Notes - Private Equity Deals

October 25, 2024

Chapter 1: The Power of Private Equity

Private equity has experienced significant growth over the past 30 years, evolving from a niche strategy to a dominant force in the global economy.

• Thirty years ago, private equity was a small industry, with few institutional investors understanding or committing to the strategy.
• Leveraged buyouts of cash-flowing, founder-run businesses were the main type of private equity deals.
• Media attention on leveraged buyouts in the late 1980s, highlighted by books like Barbarians at the Gate and The Predator’s Ball, focused on extravagant deals and the controversy surrounding Drexel Burnham Lambert's bankruptcy, which kept institutions away from private equity for about a decade.
• Over the last 20 years, private equity transformed from a small allocation held by a select group of investors to a large, powerful force sought after by many.
• The industry's influence has expanded from a small segment of the private business world to affecting all aspects of the global economy.
• Public awareness of private equity is increasing due to several factors:
  • Large alternative asset management firms like Blackstone, Apollo, KKR, and TPG have become publicly traded companies.
  • Mainstream media regularly reports on new private equity deals.
  • Books like Sachin Khajuria's Two and Twenty provide an insider's perspective on the industry.
• Private equity's growth is fueled by institutional and individual investors (LPs) who commit capital to funds managed by private equity firms (GPs).
  • The returns generated by private equity have attracted significant capital from institutional investors like:
    • Retirement funds for public workers and corporations
    • University endowments
    • Nonprofit foundations
    • Hospitals
    • Insurance companies
    • Sovereign wealth funds
    • Family offices
  • Individuals are also increasingly investing in private equity.
  • Essentially, retirees, students, beneficiaries of nonprofits, hospital patients, and people with savings are the ultimate owners of the businesses private equity invests in.

Chapter 2: Requisite Disclaimer

The author acknowledges that the nature of private equity firms makes it hard to avoid bias when talking about transactions. The firms are biased towards sharing their successes. To reduce cherry-picking of deals discussed on the podcast and in the book, the author decided to only include companies that were current portfolio companies or recent exits.

This still presents some bias:

• There is a selection bias from the dealmakers in choosing what to share.
• Deals under ownership may be off to a good start but are not guaranteed to be successful.

The author also outlines how the firms were selected for each season of the podcast.

Season 1

The author chose 8 well-known private equity firms with long track records of success and allowed each firm to choose a deal to discuss. This introduces survivorship bias, as only large, historically successful firms were included. Their future success, however, is not guaranteed.

Season 2

The author shifted the focus from the private equity firms to the companies themselves, selecting companies that were familiar to a general audience.

From those two seasons, the deals included in the book were chosen to represent a wide range of:

• Prior owners
• Investment theses
• Deal types
• Sizes
• Operational playbooks

The author emphasizes that this is not a comprehensive set of case studies representing the whole industry, which is too large and constantly evolving.

The author notes that there is another important disclaimer to consider: the timing of the deals. The interviews were conducted in 2022 and 2023, while the deals themselves occurred in previous years. All of the deals in the book took place before the Federal Reserve's interest rate hike in March 2022.

This means:

• The deals were financed at lower rates than what would be possible in the future.

On the other hand, the deals were all affected by the COVID-19 pandemic in some way. Some firms were presented with buying opportunities, while others saw their revenues drop to zero.

Chapter 3: The Limited Partner's Perspective: Part 1 Hamilton Lane

This chapter provides a perspective of the private equity industry from a Limited Partner (LP). The chapter features an interview with Mario Giannini, the Executive Co-Chairman of Hamilton Lane, one of the largest investors in private equity funds.

• GPs and LPs are partners, and both share in the economics of successful deals, although this shared interest in success is sometimes forgotten in critiques of the industry.
• LPs, who are the primary source of capital for private equity investments, represent a broad range of institutions and individuals, including retirees, students, beneficiaries of non-profits, hospital patients, and those with savings.
• LPs are responsible for sourcing, researching, evaluating, selecting, and monitoring private equity managers, aiming to find managers who consistently outperform the public markets.
• The dynamics between GPs and LPs can sometimes be strained, with GPs often viewing LPs simply as a source of capital and failing to understand their perspectives and needs.
• Giannini believes that advisory boards, where LPs and GPs interact, are largely ineffective. He argues that meaningful relationships built on mutual respect and information sharing are far more valuable.
• Giannini emphasizes that while price is a factor in private equity deals, it should not be the sole focus, as other aspects like the quality of the business and management team are more crucial.
• He criticizes the industry's overemphasis on deal selection and downplays the importance of portfolio construction.
• He advocates for the use of data and analytics in portfolio construction to better understand the impact of different investment decisions on risk and return.
• Giannini expresses his preference for detailed dashboards, similar to those used in public markets, to assess portfolio risk and the potential impact of factors like interest rates and commodity prices.
• He criticizes the industry's lack of attention to fees, noting a tendency to overlook significant fee differences that would be closely scrutinized in public markets.
• Giannini offers a contrarian viewpoint on continuation funds, suggesting that they are not inherently negative. He argues that as long as high-quality companies are involved, continuation funds can provide a way for GPs to retain control of good businesses and manage LP preferences.
• He acknowledges concerns about potential greed and the possibility of continuation funds being used for less desirable deals but believes the industry has not reached that point.
• Giannini highlights LP saturation as a significant issue in private equity. This saturation stems from the denominator effect, where declines in public market values increase the proportion of private assets in portfolios, pushing investors above their target allocations.
• He also points to the fundraising success of private equity in recent years, which has resulted in an influx of capital that LPs are struggling to deploy effectively.

In summary, Chapter 3 presents the perspective of a seasoned LP in the private equity industry, offering insights into the dynamics between GPs and LPs, portfolio construction, current market challenges, and the importance of a long-term, value-driven approach to investing.

Chapter 4: The Limited Partner's Perspective: Part 2 HarbourVest Partners

This chapter focuses on the role of Limited Partners (LPs) in the private equity industry, as seen through the lens of HarbourVest Partners, one of the world's most influential investors in private equity strategies. The chapter is structured as an interview between Ted Seides and John Toomey, a Managing Director at HarbourVest, and covers topics such as:

• The Evolution of Due Diligence in Private Equity: John explains how the due diligence process has evolved significantly over the last 20 years.

  • Data and Analytics: While data was limited in the past, LPs now have access to extensive data sets and analytics that allow them to thoroughly analyze a manager's track record and investment strategies.
  • Secondaries and Directs: The rise of secondary markets and direct co-investments has provided LPs with additional avenues for evaluating managers and their portfolio companies.
  • Operational Due Diligence (ODD): ODD has become an essential part of the process, enabling LPs to assess a manager's operational capabilities and their ability to create value in portfolio companies.
  • ESG: Environmental, social, and governance factors have become increasingly important considerations for LPs, reflecting a growing awareness of the non-financial aspects of investments.
  • Distributable Net Income (DNI): The focus on DNI highlights the importance of understanding how and when returns are generated and distributed to investors.

• Manager Playbooks: John emphasizes the importance of understanding a manager's "playbook" - their specific strategies and tactics for generating returns.

  • Multiple Arbitrage vs. Operational Improvements: He distinguishes between strategies focused on buying low and selling high (multiple arbitrage) and those that involve actively improving the operations of portfolio companies to drive growth and profitability.
  • Focus on Consistent Performers: HarbourVest seeks managers who can consistently generate attractive returns across different market cycles, not just those who excel in specific environments.

• Co-investment Insights: John highlights how HarbourVest's co-investment activities provide valuable insights into the capabilities and decision-making processes of fund managers.

  • Alignment of Interests: Co-investments allow HarbourVest to observe how managers navigate situations involving multiple investors, particularly in terms of aligning interests and making difficult decisions.
  • Identifying True Leaders: John emphasizes that co-investments provide a "front-row seat" to see which managers are actively driving value creation and which ones are simply passive investors.

• Strategic Advantages of Secondaries: John discusses the strategic advantages of investing in secondary markets.

  • Early Performance and Liquidity: Secondaries offer faster capital deployment, eliminate the J curve, and provide early performance and liquidity compared to primary investments.
  • Diversification and Risk Management: Secondaries allow for broad diversification, reducing risk and enhancing portfolio stability.
  • Limitations in Portfolio Construction: While secondaries offer diversification benefits, they can limit the LP's ability to precisely construct a portfolio aligned with specific investment objectives.

• Growth of the Secondary Market: John observes the significant growth and evolution of the secondary market.

  • Shift from Distressed Sellers to GP-led Transactions: He notes a shift from a market dominated by distressed sellers to a more mature market where GP-led transactions have become increasingly prevalent.
  • New Opportunities and Investor Base: This evolution has expanded the range of investible opportunities and attracted a broader and more sophisticated investor base.

• Global Investment Perspective: John outlines HarbourVest's approach to global investments.

  • Opportunistic Approach: The firm seeks attractive investment opportunities across various markets, adapting its strategies and tactics based on market conditions and local dynamics.
  • Focus on Developed Markets: Historically, HarbourVest has focused on investments in developed markets, particularly in North America and Europe, where they have a deep understanding and extensive networks.
  • Emerging Markets: While HarbourVest has made some investments in emerging markets like China and Vietnam, their primary focus remains on developed economies.

• Learning from Best Practices: John explains how HarbourVest continuously seeks to improve its operations by learning from the best practices of the private equity firms they invest in.

  • Succession Planning: He highlights the importance of adopting a stewardship model for succession planning, ensuring a smooth transition of leadership and ownership within the firm.
  • Investment Decision-Making: John describes how HarbourVest adopted a numerical rating system for investment decisions, inspired by TA Associates, to enhance the rigor and objectivity of their investment process.

• Challenges of a Global Business: John acknowledges the increasing complexities and challenges of managing a global business in today's dynamic environment.

  • Reliance on Scale and Breadth: HarbourVest leverages its scale and breadth of expertise to navigate these complexities and adapt to changing market conditions.

Overall, Chapter 4 offers a comprehensive view of the LP perspective in private equity investing, emphasizing the importance of data, analytics, manager selection, operational expertise, and continuous improvement. John's insights into HarbourVest's strategies and practices highlight the sophisticated approach taken by leading LPs to generate attractive returns in this dynamic asset class.

Chapter 5: The General Partner's Perspective: Sachin Khajuria, Former Partner at Apollo Global Management

This chapter focuses on the perspective of Sachin Khajuria, a former General Partner (GP) at Apollo Global Management who has transitioned to the role of a Limited Partner (LP). The chapter highlights the key attributes of successful GPs and the advantages of larger firms, while also acknowledging the potential of the mid-market. It emphasizes the importance of public understanding of private equity and provides insights into deal sourcing, valuation, and the evolution of the industry.

Key Attributes of Successful GPs:

• Alignment: This refers to the GP's commitment to their investors and the alignment of interests between the two parties. Successful GPs prioritize long-term value creation and are willing to "clean up the mess" even when things get difficult. They demonstrate a strong work ethic and a commitment to delivering results for their investors, going beyond a simple "buy low, sell high" mentality.
• Knowledge Base: Leading firms have a wealth of data, experience, and networks, referred to as "the library," that give them an edge. This institutional knowledge is built over time and cannot be easily replicated, providing insights into industries, companies, and market trends.
• Temperament: Successful GPs possess the temperament to navigate market cycles and long-term investments. They can "pivot when they need to pivot, stick when they need to stick," and maintain a long-term perspective focused on achieving desired outcomes.

Advantages of Larger Firms:

• Diversification: Larger firms tend to have a wider range of strategies and expertise, allowing them to diversify their portfolios and capitalize on opportunities in different markets and sectors.
• Information Advantage: Their size allows them to gather more information from various sources, including their different strategies, portfolio companies, and industry networks. This gives them a better understanding of market trends, potential risks, and investment opportunities.
• Scale: They have the resources to handle larger, more complex deals, putting them in a unique position to compete for and acquire high-value assets.

The Mid-Market:

While acknowledging the advantages of larger firms, Khajuria also recognizes the potential of the mid-market. He argues that success in the mid-market hinges on the quality of the people and their ability to adapt to changing market environments. Historically, smaller market segments have yielded attractive returns due to being "less heavily mined". Scaling up or down in size is feasible with the right team and expertise.

Public Understanding of Private Equity:

Khajuria emphasizes the need for greater public understanding of private equity. He argues that this is crucial for improving the industry's public image and making it more accessible to a broader range of investors. Increased awareness would benefit both investors and the industry by "lowering the noise" and fostering greater transparency.

Deal Sourcing:

While the term "proprietary deal" is frequently used, Khajuria points out that it becomes increasingly difficult to maintain exclusivity in large transactions. Sellers often have obligations to their stakeholders, necessitating engagement with investment banks and potentially multiple bidders. While complete secrecy may be challenging, building relationships and proactively seeking opportunities can give firms a competitive edge.

Valuation:

Khajuria acknowledges that valuations have increased across the board in private equity. This makes it even more important for firms to be disciplined in their approach and to avoid overpaying for assets. He suggests focusing on businesses with strong fundamentals, growth potential, and cash flow generation to justify higher valuations and deliver attractive returns.

Evolution of Private Equity:

Khajuria notes that private equity has evolved significantly, with the industry becoming much larger and more sophisticated. The increasing complexity and scale of deals require GPs to be more strategic in their approach, leveraging their expertise, resources, and networks to create value for their investors.

This chapter emphasizes the importance of alignment, knowledge, and temperament as key attributes of successful GPs. While highlighting the advantages of larger firms, it acknowledges the potential of the mid-market and stresses the need for greater public understanding of private equity. The chapter offers valuable insights into the world of private equity from the perspective of a seasoned professional who has experienced both sides of the industry.

Chapter 6: The Perfect Buyout: CHI Overhead Doors by KKR

This chapter focuses on KKR's acquisition of CHI Overhead Doors, highlighting the characteristics of an ideal private equity target and the strategies employed to enhance value during ownership.

An Ideal Target

The chapter begins by outlining the traits of a business that make it an attractive target for private equity acquisition. These include:

• Strong Free Cash Flow Generation: This provides financial flexibility and the ability to service debt.
• Consistent and Growing Revenue: Demonstrates market demand and the potential for future expansion.
• Resilience to Economic Cycles: Ensures stability and minimizes risk during downturns.
• Pricing Power: Allows the company to maintain profitability even with rising costs.
• Diverse Customer Base: Reduces reliance on any single customer and mitigates risk.
• Efficient Cost Structure: Provides opportunities for further optimization and margin expansion.
• Strong Management Team: Ensures effective execution of the business plan.

CHI Overhead Doors: A Case Study

CHI Overhead Doors exemplifies many of these ideal characteristics. It held a strong market position in the garage door industry, benefited from steady demand driven by replacement needs, and possessed a solid management team.

KKR's Acquisition Strategy

KKR's approach to acquiring CHI Overhead Doors involved a multi-stage preemptive process, aiming to secure the deal before a competitive auction could take place.

• Aggressive Bidding: KKR progressively increased its offer price, demonstrating its strong interest in the business.
• Creating Urgency: KKR emphasized the time sensitivity of its offer, suggesting that it would move on if a deal couldn't be reached quickly.
• Psychological Tactics: KKR used strategic communication to convey its commitment and persuade the seller to forgo a full auction process.

Value Creation Strategies

During its ownership of CHI Overhead Doors, KKR implemented several strategies to enhance the company's value:

• Operational Improvements: KKR focused on streamlining manufacturing processes, reducing lead times, and improving delivery efficiency.
• Leadership Development: KKR brought in outside expertise and consultants to support the existing management team and drive operational excellence.
• Strategy Deployment: KKR employed the "Hoshin Kanri" framework, also known as strategy deployment or policy deployment, to cascade priorities throughout the organization, ensuring alignment and focus on key initiatives.
• Employee Ownership: KKR implemented an employee stock ownership plan, granting employees a stake in the company's success and fostering motivation and alignment.

Overcoming Challenges

Despite the initial success of these strategies, KKR faced setbacks during the COVID-19 pandemic. Plant closures and staffing shortages impacted operations. However, the company recovered strongly, regaining its momentum and exceeding its pre-pandemic performance.

Exit Strategy

KKR's exit strategy for CHI Overhead Doors aligned with its general philosophy of selling when 80% of the planned value creation had been achieved and market conditions were favorable. The sale multiple didn't increase significantly, but the return on investment was exceptional due to operational improvements and the impact of employee ownership.

Key Takeaways

The CHI Overhead Doors case study illustrates the power of combining a disciplined acquisition strategy with a comprehensive value creation plan. KKR's approach highlights the importance of:

• Identifying High-Quality Businesses: Target companies with strong fundamentals and potential for growth.
• Preemptive Dealmaking: Secure attractive deals before competition drives up prices.
• Operational Expertise: Leverage internal and external resources to optimize operations and drive efficiency.
• Employee Engagement: Align incentives and foster ownership to motivate employees and maximize performance.

It's worth noting that this chapter presents a single case study and might not represent the full range of private equity strategies or the challenges associated with them.

Chapter 7: Everyone Wins - Parts Town by Berkshire Partners

This chapter focuses on Berkshire Partners’ acquisition of Parts Town, highlighting a more collaborative and relationship-focused approach to private equity, contrasting the negative stereotypes often associated with the industry.

Berkshire Partners

• Based in Boston and manages $20 billion
• Known for its collaborative culture and responsible investing approach
• Values long-term relationships, with nearly three-quarters of its deals involving the seller rolling equity into the ownership structure during Berkshire's ownership period

Parts Town

• A distributor of replacement parts for restaurants
• Exemplifies characteristics of a strong business:
  • Supplies 150,000 essential but individually low-cost parts, diversifying its revenue stream
  • Consistent revenue growth for almost 20 years until the COVID-19 pandemic

Deal Background

• Berkshire Partners had prior knowledge of the industry through due diligence on related businesses
• Identified Parts Town as a top performer in the industry
• Berkshire Partners cultivated a relationship with Parts Town's management team, exploring acquisition opportunities together
• When the prior owner (Summit Partners) decided to sell, Berkshire preempted the deal process
• This demonstrates Berkshire's proactive approach and the value of building relationships.

Deal Dynamics

• The deal was preempted at a 15x EBITDA multiple, considered aggressive at the time
• Summit Partners rolled over some of its equity, indicating a positive outlook for the business and confidence in Berkshire Partners
• Both Berkshire and Parts Town had strong values-based cultures, facilitating a smooth partnership

Value Creation

• Parts Town's earnings grew eightfold during the first seven years of Berkshire’s ownership
• Initially driven equally by organic growth and M&A, later shifting to 60% M&A and 40% organic growth
• Berkshire supported Parts Town's M&A strategy, providing resources and guidance for larger deals while enabling Parts Town to handle smaller tuck-in acquisitions independently
• They also focused on operational improvements, with Berkshire providing resources and guidance while allowing Parts Town to maintain ownership and accountability
• This highlights Berkshire's collaborative approach, empowering Parts Town to leverage its expertise while providing support and resources.

Recapitalization

• After five and a half years, Berkshire conducted a recapitalization, providing liquidity to the older fund and allowing management to participate while remaining invested
• This unusual move reflected Berkshire's long-term view and desire to continue the partnership
• The recapitalization process involved a competitive process, ultimately leading to a new ownership structure including Leonard Green Partners and Roark Capital
• The new investors brought relevant experience, and the transition was marked by transparency and collaboration, with open dialogue about goals and concerns

Key Takeaways

• Preparation and Relationships: Berkshire Partners' prior industry knowledge and existing relationship with Parts Town enabled them to act quickly and secure a favorable deal.
• Collaborative Approach: Berkshire Partners worked closely with Parts Town's management team, providing support and resources while respecting their expertise and autonomy.
• Long-Term Perspective: The recapitalization demonstrated Berkshire Partners' commitment to the long-term success of Parts Town and its management team.
• Shared Values: The alignment of values between Berkshire Partners and Parts Town contributed to a strong partnership.
• Finding the "Winners": The chapter emphasizes the importance of identifying companies with strong leadership, market position, and capabilities, recognizing that their potential may exceed initial projections.

Chapter 7 in Context

Chapter 7 stands in contrast to the previous chapter, which focused on KKR's acquisition of CHI Overhead Doors. While both deals were successful, the approach and dynamics differed. KKR took a more hands-on approach, bringing in new management and implementing operational changes. Berkshire Partners, in contrast, focused on empowering Parts Town's existing management team while providing support and resources. This difference highlights the diversity of approaches within the private equity industry and the importance of tailoring strategies to the specific circumstances of each deal.

Chapter 8: Trophy Assets Winning Championships, Fenway Sports by Arctos Sports Partners

This chapter focuses on Arctos Sports Partners' acquisition of a minority stake in Fenway Sports Group (FSG).

Background and Investment Thesis

• Arctos Sports Partners is a private equity firm specializing in investments in professional sports franchises and related businesses.
• They believe professional sports is a compelling investment due to factors like:
  • Scarcity value: There are a limited number of professional sports teams.
  • Growing global fan base: The popularity of professional sports continues to rise globally.
  • Media rights deals: Lucrative media rights agreements provide consistent revenue streams.

Fenway Sports Group (FSG)

• FSG is a sports and entertainment company that owns a portfolio of assets, including:
  • The Boston Red Sox (MLB)
  • Liverpool Football Club (Premier League)
  • Fenway Park
  • Roush Fenway Keselowski Racing (NASCAR)
  • New England Sports Network (NESN)

Deal Dynamics

• Arctos acquired a minority stake in FSG from a sophisticated family office seeking partial liquidity.
• The deal was structured to provide Arctos with:
  • Downside protection
  • Duration enhancement
  • Return enhancement
• The acquisition process involved navigating league approvals, which can be challenging for first-time investors in sports franchises.

Due Diligence

• Arctos conducted due diligence similar to any other direct investment.
• Professional sports businesses have audited financial statements, board packs, and undergo league audits, providing ample information for due diligence.
• The challenge lies in the uniqueness of these businesses and the need to model factors like:
  • Shared beta factors (e.g., league-wide trends)
  • Local execution factors (e.g., team performance)
• Stochastic and probabilistic modeling are necessary to account for these unique factors.
• The deal took place during the COVID-19 pandemic, with no games being played, requiring Arctos to factor in potential uncertainties like:
  • A possible MLB labor strike
  • An upcoming national TV contract deal in MLB

Valuation

• Arctos determined a price by conducting an intrinsic value assessment, a process they also use for other asset classes like private equity, real estate, and infrastructure.
• While acknowledging the "trophy asset" perception of sports franchises, Arctos emphasized that they are ultimately businesses with cash flows that can be valued.

Key Takeaways

• The deal highlights the growing interest of institutional investors in professional sports as an asset class.
• Specialized private equity firms like Arctos are emerging to capitalize on this trend.
• The deal's structure and due diligence process demonstrate the importance of understanding the unique characteristics and risks associated with sports franchises.

Additional Insights

• The sources do not explicitly mention the specific size of the minority stake acquired by Arctos or the final valuation of the deal.
• The chapter focuses on the acquisition phase of the deal and does not provide details about Arctos' plans for value creation during their ownership period.
• It would be interesting to learn more about how Arctos leverages its expertise and network to enhance the value of its sports investments.

This summary of Chapter 8 provides a comprehensive overview of Arctos Sports Partners' investment in Fenway Sports Group, highlighting the key aspects of the deal and the rationale behind it. While the sources offer valuable insights into the transaction, some details remain undisclosed. Further exploration into Arctos' investment strategy and their approach to value creation in the sports industry would provide a more complete understanding of their role in this evolving asset class.

Chapter 9: Software is Eating Private Equity: RealPage by Thoma Bravo

This chapter focuses on Thoma Bravo’s acquisition of RealPage and explores the increasing dominance of software investments in the private equity landscape.

Thoma Bravo: A Software-Focused Firm

• Thoma Bravo is a private equity firm specializing exclusively in software and technology-enabled services companies.
• The firm was founded in 1980 and has established itself as a leading player in the software buyout space.
• Thoma Bravo has a deep understanding of the software industry and brings a wealth of operational expertise to its portfolio companies.

RealPage: A Leader in Real Estate Software

• RealPage is a leading provider of software solutions for the real estate industry, offering a comprehensive suite of products to manage properties, residents, and operations.
• The company has a large and diverse customer base, serving over 19 million units worldwide.
• RealPage is known for its innovation and strong track record of growth.

The Acquisition: A Proprietary Deal at a Premium Price

• Thoma Bravo approached RealPage with a proposal to acquire the company on a proprietary basis, meaning there was no formal auction process.
• The deal was struck at a 30% premium to RealPage’s then-current stock price, which was already at an all-time high.
• Thoma Bravo’s deep understanding of the real estate software market and conviction in RealPage’s future growth potential justified the premium price.

Thoma Bravo’s Value Creation Strategy

• Thoma Bravo’s value creation plan for RealPage focused on three key areas: operational improvements, organic growth initiatives, and strategic acquisitions.
• The firm brought in experienced software executives to lead the company and implemented best practices to streamline operations and enhance efficiency.
• Thoma Bravo invested in sales and marketing to expand RealPage’s customer base and drive organic growth.
• The firm pursued strategic acquisitions to consolidate the real estate software market and acquire innovative technologies to integrate into RealPage’s product suite.

The Importance of Patience and Persistence

• Thoma Bravo had been following RealPage for over 10 years before the acquisition, demonstrating the firm’s patience and long-term perspective.
• The firm’s persistence in cultivating a relationship with RealPage’s management team and developing a deep understanding of the business ultimately led to the successful acquisition.

Potential Exit Strategies

• Thoma Bravo believes that building a great business will naturally lead to attractive exit opportunities.
• For RealPage, potential exit options include a sale to a strategic buyer, another financial sponsor, or a return to the public markets through an IPO.

Key Takeaways

• Software companies are highly attractive targets for private equity firms due to their recurring revenue streams, high growth potential, and strong cash flow generation.
• Specialized industry expertise and a long-term perspective are essential for successful software buyouts.
• Proprietary deals can enable private equity firms to acquire high-quality companies at premium prices.
• Operational improvements, organic growth initiatives, and strategic acquisitions are key levers for value creation in software investments.

This chapter illustrates the growing significance of software in private equity and the importance of domain expertise, patience, and a proactive approach to sourcing and executing deals.

Chapter 10: Industry Insider: Bullhorn by Stone Point Capital

This chapter focuses on Stone Point Capital's acquisition of Bullhorn, a leading software provider for the staffing and recruiting industry, highlighting Stone Point’s specialization in the financial services sector and its approach to leveraging industry expertise and data in dealmaking.

• Software deals represent the most prominent industry vertical in private equity.
• Stone Point Capital, with a specialization in financial services, recognized the potential of software within the staffing and recruiting industry.
• Bullhorn, founded in 1999, became a leader in front-office staffing software, particularly for temporary staffing.
• The company, led by founder and CEO Art Papas, bootstrapped its way to success without relying on venture capital funding.
• Stone Point Capital, through its multi-year, proactive search process, identified Bullhorn as a potential investment target.
• Chuck Davis, CEO of Stone Point, recognized the value of Bullhorn’s strong market position, financial performance, and Art Papas's leadership.
• Jarryd Levine, a partner at Stone Point, noted that the firm had been tracking Bullhorn for over a decade, drawing insights from its proprietary database of over 10,000 companies.
• Stone Point's relationship network, developed through its focus on financial services, provided unique perspectives on Bullhorn and the staffing industry.
• The firm engaged with Bullhorn's management team over several years, offering market insights and capital markets expertise, which contributed to building trust and facilitating the eventual acquisition.
• The acquisition involved a mix of debt and equity financing, with Stone Point taking a less aggressive approach to leverage than typical for software companies, allowing for financial flexibility and growth investments.
• Stone Point aimed to achieve returns through both multiple expansion and EBITDA growth. They sought to identify businesses with strong organic growth, potential for add-on acquisitions, and a clean EBITDA profile.
• Stone Point recognized the importance of organic growth but also viewed tuck-in acquisitions as a significant growth driver.
• Stone Point's deep understanding of the staffing industry, particularly the competitive landscape, was crucial in identifying suitable acquisition targets.
• They emphasized their role as partners to portfolio company management teams, regularly engaging in discussions about potential acquisitions and leveraging Stone Point’s expertise and data to make informed decisions.
• Stone Point believed that the timing of an exit would naturally arise as the business matured, with options including a sale to a strategic buyer, a sale to another financial sponsor, or a potential public offering.
• The key takeaway from the Bullhorn deal was the power of data and a proprietary relationship network in generating conviction and driving successful investments.
• Stone Point's sector-focused approach allowed them to develop valuable insights and differentiate their investment process.

In summary, Chapter 10 illustrates Stone Point Capital's strategy of identifying and acquiring high-quality software businesses within their area of expertise. Their approach emphasizes:

• Deep industry specialization
• Leveraging proprietary data and a strong relationship network
• A proactive, patient approach to deal sourcing and execution
• A partnership-oriented approach to portfolio company management
• A focus on both organic and inorganic growth

This strategy enabled them to secure a leading position in the staffing and recruiting software market through their investment in Bullhorn.

Chapter 11: Deals Within a Deal: Rockefeller Capital Management by Viking Global

Chapter 11 shifts from the roll-up strategy of acquiring multiple smaller companies to focusing on the growth and expansion of a single platform company, Rockefeller Capital Management, under the ownership of Viking Global. This chapter provides a detailed look into the challenges and rewards of building a wealth management platform and the strategic considerations involved in attracting advisors and clients.

Building a Wealth Management Platform:

• Attracting Advisors: Unlike typical private equity deals where operational improvements are paramount, success in wealth management hinges on attracting and retaining top-tier advisors. Rockefeller's strategy involves offering advisors equity ownership, a collaborative culture, and access to a wide range of investment products and services. This approach aims to empower advisors and create a sense of partnership, differentiating Rockefeller from the traditional Wall Street model.

• Client Acquisition: Growth in wealth management relies heavily on acquiring new clients. Rockefeller emphasizes a multi-pronged strategy, leveraging its brand recognition, advisor network, and targeted marketing efforts to reach high-net-worth individuals and families seeking sophisticated wealth management solutions. The firm focuses on delivering personalized service and building long-term relationships to foster client loyalty and drive organic growth.

Viking Global's Perspective:

• Investment Thesis: Viking Global, a hedge fund known for its long-short equity strategies, recognized the potential in Rockefeller's wealth management platform. The investment thesis centered on the growing demand for independent financial advice and the opportunity to capitalize on Rockefeller's strong brand and experienced leadership team.

• Value Creation: Rather than focusing on cost-cutting or financial engineering, Viking Global's approach to value creation emphasizes supporting Rockefeller's growth initiatives. This includes providing capital for advisor recruitment, expanding service offerings, investing in technology, and enhancing the firm's brand and marketing capabilities.

Challenges and Opportunities:

• Competition: The wealth management industry is highly competitive, with established players and new entrants vying for market share. Rockefeller faces the challenge of differentiating itself from the competition and attracting top talent and clients in a crowded landscape.

• Market Volatility: Economic downturns and market volatility can impact investor sentiment and client behavior, posing challenges for wealth managers. Rockefeller needs to navigate market fluctuations while preserving client capital and maintaining investor confidence.

• Technology and Innovation: The wealth management industry is rapidly evolving with advancements in technology and digital platforms. Rockefeller must embrace innovation and invest in technology to enhance client experience, improve operational efficiency, and stay ahead of the curve.

Chapter 11 Takeaways:

This chapter highlights the unique dynamics of investing in a wealth management platform, where attracting and retaining advisors and clients are crucial for success. Unlike traditional private equity approaches focused on operational improvements, Viking Global's strategy emphasizes supporting Rockefeller's growth initiatives and leveraging its brand and expertise to gain a competitive advantage in a dynamic industry.

Chapter 12: I'll Take Three of Those Beauties Please: Orveon by Advent International

This chapter examines Advent International's acquisition of three beauty brands from Shiseido, forming a new company named Orveon. It focuses on the complexities and strategic considerations involved in corporate carveouts, highlighting the risks and opportunities associated with this type of private equity deal.

Corporate Carveouts: A Unique Opportunity

The chapter starts by explaining the nature of corporate carveouts, where a parent company decides to sell a business unit that no longer aligns with its core strategy. These carveouts present attractive opportunities for private equity firms for several reasons:

• Undervalued Assets: Often, these divested units haven't received sufficient attention or investment from the parent company, leading to untapped potential for improvement and growth.
• Motivated Sellers: Corporations looking to divest are usually more focused on streamlining their operations and may prioritize a swift transaction over maximizing the sale price. This can provide private equity buyers with a favorable entry valuation.
• Transformation Potential: By separating from the larger corporate structure, carveouts gain the flexibility to implement strategic changes, improve operational efficiency, and pursue focused growth strategies.

Risks and Challenges

Despite the strategic appeal, corporate carveouts come with inherent risks and challenges:

• Complex Separation Process: Untangling the carved-out unit from the parent company involves numerous intricate steps, including negotiating transition services agreements, establishing independent infrastructure, and transferring essential functions like IT, finance, and human resources.
• Operational Disruptions: The transition period can create disruptions to the business, requiring careful planning and execution to minimize any negative impact on operations and customer relationships.
• Financing Hurdles: Without standalone financial statements, securing debt financing for a carveout can be difficult. Sellers may need to provide financing through seller notes to bridge the gap.

Orveon: A Complex Carveout

The case of Orveon highlights the intricacies of a corporate carveout. Advent International acquired three beauty brands – bareMinerals, Laura Mercier, and Buxom – from the Japanese conglomerate Shiseido. Advent initiated the deal during the pandemic, a time when the beauty industry was significantly impacted, with sales of these brands almost at a standstill.

The negotiations and separation process were complex, requiring agreements on various aspects:

• Intellectual Property: Ensuring clear ownership of brand trademarks and patents.
• Contracts: Transferring or renegotiating supplier and customer contracts for the new entity.
• Manufacturing: Establishing independent manufacturing processes or securing agreements with Shiseido for a transition period.
• R&D: Determining the ownership and future development of products in the pipeline.
• Financial Infrastructure: Setting up independent financial systems and processes.
• Digital Infrastructure: Migrating or creating websites, social media accounts, and other digital assets.
• Data: Negotiating access and ownership of customer and operational data.
• Personnel: Transferring or hiring employees to staff the new organization.

Advent's Approach

Advent International brought its extensive experience in corporate carveouts and a commitment to transforming businesses to the Orveon deal. The firm implemented a multi-faceted strategy:

• Experienced Leadership: Recruiting a seasoned CEO, Pascal Houdayer, with a proven track record in the beauty industry and experience in acquisitions and brand management.
• Rapid Team Building: Assembling a complete senior executive team within eight months of acquiring the business.
• Incentive Alignment: Implementing incentive plans that required personal investment from the executive team, fostering ownership and commitment.
• Operational Support: Leveraging Advent's internal portfolio support group and operations advisors to guide the new management team in establishing essential business functions, including IT, finance, HR, supply chain, and procurement.
• Digital Transformation: Developing and implementing a nine-part digital value creation plan, including enlisting an Advent employee as the interim head of digital.
• Cultural Transformation: Defining Orveon's unique values and establishing a distinct culture for the newly independent company.

Financing the Deal

Given the lack of independent financial data, Advent secured financing for Orveon through a seller note from Shiseido, avoiding the need for external debt in the initial stages. This provided flexibility for operational improvements and minimized financial pressure during the crucial transition period.

Looking Ahead

The successful execution of the Orveon carveout involves ongoing efforts to:

• Stabilize Operations: Addressing supply chain challenges and navigating inflationary pressures impacting the cost of goods.
• Drive Growth: Implementing strategic initiatives to expand the brands' market presence and capture growth opportunities.
• Build a Strong Foundation: Establishing a robust organizational structure, culture, and operational processes to support long-term success.

Key Takeaways

The Orveon case study provides valuable insights into the dynamics of corporate carveouts, showcasing:

• The Importance of Preparation: Thorough due diligence, comprehensive planning, and proactive engagement with stakeholders are crucial for navigating the complexities of carveouts.
• The Power of Partnerships: Building strong relationships with the seller and key partners is essential for a smooth transition and ongoing support.
• The Value of Expertise: Leveraging a network of experts and advisors can provide valuable guidance and accelerate the implementation of critical initiatives.
• The Benefits of Patience: Carveouts require a long-term perspective, recognizing that transforming the business and unlocking its full potential takes time and sustained effort.

This chapter emphasizes the need for a disciplined approach, operational expertise, and a strong commitment to transformation to succeed in corporate carveouts. The Orveon case serves as a reminder that, while complex and challenging, carveouts can offer significant rewards for private equity firms capable of navigating their intricacies.

Chapter 13: You Bought What? Yahoo by Apollo Global Management

This chapter explores Apollo Global Management's acquisition of Yahoo, a seemingly contrarian investment given the brand's decline from its peak during the dot-com bubble. The chapter emphasizes Apollo's strategy of identifying undervalued, misunderstood assets and strategically enhancing their value.

Apollo Global Management: A Distinctive Approach

• Apollo prioritizes acquiring companies at a favorable price, emphasizing that "purchase price matters".
• Their strategy involves targeting "misunderstood assets, diamonds in the rough," and improving them during their ownership period.
• They aim to "buy complexity and sell simplicity," seeking opportunities overlooked by others due to perceived complexity or negative perceptions.

Yahoo: From Dot-com Darling to Acquisition Target

• At its peak in 2000, Yahoo, along with AOL, held a combined market capitalization of $350 billion.
• However, the business experienced a gradual decline in the following decades.
• Verizon acquired AOL in 2015 and Yahoo in 2017, aiming to capitalize on digital media, but failed to achieve expected synergies.
• Verizon decided to divest Yahoo in 2021 as it was a small, non-core asset.

Apollo's Persistent Interest

• David Sambur, co-head of equity at Apollo, initially explored acquiring Yahoo in 2017 when it was still a public company.
• Apollo couldn't compete with Verizon's strategic acquisition at the time.
• However, Sambur and his team gained familiarity with the business during due diligence and continued monitoring it.
• When Verizon put Yahoo up for sale again in 2021, Apollo saw a renewed opportunity.

Capitalizing on Market Misconceptions

• The size of the asset, perceived lack of quality, and low growth expectations deterred many potential buyers.
• This created an opportunity for Apollo to acquire Yahoo at a favorable price due to the "baggage" associated with the brand.

The Acquisition and Turnaround

• Apollo acquired Yahoo for $5 billion, a significant discount from its peak valuation.
• They brought in a new CEO, Jim Lanzone, with experience in revitalizing digital media businesses.
• Under Lanzone's leadership, Yahoo focused on enhancing its core businesses, including Mail, Homepage, Search, Finance, and Sports, while also divesting non-core assets.
• The turnaround strategy emphasized improving user experience, strengthening advertising technology, and leveraging the platform's large user base.

Lessons Learned

• Open-mindedness and Due Diligence: Avoid snap judgments based on prevailing market perceptions and conduct thorough due diligence to uncover hidden value.
• Impact of Management: Strong management teams can significantly enhance value creation.
• Adaptability and Pace of Change: In dynamic industries like technology, adaptability and the ability to respond quickly to changing trends are crucial.

Success and Future Prospects

• Under Apollo's ownership, Yahoo's value has increased substantially, highlighting the effectiveness of their contrarian investment approach.
• The chapter implies that Apollo's exit strategy will likely involve selling Yahoo at a significant premium to its acquisition price.

Chapter 13 in Context

This chapter reinforces Apollo's distinctive investment philosophy, emphasizing their expertise in identifying undervalued assets and employing financial engineering, operational improvements, and strategic management changes to unlock their potential. It also highlights the importance of patience, conviction, and a willingness to go against prevailing market sentiment to capitalize on overlooked opportunities.

Chapter 14: Hustle Amid Complexity - BlueTriton Brands by One Rock Capital Partners

This chapter explores One Rock Capital Partners' acquisition of BlueTriton Brands from Nestlé. The deal involved navigating a complex corporate carve-out process, highlighting One Rock's expertise in executing such transactions, often overlooked by larger private equity firms.

One Rock Capital Partners

• Specializes in control-oriented investments in North America and Europe, focusing on:
  • Corporate carve-outs
  • Complex situations
  • Businesses with operational improvement opportunities

BlueTriton Brands

• A leading provider of bottled water brands in North America
• Previously a division of Nestlé, comprising brands like:
  • Poland Spring
  • Deer Park
  • Pure Life
  • Ozarka
  • Arrowhead

Deal Background

• Nestlé decided to divest its North American bottled water business to focus on higher-growth categories.
• One Rock had considered acquiring the business in 2017 but was deemed too small at the time, highlighting the challenges faced by mid-market firms.

Deal Dynamics

• The transaction was executed as a corporate carve-out, involving the separation of BlueTriton from Nestlé's existing infrastructure.
• The condensed timeframe (January to March 2021) required rapid execution across various aspects of the deal.
• One Rock's expertise in carve-outs and willingness to move quickly proved advantageous.

Purchase Price and Financing

• One Rock acquired BlueTriton for $4.3 billion, representing an 8x EBITDA multiple.
• This multiple reflected a discount compared to typical valuations for beverage companies and spring water companies, presenting an attractive opportunity for One Rock.
• One Rock secured financing through a combination of equity and debt, including a syndicated loan.
• The high cash flow generation of the business provided a margin of safety for debt repayment.

Value Creation Strategies

• Management Team Overhaul: One Rock recognized the need for a strong and experienced management team to lead BlueTriton as a standalone entity. They partnered with industry veteran Dean Metropoulos, who had a track record of success in the food and beverage sector.
• Operational Improvements: One Rock identified opportunities to enhance efficiency and profitability through various initiatives:
  • Leaning out manufacturing processes
  • Reinvigorating sales efforts
• Focus on Sustainability: Recognizing the growing importance of sustainability, One Rock planned to invest in initiatives that would reduce BlueTriton's environmental footprint, a key consideration for consumers and investors alike.

Exit Strategy

• While specific exit plans were not explicitly outlined, One Rock anticipated a significant uplift in the multiple upon exiting the investment.
• They expected to achieve this through EBITDA improvements and the successful establishment of BlueTriton as a standalone entity.
• Potential exit avenues could include:
  • Sale to a strategic buyer
  • Sale to another private equity firm
  • Initial public offering (IPO)

Key Lessons Learned

• Act Decisively When Opportunities Arise: One Rock's initial exclusion from the process in 2017 due to size limitations highlights the importance of seizing opportunities when they align with the firm's capabilities, regardless of scale.
• Meet Seller Timeframes: One Rock's ability to meet Nestlé's demanding timeframe contributed significantly to their success in securing the deal.
• Target Corporate Carve-outs: One Rock recognizes the potential for attractive valuations in corporate carve-out situations, as sellers often prioritize speed and certainty over maximizing price.
• Build Strong Relationships with Intermediaries: One Rock's transparent communication with intermediaries fostered trust and credibility, ultimately positioning them favorably in the deal process.

Chapter 14 in Context

This chapter reinforces a theme present throughout the sources: private equity firms specializing in specific niches, like corporate carve-outs in One Rock's case, can capitalize on opportunities often overlooked by larger firms. It also underscores the importance of strong operational expertise and a willingness to move quickly in a competitive market.

Chapter 15: The Tiger Woods Piñata: TaylorMade by KPS Capital Partners

This chapter details KPS Capital Partners' acquisition and turnaround of TaylorMade, a well-known golf equipment manufacturer, showcasing a value creation strategy centered on operational improvements and strategic product positioning.

KPS Capital Partners: Specialists in Turnarounds

• KPS Capital Partners is a private equity firm known for its expertise in acquiring and revitalizing underperforming businesses, particularly in the manufacturing sector.
• The firm's investment approach focuses on identifying businesses with strong underlying potential that are facing operational or financial challenges.
• KPS leverages its operational expertise to improve efficiency, enhance profitability, and position these businesses for long-term success.

TaylorMade: A Golf Brand in Need of a Swing Adjustment

• TaylorMade is a leading manufacturer of golf equipment, renowned for its high-performance clubs and golf balls.
• At the time of KPS's acquisition, TaylorMade was a division of Adidas and had been facing several challenges:
  • An overly aggressive product cycle had led to excessive inventory and discounting, eroding profitability.
  • Lack of focus on key product categories, such as golf balls, had resulted in a limited market share.
  • Operational inefficiencies and a lack of financial sophistication as a division of a larger corporation further hindered performance.

Identifying the Opportunity: A Contrarian Bet

• Many investors perceived TaylorMade as a risky investment due to its recent struggles.
• KPS recognized the intrinsic value of the brand and its potential for a turnaround under the right ownership and management.
• They saw an opportunity to leverage their operational expertise to address the company's challenges and unlock its potential.

Key Issues and Due Diligence Focus

• KPS concentrated its due diligence on three core areas:
  • Understanding the product cycle and its impact on inventory management.
  • Assessing the potential for improving the cost structure and profitability.
  • Evaluating the feasibility of carving out the business from Adidas and establishing it as a standalone entity.

Addressing the Challenges: Operational Expertise at Play

• KPS partnered with David Abeles, an industry veteran who had previously worked at TaylorMade, to lead the turnaround.
• They implemented a multifaceted strategy to revitalize the business:
  • Extending the product cycle: Slowing down the pace of new product introductions to better align with market demand and reduce inventory buildup.
  • Improving information flow: Establishing better communication between sales, marketing, and supply chain to optimize production and inventory decisions.
  • Focusing on key product categories: Increasing investment in the golf ball segment to gain market share and diversify revenue streams.
  • Enhancing operational efficiency: Implementing lean manufacturing principles to optimize production processes and reduce costs.
  • Building a strong finance function: Establishing a dedicated finance department to improve cash management, financial reporting, and overall financial discipline.
  • Fostering a culture of excellence: Emphasizing quality, on-time delivery, and a customer-centric approach across the organization.

The Exit: Reaping the Rewards of a Successful Turnaround

• After successfully implementing their turnaround strategy and improving TaylorMade's performance, KPS decided to sell the business.
• Despite initial skepticism from some investors, KPS's strong track record and TaylorMade's improved financial performance attracted interest from multiple buyers.
• The sale resulted in a significant return for KPS, validating their contrarian investment approach and operational expertise.

Key Takeaways:

• Specialization and Operational Expertise: This chapter demonstrates the importance of specialized expertise in private equity, particularly in complex turnarounds. KPS's deep understanding of manufacturing operations and their ability to identify and address TaylorMade's specific challenges were crucial to the deal's success.
• Patience and Conviction: KPS's willingness to invest in an underperforming business that others perceived as risky highlights the importance of patience and conviction in private equity. Their belief in TaylorMade's underlying potential and their commitment to the turnaround strategy paid off in the long run.
• Value Creation Beyond Financial Engineering: While financial engineering plays a role in private equity, this chapter emphasizes the importance of operational improvements and strategic product positioning as key drivers of value creation. KPS's focus on improving TaylorMade's operations and product strategy ultimately led to a successful exit and significant returns.

The chapter provides valuable insights into the world of private equity, showcasing how a firm with specialized expertise can transform an underperforming business into a profitable enterprise. The TaylorMade acquisition exemplifies KPS's successful strategy of identifying undervalued assets, implementing operational improvements, and creating value through a combination of financial acumen and hands-on management.

Chapter 16: Private Skiing and a Public Mess: Yellowstone Club by CrossHarbor Capital Partners

This chapter examines CrossHarbor Capital Partners' acquisition of the Yellowstone Club, a private ski and golf community in Montana, revealing the complexities of investing in trophy assets and the challenges of managing a high-end, niche business. The Yellowstone Club, despite its luxurious amenities and exclusive membership, faced financial distress and operational issues prior to CrossHarbor's involvement. The chapter focuses on CrossHarbor’s strategy for reviving the club, navigating legal battles, and ultimately achieving a successful exit.

The Yellowstone Club: A Trophy Asset in Distress:

• Founded in 1997, the Yellowstone Club quickly gained a reputation as an exclusive haven for the ultra-wealthy, boasting world-class skiing, a renowned golf course, and luxurious real estate offerings.
• By 2008, the club faced significant financial challenges, culminating in bankruptcy filings amidst the global financial crisis and legal disputes involving its founder.
• The club's financial woes stemmed from a combination of factors, including over-leveraged expansion plans, ambitious real estate development projects, and the impact of the economic downturn on high-end discretionary spending.

CrossHarbor's Investment Thesis:

• CrossHarbor Capital Partners, a private equity firm with a focus on distressed assets and special situations, saw potential in the Yellowstone Club's unique assets and brand value.
• They believed that the club, with its strong underlying fundamentals and attractive location, could be revitalized through a combination of financial restructuring, operational improvements, and strategic repositioning.

Navigating Complexities and Challenges:

• Legal Battles: CrossHarbor inherited a web of legal entanglements related to the club's previous ownership and bankruptcy proceedings.
• Operational Turnaround: The club required significant operational improvements to enhance efficiency, improve service quality, and restore its reputation.
• Membership Management: Managing a high-end, private club demanded a delicate balance between exclusivity and accessibility, catering to the discerning needs of its affluent clientele.

CrossHarbor's Value Creation Strategy:

• Financial Restructuring: CrossHarbor injected capital to stabilize the club's finances, reduce debt, and provide a runway for operational improvements.
• Operational Enhancements: They focused on streamlining operations, improving service quality, and enhancing the overall member experience.
• Strategic Partnerships: CrossHarbor formed strategic partnerships with key stakeholders, including real estate developers and hospitality operators, to enhance the club's offerings and attract new members.

Achieving a Successful Exit:

• After several years of ownership and operational improvements, CrossHarbor successfully sold the Yellowstone Club in 2016 to a group of investors, generating a significant return on their investment.
• The sale demonstrated the potential for private equity firms to create value in distressed assets by navigating complexities, implementing strategic initiatives, and restoring investor confidence.

Key Takeaways:

Chapter 16 provides a compelling case study of private equity investment in a distressed trophy asset. CrossHarbor's success with the Yellowstone Club highlights the importance of:

• Specialized Expertise: CrossHarbor's experience with distressed assets and special situations enabled them to effectively navigate the complexities of the Yellowstone Club's financial and legal challenges.
• Operational Focus: Implementing operational improvements and enhancing service quality were crucial to restoring the club's reputation and attracting new members.
• Strategic Partnerships: Collaborating with key stakeholders, including real estate developers and hospitality operators, enhanced the club's offerings and contributed to its overall success.

This chapter demonstrates how private equity firms can create value by identifying undervalued assets, addressing operational issues, and strategically repositioning businesses to unlock their full potential. It also emphasizes the importance of meticulous due diligence, a clear understanding of the target market, and a well-defined plan for operational improvement and growth.

Chapter 17: The Large World of Small Businesses: Selective Search by Permanent Equity

Chapter 17 examines Permanent Equity's acquisition of Selective Search, illustrating the firm's unique investment approach in the vast landscape of small and medium-sized enterprises (SMEs). Permanent Equity distinguishes itself through its "permanent capital" model, which eschews the traditional private equity model of fixed-term funds in favor of holding businesses indefinitely.

Permanent Equity's Differentiators:

• Permanent Capital: Unlike traditional private equity firms, Permanent Equity does not operate under a fixed-term fund structure. Instead, it invests capital from its balance sheet, allowing it to hold businesses indefinitely and eliminating the pressure to exit investments within a predetermined timeframe. This approach provides flexibility and stability, enabling the firm to make long-term decisions that align with the best interests of the businesses it acquires.

• Focus on Owner Earnings: Permanent Equity prioritizes companies with strong and sustainable owner earnings, which represent the true discretionary cash flow available to the business owner after accounting for essential capital expenditures. This focus ensures that acquired companies have a solid foundation for growth and can generate consistent cash flow to support their operations and expansion plans.

Selective Search: An Acquisition in the SME Landscape

• Company Overview: Selective Search is a retained executive search firm specializing in recruiting senior executives across various industries. The company operates with a strong reputation for quality and personalized service, making it an attractive target for Permanent Equity's investment philosophy.

• Acquisition Rationale: Permanent Equity saw Selective Search as a good fit for its permanent capital model due to the company's consistent profitability, strong management team, and potential for long-term growth. The acquisition aligned with Permanent Equity's strategy of acquiring businesses with stable earnings, a strong market position, and a capable leadership team.

Value Creation Strategies:

• Professionalization and Specialization: Permanent Equity focuses on helping acquired businesses improve their operational efficiency and professionalism. This includes streamlining roles and responsibilities, bringing in specialized talent to manage specific areas of the business, upgrading systems and processes, and establishing robust banking relationships.

• Growth Support: While Permanent Equity does not seek to impose drastic changes or disrupt existing operations, it actively supports growth initiatives through strategic investments, talent acquisition, and expansion into new markets or service offerings. The firm's long-term perspective allows it to patiently invest in growth opportunities that may take time to materialize.

• Financial Flexibility: The permanent capital model provides financial flexibility, enabling Permanent Equity to act as an internal source of debt financing for its portfolio companies. This eliminates reliance on external lenders and allows the firm to tailor financing terms to the specific needs of the business, as demonstrated by the example of deferring interest payments and repayments during the COVID-19 pandemic.

Chapter 17 Key Takeaways:

This chapter provides insights into:

• The potential of investing in SMEs: While large-scale private equity deals garner significant attention, the vast universe of SMEs presents compelling investment opportunities, particularly for firms with a long-term perspective and a focus on sustainable owner earnings.

• The benefits of the permanent capital model: Permanent Equity's permanent capital approach allows for greater flexibility, stability, and alignment with the long-term interests of the businesses it acquires. This model provides advantages in terms of financial flexibility, growth support, and long-term value creation.

• The importance of operational improvements and growth support: While Permanent Equity does not pursue aggressive cost-cutting or financial engineering strategies, it recognizes the importance of operational efficiency and professionalization in driving sustainable growth.

By showcasing Permanent Equity's acquisition of Selective Search, Chapter 17 highlights a differentiated approach to private equity investing that emphasizes patient capital, operational excellence, and alignment with the long-term goals of the businesses it owns.

Individuals Mentioned in "Private Equity Deals" and Their Titles/Roles:

• Ted Seides: Author of the book Private Equity Deals. He is also the host of the Capital Allocators podcast and Private Equity Deals podcast.
• Pete Stavros: Co-Head of Global Private Equity at KKR.
• John Connaughton: Co-Managing Partner at Bain Capital.
• Kevin Callaghan: Managing Director at Berkshire Partners.
• Chuck Davis: CEO of Stone Point Capital.
• Ian Charles: Managing Partner at Arctos Partners.
• Greg Fleming: CEO of Rockefeller Capital Management.
• Mario Giannini: Executive Co-Chairman of Hamilton Lane.
• Chris Ailman: Chief Investment Officer at CalSTRS.
• Raphael Arndt: CEO of the Australian Government Future Fund.
• Kim Lew: President and CEO of Columbia Investment Management Company.
• Andrew Golden: President of Princeton University Investment Company.
• Ana Marshall: Chief Investment Officer of William and Flora Hewlett Foundation.
• John Toomey: Co-CEO of HarbourVest.
• Greg Durst: Senior Management Director of the Institutional Limited Partners Association (ILPA).
• Hank Strmac, Morgan Arguello, Rahul Moodgal, Jen Prosek, and Ron Biscardi: Members of Ted Seides' team.
• Tim Sullivan: Former colleague of Ted Seides at the Yale Investments Office, specializing in private equity investments.
• Brian Doyle: Recruited Ted Seides to J.H. Whitney & Co.
• Todd Boehly: Partner at Eldridge; previously at J.H. Whitney & Co.
• David Swensen: Former Chief Investment Officer at the Yale University Investments Office.
• Vanessa Seides: Ted Seides' wife, who reads the legal disclaimer for the Private Equity Deals podcast.
• Teddy Forstmann: A prominent figure in the private equity industry.
• Ed Kane: One of the founders of HarbourVest Partners.
• Sachin Khajuria: Author of the book Two and Twenty: How the Masters of Private Equity Always Win. He is a former partner at Apollo Global Management and currently an LP in partnerships managed by Apollo, Carlyle, and Blackstone.
• Pete Wilson: Partner at KKR, who discusses the acquisition of CHI Overhead Doors in Chapter 6.
• George Roberts: Co-founder of KKR.
• Larry Cheng: Managing Partner at Volition Capital, who discusses the investment in Parts Town in Chapter 7.
• Steve Schwab: CEO of Parts Town.
• Greg Bondick: Partner at Windjammer Capital.
• John McDonough: CEO of a company acquired by Parts Town.
• Sam Kennedy: CEO of Fenway Sports Group.
• John Henry, Tom Werner, and Mike Gordon: Owners of Fenway Sports Group.
• Scott Crabill: Partner at Thoma Bravo, who discusses the acquisition of RealPage in Chapter 9.
• Carl Thoma: Founder of Thoma Bravo, previously a founder of Golder Thoma (later GTCR).
• Stan Golder: Co-founder of Golder Thoma (later GTCR).
• Steve Winn: Founder and former CEO of RealPage.
• Jarryd Levine: Partner at Stone Point Capital, who discusses the acquisition of Bullhorn in Chapter 10.
• Art Papas: Founder and CEO of Bullhorn.
• David Wermuth: Partner at Viking Global, who discusses the acquisition of Rockefeller Capital Management in Chapter 11.
• John D. Rockefeller: Founder of Standard Oil and patriarch of the Rockefeller family.
• John Rockefeller Jr.: Second-generation member of the Rockefeller family and philanthropist.
• Laura Spelman Rockefeller: Wife of John D. Rockefeller.
• Tricia Glynn: Managing Partner at Advent International, who discusses the acquisition of Orveon in Chapter 12.
• Pascal Houdayer: CEO of Orveon.
• Leslie Blodgett: Founder of bareMinerals and Buxom, beauty brands acquired by Advent International to form Orveon.
• Janet Gurwitch and Laura Mercier: Founders of the Laura Mercier beauty brand, acquired by Advent International to form Orveon.
• Ron: Head of North America at Shiseido.
• David Sambur: Co-Head of Private Equity at Apollo Global Management, who discusses the acquisitions of Yahoo and TaylorMade in Chapters 13 and 15.
• Jim Lanzone: CEO of Yahoo.
• Dean Metropoulos: Industry expert who partnered with One Rock Capital in their acquisition of BlueTriton Brands.
• Tony Lee: Co-founder of One Rock Capital.
• Andy Taussig: Investment banker involved in the sale of TaylorMade to KPS Capital Partners.
• David Abeles: CEO of TaylorMade.
• Sam Byrne: Founder and Managing Partner of CrossHarbor Capital Partners, who discusses the acquisition of Yellowstone Club in Chapter 16.
• Tim Blixseth: Founder of the Yellowstone Club.
• Warren Miller: Legendary ski film producer and resident of the Yellowstone Club.
• Brent Beshore: CEO of Permanent Equity, who discusses the acquisition of Selective Search in Chapter 17.
• Emily Holdman: Leader of the deal team at Permanent Equity.
• Barbie Adler: Founder of Selective Search.
• Craig Pearce: Publisher at Harriman House.
• Carolyn Boyle: Editor of the Private Equity Deals podcast transcripts.
• Ted Gooden: Partner at Berkshire Global Advisors.