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Capital Decanted
S2 | Episode 11: The Evolution of Private Equity - From Wizards to Artisans with Jacob Kotzubei
01:43:04
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- [00:00]
John Bowman
Foreign welcome to Capital Decanted. In this show, we say goodbye to tired market takes and superficial sound bites. Because here, instead of skimming the surface, we dive into the heart of capital allocation, striking the perfect balance and exposing the subtleties that reveal the topic's true essence. Prepare to have your perspectives challenged as we open up the issues that resonate with the hearts and minds of those shaping capital allocation. We've enlisted the wisdom of visionary leaders in the industry and just like a meticulously crafted wine, we'll allow their insights to breathe, unfurling their hidden depths and transforming our understanding. This is season two, episode 11 of Capital Decanted Private Equity. From wizards to artisans, I'm John Bowman.
- [00:56]
Aaron Filbeck
And I'm Aaron Filbeck.
- [00:58]
John Bowman
A quick thank you as always to our returning title sponsor, Alternatives by Franklin Templeton. We're so grateful they're back to partner with us. They've got over 40 years of alt investing over 260 billion of asset center management. They're specialist investment managers, have expertise across six different asset classes, real estate, private equity, private credit, hedge strategies, venture capital and digital assets. And of course, all of them operate with the client first mentality that has always defined Franklin Templeton to help prioritize investment outcomes. So thanks again, Alternatives by Franklin Templeton. I'm also delighted once again and we heard from them a little bit earlier this season to introduce SLR Capital Partners as an episode sponsor. SLR is an independent boutique asset manager focused on direct lending with expertise across a range of primarily senior secured financing solutions for US middle market companies. From their roots as a cash flow direct lender to sponsor owned companies, the SLL platform has evolved into a diversified commercial finance solutions provider encompassing cash flow, asset based lending and specialty finance. So stay tuned to halftime where we'll hear more from Michael Gross, one of the founders of SLR and currently the co CEO. Well Aaron, we have reached the end, the series finale, the season finale, I should say of Capital Decanted for this exciting season two. How are you feeling about the end here?
- [02:22]
Aaron Filbeck
I'm feeling pretty good. We've had a good season so far, John.
- [02:25]
John Bowman
It has been fun. It has been fun and you're going to hear a lot more from us in the coming 60 days or so about what our plans are in store to transform this show for season three. So I think some exciting evolutions around the edges that is going to make this even more interactive and hopefully engaging. So stay tuned for that. But today we are once again, as has been the case many times this season in particular but both seasons diving into a dramatic transformation story and today it is the evolution of the swashbuckling corporate raiders, the bootstrapping deal junkies, the ruthless high yield pirates and their transformation to the process savants, the roll up your sleeves mechanics, the programmatic value quarterbacks. This is the story of how private equity over the course of more than five decades has metamorphosized from financial engineering to operating artisanship. The Institute of Private Capital, the ipc, which is led by our friend and board member Greg Brown, looked at nearly 3,000 exits between 1984 and 2018 and here's what they found from 84 to 2000. As I said, the go go years of the leverage buyout that we'll talk about in depth today, 70% of deal value creation was due to leverage alone. So you'd buy struggling businesses on the cheap. You'd load up the balance sheet with all kinds of debt facilities, slash some spending shutter or sell some capital sucking assets around the edges and move quickly to an exit before that short term arbitrage window closed. And when this playbook worked, your small cash or equity investment was typically levered, hence the name, by many, many multiples. But starting in the 2000s and accelerating after the GFC, the music begun to stop on this balance sheet alchemy and a major transition was set in motion post gfc Again from that IPC study. Less than a quarter of value creation has been based on the use of leverage. So from 70 to 25 and there's a sense from GPS that this will continue to shrink. Simon Kutcher, the consulting firm, conducted a GP survey in 2024 to determine the drivers of return expectations or you might say the contribution to the investment thesis upon acquisition of new companies and the verdict, GPs only ranked leverage as participating in a modest 7% of their expectations. So a very small part of their motivation for acquiring these portfolio companies. The practice of private equity is now a sophisticated laboratory of sustainable enterprise value improvement. Scores of experts across practices from HR to marketing to AI are employed and brandished across portfolio companies with the expectation of cultivating long term and durable margin improvement. Operating value add ova, as Stepstone calls it, now accounts for about half of the value creation of private equity deals. So while leverage has been going down 70 to 25, operating value add has been skyrocketing up and accounting for nearly half of that value. Most of that ova, even more importantly, is in sales growth, in product improvement and expansion, in efficiency gains versus cold hard cost cutting. And this is the patient craftsmanship that underpins many of us to believe that private companies, private structures, are a superior form of governance and ownership than the moment by moment emotional and schizophrenic machinations, you might say, of the public markets. But that is a very modern reality. It was not the roots and the origin of private equity. So what were the circumstances that led to this revolution? Why did the industry abandon that old model? Was it voluntary progression or collective coercion? And that's what we're going to examine today. So, as is common, Aaron and I are going to invite you into the capital decanted time machine to try to experience this transformation together. We'll start in the proto private equity era of the 50s and 60s and describe how the LBO was first conceived and how it was utilized and ultimately became synonymous with the pop culture of the roaring 80s when it really peaked. We'll spend a few minutes investigating the anatomy of those deal structures and actors that compose the financial engineering glory days. And then we'll begin peeling back some of the subtle but ultimately irreversible powers and trends that crept into the industry and begun disrupting and demanding this model change towards operating value. And finally, we'll complete the story by describing how the operating value add model is employed today, what levers these firms use and how it manifests itself in risk return synthesis. And then of course, after our short break for halftime today, we will be joined by Jacob Katsube, co president of the 50 billion asset center management GP Platinum Asset Equity, one of the very first movers in the operating value space. So that's where we're going. That is our blueprint. Aaron, are you ready?
- [07:25]
Aaron Filbeck
Ready to go? Let's do it.
- [07:26]
John Bowman
All right, so history as I mentioned, as I periodically mention on stage and on this show, I believe before the first venture capital deal was as early as 1957, there was a 30 year old young corporate finance professional at Hayden Stone & Co. Named Arthur Rock. And Arthur was famous for providing capital for the founding of Fairchild Semiconductor to what is infamously called the Traitorius eight. These were the eight engineers that walked out simultaneously of Shockley Semiconductor. As I said in 57. And by the way, the legacy of those eight is just mind blowing. Just as a fun fact, it included Gordon Moore, which is the inventor and the namesake of Moore's Law. And then Moore, the same Moore and another of those eight, Robert Noyce, later founded another integrated circuit company that probably most of you have heard of, Intel. Andy Grove, another of the eight, was the third Intel CEO that was recruited over from Fairchild and some of the others of those eight would be part of startups that we would know today. National Semiconductor, Advanced Micro Devices. These offspring of the Fairchild startups and founders were often called the Fair Children, which I thought was amusing. But that's venture capital. That is defined by early stage and a minority non controlling stakeholder. So Aaron, in your research did you come across or do you have a view on what was the first LBO leverage buyout deal ever?
- [08:53]
Aaron Filbeck
Oh man, I don't know what the first one ever was. I know when it peaked, but I imagine you're about to tell me.
- [08:59]
John Bowman
I am. I stumped you there. So of course history's never clear and definitions are murky back in the 60s and 70s, so there are admittedly to be fair alternative answers and plenty of lore associated with who was actually first. But I'm going to go with the most widely promulgated version of the first and that is of Orkin, the pest control company. So just quick story. The founder was Otto Orkin, who as the mythology goes, at only 14 years old, back in 1901 he borrowed 50 cents from his dad and that 50 cents was utilized to experiment with mixtures of arsenic in attempt to develop a pesticide at his d dad's request to keep the rats away from their Pennsylvania farm stocks. I have to admit I'm not sure that this is great parenting advice. I've never given arsenic and suggested chemical experimentation or cocktail experimentation with poison to my children, especially my 14 year old children. But the history is the history. And Otto's revelation worked so well he started selling it door to door. And thus was born the modern pest control business. Now fast forwarding many decades much later, in the early 60s, through a bit of family drama and obviously his age, Otto had ceded control of the organization to his children and they had actually taken the company public in 1961, looking to monetize a portion of their inheritance. I think they floated about 15% of the company, but after a year of a listing and the company peaking previously shortly after the listing at a valuation of 72 million, and despite having almost 40 million in revenue, strong margins and a cash rich balance sheet, the stock was actually wallowing at about half that peak price. Now, around the same time, the Oregon children were flummoxed by the underappreciation, they would say, of their cash rich pest business. A Georgian entrepreneur gentleman named Wayne Rollins had assembled various broadcasting assets. Six radio, three TV stations. But 1964 will be the end of that media identity for Wayne, as through this acquisition of Orkin, it begun its extreme makeover, you could say, to one of the largest pest control conglomerates in the world, which is what it stands as today. It's still listed as R O L on the New York Stock Exchange. So the story goes that two independent financiers and deal brokers, Lewis Coleman and Herb Weiner, engineered and facilitated the leverage buyout of the much larger Orkin by Rollins. The terms at the time, Aaron, were $26 a share which valued Orkin at 62.4 million. That was approaching that previous peak if you remember. And this 62.4 million was funded through a 40 million bank loan from Prudential Insurance, a 10 million loan from Chase Bank, 10 million additionally in seller's notes, which are effectively more debt IOUs, and about 2 1/2 million in cash. And so for those keeping track, that's about a 96% levered buyout. And while Rollins, by the way, just as a fast forward, only reports consolidated numbers today, analysts believe that the Orkin subsidiary is doing over 1.5 billion billion now in annual revenue. So I think it's fair to say that Otto would be proud of that return on his two quarters back in 1901 of what you could call precede money from his dad. So a fascinating story, but you might have noticed that while that was certainly an LBO in the literal interpretation and definition, these proto private equity days were largely financing corporate to corporate takeovers without institutional LP money. They were deal makers and they assembled capital from various sources using their personal networks and relationships. In fact, to my earlier point on alternative histories and variations of definitions, you could make a very good argument that the merchant banks and the robber barons of the Gilded Age, think J.P. morgan, Andrew Carnegie, the Vanderbilts, the Warburgs, they all took part in buyout activity and takeover financing from their own balance sheets around the turn of the 20th century. So again, I'll leave it to you, Aaron and the listeners to determine whether this Orkin story is the best version of the first lbo.
- [12:52]
Aaron Filbeck
John, does this make you a buyout manager yourself? I'm sure you've given some loans to your children and the Bowman GP fund sounds like that might exist too.
- [13:02]
John Bowman
Yes, although I'm not sure what you'd call this. I've given several loans that don't have any coupon in return and there's no equity kicker, let's just be clear on that. So there's no leverage in the pure form to my debt facilities. It is more of a charitable bank is what I describe it as well.
- [13:18]
Aaron Filbeck
I hope your kids are listening and they can appreciate all this.
- [13:21]
John Bowman
I can assure you they're not. So there you go. They were forced to listen to one episode and I think they've retired their subscription, but oh well. So jokes aside, in order to understand how we evolved from these saber rattling financiers and cowboys to the modern LP fund innovation and asset class that we all know today, we need to return to our story in the 60s. So a month after the Rollins deal for Oregon, this is again July 1964. Businessweek, the magazine called the Orkin Exterminating Company deal one that quote truly captures the imagination. End quote. Well, Businessweek wasn't the only one that took notice of the opportunistic success and the obvious monetary benefit of using largely debt to finance take privates and takeovers. Jerome Kohlberg Jr. Then head of corporate finance at Bear Stearns, and his younger proteges Henry Kravis and Kravis cousin George Roberts also found the buyout process, what they actually termed bootstrap investing, quite dreamy themselves. And they began experimenting with their own series of buyouts while they were still employed with Bear Stearns. So through the 60s and 70s they began setting up these personal individual limited partnerships to pursue companies that that trio felt were performing well below their sales and profit potential and perhaps had assets that could be more optimally monetized. These were typically family owned businesses that were struggling with succession and needing a liquidity event and some restructuring. So to fund the takeovers, just as with Oregon, the three usually borrowed 90 or so percent through high yield debt shops and funded the remaining 10% through equity from those limited partnership funds. So for several years, Kohlberg and his two counterparts had lobbied the executive team at Bayer to create their own investment division for them to do this full time. But after repeated rejections, tension had built between the three and leadership to the point, to the breaking point. You could say with all this time that execs thought they were spending on a hobby. So that ultimately in 1976 the three had had enough. And they would leave Bear to start of course Kohlberg, Kravis and Roberts or kkr. And they would not waste any time getting started in their new address. In 1976, almost immediately they made their first acquisition, buying AJ Industries Manufacturing Company for 26 million in that same inaugural year. They would go on to buy two more small companies. But here's where this inflection point occurs. Cause in 1978, this is obviously two years later, they raised and launched their first and as far as I can tell, Aaron, in history, the first ever private capital collective LP fund, meaning multiple LPs are funding a traditional drawdown fund. And they raised a whopping 35 million. Now, before this first fund, I should say that most of the equity capital for those isolated limited partner vehicles they used at Bear and that first year at KKR was one off insurance money. Again, they were really working the phones of their networks. But a critical regulatory milestone had just occurred in the latter years of the trio's time at Bear Stearns. And that of course was the ERISA act had been approved in 1974. And that provided a huge tailwind as they entered fundraising for their very first fund. ERISA was more than a decade response. It actually was initially catalyzed way back with the JFK administration and it was attempting to address the systematic underfunded status of public pension systems. And so as such, in 1974, as I said, it introduced minimum fiduciary duty requirements, a focus on performance comparison and benchmarking, and most importantly for our story today, it gave broader interpretation and leeway to what types of asset classes could be included in these institutional pools. So pension fund CIOs were liberated, you could say, to be a bit more creative in their asset allocation. So in this first KKR LP drawdown fund in 78, the state of Oregon invested $10 million. This was the very first instance of any US public pension fund investing in any type of alternative, as we call it today. They and all their brethren were 60, 40, and that was probably by the way, 60% fixed income or more. But ERISA had nudged them to consider other ways to maximize risk return optimization. And Oregon's neighbor Washington would follow a couple years later. And eventually Michigan and New York city jumped into KKR's funds during the early 80s as well. So again, alternative history you could choose as well. The first acquisition using institutional LP money from that KKR fund was a manufacturing conglomerate in Buffalo, New York called Hudai in 1979 for 355 million. And so due to KKR's early successes, the floodgates just opened violently to this approach to financing and buying companies and retooling them, restructuring them and selling them for a profit. Over the next decade, the 80s, it is estimated that over 2,000 LBOs were completed for a cumulative value of over 250 billion. Some of the more notable takeovers during that period were Safeway. That was my grocery store grocery growing up, Aaron, just so you know, that was for 5.5 billion in 86 Beatrice, the consumer goods conglomerate. So think the Samsonite, Tropicana brands, among others, for 6.1 billion. That was also in 86. Federated Department Stores for 6.6 billion in 1988. That's Bloomingdale's, Filene's for you. Boston friends, among other store brands, William Simons. And by the way, William Simon had just completed his term as Nixon's Secretary of the Treasury. He purchased Gibson's greeting cards for 80 million. And that was iconic, not because of its size, this was in 82. But rather because Simon made 200 times his money in only 18 months when he took it public. So his 330,000 of cash turned into 66 million. That is the power of leverage, to say the least. And all of this, of course, culminated in the most famous of all, the 25 billion 1989 KKR takeover of RJR Nabisco immortalized in the book. But Barbarians at the Gate. And still, I should say, which is just shocking, more than 35 years later, the fourth biggest LBO still of all time, that one, which could be a whole nother episode by itself, was truly excess personified. So, Aaron, before I shift to the circumstances on how we begun shifting to operational value creation, I think it's important to spend just a few minutes here, pause here, and break down the anatomy of these, what I've called proto PE deals. Who were the actors? I hinted at a few examples, but who were the players generally? What did the capital stack look like? Where did the funding come from? How did this all work back in those early days?
- [20:04]
Aaron Filbeck
And I think at the very beginning of the episode, you were describing swashbuckling pirates and all sorts of different descriptors for these transactions. As I was going through this, I was thinking about the late 80s into the 90s. This was the birth and adolescence of the modern LBO that we're familiar with today. It's obviously changed a lot since then, but like a lot of young toddlers, there's a lot of kicking, screaming and in some cases, dirty diapers. So now that you've got that mental image, we'll get serious on the actual structure. But I think it does paint an image of this time where you've seen greed and excess in this industry and then the evolution since then. So in the early LBO days, these transactions were all a little bit different. You walk through some of those different examples, but they all had a few things in common. One is the high leverage. So you mentioned that already. Second, which I'll get into, is these Complex capital structures. The early stories that you were telling of banks coming together to provide financing is the early side of this. But as you got into the 80s and 90s there were a lot more players, which I'll walk through. And then of course is that mission of more aggressive cost cutting asset sales, all of which to juice returns and return quickly value to shareholders. So this truly was the greed is good era of private equity. But rather than talk in hypotheticals, John, I think it is helpful to use this KKR buyout of RGR Nabisco, which is I think the quintessential illustration of this time period. So obviously one of the biggest, still one of the most high profile at the time as well. And it also carries all three of those characteristics that I described. So to break things down, the total transaction value as you mentioned was 25 billion, which at the time was the largest. And here's how the deal actually looked when you start getting into some of the sub components. So 25 billion at the headline level, 21 to 22 billion of that was financed through debt and 3 billion or so through equities. So if you do the Math, that's roughly 85% leverage on that particular deal. And that represented a debt to EBITDA multiple of close to eight times. And for context, today a typical on average debt to EBITDA is somewhere around five times. So we've come down significantly since then, even with lower rates. You have to remember at this time interest rates were much higher than they were even today. Now like most transactions at this time, the component of that 21 to 22 billion in debt financing came from multiple sources and it was pretty complicated. So no longer just banks, but in RJR's case, when you break things down, it amounted to this breakdown approximately so 7 billion in senior secured debt. And this was provided by the banks. This was the senior part of the capital structure backed by assets. Senior secured typical debt that you even saw in the early stages of a lot of these transactions, 9 billion in high yield junk bonds. So at the time the rates on these bonds were mid double digits. So very expensive debt that was coming from the public markets. Unsecured 3 billion in bridge loans, which these were just short term loans and the idea was to refinance them later into high yield bonds. So add that three onto the nine, you've got 12. So almost half of the debt was financed in the high yield junk bond market. And then finally 2 billion in the other stuff, which is a technical term. John, I don't know if you knew that. But that included things like seller's notes that you mentioned, preferred equity and other sources of financing. So this was one of the most complicated capital structures in the industry at the time and it was really expensive. The interest alone across all of those different sources was around 2 billion per year, which was barely enough for the cash that was just being generated by the company to cover. You have to remember RGR Nabisco was a pretty boring consumer staples company that sold food and tobacco products. So it's not like this is a high flying tech company with a lot of upside in terms of revenue generation. So as a result of the debt burden alone, the company struggled to deliver on some of the operating metrics that was necessary in order to just cover the debt. And we saw numerous asset sales throughout the rest of the 90s, especially as KKR struggled to service the debt levels within the company itself. RGR wasn't the only one like this, and some deals were more successful than others, but the structure was pretty common. Other notable names throughout this era included Duracell Hospital Corporation of America and then of course Toys R Us, which we've talked about in previous episodes, which really ushered the late 90s into the 2000s. So, John, I'll leave it there, but I think this is a good transition into that next phase as the model began to get challenged.
- [24:58]
John Bowman
Toys R Us has gone back to the well a few times into private equity and LBO. They just can't catch a break. The 85% Aaron, just to put a benchmark or an over under on it, was that about average for the debt level? Debt percentage, I should say at that point. Was that higher or lower?
- [25:16]
Aaron Filbeck
That was about average in terms of the makeup. And you even gave a couple of examples a few decades prior where the leverage component was higher. I think what's different about this transaction is the source of those funds. It might have been 80 to 90%, but a lot of that was coming from banks which had a lot of requirements. Maybe less expensive in terms of the interest being generated from those loans, but in this instance, pretty typical debt allocation, but very different in terms of the source of funds.
- [25:44]
John Bowman
And that's hence the beginning of the high yield debt junk bond explosion.
- [25:49]
Aaron Filbeck
Long way from a couple quarters.
- [25:51]
John Bowman
Yes, indeed. All right, well, let's return to our story. That was really helpful, Aaron, just to frame that and understand how those structures work. So as we've been describing this era and as Aaron walked us through a couple examples, this era was all about access to capital and mostly debt capital. Very little Attention was paid to the operational efficiency or finding new strategies to grow. In some cases these businesses, as Aaron mentioned, really there was no expectation that they had a lot of growth capability in them. This was about flipping. It was really about re engineering the balance sheet to significantly steepen the payoff curve towards an exit. As one blogger put it. Quote it was an era defined by boldness where big money and big debt made big returns. End quote. The original dealmakers used financial sorcery, things like capital restructuring, tax arbitrage, asset sales, dividend recaps and borrowing on top of borrowing on top of borrowing as Aaron talked about, to create super sized outcomes. Or at least when it worked, they created super sized outcomes. So KKR was joined in the 80s and 90s by early entrants like Forceman, Little Thomas Lee, Leonard Green, eventually the other behemoths we've covered at length on this show, Blackstone, Carlyle and Apollo. But the decade that begun with the dot com bubble in the early 2000s and finished with the recovering war zone that was post GFC is when the winds begun to shift and new pressures were placed on these firms to mature, to grow up, to find other ways to add value to their portfolio companies outside of the strip and flip model you might call it. So what were some of these pressures that started arising in the 90s and the 2000s? First, and we devoted a whole episode on this show earlier this season to the poor pr. Partly self inflicted, but the poor PR of the private equity industry. And let's be honest, the hostile corporate raider reputation of these first few decades that we've just walked you through largely still persists on Main street today. Whether we think that's fair or not, that's the reality. Well, those early days shenanigans and high profile bankruptcies of deals eventually caught up with them with the industry and public scrutiny began to tighten up Wall Street's Gordon Gekko, which of course Aaron just quoted Greed is Good, Bonfire, the Vanities, Masters of the Universe. These archetypes loom large in defining the private equity brand. And the very real RJR Barbarians at the Gate cast a long shadow over this industry. So headline bankruptcies in the 2000s continued Caesars, entertainment, Energy, Future Holdings, Linens and Things, Reader's Digest, household businesses and brands. More recently, as Aaron mentioned, Toys R Us included massive layoffs, excessive debt, flawed growth assumptions and poor operational oversight. And these case studies, while statistically exceptions, nonetheless became cautionary tales and poster children that the public begun to wield to begin casting stones at the industry so the first reason here is that the ire of the public eye began to close in. But number two, as we described, once the spigots of this tsunami of capital turned on and all these copycats jumped in to join KKR, competition massively increase. According to PitchBook, the number of PE firms globally grew 143% between 2000 and 2014. Fundraising in the US alone skyrocketed from 68 billion in 2001. That's the whole industry, not the big firm as you might consider today. 68 billion in 01 to a peak of nearly 350 billion just before the GFC. So there was suddenly a ton of capital and dealmakers chasing new opportunities. And this of course drove up purchase multiples significantly and begun to pressure firms to think outside of the financial magic and the multiple expansion to something more differentiated to create real value, you might say, versus masquerading shell games on the balance sheet. The period of buying companies for mid single digit EBITDA multiples and flipping them for double your money in a few years was really drying up as these entry multiples ballooned around that period of time to 9 to 11 times. You had to find other ways to extract value. And by the way Aaron, as you know, I just quoted 9 to 11 times like I'm dropping a mic there. But entry multiples are probably 150% of that today. So even as I tell this story, it's fascinating how we tend to move the goalposts of reasonable valuations even from this high flying peak that we're describing here. So third, cost of capital, while historically low interest rates of course persisted through even Covid. The lending industry dynamics fundamentally changed after the GFC. After the systemic paralysis of the credit markets in 2008, fall of Lehman, Bayer, Merrill lynch, among others, massive new regulation and capital controls on banks were introduced. And the easy and loose money decade that led to the subprime crash gave way to, yes, the rise of private credit, but in the meantime, a whole lot more friction. Extensive due diligence process, higher lending standards. And so with the relative credit tightening and this structural shift, it just got a bit harder to make money versus those halcyon days of the 80s. And then fourth and finally, the other pressure that arose in this period of time was that LPs themselves begun to get more demanding as the balance of power shifted to the investors. As more of these collective LP funds were proliferating, the LPs had a stronger voice. So endowment, pension, SWF boards and staff began tightening the screws. On manager selection, demanding that GP showcase the ability to create sustainable and repeatable long term value versus again these financial statement gymnastics. This expectation of durable value add became even more important more recently as ESG considerations leaked into the culture of large LPs. The idea of social responsibility took hold in their investment beliefs. And so the asset owners and the clients were holding themselves, and by extension their managers to a broader and more strict definition of fiduciary responsibilities. So these new pressures began challenging the conventional wisdom and the ability for these firms, the gps, to continue to drive and produce the returns they were used to for those first couple decades of their existence. They needed to showcase the ability, you might say, to produce alpha versus this, riding the waves of beta they had been enjoying like multiple expansion and access to balance sheet leverage. They needed to begin finding other ways to improve the enterprise value of the portfolio companies. And as we said in the title of this episode, they needed to begin morphing into operational artisans instead of merely financial engineers. But who would move first? I mean this is a big change with very different competencies and identity of talent and organizational posture. Well, back in 1978, the same year that KKR raised their first fund, Martin Dublier, Eugene Clayton and Joseph Rice founded Clayton, Dublier and rice, or CD&R. CDNR is often called the godfather of the operating partner model. And the operating partner model as they originally imagined it way back in the late 70s, was the placing of seasoned executives in their portfolio companies that through their managerial expertise could unlock value and drive performance. On the history section of CDNR's website today reads the following quote. CD&R was founded on a simple premise. Good investments results from sound decision making and great businesses are built with a commitment to operational excellence. The founders shared the belief that the combination of financial and operating capability would lead to better decision making, more effective business building and strong investment performance. They called it an operational approach to private equity investing. End quote. Now, frankly Aaron, there's probably a little bit, as with all of our websites, of revisionist history here, or at least a sprinkling of exaggeration in this origin story. As these founders, let's be honest, they were primarily financial engineers to start as well, just like everyone else, their original investment thesis was to focus on carve outs and turnarounds where significant intervention and capital restructuring was needed. But to their credit, pun intended there, as early as the 80s, their insight on the power of leadership compelled them to begin building a network of proven CEOs and experienced corporate leaders to install in their companies. So their motto Was at least financial engineering. Plus many of these operating partners were from large organizations like GE who had a deep understanding of supply chain rationalization, asset utilization, labor optimization, all the elements of course of Jack Welch's Six Sigma worldview. And this hands on operational leadership. While ad hoc and arguably more brute force cost cutting to start begun to unveil or peel back exciting lessons. And it started to write the playbook for more comprehensive and programmatic value creation. So as they entered the 90s and 2000, this is again post.com crisis CDNR really began to institutionalize the operating partner model. These leaders were no longer just dropped in and asked to cut costs and polish up the machinery and the workflows for an exit. But executive level leadership begun to be viewed as an execution enabler. Now as a key competitive advantage, they were at the table or on the ground floor and aligned with the original investment thesis. They participated and contributed to the due diligence and the pre transaction plan and then post deal. They were charged with sustainable long term value creation. The partners called this their industrial approach. So transformative change that effectuated higher and more durable margins was the new blueprint that was really the imagination of C, D and R. So these operating partners now sought strategic M and A deals, expansion in new geographies or products, digitization, talent mapping, salesforce reorganization and other levers to maximize the potential of the business. So CDNR really deserves much of the credit for pioneering this space. At least being the very first vocal proponent of operating value improvement. Now Platinum Equity, our guest today was founded in 1995, still a fairly early entrant and postured an acronym they continue to highlight today. M and A and O meaning they're combining investment expertise in their portfolio. Company acquisition. M and A combined with the power of a quote large team of in house operating professionals that add value from the boardroom to the factory floor. End quote. So M&A plus O in 2000 KKR back to our original protagonist here stood up an internal division called Capstone. Capstone was an in house roster of operators solely engaged to help portfolio companies improve performance and enterprise value. Sound familiar? CD&R would certainly say so. Capstone along with Blackstone are probably today seen as the industry benchmark for running this capability at scale with teams of unprecedented size that focus on everything from corporate governance to human capital to growth and expansion. But other early movers back in the 2000 towards the operating model were Bain Capital. And that was likely out of the consulting methodology and their DNA on their consulting business. TPG and Pelman and Friedman. So by the 2010s, it's fair to say that every major private equity house led with operating improvement versus cost cutting and certainly over financial engineering. Almost all GPs have a dedicated value creation team like Capstone at KKR, an army of fungible operating partners that CDNR created or at least modeled that they could move around the proverbial chessboard of their portfolio companies and they created, which is really standard across the industry now, what's called value creation theses as part of the sourcing and deal closure process. So the map is put in place before the transaction even closes. And these value creation theses now extend to sales optimization, email, esg, pricing strategy, culture, incentive alignment, broad tech stack integration. Of course, AI is top of mind these days, analytics, rigor, procurement synergies and marketing best practices among many many others. As we said a number of times, sustainable EBITDA improvement was now the holy grail. And this is where my portion of the story really reaches its end. However, before I hand to Aaron, I do want to pose a parting question that perhaps we can press Jacob on and to me is the critical response of this entire episode. Especially if you're an LP that's listening. Because when seemingly every GP says they focus on a differentiated set of proven and repeatable value creation capabilities, well, it logically follows that this just can't possibly be true. There has to be a spectrum of peddling charlatans on the one end, all the way to superstar artisans and a whole lot of participants in the middle. And how do we discern the players from the pretenders? I think it's a really important question. On Platinum equities website today it states, quote, we believe our commitment to the O, remember again, M and A and O sets us apart from other firms and helps us build strong, healthy companies and create meaningful long term value. Platinum is set apart and they've made a business out of this. And that's probably fair, but the phraseology and verbiage I hear all the times in decks and speeches across the industry and at conferences. So where does lip service end and demonstrative proof begin? The financial wizardry is still there, it's just a bit more subtle. And how do we make sure we're understanding the attribution that creates value from each of these gps? So Aaron, on that note, baton passed as we progressed into the teens and through the pandemic. Ultimately, how did OVA emerge as the dominant model? What avenues and activities really define what these GPs are doing with their portfolio companies?
- [39:19]
Aaron Filbeck
Yeah, and I love the four points that you brought up a little bit earlier, John, of the reason why we've seen this evolution, if I can add a fifth, which I think is a good segue into the more Recent past decade, 15 years or so. It's just the complexity of the private equity industry and in particular the different sectors that these GPS are playing in. RGR Nabisco was again that boring consumer staples, food and tobacco company. But now you have private equity, heavily invested in tech, in software, cloud and all of these require a lot of more subject matter expertise. A lot of them chase platform types of solutions. And there's a stat when I was doing some research on this from PitchBook that looked at just add ons as a component of the overall private equity transaction volume. And in 2007. So right at the beginning of the GFC only about half of the transactions that were in place were add ons. So basically a GP coming in, taking two companies or merging them together or adding a smaller company to an existing larger company to try to grow scale. When you look at the early 2000s, around the COVID period, it was over 70%. So this volume of transactions and I think a lot of this is driven by the tech wave that we've seen post GFC as well. I think that's another huge component. You need subject matter expertise in order to execute. So I don't know if that came up in your research as well, but I thought that was interesting during mine. So in terms of a more recent history, I think maybe starting with an example and then I can get into the more recent playbook. So I used RJR Nabisco as an illustration of the early days of LBOs. So if we look at post GFC era, let's use a more recent example to contrast some of those differences in terms of how deals look and are structured and different alignments. So the one that I'm going to use here is Dell Dell Technologies, which is a pretty common one when you take a modeling class. This was part of my grad school M and a class that I took. If you take any LBO transaction certificate or course that's out there, Dell is usually a really good one that's used in of those different courses. So Dell went through different buyout transactions over the course of 2000 and tens. The first one which I'll focus on is in 2013. They had another one a couple years later in 16 and then ultimately we went public in 2018. Michael Dell himself and Silver Lake Partners were the two sponsors and lead buyers on this deal. In 2012, Dell was a public company that was struggling to grow and really shift into this new cloud based environment that we now know today. Michael Dell, founder of the company, believed that he would be in a better position as a leader of the organization and just from a governance and strategy perspective to transform the company and adapt in the private markets rather than in the public markets. So in late 2013, Dell and Silver Lake Partners took the company private at a valuation of 25 billion. So the same valuation that we saw with RGR and Abisco.
- [42:22]
John Bowman
Aaron actually, I think to be Precise, it's about $100,000 cheaper, which means it comes in at number five, not number.
- [42:30]
Aaron Filbeck
Four all time, close enough for this particular example. So 24.9 billion in terms of valuation. But the makeup of the transaction looked really different than what we saw with the early transaction of RGR Nabisco. So 4.5 billion in equity through a combination of Dell and silver lake, only 15 billion in debt. So rather than the 21 to 22 billion, and then about seven and a half billion was in cash, and this was cash that came from the balance sheet, so didn't have to go for external sourcing in order to make this transaction. So while the leverage was high, it was only about 60% of the transaction value instead of the 85% that we saw 30 years ago. And the debt to EBITDA multiple was closer to about four and a half instead of eight. So that's the structure. But I think in comparison to what we saw with RJ Nabisco, there's also three other differences that showed up more in the alignment and long term thinking of the transaction, maybe not so much the numbers. So first, Michael Dell himself was an equity owner in the private company. He effectively rolled his 750 million in equity from the public company into this new privately held company. And then Silver Lake put up the rest of the capital in the transaction. Second, the debt was much less complicated and aggressive. For Dell, for example, only 3 billion came in in the form of junk bonds versus the 8 to 9 or 12 if you're going to count those rollover components. And then finally, of course, as I mentioned, some of this was self financed as well. So 7.5 billion was used from cash on the balance sheet, which meant that the real debt was even less. There was less leverage in the system. While the deal structure isn't everything, you can probably see the differences just in terms of the alignment and the attitude between the new equity holders of this private company versus what we saw many, many years ago the buyout of RGR Nabisco was focused on extracting value and using debt to juice returns. And in contrast to that, the Dell transaction was similar valuation, but much more focused on turning the company around to take advantage of new trends, new technologies and so on. So for the sake of time, I won't discuss the details of the following Dell LBO a few years later, but the spirit of it was pretty similar. Silverlake and Dell completed a merger in 2016 to integrate them into cloud infrastructure as part of a long term platform strategy. So to bring that point back up as well. And then of course, Dell went public in 2018 through an IPO. Now Dell is just one example, but I think this is indicative of a few industry trends post gfc. John hit on a couple of these, but first, the leverage component has come down significantly post GFC. So again, instead of the 80 to 90% that we were used to seeing in the late 80s through the 90s, we're looking at leverage closer to 50 or 60% for most deals. Second, capital structures have been simplified and there's greater coordination amongst the players. We've seen a large rise in middle market direct lending take the place of the banks in the senior secured space. And also, even if banks are playing in the broadly syndicated loan space, the covenants have become much more flexible, typically Cov Lite, which works in great times and can be dangerous and challenging times, but there's much more partnership and coordination amongst the equity holders and the lenders to these companies. And then as John just mentioned, third, you've started to see these GPs build out their operator expertise and try to partner with organizations to maximize value over a longer time period instead of the typical couple years of flipping things around. And then finally, another interesting evolution is the shift for a lot of GPS from IRR measurements to cash multiples. Leverage creates an opportunity to juice IRRs and that has historically been the focus for a lot of these gps. However, more and more investors are focused on cash on cash returns. What are you actually earning for your investment, which isn't as easily gamed by some of the tactics that leverage provided in the 80s. So that leads us to today. Let's talk about the playbook. So oftentimes you'll see organizations discuss their operational playbook, which is their quote unquote secret sauce dedicated to value creation for these organizations. And these are simply the levers that these operating teams focus on when they get really hands on with the business or they're developing that theses as John mentioned. Now, every GP has their own way of articulating their playbook strategy. But when you zoom out and try to look across all of the major players, there's a bit of a common taxonomy across four to six levers that they tend to pull with these organizations. So I'll list them quickly and then we can get into how some of the different players lean into ones versus others. So first is revenue growth. Sales and pricing is an area of focus for this. Second is operational efficiency, and this is really focused on margins, EBITDA expansion and so on how you actually managing the business from an operational perspective. Third is M and A. These are the add ons that I was talking about earlier, platform based strategies. How do you build synergies across multiple companies within the industry? Fourth is talent and culture, so leadership development, broad based equity participation for employees and so on. Fifth is sustainability, focusing on climate, people, human rights, et cetera. And then sixth is capital efficiency, the good old financial engineering that we started this episode talking about. Now, each GP might focus on a handful of these. It may not be all four or all six depending on the organization. And these are all an art versus a science. Some are much more explicit than others. But when you look at places like Blackstone, Blackstone tends to focus on operational efficiency and M and A add ons, whereas kkr as we've talked about, is significantly shifted from the early days of capital efficiency to revenue growth and talent. And of course we covered this in a previous episode on the PR side of this with Pete Stavros. Now some of this becomes a little bit clearer when you start to think about where some of these gps play in terms of segmentation. So, for example, Apollo is still probably one of the major organizations that maintains that reputation on capital efficiency. They're typically looking at more distressed assets, value oriented assets, to try to turn companies around. They may be less inclined to do M and A solutions and emphasize different elements of this. On the other hand, Vista has a focus on software and tech, which means that they're much more focused on the M and A platform based strategies to try to scale revenue growth. But they may not focus so much on the capital efficiency because leverage is not a big component for a lot of these organizations. So it really depends on sector bias and where some of these organizations started to cut their teeth in terms of making these transactions. Now the natural question to ask here is to John's point, how much of the value creation actually comes from the GPs versus these just being good companies? After all, GPs want to invest in These companies for a reason. They're typically generating healthy cash flows and are stable. But what is that correlation versus causation? So I'm also very excited to get Jacob's view on this as a GP himself because it's really, really hard to break the these components apart as GPs talk up their operational expertise. Practitioners and academics have tried to determine who's a good operator versus who's just good at identifying good companies. By the way, identifying good companies isn't a bad thing, but understanding where the actual value creation comes from can be really helpful for manager selection, particularly LPs who are potentially willing to pay up for fees where that value is being created. I won't go into the details, but before I turn things over to John to close us out, I'll just highlight two studies that I think our listeners should check out on this correlation versus causation question. One is from Verdad Capital which looks at the US buyout industry and the other is from the European bank for Reconstruction and Development that looks at the European component of the buyout industry. And both of them try to disaggregate what is attributable to the GP value add versus GP's ability for selecting portfolio companies that we're already on a positive trajectory to begin with. I'd say just as a headline, the results are still mixed, but it's not a situation where we can paint the broad industry with a broad brush either way. So I'm excited to tease this a little bit further with one example with Jacob and Platinum Equity, but that's the playbook. John, curious what you think?
- [51:10]
John Bowman
Well, I think you really highlighted the reality of today which just looks like a 180 from where I started back in the early days of KKR and Rollins and Oregon and it's a fascinating as we often talk about coming of age story. That's really where I think our guests can be. Really helpful is that we can walk through the history, we can give great puns on what these individuals look like and how they behave. But ultimately it's really valuable to bring in folks that are actually practicing and doing this on the ground. So with that let's transition to Jacob Kotzube who is the co president of of the 50 billion AUM platinum equity, as I said a little bit earlier, one of the true pioneers and early movers on operating value add. So stay tuned for halftime and we'll come back with Jacob. Well welcome back to halftime in this episode of Capital Decanted and I am just delighted. As promised to be here with Michael Gross, co CEO and co founder of Sleep LR Capital Partners. Michael, welcome to Capital Decanted.
- [52:16]
C
Thank you for having me.
- [52:17]
John Bowman
Well Michael, I thought it would be helpful for the listeners and certainly me to get a little bit of a tutorial, a primer on ABL on asset backed lending. I think this is one of the hottest and trendiest areas as a subset of this private debt explosion that we've seen in the last five to seven years, let's call it so it has advanced and matured considerably in the post Covid days. So I wonder if you could just quickly walk us through the categories, the taxonomy that make up this asset class.
- [52:44]
Aaron Filbeck
Sure.
- [52:44]
C
And it's a very timely question because as you mentioned it seems to be in 2024 and into 25. This is the hot area. In 2023 it was quote unquote the golden age of private credit when you saw a real explosion to cash flow lending. And now we're seeing is people moving beyond that and looking to find other ways to make money within private credit. I think it'd be helpful to begin by distinguishing between ABL and and ABS and ABF versus specialty finance. This Alphabet soup can be very confusing to new investors and allocators to the space. Yet the risk rewards in financing the underlying collateral of various hard or real assets can be very different. The ABL market asset based lending has traditionally been defined by carving out assets within working capital which can be quickly converted to cash. And the most common types of assets here being financed our receivables, inventory and this is lifeblood of US companies and it's been around forever. But today we are seeing more private credit managers expand the opportunity set by going into not necessarily ABL but into ABS and ABF which include financial securities that typically have a CUSIP or extend further down the balance sheet to property sale, leasebacks, plant equipment and ip. And it's interesting that the financing of these financial securities that has been very prevalent in the press and very prevalent within private creditor manager marketing materials includes assets that tend to be more associated with the consumer like credit space like credit card receivables, non agency residential mortgages, auto loans and student loans. These pool of assets, financial assets tend to be very large and present very much scaled opportunities for large private credit managers to distribute in size. Also presenting opportunities to be financed by insurance capital. We're a little different and one of the reasons we're having this discussion is we've been focusing on asset based strategies now since 2012. So this is not a new flavor for us and we do it for a variety of reasons and we'll get into that a little bit later. But the type of assets that we do with an ABL lending are stretch ABL healthcare, ABL equipment finance, inventory finance, life science finance and lender finance. These are all strategies that are extremely high in labor intensity to both source service and monitor the collateral. And as a result, the reason we like to be in these businesses and the reason why investors are extremely interested today is there's what I like to call the complexity premium involved with these because they are highly complex strategies and as a result our borrowers tend to pay higher returns which allows us to generate higher yields invested than other mainstream lending strategies.
- [55:24]
John Bowman
That's really helpful. You alluded to allocators a little bit and I'm curious how your conversations go when someone is constructing a diversified portfolio with all types of risk premia. You talked about higher rates and returns. These are obviously different drivers, business and economic drivers than maybe your pure vanilla cash flow direct lending. How do you counsel them to think about where this fits in a portfolio? Michael?
- [55:49]
C
Yeah, it's a great question and we're having these conversations constantly. But I think in answer to that question, it's first help us understand why ABL is in vogue today. From an investor perspective, it's attractive to allocators investors for its absolute return and its countercyclical profile. And that countercyclical profile comes from a recurring current income stream in the high single digits to low double digits. It doesn't have much correlation to base rates and importantly doesn't have much correlation to the cash flow lending strategies that you alluded to. It's also an inflation hedge and it tends to have higher recovery rates from collateral values and less volatility than cash flow lending collectively. If done properly, an allocation to ABL should create more attractive risk adjusted returns and expand a portfolio's efficient frontier. We like to talk to our clients that ABL loss rates tend to be lower than cash flow loans and importantly they are more constant throughout cycles whereas cash flow loan loss rates will vary based upon the economic cycle. And also lastly direct lending, more traditional direct lendings become extremely competitive and borrower friendly. And with the advent of these tremendously large perpetual private BDCs, rates have been coming down and structures are getting compromised. And you do not see that in the asset based lending space. What we have found though is that allocations to abl, whether it's from a pension fund, an endowment or an ria, still relatively early in its adoption. Yet the opportunities for access have increased meaningfully over the last couple of years, including from the asset liability mismatch dynamic that took place at the regional banks in 2023. But we do think there's still a challenge here in getting clients to move into the space because ABL is still grappling with the bucketing problem that private credit used to have versus public credit. Most often we find the decision to allocate the ABL follows a preexisting investment in direct lending by these parties. And lastly, I think most allocators view this direct lending exposure as as private credit beta and are now looking at ABL and niche lending strategy to provide them with private credit alpha.
- [57:50]
John Bowman
Yeah, it's really interesting. It is a bit of a mashup in a way in that it shares some DNA with real assets. You mentioned inflation protection and then certainly it's fixed income in its very essence as far as being private debt like and with a little bit of a premium given the return stream. And yet it has very low loss rates. So it's a very interesting combination that you're charting a new course here, Michael, even though you guys aren't new to it. So we're going to have to leave it there listeners. And if you're interested in more of a primer on private credit, the entire space overall, we did a dedicated episode on that in season one last year. So Michael, thanks so much for joining us and listeners, stay tuned for our guest segment. Well, welcome back to this episode of Capital Decanted. And as promised, we are now delighted to have join us in the studio Jacob Katsube, who is co president of the near 50 billion of assets under management at Platinum Equity. Jacob, thank you so much for joining Capital Decant.
- [58:49]
D
Thank you John, and a pleasure to be here. Look forward to the chat.
- [58:51]
John Bowman
Well, I want to start with a little bit of historical framing, Jacob, that I thought you could help us with before we get to the operating capabilities and the rolling up your sleeves that has really defined this phase and certainly Platinum Equity. I'm hoping you could help the listeners take a little bit of a journey back to how we got here. A lot of these capital decanted stories, as we often say, are coming of age stories and private equity is certainly no exception there. So when I think of as we talked about a little bit in the intro, those early iconic LBOs back to the 70s and 80s, Safeway, Beatrice, of course, RJR, which everyone knows about, this was predominantly a financial engineering business and that really persisted for decades There were these leverage wizards that would spin their magic, and that has really morphed into artisans, as you might call it, that are building true enterprise value with operating improvements. So I'm curious on your perspective, Jacob, on how and when did we begin to start seeing that shift and why did it occur?
- [59:51]
D
You raise a great point. And I think it's a natural evolution in private equity. You know, as competition has increased, more and more GPs have been funded by LPs. People have had to find a way to continue to differentiate themselves and find a way to generate alpha beyond just the financial engineering skills. And I think that's the biggest driver is how to be different and how to do more than what financial engineering alone lets you do. There's probably not a single GP today who walks into an LP meeting and says, hey, we're great financial engineers. Please make a commitment. Everybody talks about operations. Operations, though, is a very amorphous word. It has many different meanings in terms of how that's actually implemented and executed. I don't know when that transition began, but I will tell you that Platinum was among the earliest firms to utilize true operational differentiation, having been founded in 1995 with operations as its core DNA. In fact, our founder, Tom Gores, our current chairman and CEO, is somebody who came out of operations. His first hires were a group of operations executives. And this group of operations executives together learned M and A. And it takes the typical founding of a US private equity firm and really flips it on its head in that they are typically founded by ex Wall street professionals who most likely have not spent a day of their life actually working in a factory or in a distribution facility. So we come from a totally different place. And when we raised our first fund, Outside capital fund, in 2004, the idea of an operations led and operations centric private equity firm was still very much a novelty. Being in these meetings with LPs, they were scratching their head at the fact that all the leaders in the firm didn't come from a pedigree of Wall street education. And it was exciting to educate them and exciting to deliver the differentiated results that we've been able to deliver as a result of that DNA. And in fact, that DNA impacts everything at our firm, from how we assemble our deal teams, to the kind of diligence that we do, to the operational impact that we make on businesses once we own them, as well as even how we form our investment committee. There are seven members of our investment committee. I'm one of them. But five of the seven come from an operations Background. And again, that takes the typical power base and voice inside a private equity firm and flips it on its head. It's a nice place to come from. I think everybody feels they need to have it in some way, but again, how they implement it, how they execute it, is a really wide variety of dynamics there on the operation side.
- [62:38]
John Bowman
That's really helpful, Jacob. And there's a bunch of hooks that I want to make sure we come back to. You talked about that fictional exchange with the lpgp. I know we want to get back to that to help the listeners understand the players versus the pretenders, because everyone's talking about operating value. So we'll circle back to that later. I have to imagine that retrospective too. Competition has been a big part of this, meaning it's just harder to make money off of really solid financial engineering. You have to have a lot more than that. Certainly the cost of capital in more recent years has obviously, I think, accelerated the pressure to offer something different and truly value added. So again, we'll get back a little bit to that, how that's affected your talent map and the type of individuals that you both have on staff and then I know you have in your network when you work with portfolio companies. I want to maybe zoom in, however, before we get back to some of those points. Jacob Platinum uses this really interesting framing of M and A and O, meaning mergers and acquisitions. And I assume the O, you can correct me, is operating value or operating capability. You've added that third element and that means a couple things. Clearly you're emphasizing the third element, but it doesn't mean you're ignoring multiples. It doesn't mean you're ignoring entry point and exit point completely. I assume. So I'm curious, as you assess a prospective deal, a perspective portfolio company, how does the calculus work for the value you expect to get out of smart timing of entry and exit, and then the value you expect to extract in between those two periods.
- [64:06]
D
So look, you're absolutely right that a GP has to be good at asset selection, which is to say, correctly judging the macro and the microeconomics, that will weigh heavily in favor of a business being successful in the long run, as well as ensuring that you don't overpay at entry. I think it may have been Buffett who said half the battle of being a good investor is not overpaying or to buy it. Right. But we view operational improvement as a core additional pillar in our investment thesis, investment philosophy. And importantly for us, we never want to be just capital in a transaction. We Always want our operations team to be impactful to the deal that we're working on. And a lot of what we do is corporate carve outs. I think as a firm, we're well known as the premier global corporate carve out investor. And in corporate carve outs, there's two elements to operational capability and how to think about it. One is you're often buying businesses that have never been standalone companies. And it's a complex separation process and you have to be good at that. And then also you have to be good at taking a business that has been non core, under loved, underinvested and understand how to improve those operations. And so for us, that operational element is a sine qua non in terms of making an investment. It has to be a core part of our operational thesis. So we're always looking for those opportunities where we're not just buying a great management team, a great company with great macro and micro dynamics. There has to be something that we can do to transform it and significantly improve it. So it's all of those things. It's being a good asset selector, a good buyer in terms of not overpaying, but also having ways to add value to the business beyond just its standard course without operational intervention.
- [65:57]
John Bowman
So that's table stakes. There has to be this assessment that not only is the multiple outcome upon entry and exit compelling, but also that there is room to get in there, roll up your sleeves and truly change the business. Improve the business and we'll talk about which levers you often pull there. I'm curious, given that all three of those, as you've just said, need to be there. Jacob on the front end. And if you want to use examples, that would be helpful. But give us a sense for how that sourcing works. Where does this universe come from? Meaning you have to check all three boxes. So where do you assess these companies? What is the mosaic of how they eventually end up on your lap? And then what do you go about doing? What's the playbook to move through this process of entry, operating, improvement and eventually exit?
- [66:40]
D
We think we're quite differentiated really in the entire life cycle of an investment from whether you're talking about the sourcing side, through the diligence process, through the impact process, through the exit process. We have some very unique takes on each of those things and I'll walk you through that arc. From the sourcing side, we have, and we have always had a dedicated business development group whose sole job when they wake up in the morning is go find deal flow for platinum Equity or if we have a platform, work with M and A and management on finding strategic add ons for that platform. And this is a group that's empowered to be more than just transactional. Really build relationships with counterparties like investment bankers, like CEOs, CFOs, heads of corporate development and develop relationships that extend beyond an opportunity that is extant at this moment. So quite differentiated on the sourcing side in that regard. We might call on a company for two or three years reminding them of who we are, what we look for, how we work and we're told for two or three years. Thanks. Don't have anything for you now but the moment that they have a transaction where they're going to divest a division, the very first thing they think about is oh, that person from Platinum Equity. They've been calling on me a long time. I'm going to have them on the list as a potential purchaser of the business. I think we have become in North America the gold standard, I probably should say platinum standard for complex global corporate carve outs. So often find ourselves with reverse inquiry from bankers detailing their views on hey, we think this is a perfect situation for you. There's operational improvement here. We know you guys like that and put us on the list. So sourcing today Platinum Equity is not an issue. We have plenty of deals to sort through and determine where we want to focus our resources. You asked also about post sourcing. What are we looking at from a diligence point of view? How are we using a playbook there? And it's really interesting, you mentioned earlier our phrase M and A and O Mergers and acquisitions and operations is how we sum up that acronym. And the point of that is to say that we view that as a single discipline. We assemble a deal team consisting of all of those capabilities. From day one. This team goes to management presentations together, they model together, they go to investment committee together and they act as a unit. In many private equity firms the traditional M and A professional is the individual who is the voice of I really want to do this deal and is talking to similarly minded M and A execution professionals at an investment committee level. At Platinum we really value the diversity of experience that the operations side brings to the deal team. And it's a consensus driven, team oriented philosophy around bringing together these different perspectives and aligning on it. Something we want to do. If I could tell you a little short story about the three disciplines that we bring together in a team. It's a very traditional M and A execution discipline. It's somebody like Myself or somebody I might have trained with financial training at investment bank. Quite typically we also bring in A M and A finance resource. That is somebody who typically has had five to seven years of experience at a big four accounting firm doing audit and transaction services. Work together with an operations professional who spent a career in corporations working on problems and transformation. And if you think about their personalities, an M and A execution professional. If you took a glass poured roughly halfway full, the M and A execution professional is going to tell you every single time that glass is half full. You need to have a deal champion. There's a thousand reasons not to do a deal. You need somebody who's willing to break down walls, climb over obstacles, find a way to the finish line. You combine that with the personality of an M and a finance professional, classically trained in accounting, conservative, looks at that same glass of water and tells you every time that glass is half empty. And then you combine that with the M and A operations professional who has accountability and responsibility for underwriting change. And they'll look at that very same glass. They'll study it. They might pause for a moment and then they'll tell you that glass is 48.7% full. And when you can bring those three personalities and disciplines together and agree that a deal is a deal that we should pursue, we think we're making better investment decisions than the typical model of just an M and a execution professional saying, hey, this is a deal we ought to transact on. So a deeply embedded embracing of diversity of experience in our investment process that's mirrored at our investment committee level. We have all three of those disciplines at our investment committee level. So our diligence process is different. And during our diligence process, we are actually underwriting an operational transformation with details around functional area by functional area, how much, when, how fast, what do we expect it to deliver? And that means that when we close on a transaction, we're actually running at 60 miles an hour executing on that transformation plan in partnership with management. Rather than we buy the business now, let's go figure it out operationally what we want to do. We're actually executing on that plan right away. And we think all of those ways in which we utilize our operations team, from integration in the sourcing with our business development group, to the diligence process, to the execution of transformation, all of that is really impactful in how we deliver results for our investors.
- [72:02]
John Bowman
I love the illustration around the table of the different perspectives and the competencies, because I think if you're going to underwrite all these elements, as you articulated, you've got to have the diversity of capability. And as we all know, diversity is chaotic and it's messy, but it leads to better outcomes. So I really like the way that you described that, Jacob. As most of listeners know, and as you know, most of capital decanted is meant to be long shelf life. This is not a timely pod in the sense that we're trying to assess today's market. But I'm going to break that rule for just a minute before I hand it off to Aaron, who I know is anxious to get into the nuts and bolts, because I think this is just some unprecedented levels of extremes you might say that you're currently faced with, most of which I would argue are headwinds. So when you think about fundraising and deal flow and the amount of dry powder, the competition, I have to imagine that that's creating some challenges. And I'm just curious if you give us a quick word on kind of what you're seeing out there and whether that's actually affecting something that was on my mind with all this dry powder. With the bank account full or fuller than normal, is the cap table looking more equity heavy than it typically does? Just because you've got to get this stuff in the ground?
- [73:11]
D
So, big question, a few aspects to it. One, I think that the fundraising environment, having slowed down, has had a big impact on the asset class. The most vulnerable GPs in that regard are those whose capital is running out or whose time to invest their capital is running out. And the Drumbeat today among LPs is DPI distributed to paid in. What have you brought back for me relative to what I've invested in you? And for those GPs whose capital has been depleted, running out of time, and they haven't had many sales because deal flow has been slow, they are in a situation where they have to compromise on value. So this is, to your point, an ephemeral dynamic. It will pass. Most of the time, I think buying from PE is expensive, but there are dynamics in play right now where you can actually find a value deal in the PE environment. In terms of the cap table, the cap table for sure is driven heavily by how well are the debt markets functioning. And I would say that they are functioning today. They are working. They're not frothy, though. And with debt markets delivering, say, four to five times leverage in LBOs today, it does mean, depending on valuation and where one is hunting and paying for businesses, that the cap tables have gotten more equity heavy. There really is no discussion today of a 20% equity check. It is 35% as a floor and can go up to 50% or even more. And GPS, even if they have a lot of capital, always want to balance the equity to debt ratio in a way that they think is most optimal for generating a good MOIC on their capital. But we're definitely in a more equity heavy environment without question and I think that's going to persist for some time.
- [75:03]
Aaron Filbeck
Jacob, I think that's really helpful in terms of the current environment. As a wise investor once said to me, DPI does not lie. So very helpful in the context of the current environment. I want to pivot a little bit into some of the more mechanics of these transactions and as you're looking at deals I want to focus on the soft stuff which tends to get overlooked. There's a lot of conversation on how do you structure a deal, how do you think about balance sheet and income statement optimization and so on. But maybe if we zoom in on management and culture as two levers and we'll focus on the first being management. How do you think about the relationship with management, how you assess leadership at an organization and maybe how that's evolved over the course of the history of buyouts. It maybe started as a very adversarial type of relationship, but it, it seems like management is more important than ever. So what are things that you're looking for and how do you view management in the context of a new transaction?
- [75:55]
D
Thanks for this question. It's something we care really deeply about and I think it's a really interesting question. At the end of the day, we've always believed at Platinum Equity that we are not investing in inventory or accounts receivable or PP&E. We are investing in people and people are what make businesses valuable. So leadership at the management level and their ability to embrace the operational capability that we bring to the table is an essential element of our evaluation process. It's something we're doing from day one when we first meet management and looking to go many layers deeper than just the C suite. And we're really looking for managers who know how to inspire people and how to instill a culture of of excellence and a sense of urgency about everything that needs to be done. And those attributes are really invaluable in terms of where we find those leaders. We having been around for 30 years, have a large cadre of former Platinum management teams that we draw upon for serial assignments. And there's an interesting dynamic that plays out in the corporate carve out context as it relates to management which is, as you can imagine, it would be the very rare, highly driven, highly capable, highly skilled executive who raises their hand and says could I please go work in the non core division? That's not typically where those kind of people want to go. So what we find in the corporate carve out context is about half the time we're encountering meh management to bad management in our context, that makes us excited because it means there's a lot operationally that hasn't been thought of, that hasn't been gone after. And we can tap into our network of executive leaders to come in and help transform the business. But also about half the time you actually have a really intelligent, really capable management team whose every idea and every initiative has been ignored. And we have the opportunity to unlock that management team's focus on the new standalone division that we're separating out from the carve out. So it can often come from the company where they just have been unable to execute on their vision because they've been deemed non core and been run for cash. And when that's not the case, we tap into the large network that we have. But this core concept of inspiring people to embrace change, to have excellence as the foundational standard of everything they do, is really core to how we think about what management to put in place and to work with.
- [78:27]
Aaron Filbeck
And maybe to take that a step further as you go down from leadership into the rest of the talent pool. And I love that framing within the context of a carve out, this might be a non core business that's not being invested in. There's real opportunity to grow and develop this part of the business. As you think about the talent pool that is going into this new business that's being spun out, things that you're looking for, are there particular characteristics in the talent pool and maybe importantly, how do you think about getting alignment in this new business that's no longer part of the broader organization that's maybe comfortable at times. So how do you think about that?
- [79:02]
D
So look from a characteristics point of view, you need somebody, as I mentioned, who can inspire employees, who can rally people instead of being afraid of change, to embrace change and be excited about what that can bring to the business. And I think that in this context, culture is really paramount. And culture, it's not just a set of values you can write down and hand to each new employee you onboard and say, hey, here's our culture. Please follow accordingly. It's something you have to as a leader and as a set of leaders, you have to demonstrate every single day in how you behave and what you do. And when you demonstrate it every day, people absorb that and mimic that and mirror that and building a culture where trust is pervasive, communications high. An executive is as comfortable walking into a room and delivering tough news, something's gone wrong as they are coming into a room and saying, hey, look at this success we've had where bad news travels fast. That's a really important aspect of what we look for and what we want to create in the businesses that we invest in is that environment of trust with great communication and an ability to come together and solve problems quickly when there are problems. So that's what we look for and what we hope to find. I think employee engagement is a key indicator of success. Turnover may or may not be an indicator. Sometimes when you have low turnover, it's actually a sign that the jobs have become sinecures and nobody's really pushing each other and everybody's protected. So you have to look deeper than just a turnover stat at really what is the culture like and trying to understand that in your diligence process. And one of the things I think we're really good at is cultural change and driving cultural change in partnership with management in a business. And we're very comfortable investing in businesses that don't have the right culture but in putting that in place.
- [80:52]
Aaron Filbeck
So Jacob, I want to pick up on something you said earlier, which is that feeling of urgency and maybe tying that back with that desire for change as well. If you zoom out and you think about your initial purchase of a particular portfolio company all the way to exit, there's a lot of different levers that you can pull within an organization to drive value, create value. And that could be sales optimization, pricing, product positioning, all sorts of different opportunities within this organization to grow value, increase the value of the business, and so on. So maybe a two part question. One, I'm sure there's levers that I'm missing when I describe some of those. And then two, what do you tend to prioritize and is it a nature of a couple of these first and then others later, or are there particular areas that you're really focused on and that creates a value creation process?
- [81:40]
D
Thanks for this question. I think it's important to understand that every business is different and what they need operationally varies and often varies considerably. Our approach has always been to offer all of our operational capabilities to an investment, but prioritize what is going to be the most impactful. It is not a push model as much as it is A pull model for management on where can Platinum help me and be most impactful. And it's interesting, as someone who's been at the firm for over 23 years now. When I joined our operational capability was really focused on what Today we call Ops 1.0, which was about cost extraction, removing excess costs from a business. And the firm was already world class at that. But it's evolved over time. And as we reflected on where can we be impactful to a business and deliver in a consistent, methodical, repeatable way, we realized hey, we can move up the P and L from SG and A into margin expansion, focusing on things like strategic sourcing. There are businesses we buy that may have never looked at their sourcing for five years and there's an opportunity to go re look at that and dramatically improve your gross margin and all the way up even into revenue trajectory. So we look at all of the P and L, we have a deep focus on balance sheet management and removing underutilized fixed assets and looking at working capital and where that's often inefficient. Sometimes we buy businesses where for many, many years management's been able to say hey, I need 10 more million for inventory and whoosh, a transfer comes in and they have $10 million and they go invest in inventory but no real KPIs or metrics around it. So deep focus on the balance sheet where you can on a one time basis monetize for cash excess assets on a balance sheet and de risk your investment early. We've also developed expertise on the tech side. We've created a group we call the Wide group, stands for Winning in the Digital Era. And that group is focused on implementing technology both internally in a business that improves efficiency and reduces friction in internal processes as well as externally with customers, making a business easier to do business with. So we leverage all of that capability in our underwriting and really focus on what can we deliver that is the most impactful in the shortest timeframe possible. And as we've discussed at length already, a deep focus and capability around talent enhancement is core to what we do as well. Delivering management the very best leaders they need to make their vision a reality. By way of example, I'll just give you a concrete example of this. We acquired a business from Emerson that was their non core division that they called Network Power. We renamed this business Vertivor. The business manufactured cooling and backup power systems for data centers. And under Emerson's ownership, its revenue was actually attriting slowly and the business had accumulated as a long non Core operation, a lot of unmotivated senior management. And once we invested, we brought in really talented leaders. We invested in innovation around energy efficiency of their products. We cleaned up a very messy IT environment and we redirected the salesforce's go to market from corporate data centers where the business was a leader but the market was in decline to colocation and hyperscalers like Microsoft, Amazon, Google, Apple, Tencent, Alibaba and incented them to go after where the growth was. Putting all those things together resulted in a business that we bought for $4.2 billion in 2016 to being a public company today with more than $42 billion of equity market cap. So there is room to create really, really exciting returns delivering what a business needs. So we never come in, Aaron, with a predetermined view of we know how to do xyz. This is what you need. It's really very much customized by business and what operational change is going to be most impactful for that business's success?
- [85:43]
Aaron Filbeck
Great. I want to zoom back out a little bit. It may be similar to the question on deal flow and valuations and all of those current events. I think there's a bit of a current element to this, but then how you guys think about this within your own organization and that is exits and the timing of those exits, the different levers you can pull for realizing that value after a certain amount of time. So how do you think about the amount of time, effort, capital, maybe emotional investment that you're putting in some of these different companies and then the timing of those exits and the levers that you have for different ways of exiting. And I would imagine valuations certainly plays a part of that in this environment. But other things that you factor into that decision would be helpful to know as well.
- [86:26]
D
It's interesting. The way we run our business is the investment team that was engaged in the diligence process and encouraging the investment decision by the investment committee has lifelong ownership of that investment and stays very engaged in. How are we developing the investment in accordance with our operational transformation plan? And importantly, how is that intersecting with the marketplace and the opportunity to divest somewhat unintuitively? You might think that having a large operations team and a big transformation plan means that we might take longer to exit. But in fact, Platinum has had a long history of shallow J curves and shorter hold times than traditional private equity because of the fact that we're driving this operational transformation plan right out of the gates quickly and generating value very fast. That coupled with the fact that the most prominent Exit type for us is to a strategic who has coveted the business that we buy but cannot get their arms around the complexity of that corporate carve out separation or the complexity of the transformation. And once we've done our work and they have a simpler thing to acquire, they come buy it from us. And that combination has led to rapid exits, rapid value creation translating into rapid exits. And as a matter of course, at Platinum, in our investment process we don't model multiple appreciation as a core part of our investment thesis. We are modeling either parity or in some cases where we're knowledgeable about a space and we think things are overheated. Might even model multiple compression and the operational value add has to make up for that multiple compression plus some on top. But we get after it very quickly and try to generate not just an attractive moic, but an especially attractive IRR in connection with that MOIC because of the speed at which we move.
- [88:26]
Aaron Filbeck
Great.
- [88:26]
John Bowman
Well Jacob, as we move towards the end here, I thought we would finish with a couple bigger questions zooming back out as we've taken a bit of a roller coaster ride. And I'd like to ask you a little bit about the pr, for lack of a better phrase, of the industry as we know. Well, as I'm sure you know even better than us because you're faced with these, what you might call accusations, narratives, stories all the time is the derogatory terms on Main street like vultures, asset strippers. Locus is pretty pervasive. And yet in preparation for this and in my own study, it's abundantly clear that revenue growth and operational improvement versus cost cutting and layoffs is actually responsible for the majority of EBITDA improvement. And that's pretty overwhelming these days. It certainly wasn't true, to be fair, in those high flying days we opened with, but it certainly is true now. Why is PR so poor here and what can we do collectively to change that narrative?
- [89:24]
D
Well, let's start with the hard fact that PE as an asset class is not always successful. And that does mean that the use of leverage can result in bad outcomes. We fight very hard for employees and customers and vendors when things go off plan. And it does happen. We're very proud at Platinum Equity of how few times in 30 years we've had any negative outcomes like that. And we dedicate significant resources to recovering from situations that have gone off track. It's one of the things I'm most proud about as an executive at Platinum is not when we generate a great multiple like a 4x in three years or a 10x overall, but rather when we have a 1.1x after a very difficult situation, that is our operations talent hard at work as well. It's interesting though, the negative bias in terms of that PR and the successes are rarely heralded broadly. Take for example our Vertiv asset, that former Emerson Network Power division we discussed. I haven't seen that written up extensively as an example of a great PE success that's generated significant growth in hiring. People tend to focus on the negative. And much like in comment sections on review websites, you see a lot more negative reviews than you do positive because people highly emotionally engaged on the negative side of things. But at the end of the day, the asset class is largely generating returns for pensioners who were firemen or police people or teachers or corporate workers. And the more success the asset class has, the more secure those pensions are. I believe the industry has done much more good than anything else. And I know that's something that we care really deeply about. I think the industry needs to do a better job of heralding a who we're working for. We're working for these pensioners for the most part in the terms of the US investors and heralding our successes. And also I think the industry needs to do a job of minimizing how many bad outcomes there are. And that means responsible use of leverage, fighting when things go wrong. There are too many GPs, especially those without operational talent, where they just don't have the bandwidth. If something's gone off track, they have to let it go and move on. We fight really hard. If things are off track, that's when we reassemble a SWAT team and go after and fix them so that at a minimum, even if our return is not going to be great, the business is stable, employees are taken care of, customers and vendors have a stable business to continue interacting with. But no doubt I'll close with this, John, on your PR question. We have work to do as an industry to improve it.
- [91:59]
Aaron Filbeck
Jacob, maybe a final question for me, and as I was doing some preparation for this episode and looking at the different ways that gps can add value to portfolio companies. There's research out there that some GPS are really good at selecting companies that are already on that upward trajectory in a lot of ways. And others go above and beyond that in terms of adding that incremental value which you spend a lot of time describing in your seat at Platinum. But if you were to take a step back outside of Platinum itself for an LP or an investor who is looking at this asset class and looking at GPs across the private equity spectrum, what are some things that they should be asking, examining and so on around the selection process to try to determine which is which. Are you just good at selecting good companies or are you good at selecting good companies that you're then adding some value on top of?
- [92:49]
D
I think LPs and investors have a very hard job separating the wheat from the shaft, so to speak, in this regard. As you rightly mentioned, performance by itself could be misleading as a lot of firms have had the benefit of a long run of interest rate demands before 2022 and or they took high risk that paid off. And I think LPs really need to look for what are those firms taking low risk, generating high returns? I think Platinum Equity falls into that category. I'm a big believer in the LP diligence process in enabling them to dive deeper in the diligence to understand a firm's beyond performance, a firm's processes and the talent pool that they have. At Platinum we have nearly 100 full time employees on the operational side alone. And if that's not the largest in North American private equity, it's close to the largest operations team and they should take a close look at the size and breadth of the team. How are the employees at the GP aligned with success in the investments? At Platinum, we deliver competitive annual comp carry participation at more senior levels and a broad and deep co investment program in the deals. And I think they should also look at the DNA of the firm. Is it ex Wall street professionals who've tacked on operations as this adjunct thing or is it really in the core DNA of the firm? Look at where those operators engage, what are they doing? Are they represented throughout the investment process, including at the investment committee level? Obviously Platinum operations is the DNA.
- [94:18]
Aaron Filbeck
It's our core.
- [94:18]
D
We talked about the founding of the firm and how we got started and how our investment committee is comprised and how our deal teams are comprised. I think once you really dig into those things, you look beyond the numbers at the firm, the organization, their processes, their talent pool, it should become clear who's really walking the walk versus who's just talking the talk.
- [94:39]
John Bowman
I think that's really well said. And as we said at the beginning, there's your answer, LPs and listeners for distinguishing between the financial wizards and the operational artisans. So Jacob, really well said, thank you. Also, I mean it's abundantly clear that you take your stewardship and your responsibility to the stakeholders, the ultimate owners of this capital, very seriously. We at Kaya obviously exist for Just that reason. And it's really nice to see authentic validation of that in practice. And so, Jacob, we thank you. We applaud you at Platinum for really building this into, as you said, your DNA over at Platinum. It's been absolute pleasure to have you on Capital Decanta, Jacob. I know Aaron and I have learned a ton. I'm sure the listeners have too. And I just want to thank you again for being part of this show. And listeners, stay tuned for the Last Sip. Well, welcome back to the Last Sip, Aaron. Jacob was fantastic. Called in from vacation listeners, you should know. I don't think we mentioned that. So we are deeply appreciative not only of the wisdom that he shared, but his willingness and sacrifice and making himself available in a time where he, I'm sure, would much prefer to be on the beach and sipping fun cocktails. So what was your big takeaway, either through your own research, Aaron, or perhaps reconciled or contradicted with the discussion with Jacob? I'd love to hear what you came away with.
- [95:59]
Aaron Filbeck
Yeah. Well, first of all, Jacob deserves a Platinum star. We're not giving gold stars here at Capital Decanted, but as the CEO of Platinum Equity, Platinum Star is, I think my biggest takeaway from Jacob was when he was talking about the way that they approach how they source deals. And you typically think of a buyout transaction as a company that might be middling. Maybe it's generating some attractive cash flow, but underperforming relative to its potential. But the way that he was describing the way that they look at the world, and I realized it's one GP was we're looking for teams or businesses within larger organizations and try to pull them out and provide them with capital strategy to maximize the potential from that perspective. So it's just a bit of a different way of looking at the buyout space. That maybe is not always obvious when I think of buyouts, but I thought that was just a really interesting conversation around how they develop a thesis around that. How about you?
- [96:54]
John Bowman
That's fantastic. I agree. I thought that portion of the conversation was really compelling too. Mine is maybe combining a reference you made to episode six, the PR of Private Equity, with some of the conversation we had on Platinum Equity's model to find great leadership and the importance of. Of installing these corporate leaders that have a lot of experience and capability. So the last mile, it seems to me of this ova evolution seems to be the soft stuff. The early days of this, when we were abandoning and departing from pure financial engineering, it was really mechanical stuff like supply chain optimization, factory floor efficiency improvements. But what you heard from Jacob and what you heard from Pete Stavros, as you mentioned at kkr, is that things like empathy of leadership, actually defining a quotient of the CEO's empathy has big correlation with the employee engagement of the organization. And that combination, that secret sauce, can have outsize effects on morale, efficiency, turnover, and ultimately margins. As we heard back again in episode six. And there is just a growing body of research spearheaded partly by Pete at KKR and as we know, at Ownership Works, which was his creation and others that clearly correlates a great culture with superior financial performance. So I say all this because even within this era or epoch of ova, you've seen it shift and morph and take on different shapes and emphases that I think ultimately is ending with this idea of leadership and soft, strong culture and healthy leadership being really the ultimate in building value. I just think that not only aligns with my values and who we are at Kaya, but also is just a fascinating final stage of the maturity of private equity. So that was really my takeaway.
- [98:44]
Aaron Filbeck
Yeah, that's a good one.
- [98:46]
John Bowman
So as I mentioned at the beginning series finale, we are done. We are headed off to a short break. Seems like this break is even shorter than last season. I did also tease that we would be speaking soon about some of the changes and tweaks we thought based partly on your feedback and partly on what we're seeing from others and what we think resonates to make season three even better than season one and two. And as I said, we'll have more on that later. But just as we leave, as we move towards a conclusion of season two, Aaron, what was your highlight? What was your favorite episode? As you recall, this journey together, there's.
- [99:24]
Aaron Filbeck
Several that we've done that really resonate with me. I think maybe the one that I learned the most from, maybe that's a lens for me to think through, was definitely the crypto episode and how this could be the time for crypto, how it could fit in a portfolio. So I learned a lot from that one. I think more generally, both Private Equity episodes, the PR one that we did, and then this one, I feel like I've learned a lot, even just in the research and the prep and the history around this industries. But in terms of the delta of what I didn't know versus what I know now, I'd say crypto was the one that I learned the most. How about your yourself?
- [100:00]
John Bowman
I think my answer is correlated with what you just said. What I learned the most what made me most proud, based upon the labor and the hard work and the discipline of diving in. I think it's gotta be China for me. I know it was our longest and that was, forgive us, but that was a manifestation of just a ton of reading and enlightening understanding of history. And oddly, while an ancient country, a very short modern history that has defined the investing thesis around that massive economy these days. So I think that's gotta be it. I loved a lot of episodes. Again, as I've said before, it's like choosing a child. But that was probably the most proud I've been. By the way, listeners, we're also, as we did last year, going to release our five top episodes in the off season. So Aaron and I's answer aren't necessarily the most popular. And we'll let the suspense build for whether they were or not, whether those two were in the top five. But we'll see what you guys thought was your highlight just to contrast it with ours. So our fun question, just to finish off Aaron, this was suggested by our fun production team that are getting to know us all too well. But Aaron, what movie world or universe if you could live in, would you choose?
- [101:13]
Aaron Filbeck
So with all the disclaimers of this being a dystopian story, it's a good book, really good movie. But if I could live in the oasis of Ready Player One, that'd be a ton of fun. So, yes, there's a evil villain who's trying to control it, and there's all sorts of bad things about virtual reality in the story, but it'd be cool to visit every so often. So that probably says a lot about me, but that would be my choice. How about you?
- [101:40]
John Bowman
I'm really having a hard time on the spot here. I mean, I could say I'd love to be linked in Zelda if I could be one person, but if I had to say universe, Nicholas Sparks. I'm a romance lush. So basically all of his universe of just perfect fairytale endings, as you've heard, Nicholas Sparks and me at 35,000ft end with a lot of crying and tears and quite embarrassment with my neighbors on the plane. So I'm a sucker for anything Nicholas Sparks. So if that's a universe, I would live in it.
- [102:12]
Aaron Filbeck
So I want to go into a cool technology virtual reality. And you want to cry a lot. That's great.
- [102:18]
John Bowman
I just want to win the girl in the end. Yeah, I'm a romantic at heart. There you go, lover, not a fighter.
- [102:23]
Aaron Filbeck
There you go, all right.
- [102:25]
John Bowman
Well, listeners, it's been an amazing season. It's been a fun ride both today and through the other 10 episodes. Thanks for hanging with us. Thanks for listening. Thanks for making this an enjoyable and fulfilling element of our work. It is hugely and richly valuable for us. And I hope on the margin that there are takeaways and nuggets and elements that you're taking away to your desk that is making you a better investor and a better fiduciary for your clients. So with that, have an amazing summer and we will be back soon with some updates on season three. Take care.