.
I started my corporate career.
At large companies likeMicrosoft and Amazon, I was a
tester for the original Kindledevice, so the e reader, when
that was a brand new thing in07.
(02:16):
And then I worked for a seriesof small to medium private
equity backed businesses.
And those were all pretty muchin technology based businesses,
and so I got opportunities inleadership roles and grew my
career from there, and itculminated in a role as chief of
staff for a digital marketingcompany, and that company was,
um, backed by a P.
(02:38):
E.
firm that I had previouslyworked for, and they had called
the C.
E.
O.
And myself back into theirinvestment In 2021, I started my
full time coaching practice andhave built that up.
And because I was a chief ofstaff and I have coaching
credentials, I specialize incoaching for chiefs of staff,
(02:59):
for their principals, forexecutives, and companies who
are looking to set that role up.
So that's what I do full time.
I also do podcasts and writebooks.
And that is me.
My memorable moment My memorablemoment is mid career.
I was at a board meeting andsomeone was like, Emily, uh, you
(03:19):
know how to build aninternational client management
team from scratch.
Right.
In my head.
I was like, no, no, I don't.
But out loud, I was like, yes.
Yes, I guess I can.
And I went back to my desk and IGoogled how to build an
international client managementteam.
That was before chat GPT too.
(03:40):
So it was even harder.
You had to figure that out.
Um, so that was my memorablemoment and that was in a PE
backed, uh, board situation.
Go Hawks.
So I'm the old person in thegroup, um, had a chance to work
with, oh yes, had a chance towork with, uh, both Rory and
Emily at multiple BE backed, um,companies and overlapped with
(04:04):
all three of us overlapped atone, uh, two, That was, uh,
backed by, uh, Primus Capitalback in, uh, the early 2010s.
Um, but I've spent most of thelast 25 years of my career in
private equity backed businessesas a chief executive officer,
chief operating officer, chieffinancial officer, and then
interim chief technologyofficer.
Chief revenue officer.
(04:25):
So I've pretty much done, ifit's got a officer chief
attached to it, I've managed tomanage to, uh, sit in those, sit
in those seats.
Um, I've worked with four, uh,different private equity firms,
uh, over that period of time,um, both working at the kind of
at the PE level, uh, as a kindof a.
CFO in residence with some oftheir portfolio companies, as
(04:48):
well as being picked up anddropped into companies that
usually needed a little bit ofhelp and guidance and direction,
have spent You know, the, thebulk of my career in, in, uh,
financial services or financialservices related companies.
Although I had a stint inrestaurants, I had a stint, uh,
in, uh, again, with Emily anddigital marketing.
(05:10):
So, you know, the, the privateequity world, uh, can be pretty
varied and, uh, they invest inpretty much anything that has a
chance to make money and, uh,kind of, you know, History, uh,
history lesson.
I, I was, uh, involved in a, ina situation where we were
getting, uh, deposed.
(05:31):
So there was a, there was alawsuit, um, uh, amongst, uh, a
number of folks in the, uh, inthe investment.
Um, so it was a pretty stickysituation.
And you might've been involved.
And, uh, I actually, mydeposition was used as a
training film for, uh, for amajor, a major law firm, um, on
how to answer the questionsconsistently and not get rattled
(05:54):
under pressure.
So I, I'm kind of proud of that.
I subsequently, um, kind of funfact related to that, um,
because of the, that, thatlawsuit and the kind of the.
period I was in, in my career, Iactually went back to law
school, um, in my thirties.
Um, and that subsequently haspassed, have passed the bar
exam, have now admitted topractice.
Um, and I spend most of mycurrent time working as a chief
(06:18):
financial officer or doingconsulting and tax consulting
work and tax attorney work, um,for folks in the Pacific
Northwest.
And just for the record, What doall the letters behind your name
stand for?
Um, I spent way too much timestudying for tests.
That's what they stand for.
Okay.
(06:39):
Uh, Rory.
Yes.
Uh, Rory Liebhardt.
Uh, I'm a Pisces.
No, I'm kidding.
Um, I like long walks on thebeach.
Yeah, exactly.
Uh, boy, yeah, I've been infinancial services for 20 years,
both as an asset manager, aswell as an executive operator
and kind of many points inbetween.
(07:00):
If I were to typecast myself,I'd probably be, um, identified
as a CFO for small to mediumsized private equity backed
companies like Ed.
I've, I've worked for fourdifferent, uh, private equity,
um, sponsors through theiroperating company.
Um, you know, cumulatively beeninvolved with about a dozen or,
you know, transactions, about abillion dollars in transactions.
(07:22):
And fun fact, I suppose youcould call it, maybe at the time
it wasn't as fun for me, but,um, you know, I've sold the same
business three times.
And actually that was the pointmaybe about almost 20 months ago
now, where I decided to kind ofpull the plug on, um, for the
moment anyway, you know, beingan executive in operating
business and started doing a lotof, um, consulting for
(07:43):
businesses and, you know, AndI'm working as more of a
fractional CFO.
So I've had a lot of coolexposure to early stage
businesses, family offices,manufacturing companies, and,
you know, a lot of differentpoints in between.
So, you know, I, I met Ed andEmily, um, met you guys.
Speaking of first, third person,whatever, um, you know, long
time ago, I known Ed for 20years now, Ed's been a mentor,
(08:05):
friend, confidant, all of thethings in between in my career.
And, you know, thanks to Emily,we've kind of come together
again as a, as a unit and said,Hey, let's put something out to
the world, uh, about privateequity and our experience
cumulatively in it, and just,um, You know, really excited to
be sharing that with the world.
Beautiful.
All right.
So now the listener knows who,who they're talking to here.
(08:29):
PE 101, like lay of the land.
Part of my brain was like, what,what was there before private
equity?
So in other words, what gap wasit filling?
What role does it play in theeconomy or in the market?
Yeah, I mean, I'll speak realhigh level.
Um, it's kind of in the name,right?
It's, you know, for sources offunding for any business you
(08:54):
look to outside Capital a lot oftimes.
So, you know, whether it's abank to lend you money or it's
issuing stock for the public,like you, me, and millions of
others to buy little slices ofthe company.
You know, those are the two thatmost people think about, but
private equity, uh, sits in aspot that is what the name
implies.
These are private companiestaking private, uh, positions in
(09:18):
your company, um, and partneringwith you to help you grow your
business.
In large part.
Yeah.
A lot of historically, a lot of,you know, if you go back a
hundred years or so, um, whichis really private equity has
been around a long time.
Yeah.
Um, but if you go back a hundredyears or so, so right around
the, the great depression andthe stock market crash, um, you,
(09:39):
you built a business one of twoways you either, you know, went
friends and family and had, youknow, family money and you
raised money at the local rotaryand, and, The Masonic temple and
all that other stuff and kind ofpulled in and did the kind of
did the bootstrap where you wentpublic and there was really
nothing in the middle.
(09:59):
Um, you, you basically were apublic company or you were a
closely held family business.
Um, once we kind of transitionedpast the second world war into,
um, Kind of into a, a much more,uh, a much more diverse economy,
there was a need, as Rory said,for the, for the, to raise this
capital.
(10:20):
Um, and it was too big, um, for,you know, the, the friends and
family thing and going publichas become, you know, over time
has become incredibly expensive,incredibly difficult to maintain
compliance.
Um, so a lot of times lawyersinvolved, man, too many damn,
it's, it's definitely that plustoo much.
Yeah.
(10:40):
Too many, uh, too manyregulators too.
Um, but you, you go back, you goback into the eighties.
And really that was when privateequity really started taking
off.
So prior to the, prior to theeighties whole LBO thing that
people think of.
Right.
You could, you could, A lot ofyou had a lot of small public
companies.
Yeah.
I mean there was a ton of smallpublic companies in the American
Stock Exchange was popular andstuff like that in the, in the
(11:02):
eighties.
All of a sudden you saw, youstarted seeing these, these big
aggregators like KKR pull in.
Uh, which is Colbert, Kravitz,Roberts.
They started pulling in a lot ofinstitutional money and going,
we can get a better returnbecause these public companies
aren't really well, aren'treally well run.
And so we're going to take themprivate.
We're going to buy all thestock.
We're going to take themprivate.
We're going to put debt on,we're going to try and optimize
(11:24):
their, their, um, Theiroperations.
And that started at like thesebig companies, like, like RJR
and Abisko.
And, and that same model overtime really started working its
way down into the, into the midmarket, especially as, you know,
you start looking at like the,the stock market.
Uh, issues around, you know,2000 or so, and you had Sarbanes
(11:47):
Oxley come in, which really madebeing a public company very
expensive.
And private equity has, hasbecome the primary way to raise
capital, um, for small, midsized business.
So let's, let's pause there.
So private equity is for abusiness who wants or needs
outside funding.
Traditionally, it was fromfamily and friends, or you went
(12:08):
public.
Private equity offers.
Another option.
Okay.
And this has been around likefirst private equity firm was
when.
I think the first, like, I thinkthe one that people think of as
the first private equity dealwas way back in like 1946 with
J.
(12:28):
H.
Whitney and Company and, andthat was, that was kind of the
impetus and, you know, the, therun up started in the 70s.
Okay.
And so that became much more ofa bigger part of our global
economy.
Now there's 4,000, 5,000 privateequity firms globally,$5
trillion of assets undermanagement, which we'll talk
about later about assets undermanagement.
(12:49):
But if you wanna think aboutthat in terms of like
comparables, that's the GDP ofJapan and a lot of other
countries in this world.
So it is foundational now,really.
So, you know, hence the reasonwhy.
More information needs to beshared with the world about this
environment because it's, it'shere to stay.
(13:09):
And, and it's, it's a really,um, I would say, you know,
macroeconomically it's notcyclical.
It's there all the time, asopposed to, you know, stock
markets ebb and flow.
Private equity is always there.
And I think the likelihood thata company goes with private
equity versus going public ismuch higher.
(13:31):
So if you're listening to thisand you're a founder or you're
on a leadership team, thechances that you will be
involved in with private equityin some way is much greater than
you going public with an IPO.
Yeah, I would totally agree withthat.
Far greater.
Yeah.
That was about saying you're,you're likely to, even if you do
go public with an IPO, you'relikely to stage through private
equity or venture capital to getthere.
(13:51):
Yeah.
Okay.
Okay.
And then you mentioned it, Roy.
So, um, assets under management,which is an acronym, AUM, we'll
use over and over again, uh,means what briefly, and then
what is the number that the, theprivate equity kind of footprint
represents today?
So private, I'll start with asecond question first.
It's so big.
I mean, five to 10 trillion ofassets under management,
(14:14):
depending on how you measure it,but assets under management
simply means The dollars thatthese private equity funds have
to invest in businesses andother So assets being businesses
primarily, but there's alsoportfolios of loans and things
like that, that could beconsidered investments for
(14:35):
private equity funds.
Okay.
So like the money under theirmanagement, under their control,
like running through the privateequity ecosystem is four to 5
trillion with a T dollars today.
Think about it.
Like if you're, you know, backwhen I was young, I got like a 5
allowance probably till I waslike 14, actually.
So I was.
Not a very savvy negotiator withmy parents, but if I'm walking
(14:58):
around on Saturday with fivebucks in my pocket, that's my
assets under management.
I don't own any other stuff.
But that cash that I have tospend on comic books or baseball
cards or whatever it may havebeen, that's my assets under
management.
And how I invest that, you know,I hope to get a return on it.
I was not a very good investor,so I bought that kind of crap
and it was pretty muchdepreciated to zero at the
(15:20):
beginning.
So, but yeah, I've learned a lotsince then.
I am a professional now, but youknow, Okay, beautiful, beautiful
explanation.
Uh, Another acronym got thrownout, LBO.
Is that important to cover now?
Why not?
Ed, you want to take that one?
Yeah, sure.
So LBO is leveraged buyout.
And so that's what happens whena private equity firm takes a
(15:42):
look at a company and says,we're going to buy the company.
Um, and The sellers of thecompany generally will get cash.
Um, however, the buyer of thecompany, instead of writing a
check for let's say a hundredmillion dollars, writes a check
for 25 million and borrows 75million from either other
institutional investors, banks,um, or issues bonds, and then
(16:05):
they utilize the cashflow fromthe business to pay off that
debt to service that debt.
And so as a result, they get,they get to control a hundred
million dollar asset with alink.
25 million of equity and therest of it is leveraged and they
bought it out, thereforeleverage buyout.
Yeah.
Okay.
Yeah.
All right.
Leverage equals debt in terms ofuse of capital.
(16:28):
And I think that one of thethings that is associated with
leverage slash debt is justrisk, right?
If you put all of your own moneyinto something, you can kind of
control the payback timeframeand kind of how much and things
like that.
But if you take on debt from abank or another.
Private credit fund or howeveryou want to do that.
You know, you're on their terms.
You have to agree to theirtimelines and their required
(16:50):
returns.
In most cases that works outwell, if you put, if you're, if
you're the private equity groupand you put down a small sliver,
as Ed said, you get the benefitof the whole asset, well, once
you pay off these, Clown banksand private credit funds, then
everything's there for you.
So that would have been a sweetdeal.
However, if things don't go asplanned and you have these
(17:11):
obligations to your bank or yourother credit provider, your debt
provider, that's where thingscan get pretty hairy.
So therefore, you know, when youthink about LBOs, that's how
people associate it, they thinkabout that as like, Ooh.
Private equity, super risky, allthis, that, and the other thing,
that's what they're associatingthat with.
Okay.
All right.
So we've got PE firms are a wayto get money into a business.
(17:36):
They've been around since theforties.
They really took off in theseventies.
They now represent whattechnically term is like a crap
ton of money in the market.
Uh, and there's this thingcalled, uh, LBO, which is kind
of representative of just howyou structure debt and how you
structure I'm going to betalking about how to get into
different deals and how you caninfuse capital in there, which
(17:56):
we'll get into in otherepisodes.
But that's one example of that.
Uh, as you mentioned, like KKR,who are some big players in this
space?
Like when you say, okay, in thePE world, here's like your big
boys or here's, you know, thedifferent types of PE firms you
can have.
I mean, I would tend to, there'slike Rory said, there's,
there's.
Thousands of PE firms now.
Um, but KKR, uh, is probablythe, they're like the cutting
(18:22):
edge foundational, um, Kind ofprototypical firm.
Um, but you've got, I mean, I'mjust thinking there's, I, I've
got so many kind of runningthrough my head.
and the challenge is you used tohave a very, you know, obvious
split between like, this is aprivate equity, you know, Firm.
This is an investment bank.
This is a, but now like theinvestment banks have their own
(18:44):
private equity firms or funds,and so it's all starting to get
kind of mishmashed together.
Um, but you know, theBlackstones, the KKRs, uh, you
know, Rory and I both workedwith Lone Star funds.
Who's a huge, um, huge, uh,private equity firm, uh, three
headed dog.
I remember at night, I used tojoke about that one, but yeah,
(19:06):
Apollo Cerberus, uh, you know,Ares, man.
I mean, there's, there's a lotof them out there.
And when we're talking about thebiggest ones, we're talking
about, you know, uh, four or 500billion under management.
And so, you know, maybe the nextquestion is, well, where the
hell do they get all thatcapital?
Right.
So When you think about privateequity funds, they're just like
(19:30):
other businesses that requirecapital to go do the things they
do.
It just so happens that privateequity funds are existing to
make investments.
So the folks that, that's, thatthey serve to make those
investments tend to be calledlimited partners, LPs.
You'll hear that a lot.
You'll see that a lot.
What is an LP?
Well, an LP is, is a typicallyan institutional investor.
(19:54):
What's an institutionalinvestor?
It's usually a, a very largefund, um, of could be, um,
retirement funds from a pension.
Could be sovereign wealth funds,could be university endowments,
insurance, uh, conglomeratesreally what it is is it's these
massive amounts of capital outthere that we as consumers or
(20:17):
individuals usually pay into,we're paying into a retire or
we're like accumulating in aretirement plan, social
security, whatever kind of stufflike, so that all that money all
needs to get invested somehow.
Otherwise, as you.
Is time passes the value of thatdollar that's sitting there goes
down with inflation, right?
So they need to keep making areturn on that money.
So where do you put it?
(20:38):
Well, they put most of theirmoney just like most people into
public public equities Some verysafe bonds and other other
things like that, but they haveallocated To alternative
investments, private equity, aswell as other things sit in this
world of alternativeinvestments, typically.
So these, these large endowmentsand university pension funds
(21:01):
and, and sovereign wealth funds,they allocate money to private
equity.
And so that's where privateequity gets their capital.
They invest that capital onbehalf of those LPs.
And they return profits to thoseLPs, which then in turn,
theoretically funds theretirement of teachers and
pensioners and, you know, um,government officials and
(21:23):
sovereign wealth funds andwherever else it's going out of
the sovereign wealth funds too.
We don't know.
Um, but that's kind of, that'skind of how it works.
It's, it's basically just followthe money around.
It's it's money is going throughvarious points.
To come back with a littleextra, but that extra is being
made off of somebody else andredistributed basically.
(21:43):
Yeah.
So we have a chart on this inour book on ramp to exit, but
there's like the middle level,which is kind of the PE firm
level.
And then above that would be theLP.
So limited partners that Roryjust mentioned.
And like to think about that ina real example, it might be, you
mentioned pension funds.
So a pension fund will make, youknow, a dozen investments for,
(22:04):
you know, A series of decades,right?
Cause they're talking aboutdecades and decades and decades.
You're, you're looking atdecades long obligations to your
pensioners.
You know, a relatively smallpercentage of their investments
will be to private equity, uh,funds because that's riskier.
And so they're like, we're notgoing to put our whole thing and
less liquid.
Exactly.
That's key right there.
(22:25):
What Ed said.
Well, we want some kind ofalternative, maybe some more
aggressive.
We want higher returns.
Yeah.
portfolio that it does.
So maybe like sub 10%, like sub5 percent even will be allocated
to private equity investment.
So they will fund the privateequity firms, which in turn, so
that's, so LPs on the top layer,PE firms in the middle, and then
(22:47):
below that are these portfoliocompanies or what most people
would think of as like companiesor businesses.
Yeah.
Yeah.
That are saying, yes, I want totake that private equity funding
because I need external or Iwant external funding.
And that's kind of like thecircle of life, Simba, for the
PE world.
So in terms of how a PE firmmakes money, I think that that's
(23:09):
important to understand.
So we have the LPs on the top,the middle level or layer is PE
firms.
And then we have, um, likethese, they're called funds.
So what normal people think ofas companies or businesses, a PE
firm will group them in likegroups of like 10 to 15
companies and call that fundone, and then they'll have, you
(23:31):
know, like fund two with 10companies and fund three, and
we'll talk about how that, thatworks.
But basically those companiesgrouped in those funds are on
that third bottom.
layer.
And so how a PE firm makes moneyis they get some on both ends,
right?
So maybe someone, Ed, can youtalk through like they get a
management fee for the LPs andall that stuff?
(23:52):
Yeah.
So, so the LP essentially isutilizing the private equity The
private equity management teamas a efficiency to make these
investments.
So private equity managers areexperts in finding undervalued
assets, negotiating these deals,unlocking value, structuring
balance sheets.
And so, and it's difficult.
(24:13):
They're sifting through.
If you're sitting in a privateequity firm, you're sifting
through potentially dozens ofdeals a day to try and find ones
that fit your investment thesis.
So the.
The folks at the, the upper end,the, uh, uh, institutional
investors go, look, I'll pay yougenerally around 2 percent of
(24:33):
the money I'm investing with youevery year for you to do that
for you to kind of sift throughall this stuff, find these
investments, manage theseinvestments for me, just like
you would pay, um, if you weregetting a managed kind of
managed fund to Edward Jones orsomething.
So that's the, the, the.
These guys up here at theinstitutional level are really
happy.
It's a good deal for them to paythat 2 percent or so management
(24:54):
fee on the assets every year tohave those private equity
experts go through a veryinefficient market in a private
space and find the best dealsand sift through those deals.
Now, the other side of that is,and I'm not going to talk about,
you know, kind of the, themanagement fees coming into, um,
The private equity firm rightnow, I'll just start with the
(25:16):
private equity firm, then goesand invests in these, these
companies and the companies aremanaged.
By the private equity firm.
And in a number of ways, there'soperational efficiencies that
they look to unlock and there'sfinancial efficiencies that they
look to unlock.
That strategy goes, they go inwith a strategy.
I know we'll talk about this alot more, but they go in with a
(25:37):
strategy that when they'rebuying into that business, they
know how they're going to,they've got a plan on how
they're going to get back out ofit and how they're going to
unlock value.
Always, every time that valuethat they unlock, Okay.
So let's say they, they unlock ahundred million dollars of
additional value.
They send that the initialinvestment back to that
institutional investor and go,thank you for your a hundred
million dollars.
(25:57):
We've now made you 200 million.
We're going to send you back 180million.
And we're going to keep 20percent for ourselves of the, of
the ops.
So we're going to keep 20million.
So now they've made 2 percentfor just kind of managing that
investment over time.
And then they get 20%.
And again, this is roughly someare higher, some are lower.
It depends on the, the, thefund, the 20 percent of the
(26:21):
profit.
So now on that a hundred, ahundred million dollars that was
invested by the, by the, uh, Theinstitutional investor, they
might've gotten 2 percent peryear.
So they got, you know, 10million, um, on that, um, for a
five year hold.
And then they got another 20million on the investment and
the original investor got 180million.
Everybody's happy, not a badgig.
(26:43):
No.
So institutional investor equalslimited partner.
Yes.
Yep.
Okay.
So on that top layer,institutional investor or LP,
and in between like that toplayer and the PE firm, there's
like a little cycle of moneythat's happening, which is 2
percent and then in between thesurrounding air, you know,
nothing big, just a couplemillion here, a couple million
(27:06):
dollars on a Apollo size phone.
And then in between the middlelayer, which is the PE firm and
the Lower bottom level, which isthe companies in those funds.
There's a little money loophappening there, which is the go
ahead, Ed, which is, yeah, so,so, Some private equity firms,
(27:26):
I've worked for private equityfirms that both do this and some
that do not.
Um, but there's private equityfirms that will also charge the,
the operating company amanagement fee too.
So they, they get a little bitof money coming in from the
operating company to manage it.
They get a little bit of moneycoming in from the, from the,
uh, the LPs to manage the money.
So they're getting it on bothends.
(27:47):
And then when they sell.
They get generally 20 percent ofthe profit, so they get, so they
get, you know, but that'stransactional.
So that's only going to happengenerally once during the course
of the, the investment.
Okay.
So that's high level how a PEfirm makes money.
Yep.
Okay.
Um, so then Rory, what are somereasons why a founder Or
(28:11):
original founders would evenconsider private equity.
you know, a lot of times itcomes down to it's reached a
point in its life cycle, thefounders probably bootstrapped
the business up to a certainpoint.
And, you know, the businessitself at that very moment,
isn't generating enough.
Free cash to make biggerinvestments, to grow, grow more.
(28:34):
Maybe they don't have access totraditional debt markets, et
cetera.
Um, so they need outsideinvestment.
So that's, that's place and goalso another reason why a
founder might take on a partner.
Maybe they want to, uh, they,they want to monetize some of
what they've built rightfully.
So, you know, if you spent 15years of your life grinding
(28:55):
away, um, to build yourbusiness.
You want to reap the benefits ofthat in some way.
Um, so you could either sellyour entire company altogether
to maybe a strategic buyer and,you know, be done with it and
move on, or you can sell amajority of your business to a
private equity fund at a valueyou think, and they agree on or
vice versa, uh, is fair.
(29:17):
And so you can take some moneyoff the table and start building
that big house or buying thatMaserati or whatever.
Um, but it's a way to, it's away to realize some of that
investment without going throughthe rigmarole of.
Um, taking a company publicbecause that could, you could,
you could be dead on arrival ifyou do that wrong and time that
wrong, you know, so.
(29:38):
oftentimes it is a great deal,uh, for.
Relatively little friction to goget more capital, right?
Even if you have a veryfundamentally sound business,
taking your company public is amassive endeavor.
It's extremely costly.
And it, you know, it is notalways a given private equity in
(30:01):
my experience.
Uh, the ones that I've workedfor are oftentimes very flexible
in how they get a deal done.
Um, so there's, I would say if Iwere to wrap it up, it's
potentially the easiest, um,avenue of those three.
To get deal done basically.
And so again, why would you wantto get a deal done?
(30:22):
One, you just need more money togrow your business.
You have a new product or a newstrategy or new geography you're
trying to get your solutioninto.
It takes a lot of dough to hirethe people, to build the
technology stack, to managethrough the compliance and all
that kind of stuff.
Um, you need money to do that.
And so if you don't otherwisehave the means to do that
(30:43):
through your current business,you need outside money to,
again, like I said, you know,some, some founders want to take
money off the table by that.
I mean, you know, get, get paidfor what they've built and doing
that through selling to aprivate group.
Is probably again, the path ofleast resistance to doing it.
(31:04):
Now, again, we'll talk moreabout what that means.
Once you do lock arms with yourpartners, but, um, but, you
know, getting to the point II've been through a lot of
private equity deals and, andsometimes they can be pretty
straightforward, believe it ornot, so, you know, Okay.
Those are some reasons why youwould engage with a PE firm.
(31:25):
Ed, any, anything else to add?
Well, I think the, the other,the other piece is you do run
into a situation where it's, youknow, could be a family owned
business or closely heldbusiness and partners are no
longer getting along.
So you need to be able to, uh,make a transition, make a
transition, um, of one or moreof the partners that founders of
(31:45):
the business, um, been in thatsituation before.
And also, um, you've gotsituations where I forgot.
It's not all rainbows andunicorns.
You know, it's, so there's adistress, there's a distress
side of this too.
And there's private equity firmsthat specialize in distress
where they, you've gotsituations like that.
Um, you got situations wherefounder founder may, uh, need to
(32:05):
get liquid because they've got afamily situation or they're a
divorce or, or, um, an illnessor death.
Um, and so private equity firms,as Rory said, it's a very low
friction, uh, comparatively and.
Quick to close comparatively.
And so they could come in andkind of provide that liquidity
to founders, founders, families,um, could save the business in
(32:28):
some cases, if there's a needfor additional equity, but the
business has, you know, a futureahead of it.
And so there's the distress sideof private equity as well.
And that's a pretty lucrativepiece of that business.
Actually, that's a great point.
Um, it's worth talking aboutthat.
Not all private equities are thesame, right?
Like you have private equitygroups that focus purely on
(32:48):
technology and, um, let's callit, you know, services
businesses.
And you have others that onlydeal in industrial and
manufacturing type businesses,and furthermore, Like Lone Star
Funds, I'll go out and say it,you know, who we've worked with,
they, they look for a lot oftimes, um, financial services,
(33:09):
but undervalued or, or sort ofdistressed scenarios, you know,
so they build their business inwhat they do best.
And again, these private equityfirms are made of human beings.
You know, every human being hastheir own core competency and
the things that they are good atand they're knowledgeable for.
So, they build these businessesaround people and then double
(33:32):
down on the emphasis of wherethey put their money based on
that.
So Okay.
Okay, my second to last questionis If Who would not be a good
fit for private equity?
So if someone's listening andit's like, look, if you want to
maintain a lifestyle business,if you want to maintain control,
like who is just this You'reyou're hit, you just did on two
of the big ones.
(33:52):
So if you're, if you're goinginto a PE back deal, um, A
couple, a couple of companiesthat should not be not be
looking at it is if you're toosmall, um, and you know, by too
small, I'm saying, you know,equity value under 10 million.
Um, you're probably going to betoo small for private equity.
Uh, you know, there's, you'regoing to have to go, you know,
(34:12):
to hit the Elks Lodge and pass ahat around a church, um, to, to
raise additional capital.
That's still friends and family.
Um, If you, if you want to runyour business as a lifestyle
business and you've gotten usedto making, you know, a million,
million and a half a year,working 35 hours a week, it
ain't going to be that wayanymore.
And if that's what you'relooking for, you'd best exit.
Um, if you're going to goprivate equity and you know, the
(34:34):
other, the other piece where itisn't good is.
And we'll talk, I know we'lltalk about this more is if
you've got a problem and you'retrying to sell out from in front
of that problem.
And you don't think the privateequity guys are going to find
that problem.
Um, they're going to find thatproblem during diligence.
They've generally seen it all.
And if they don't find it duringdiligence, they're going to find
(34:55):
it after diligence.
And so if you're, if you'retrying to get out and you're not
being transparent about what thebusiness's opportunities and
challenges are, that's going tobe a bad fit ultimately for that
private equity partner in you.
Yeah, well said, you know, firstand foremost, if you're a fan of
total control of your business.
(35:16):
And you're not willing to seethat private equity ain't for
you.
All right.
What is private equity not?
So Ed, you mentioned, youalluded to this just a second
ago with VC, but just what arethe things that private equity
gets confused with?
We want to clarify.
Yeah.
So, so venture capital, um, andI'll, and I'll use the example.
(35:36):
Um, venture capitalists lookfor, you know, 20X, 30X returns
and they expect 10 percent oftheir stuff to hit.
Private equity looks for 20percent returns and expects 90
percent of it to hit.
So you're, you've got adifferent risk profile that
those, that those two types ofinvestors are, are looking for.
And so if you're a high riskkind of early stage business,
(35:57):
that's rocket ship to the moon,you're probably not a private
equity.
You're probably a venturecapital as a candidate.
Um, The other thing that privateequity is not is generally a
passive investor.
Um, private equity is, islooking for ways to either
operationally or financiallyenhance the value of that
business through efficiencies.
(36:18):
And that's where they're, that'swhere they're going to bring
their expertise in.
And, you know, so if you'reexpecting someone who's just
going to hand you a big checkand walk away and, you know,
come back five years later, thatain't going to happen.
They're not that they're,they're an active partner in the
business.
That's the angel investment seedround action.
That's not right.
Yeah.
Yeah.
(36:38):
Yeah.
Yeah.
Well said.
I mean, um, yeah, it's, it's, itjust, it comes down to really
what you're used to and how muchyou control and ultimately, you
know, how, how much honestly,from what I've observed and
experienced.
How much you're willing to kindof put your ego aside and move
(37:02):
your business forward with apartner.
Because again, oftentimes theprivate equity groups see things
beyond what the founder sees inyour business.
And they want to work with thatfounder and the management team
to even potentially pivot thebusiness in a way that everyone
thinks can make a lot of money,but sometimes if it's.
(37:23):
Not the right chemistry ordynamic off the, off the jump
that that's going to be aproblematic road.
Um, and I think that thefounder, uh, generally controls
that destiny on how they respondto change and the input of
others, if you will.
Yeah, I think that's a good noteto leave on because the whole
(37:44):
premise of this is it can be,when it's set up well, it can be
a win, win, win scenario.
Oh yeah.
Everyone can hit home runs.
Life changing.
It can be lucrative.
Uh, you can win.
The PE firm can win.
Your customers can win.
So when it's done right, um, it,it can be, um, a great move to
make.
And part of why we're doing thispodcast is just to arm you with
that knowledge.
(38:04):
So, you know.
What's going on, eyes wide open,what, what you're getting into.
So, um, we'll call that a wrapfor our first episode, but, um,
there's, that was literally justthe tip of the iceberg, the very
tippy top of the pyramid type ofthing.
So we're going to expand on, um,all of these topics and more,
and just make sure that you haveeverything you need.
(38:26):
To, to make an informeddecision.
And right now we're planning onevery other week podcast.
So it'll drop every other week.
But if you, um, like what youheard here or want to hear more
and learn more about this, thenhit subscribe.
So you don't miss an episode andwe will catch you next time on
the private equity experiencepodcast.
(38:51):
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