New Normal, New Opportunities w/ Triton’s Peder Prahl

Previously on DriveHunter, Peter Perall, the founding CEO of Triton, shared his thinking on the era of easy money, and why at the height of the cycle, Triton chose to slow down fundraising. Today on the show, I'll ask Peter how he's thinking about a world of higher interest rates, more constrained leverage, and far greater geopolitical and macro uncertainty, and why he believes it's actually a more attractive environment for disciplined investors. We had an environment where sellers would only sell if they got more than they expected, the era of free money. Now we have sellers who have strategic objectives, they have financial objectives, they have personal objectives to realize. So we see that there is a lot more opportunity to buy again. So we've got to love it, right? We love this environment. We'll talk about where he's seeing value dislocation across Europe today, from infrastructure to defense, and how Triton identifies the less obvious, second and third derivative approaches. Now everybody would like to buy a defense company, or an infrastructure company. So we're looking for new areas that are not so hot right now. We'll also explore Triton's approach to culture, and why they think about fun and profit in that order. I'm Himakar, their chairman of Bains Global Private Equity Practice, and this is Tripodder. But as we shift into what you described as the new normal, I've termed it an inflection point. I think we all agree we're at some period of time where things are different than they were in the past, and we're probably not going back to the past. And we've come through a series of really unprecedented, in my view, macro events. We've obviously had a global pandemic. We've had massive inflation spikes. We've had very rapid and steep interest rate spikes. We've had shooting wars, different macro policies that have affected things, and it's been very challenging for the private equity world to be able to deploy capital, really underwrite with confidence and leverage over five years what cash flows are going to be, and then return that capital to LPs as a result. What do you see as some of the big changes that these macro developments have created for Triton, and talked to me a little bit specifically about some of the shifts in Europe today that are mattering the most for long-term investors, such as yourself? First, another question which comes up often, the M&A markets are totally open. The M&A markets are totally open. There are strategic buyers who would like to buy companies. They just don't want to buy them at yesterday's prices. So we have been able to sell a number of our companies, and I think we have a 25, 30% now return over the last couple of years with industries around 10, 15. Simply because we didn't overpay, and partly because we improved these companies, and we made them attractive to them. The M&A markets are very open. That market are also, they're just not lending at 10 times anymore. Maybe they're lending at 4. We never used the 10 because we thought that that would be too much risk, and would not allow us to do the operational improvements that we'd like to do it. So we don't like the water to be up to your head or above your nose even, right? So we like the debt to be around your knees, maybe, or your ankles. So we use less debt than like to create our returns at lower risk. Now, when you think about the markets, in my personal view, the direction of travel is very clear. We are at around an average interest rate. We are at around an average liquidity. Those were crazy before. Now they're back to normal. That's why we call it normal. What is new? And I don't think it's that new, or the geopolitics. It's been gone all for a long time. China, India, Middle East, what's happening in the West, in the United States, that if you think the other thing also about technology, it's also. The direction of travel is very clear. It's been going on for a long time. And we all heard about Chachi, PT, all this three, four years ago, and then everybody gets so surprised that the flood comes out with a new model. I mean, we know it's going to be another better model in six months. So this is all happening. So what we think is that the direction of travel is very clear where the world is going, but there's going to be a lot of volatility and changes in it. And that's exactly the environment that provides great buying opportunities. If you know what you're doing, if you know your sectors, if you know your niches, you know where the growth is, you know where you don't want to invest, it's also exactly the environments where they're going to be a lot of sellers. We had an environment where sellers would only sell if they got more than they expected. They had our free money. Now we have sellers who have strategic objectives, they have financial objectives, they have personal objective to realize. No, I love that narrative, Peter. I really love it because I do think volatility promotes value dislocation and that provides opportunities for folks that are able to buy and capitalize to your point. If you know what you're doing and if you know what you're looking for, so a lot of people throw their hands in the air and say, gee, this is a disaster, but I like your optimism that, hey, this is an opportunity. We see lots of opportunities and I'd love to pick your brain and just get your sense of what are some of the promising growth opportunities that you're seeing across Europe right now? What are some of those areas? So if you look at the world, as you said, it is pretty clear where the money is going to go, where the demand is going to be growing, infrastructure, infrastructure, servicing, maintenance, technology, AI, security, defense. I mean, this we knew five years ago, at least, and we certainly knew it when Vans come to Europe and told every European, well, we all knew, but nobody there to say it. So we've been investing in these niches for a while and generally they worked out very well. So what we're working on right now is to find the second and the third derivative of this because now everybody would like to buy a defense company or an infrastructure company. So we're looking for new areas that are not so hot right now, but those areas that I mentioned are really growing and the companies we own in these areas are doing well. So we'd like to keep investing in that, but we're not going all in in data centers or data centers services right now, not because we don't like that and think it's going to be growing, but we think that there's a lot of money chasing that. So we're going to go look, I don't know if you read this book, who moved my cheese, but it's fantastic and these two mice that have this cheese on the ground a long time and suddenly they run out of cheese or gets old to cheese so they have to go look for new cheese somewhere else. And that's what I tell people a lot of Triton that, you know, this cheese was pretty good, but we're kind of running out of it soon. So before we run out of it, let's go look for some new cheese somewhere else. So we're looking for new areas now. So how are you positioning Triton to capitalize on these trends and to find the new cheese? We are educating ourselves more than ever and training ourselves and, you know, where is the world going? What are the issues? Defense, safety, security, technology, governments, by meeting them, by reading, by talking to you, listening to you. But then again, we're also entrepreneurs and doers, so we get out there and we source a lot. And we'd like to create a very big funnel of ideas coming in and then we fairly quickly what we call an investment forum that we have every week, Mondays, every ideas welcome, every topic can be discussed. And there in that, a lot of new ideas come in and most of them we say, no, maybe but not now. And then some we take forward. So it's a lot of work. More than half of what we do is looking at finding new opportunities. So Peter, you know, I'm really interested in the value orientation that you have at Triton. How does that translate into a culture and the kind of talent that you attract and retain? Life is a team sport. And we like to approach it at Triton as a team sport. And we think that we're only as strong as all the links together, whether you're an investment professional, you're an investor relations professional, you're a senior industry executive or that professional or a tech implementer, we treat everyone the same. We also have partners from all those fields. So we're not an all investment partners only group of people. And I think that that's served us very well over the years. And for example, as we were raising our last funds, we reached and exceeded the target, but it took a bit longer than it usually does for us. And I am so happy and so grateful to our investor relations team that worked so hard to do that. So I think making it at one team is really important. But then of course, each individual has to be accountable for their contribution to the team. So we work a lot with that. And overall, we don't try to make it too complicated. We like to treat people like we treated ourselves, with respect, with dignity, and we also think it's important to have fun. We talk about fun and profits at Triton, and we have it in that order. And I believe that if you really love what you do and then you Joey, what you're doing it and you make a plan, the money, if you will, will come. But if you start thinking about, oh, I'm going to join Triton or private eco-fers that make so much money, you're probably in it for the wrong reason. So it's a bit like athletics that you want to become a really good hockey player or baseball player or a soccer player, you know, you got to practice, you got to love it, and not, and not kind of do it for the money. So we also think about our compensation, our incentive structures to be long term and to be aligned with our investors, and that served us well, and we're very open about this, and we're very transparent when people come to us, and maybe want to join us, so we're trying to have somebody else join us. We also start with, why are you here? Why do you want to do this? It's going to be fun, but it's going to be a lot of hard work, and it's going to be some nights and weekends and holidays, and what have you. Finding out why people want to do it, probably can ask you, why are you still doing this? You've been doing it for a long time, your legend in the industry, and you still do it. So you probably love it and like it. So those are the kind of people that we want to attract, and those are the kind of how we talk to our younger generation, and that this ain't going to be all easy days, all glory, all money, you're going to be some tough times, and you're going to make some tough calls or work hard. And so coming here because you really want to become the world's best alpha return generator. That's how we talk about it at Triton. And if you don't want that, go somewhere else. I love that egalitarian approach with team, and that's actually where the industry has to go, and it sounds like you started there with with Triton's DNA, because things like investor relations and fundraising are now that's a strategic operation. That's not so easy anymore, even if you're a pretty good investor, that takes real people doing real work and being happy to do work and really feeling like they're part of the team because it's a strategic function is not just an operation of the firm and all the folks that work on post acquisition or sourcing or executives that you partner with the fact that they all feel as equal members of the team, along with obviously the deal making operation. I think it's critically important, and I love what you said about about fun and profit. In fact, years and years and years ago at Rangabel for me at Baining Company, we used to have t-shirts with a triangle on it that said fun impact profit at the three points of the of the triangle. So the cultural similarities not lost on me at all. I think if you think about it, for example, or I.R.T. and our acceleration units, they are partners in the firm. The I.R.T. has carried interest. We don't want to pay them a bonus so they get investors and then they go to another place. So the investors are to be serviced not just when you raised the capital, but throughout the life of the fund. So we align all of this and hopefully in a good way to create win-wins for everyone. Peter, this has been a fantastic conversation. I've learned a lot. I'm sure our listeners have to. I want to thank you again for coming on the show because I think you really were incredibly entrepreneurial and innovative in an area of investing that we don't talk a lot about on on dry powder and I just think it was a terrific conversation. Thanks again. Thank you. I'm Hugh McArthur. Thank you for listening.