Capital Decanted: S2 | Episode 11 Summary
Title: The Evolution of Private Equity - From Wizards to Artisans with Jacob Kotzubei
Host: John Bowman
Guest: Jacob Kotzubei, Co-President of Platinum Equity
Release Date: July 29, 2025
Introduction
In the season finale of Capital Decanted Season 2, host John Bowman and co-host Aaron Filbeck delve deep into the transformative journey of private equity (PE) from its early days of aggressive financial engineering to a more nuanced approach centered on operational excellence. The episode, titled "The Evolution of Private Equity - From Wizards to Artisans," features insights from Jacob Kotzubei, Co-President of Platinum Equity, a pioneer in operational value addition within the PE landscape.
Historical Context of Private Equity and Leveraged Buyouts (LBOs)
The discussion begins with a historical overview of private equity's origins, tracing back to the 1950s and 60s. John Bowman recounts the first known LBO—the acquisition of Orkin, the pest control company, in 1964 by Wayne Rollins. This deal, characterized by an 85% leverage (high debt financing), set a precedent for future buyouts.
Notable Quote:
"So for those keeping track, that's about a 96% levered buyout."
— John Bowman [00:58]
The narrative continues with the formation of KKR (Kohlberg, Kravis, Roberts) in 1976 by Jerome Kohlberg Jr., Henry Kravis, and George Roberts, marking a significant evolution in PE practices. Their first major acquisition, RJR Nabisco in 1989, exemplified the excesses of the era, becoming synonymous with the high-stakes world of LBOs.
Notable Quote:
"More than 35 years later, the fourth biggest LBO still of all time, that one, which could be a whole another episode by itself, was truly excess personified."
— John Bowman [13:02]
Transition from Financial Engineering to Operational Improvement
The episode explores the shift that began in the 2000s, accelerated by the Global Financial Crisis (GFC), which saw a decline in leverage-driven value creation—from 70% to 25%. This period necessitated a pivot towards Operating Value Add (OVA), where PE firms began focusing on sustainable enterprise value improvements through operational enhancements rather than mere financial structuring.
Both John and Aaron emphasize:
- Changing Value Drivers: As leverage became less dominant, operational strategies like sales growth, product improvement, and efficiency gains took precedence.
- Industry Pressures: Poor public relations, increased competition, tighter credit markets, and more discerning Limited Partners (LPs) pushed PE firms to adopt more responsible and value-driven approaches.
Notable Quote:
"Operating value add, as Stepstone calls it, now accounts for about half of the value creation of private equity deals."
— John Bowman [07:24]
Factors Driving the Shift
Several key factors influenced the evolution of private equity:
-
Poor Public Relations (PR): Early PE practices fostered negative perceptions, associating firms with "hostile corporate raiders" that prioritized short-term gains over long-term sustainability.
-
Increased Competition: The proliferation of PE firms, growing by 143% globally between 2000 and 2014, intensified competition, driving firms to seek differentiated value-add strategies beyond financial engineering.
-
Higher Multiples: Rising purchase multiples made traditional flipping strategies less viable, necessitating innovative approaches to value creation.
-
Tighter Credit Markets: Post-GFC regulatory changes increased lending standards, making high-leverage deals more challenging to execute.
-
Demanding Limited Partners (LPs): LPs began scrutinizing GPs more rigorously, emphasizing the need for sustainable and repeatable value creation aligned with Environmental, Social, and Governance (ESG) criteria.
The Role of Operational Value Add in Modern PE
The conversation highlights how operational excellence has become central to modern PE strategies:
-
Creation of Value Creation Teams: Firms like Blackstone and KKR have established dedicated teams to drive operational improvements across portfolio companies.
-
Strategic Initiatives: Emphasis on revenue growth, operational efficiency, M&A add-ons, talent development, sustainability, and capital efficiency.
-
Customized Approaches: Each PE firm tailors its operational strategies based on the specific needs and potentials of their portfolio companies.
Notable Quote:
"Sustainable EBITDA improvement was now the holy grail."
— John Bowman [07:24]
Interview with Jacob Kotzubei: Operational Artisans in Private Equity
Guest: Jacob Kotzubei, Co-President of Platinum Equity
Key Topics Discussed:
1. Platinum Equity’s Operational-Centric Approach
Jacob explains how Platinum Equity differentiates itself by embedding operational expertise into the core of its investment philosophy. Founded in 1995, the firm prioritizes operational improvements alongside financial strategies to unlock and sustain value in portfolio companies.
Notable Quote:
"Our founder, Tom Gores... flipped the typical private equity model by emphasizing operations as core DNA."
— Jacob Kotzubei [62:37]
2. Sourcing Deals
Platinum Equity employs a dedicated business development team focused on building long-term relationships with counterparties, ensuring a consistent pipeline of opportunities. Their reputation in handling complex corporate carve-outs has made them a preferred buyer for divesting non-core business units.
Notable Quote:
"We have become in North America the gold standard, I probably should say platinum standard for complex global corporate carve outs."
— Jacob Kotzubei [66:39]
3. Due Diligence and Operational Transformation
Jacob outlines how Platinum equips its deal teams with diverse expertise, integrating M&A execution, financial analysis, and operational planning from the outset. This comprehensive approach ensures that operational transformation begins immediately post-acquisition.
Notable Quote:
"Our diligence process is different. We are actually underwriting an operational transformation with details around functional areas."
— Jacob Kotzubei [72:02]
4. Execution and Value Creation
Highlighting a case study, Jacob discusses Platinum’s acquisition of Vertivor from Emerson. Through strategic leadership changes, technological enhancements, and market realignment, Platinum transformed Vertivor from a struggling unit into a publicly traded powerhouse.
Notable Quote:
"We bought it for $4.2 billion in 2016 to being a public company today with more than $42 billion of equity market cap."
— Jacob Kotzubei [81:39]
5. Exit Strategies
Platinum Equity emphasizes rapid value creation, allowing for shorter hold periods and swift exits. By driving operational transformations from the outset, they enhance company value promptly, making portfolio companies attractive acquisition targets for strategic buyers.
Notable Quote:
"We're driving this operational transformation plan right out of the gates quickly and generating value very fast."
— Jacob Kotzubei [86:25]
6. Addressing PR Challenges
Jacob acknowledges the negative stereotypes surrounding PE but emphasizes Platinum’s commitment to responsible investing and stakeholder stewardship. He advocates for better industry PR by highlighting success stories and minimizing negative outcomes.
Notable Quote:
"We have work to do as an industry to improve it."
— Jacob Kotzubei [91:59]
7. Advice for Limited Partners (LPs)
Jacob advises LPs to thoroughly evaluate GPs based on their operational capabilities, team structure, and alignment with long-term value creation rather than mere financial performance. He underscores the importance of understanding a firm's DNA and operational execution prowess.
Notable Quote:
"Look beyond the numbers at the firm, the organization, their processes, their talent pool."
— Jacob Kotzubei [94:38]
Conclusion and Takeaways
The episode wraps up with reflections from John Bowman and Aaron Filbeck on the profound insights gained from the discussion with Jacob Kotzubei. They underscore the importance of leadership, culture, and operational excellence in driving sustainable value in private equity.
Key Takeaways:
- Evolution of PE: Transition from high-leverage financial engineering to operational value creation.
- Operational Excellence: Central to modern PE strategies, enabling sustainable and scalable growth.
- Differentiation Through Operations: Firms like Platinum Equity exemplify how embedded operational expertise can generate superior returns.
- LP Considerations: Essential for LPs to assess GPs beyond performance metrics, focusing on operational capabilities and firm culture.
Notable Quotes:
"We're not just capital in a transaction. We always want our operations team to be impactful to the deal that we're working on."
— Jacob Kotzubei [65:56]
"At the end of the day, we're investing in people and people are what make businesses valuable."
— Jacob Kotzubei [75:55]
"LPs really need to look for firms taking low risk, generating high returns."
— Jacob Kotzubei [92:48]
Notable Quotes with Timestamps
- John Bowman [00:58]: "So for those keeping track, that's about a 96% levered buyout."
- John Bowman [07:24]: "Operating value add, as Stepstone calls it, now accounts for about half of the value creation of private equity deals."
- Jacob Kotzubei [62:37]: "Our founder, Tom Gores... flipped the typical private equity model by emphasizing operations as core DNA."
- Jacob Kotzubei [66:39]: "We have become in North America the gold standard, I probably should say platinum standard for complex global corporate carve outs."
- Jacob Kotzubei [72:02]: "Our diligence process is different. We are actually underwriting an operational transformation with details around functional areas."
- Jacob Kotzubei [81:39]: "We bought it for $4.2 billion in 2016 to being a public company today with more than $42 billion of equity market cap."
- Jacob Kotzubei [86:25]: "We're driving this operational transformation plan right out of the gates quickly and generating value very fast."
- Jacob Kotzubei [91:59]: "We have work to do as an industry to improve it."
- Jacob Kotzubei [94:38]: "Look beyond the numbers at the firm, the organization, their processes, their talent pool."
- Jacob Kotzubei [65:56]: "Our diligence process is different. We are actually underwriting an operational transformation with details around functional areas."
- Jacob Kotzubei [75:55]: "Leadership at the management level and their ability to embrace the operational capability that we bring to the table is an essential element."
Final Reflections
John Bowman and Aaron Filbeck conclude the episode by reflecting on the importance of leadership, culture, and operational expertise in shaping the future of private equity. They commend Jacob and Platinum Equity for exemplifying the shift towards sustainable value creation and responsible investing.
Closing Quotes:
John Bowman: "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."
Jacob Kotzubei: "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."
Episode Highlights:
- Historical Evolution: From high-leverage LBOs to operationally driven PE.
- Operational Excellence: Central to modern value creation in PE firms.
- Platinum Equity’s Model: Exemplifies the operational artisan approach.
- Challenges and PR: Addressing negative stereotypes through responsible practices.
- Advice for Investors: Focus on GPs' operational capabilities and firm culture for better investment outcomes.
This episode offers a comprehensive exploration of private equity’s maturation, underscoring the pivotal role of operational strategies in fostering long-term, sustainable value.