Spotlight On with Hugh MacArthur, Chairman of Bain & Company's Global Private Equity Practice

Welcome to Spotlight on the Muscleist and Pogcast series where vision-related global executives, trolling entrepreneurs and top tier experts come together to share their inspiring stories and tackle the hottest issues facing businesses today. Broadshew by the Barton Partnership, an award-winning global talent solution organisation, we specialise in executive search, independent consulting and consulting solutions from strashing through to execution. Our mission is to help businesses accelerate their growth by connecting them with world-class strategy and transformation talent. To tune in and join us as we shine a spotlight on the game changes and thought leaders who are shaping the future of business. Today, I've got the great pleasure of talking to Kumakata, who's a senior consultant, executive and investment professional. He helped found Bains' private equity practice 30 years ago and has built the business now into an undisputed industry leader. He was also a leading thought partner for alternative asset managers including private equity firms of all kinds, hedge funds, infrastructure and real estate funds, credit funds, secondary funds, sovereign wealth funds and other limited partners. He was authored frequently on private equity value creation, state of the industry and other related topics in publications around the globe and is the host of Bain and Companies Dry Powder, the private equity podcast, in which he interviews leading experts on the trends and opportunities that will redefine the private equity industry. And when he's not busy doing all that, he who sits on the investment committee will greater share an innovative philanthropic investment model harnessing the expertise of the world's top performing private equity funds and impact NGOs to solve the complex global challenges. Hugh, great to have you here today. Thank you for joining us. Well Nick, first of all, thank you very much for having me on the show. I really appreciate the invitation and the chance to chat today. And on the back of Bains' private equity report this year, it's great to spend some time with you. So thank you for joining. Tell me a bit about yourself. It's a bit dangerous your first topic asking you to talk about me personally. I think my family's sick of talking about anything that has anything to do with me. So we'll see how that goes with your audience, but I'm delighted to be here. So I started at Bains over 30 years ago. So I've been a Bains lifer and about a year or two into my career, a couple of colleagues and I were thinking about we'd done a little bit of work at that point with a couple of bio firms on the West Coast and a bunch of us had done some thinking around both. We seem to be able to generate a lot of results, which is the word of the day, back in the early 1990s for Bains and Company, really is kind of the word we use to describe what we do for clients, which is a rather commonplace now, but was unique. Back in those days, the consultants were known for writing a lot of reports, not for generating actual results with clients. And we're thinking since we actually started a relatively successful private equity firm called Bains Capital that perhaps we might be useful to other private equity firms and a firm actually on the West Coast that we've done some work with called us up one one day and essentially said, you know, Bains Capital seems to be doing rather well. And the only thing that we can see that they do differently from us is that everybody that they have on their staff is from Bains and Company. Could you potentially do for us in an outsourced basis what they seem to be in source and try that? And we thought, oh, well, that's an interesting idea. Maybe we could. And so the first business that we really started inside of what we call our private equity group, but it's really a financial investor's practice was due diligence. Doing due diligence for private equity buyers, looking at a company and having a few weeks to assess is this a good idea or a bad idea. And that sounds like, you know, quite banal today because it happens all the time and it's a very big business. But back then, private equity firms never hired consultants to do anything that looks like that. And I very, very vividly remember walking up and down Park Avenue in New York, which is where most of private equity central was in the 1990s. Still majority of it is today with colleagues and we would visit different GP offices and go up and talk to them and they would say, well, Hugh, I know why I need an accountant to do a transaction and I know why I need a lawyer to do a transaction. But what on earth would I do with a consultant? And so we started asking questions like, well, how would you like to know how fast the industry that the target in is really growing at versus what's in that analyst report? And would you like to know what pricing is going to do in the future and whether or not their customers like them better than other options and what their competitors are doing and how regulatory issues might change or technology. And they said, oh my gosh, you can tell us things like that. And we said, well, yeah, we do that for a living. We go hunt down external data and figure those kinds of things out. And so we had to create a new product around that Nick because when we were doing it for corporations back then we did things in months and years and not weeks. So we had to create something that, you know, in a three to five week period actually told someone something insightful that they didn't know about the context around the target company and about the target company that they were going to buy and that became the due diligence business that has grown so tremendously well for us today. And that was on the back of that one conversation from the client that comes to you and said, can you do this for us? And that gave you the idea and the initiative to then put a proposition together and take it out into the street. Yeah, I would say that was a bit of a galvanizing spark, Nick. There had been conversations and dabblings. A lot of us new people in the private equity world, obviously, as I said, we created a private equity firm ourselves. And so we've done a little bit of work primarily on the West Coast with different funds over time trying to figure out what does it we should do? How should we do it? What does that look like? And so there were a number of us on both coasts involved in a lot of these conversations. It seemed like there was something there because we were in the industry and it seemed like there was a felt need there. But we couldn't quite, we had to craft kind of what the solution was. But I think that was it. I would call that a catalyst toward getting the thinking really kicking into gear saying, okay, this is this is actually a business. This is not something that quote unquote, we're doing on the side here because it's interesting. This is something that we should be doing in in places like San Francisco at scale and Boston at scale at London at scale and try and sort of see how far this goes because remember back then the the buyout world and the private equity world was really a fledgling industry was a cottage industry was not very big. The average transaction size was about a hundred million dollars. The largest business that was bought would never be enough to pay Bain and Company consulting fees. So this is not something like we're going after this in any kind of a traditional way. Believe that that there was going to be growth there and that we're going to be able to make money doing due diligence work and actually the the other way that we we came up with in 1996 that we thought we would we would align ourselves with clients and would be a good adjunct since we didn't think there'd be a lot of portfolio work there at the time was the co-investing along with our clients. And so we began co-investing on the deal by deal basis about 30 years ago with our clients. We have an investment committee that I've sat on for about 25 years along with others that make decisions on different deals and we actually found that our clients like that. This is Bain and Company and it was actually our own personal money. We would raise funds still do with our own personal money to invest in individual transactions. And we found out that our clients liked it because in addition from having a due diligence and getting an invoice from you, we get my personal check in the deal as well. And so our skin is in the game in a bunch of these deals and very often our clients were interested in whether or not our investment committee liked the deal. What they're worried about. Did we did we say yes to co-invested? We say no to co-invested and we in the instances where we do co-invest, we're shareholders right alongside of the client. Obviously it a very diminutive amount compared to the client, but it aligns our interests and aligns our conversations in a way that is more on the same team if you will rather than transactional and commercial in nature. Right. I guess in the industry, it is referred to quite commonly the Bain private equity ring faints. What percentage of the business is it account for now? How has it expanded over the last 30 years as part of Bain's proposition? Well, it's grown quite rapidly. It's better to be lucky than good. I think it's great to be both Nick, but I'll take lucky if I have to choose one of those two. And we happen to catch the incoming of a very huge tide in the move toward private assets, private equity and buyouts in particular being the leading edge of that. The business has grown incredibly strongly over the last 30 years. And if you take, when I say the business, I mean the business writ large, which includes obviously due diligence, what I've described, which is the ring fence bit that you've talked about. There's obviously the post acquisition work, which has now become since larger companies are bought a very material part of our business. And there's a third solution we offer, which we call firm strategy operations and organization, which is kind of doing work for the GPs and LPs sources of capital themselves on their own businesses. And if you take those three things in aggregate, and it ebbs and flows each given year, but it's about a third of everything that Bane and company does. So it's now the largest practice area at Bane and has been the fastest growing practice area over that piece of time. So they said it's great to catch the tide when it's coming in and have those ideas right as right as the industry is going to change and inflect upward to a huge degree. And the nature of the work on this is continuing to evolve over that time as well. How has that evolved the proposition in terms of as the markets moved? How has Bane evolved as part of that? Well, it's really interesting. I mean, it really has evolved as you pointed out, Nick, tremendously over 30 years. When we started doing due diligence, we lived in an analog world. We weren't even using the internet on a daily basis. So this was all smiling and dialing with customers and trying to dig through books and fact bases that got published every month. It looks nothing like the product that's out there now using AI and lots of technology and tools. And frankly, I don't even understand how half of them get done now versus what we did 30 years ago. And that's just on the diligence front. As I mentioned earlier, we now work very systematically through portfolio companies and trying to understand working with portfolio groups and others what good looks like and how do we take something that's underwritten, which I'm going to talk about. I call speed to insight and translate that into speed to value. How do I actually generate what I was underwriting in the fastest possible way in partnership with management in a very harmonious fashion? That's not an easy trick to accomplish. That's evolved a lot over time. Probably the biggest thing that's changed our business has been, or one of the biggest things I should say, has been the need for strategy, which didn't really exist. We have lived for the most accumulated time, but the most of the accumulated history of private markets. The beautiful thing about our business was everyone could win. There was enough space that everyone could have enough talent and enough access to investment opportunities and enough access to capital to do well. Well, we're now in an environment where it's pretty crowded out there and it's maturing and it's very intense. There's not, and whenever there's not enough of everything to go around strategy and differentiation suddenly become very, very important. And I'd say since the GFC, we've seen an increasing move toward folks realizing that they've got to have a differentiated strategy to achieve specific ambitions. It's not just make your next deal a good one anymore, which is what it always used to be. But as the industry's professionalized, it's much more now dependent upon having an end goal in mind. And that's really not, you know, in the DNA of a lot of folks that got together 30 years ago because they wanted to do deals. They're not strategic thinkers by nature, generally speaking, they're deal makers and that's what they want to do and they're great at it. So seeing that transformation and being a small part of it has been very interesting. I'd say the last thing Nick in your question is to what's really different now is just the explosion of private markets in general. When we are on a secular growth trend in private markets that's absolutely unbelievable. If you've told me 30 years ago that it's not just going to be buyouts and venture capital, it's going to be growth equity and it's going to be private credit and it's going to be hedge funds getting into private assets and it's going to be infrastructure. It's going to be real estate. It's going to be all these kinds of private asset classes and it's going to go global and it's going to be 20 or 30 trillion dollars. So I put that all in a bow and wrap it up and say, that is a universe of complexity, all of which we work in today that I don't think anyone doing deals 30 years ago would have guessed that. And tell me in your role as chairman is part of your responsibility thinking about how you continue to differentiate Bane's proposition in this market and evolve as the markets of all of it. How has Bane continued to differentiate itself from its competitors in this space? You know, we try to look around corners as best we can. Certainly, my crystal balls is cloudy as anybody else's and one of the most challenging parts of looking at this industry as you know, Nick, is the data is very, can be very patchy and very spotty. And in some cases, downright inaccurate, I use this line years ago, many talks that the old saying goes, there are lies, damn lies, statistics and then there are facts about the private equity industry out there on the edge of the spectrum. So it has been very difficult to get good data. And for that reason, 16 years ago, we started to publish our private equity annual report because we just were looking at so many things in the media and so many reported academic studies and it just didn't resonate with our daily experience. And we kind of looked and said, this is not actually what's going on in the marketplace. And so it wasn't that we had the golden key answer to everything that was going on in the marketplace, but we felt like we could do a good job at trying to divine all of these diverse sources of data and information, marry it up with what we were seeing every single day in the marketplace and saying, this is the best picture of what we think is happening. These are the trends that are going to shape the industry going forward. And if we were a GPR and LP, these are the few things that we would want to know and having the front of our minds in the end cop coming year and in the years coming forward for that. My role is in some ways to help shepherd that IP to make sure that we are doing that and that we're helping to disseminate that in many ways. The annual report is one way it's a major thrust of what we do, but there are a lot of things that hang off of it. It's to get the message out by doing the podcast that I do and doing a lot of client meetings and really to continue to build a network of world-class global relationships with senior executives in and around this business so that we can all try and divine where it's going because one of the most exciting things about this industry is that as you pointed out earlier with your question, it's young, it's dynamic, a lot of the people that founded this industry are still around in active in it, which is very unusual for most industries of this scale. And I don't think anyone person knows exactly where it's going, especially now. The Feddy is plus a bay now. I mean, I don't want to label it by any stretch, but that's an amazing run. What's kept you there? I mean, why have you stuck with Bane for so long? Has it been the evolution of the industry that you're facing into for anyone to stay in one firm for that period of time? Something must have continued to evolve. Keep your interest there, right? You've got to have a really good closet to hide in, Nick. You pointed out that I've reached the final stage of GNA in my career. I have been a Bane a very long time. And the best thing I can say about it that's kept me around personally is that Bane isn't an incredibly entrepreneurial place. When I joined the firm, there were no practice areas at Bane. There were no practice areas at most consulting firms. They're all generalist firms, not specialized at all. As I said, the internet was not extremely prevalent, which tells you what kind of a dinosaur I am. And so everything was on paper. And the private equity group at Bane became the first practice area at the company. And the fact that the company would allow a group of like-minded individuals to form a practice that ran in a very different way, as you pointed out earlier, Nick, we needed a ring fence because we were doing things in a few weeks cycle time. And the company was used to doing things in months or years, not a few weeks. And so we needed our own staffing. We needed our own folks to be had to recycle very quickly. We needed our own routines and ways of doing things that had to speed up the clock and do things in a different way than traditional corporate consulting would do it. And the fact that the firm would allow me to do that with people that I wanted to work with essentially build a business inside of a business and invest behind us if we were successful was fantastic. And so for me, that ticked a box, which is kind of the what I want to do, was to, well, if Bane is going to allow me to work an environment and do what I want to do with people that I actually want to do it with, and that's very exciting, then it puts a really high bar when doing anything else over time. And as you pointed out, the dynamism of the industry has allowed us to grow and find new opportunities and learn new things and have the opportunity to succeed in learning those new things and put in to work for clients. And it's just created for me personally, a tremendous sense of loyalty. And it's not that I haven't had opportunities, obviously, to go and do different things. But as I said, when you're doing things with a great people and they're the things you want to do and you would have drawn up on a piece of paper anyway, why would I go elsewhere? Of course. And you've supplemented this with outside interest and you share a common one with Graham. Talk to me about greater share and what your involvement has been with that and why? Well, greater share is a fascinating organization, a charitable organization that is the brain child of Graham Elton, a friend and client of mine, Paul Fletcher. He used to be the senior partner at, at, at, at, and is now a chair of a teacher for all about putting together the best of educational charities and private equity investors. And the idea was, you know, what if we created an organization where we had part of the organization focused on identifying the best educational charities in the world that are helping people that desperately need it. I think we can all agree that they're, you don't have to look too hard in any country in the world to find places where educational impact is needed. Money isn't needed to support those ideas. And so where are they as part of the equation? The other part of the equation is where are the best private equity investors that can really contribute tremendous returns and put a sustainable amount of funding into those charities over time. And so the other half of the organization, which I'm on the investment committee, was identified with, was, was tasked with identifying the best private equity operators in the world. And pitching them on the, the, the, pitching them on the greater share is a good idea. It's to be able to, how would you like to contribute some of the economics that, that you're generating into the greater share machine. And there's obviously a multiplier effect at doing this because it goes all the way back to the individual investor or the individual institution that's putting their money into the private equity fund. They're contributing 50 or 100% of their gains into the charitable foundation. The private equity fund is contributing their fees and carry into the foundation and you have these multipliers that go along and then the helpers along the way are doing the same. And so one dollar overcomes two and a half dollars or three going into the charities and the profit. And so if you, if you actually do that well, you have a stream of supporting cash flow from the best investors going into the best educational charities that goes on for years. And one thing that I found very interesting when I got involved in this, Nick, is that charities actually have a very good line of sight from the way that they fundraise to the next year's budget and maybe the next year's budget after that. But the difficulty that they face is that it's very hard for them to invest for the long term. They just have no idea what economics they're going to be looking at in years 3, 4, 5, or 6 or beyond. And that matches up beautifully with the private equity cash flow system where you put money into deals today. And then you start harvesting maybe in year 3, 4, 5, but that, but knowing that that money is going to be there for the charities over time and knowing that they can plan to, for that new initiative, they can plan for that new center. They can actually think about that because money is coming in the door is incredibly valuable for them. Tremendously rewarding experience for us to work with a broad ecosystem of people that goes well beyond Dane in Great Britain. share to get that off the ground and to close our first fund and really start to put it into practice. Amazing achievement as well. I really want to delve into your views around winning the future and having it clear strategy to win, including leveraging Gen AI and perhaps more importantly to a point, winning the talent wall. Giving the growing integration of Gen AI in private equity, what do you perceive as the most significant use cases of Gen AI across the deal life cycle? And how has been capitalizing on this both internally and inclined engagements? It's a great question, Nick. I mean, Gen AI, I think we're obligated to say Gen AI at every conference we speak at or client meeting or certainly in every publication or podcast. So I'm glad you brought that up because otherwise the burden would have been on media if we got somewhere. Yes, slip it in here. But you're wrong if I didn't. Exactly. What's sound wrong? I think Gen AI is going to be a big game changer. I am a person that pumps the brakes just a little bit when I speak on Gen AI only because we have to remember the two and a half years ago we were not even using that term. Within the last two and a half years, this has now become quote unquote a thing if not be think. It was interesting. I was doing a webinar recently and there were several thousand folks that were in attendance on it and I did a digital poll during the webinar and a lot of them were GPs and I said, what are you excited about? What's the thing you're most excited about over the next five years? And I had six or seven very interesting things up there. And of course, AI was one of them. And I was astounded that 45% of the votes were on AI that nothing else was even close and nothing. The others were 4% 5% 6% 45%. So it's fair to say that Gen AI has everyone's attention in the private equity industry. And so the question is, okay, it's less than two and a half years old really in terms of anybody's real mindset and therefore it's quite new. So to expect the world to completely evolve into in a half years I think is is a lot. But one of the most exciting things that everybody's seen in their career. And so where do we go with that and how do we think about that? I break it down into three pieces and here's how we think about it and in main private equity when we're using it for people. One is obviously it impacts every industry to one degree or another and will impact it more in the future a lot or a little. So the things are client but clients buy and they're portfolio. We need to look at what are the different industry changes that are going to provide opportunities or threats that Gen AI enables. And so we need to be able to understand for clients that are actually buying things in this industry. This is now going to be automated. These people are going to be replaced by this. These new services or new products are not going to be created by Gen I. If you can't describe what that's going to look like in a given industry and software is going to be different than healthcare provision is going to be different than industrial manufacturing. So it's going to be what flavor of it is going to actually have the biggest impact and how big is that impact and some industries that may not have that big an impact at all and other industries that will have a completely transformative effect. We haven't seen a lot of that yet. You know what I've seen so far personally in terms of food somewhere around what's happening right now. It's a lot of initiatives that if you add them all up they amount to something. But if you look if you're looking for that one silver bullet that changes the entire industry. Yeah it's not quite there yet in any industry that I've seen. So it's more like the online business that has an answering service that they've now changed into a chatbot. And so they've been able to swap out people for machine and the chatbot is more accurate and people give it better satisfaction scores and it's a small thing like that. And it's okay now we need 25 more ideas like that to move the needle at all and let them know where do we go from there. So we're still in many industries at that level of putting it into practice which is not to say that the ideas don't get bigger and the opportunities don't get bigger. It's just that you need to start somewhere, start experimenting, do a thing, believe a thing and then keep moving onward. And so I think we're in that moving onward stage in the portfolio. So that's one area where I think AI is having an impacted making a difference. The second area is for the investment process of GPs themselves. So how can I use Gen AI and new algorithms to search data lakes to find me investment opportunities to find me opportunities of businesses that I want to own that might not even be for sale yet. Maybe they'll be for sale in three years, four years, but I want to be the one that starts to know more about them now. So when they come for sale, I know the most and I can bounce on that opportunity and get it because it belongs to me because I know that I want it today, not in the future. So building my own pipeline, underwriting better utilizing tools to drive tremendous productivity and what I referred to earlier as the speed insight, those that get confidence more rapidly are able to pay the fuller price and win the asset more rapidly. And that's really what the name of the game is today. And so whether it becomes automated sweeping and summarization of data rooms or expert transcripts or other types of just ways to process data and extract the value from it more rapidly utilizing Gen AI tools critically important now and becoming ever more important in the investment process. So taking it from the companies themselves to how do I identify underwrite and make sure I win them are two critical application areas of the technology. And thirdly, I would say a lot of firms are turning Gen AI inward on themselves and saying how do I remake me as a business as we talked about a little earlier, we're seeing a great professionalization, if you will, and a maturation of the private equity industry, the firms are getting larger, they're getting more complex over time, the cost of generating alphas increasing over time. I need to have more subsector expertise. I need to have more investments in that technology. I need more investments in my portfolio operations group. Those things cost a lot of money. I need more money and capital formation to go raise money because it's harder now than it's ever been before. So I need to have earnings and margins. If I'm an investment firm, how do I actually turn technology like Gen AI to help me automate some things in areas like G A, G and A, and the back office so that I generate more productivity and make sure that as I'm scaling this business, I understand how my costs are going to behave and I get the margin structure that I need and want going forward. Now, some people think, well, of course, that applies to only the five or 10 or 20 biggest public firms. And the answer is no, it doesn't actually applies to mid market by outfirms as well because they're getting larger. They're getting ever more complex and all the forces that I just described apply to them too. There is still an uncertainty around the negative impact of Gen AI, especially in consultant. When it first came out, one or two firms actually banned it as part of their proposition. There's a long-done discussion around the impact of Gen AI in terms of developing young consultants into future partners, because all the research is now done by Gen AI. How has Bane utilized it? How has it impacted it both positively and perhaps negatively? I think it's a great question, Nick. Now, I'll tell you that from the outset that banning technology is never going to be a winning strategy. Technology is one of my partners who actually let our retail practice way back when about 20 years ago said something I'll never forget, which is don't ever bet against technology. You will be on the losing end of the bargain. So understanding how do you utilize technology and where it goes is quite important. I've always taken that to heart and I think we do as a firm as well. I'll also say that we're in probably the, I'm making this number up, but seventh or eighth cycle of technology is going to end jobs for everyone. In the PC first came out in 1984 that was said. Just keep going and going the internet. Every time you hear about something that's new in technology, all the jobs are going to go away. Well, guess what? The jobs have multiplied. They've not gone away over time because somebody needs to take care of the technology, promote the technology. There are some things that technology just can never be able to do. I know create more jobs for understanding what the technology is doing. So I'm on the glass half full side of this is that will there be some jobs that are eliminated over time? Yes, they tend to be repetitive redundant labor that frankly most people have come to bane. Don't sign up to do anyway. And when we've utilized Gen.A.I and other automating technologies because there are a lot of them beyond Gen.A.I. to try and do things like diligence. What we found is that it does actually eliminate a lot of the what I'll call hamster wheel churning work that most people don't sign up to be a consultant to go do anyway. But it only gets you so far. There is business judgment and human judgment required at the end of the day at all levels in order to be able to understand what is the information actually saying? How do I actually apply that? And in fact, we're able to answer and look at new questions that we never were able to tackle before that are becoming additive to what we do. So it's not simply reductive but additive and I'll give you an example. We've created the largest database of expert interview transcripts in the world. Bane does more expert interviews than any firm in the world. That's not just me talking the people that run the expert interview firms tell us this. And so creating a database in bi sector by sub sector by geography of all of these expert interviews and understanding what they feel about their sub sector, the competitors, how it's evolving over time and being able to track that. Literally, millions and millions and millions of words being able to search it, being able to get the three bullet points summary, the three page summary, the 30 page summary of question. We couldn't do that before. There was no point in even thinking through doing something like that. So we're actually thinking of new ways to analyze industries companies and data that we could never even do before because of Gen AI. And we need people to be able to actually interpret that look at it. And so it's expanding the pie of what we're doing versus sort of actually detracting from the pie. And now there are definitely certain types of work that ACs and consultants don't need to do anymore. And I can't forecast for you down the road what that's going to mean for those types of jobs doing that type of work. I would think as I said, most people don't want to do the boring repetitive work they want to do this so what? You've summarized it, so what are the three things this could possibly mean? What don't we know that could make this wrong? Where else should we look? Those questions tend to be there. And what I can tell you Nick is that anytime we've actually found something that's made it possible for us to take a gigantic leap forward in productivity, what it's meant is that there's another set of questions that we need to answer to become certain around what the business is, what the risks really are, and what we're really underwriting for the client. Certainly, indiligence. And when I think about 30 years ago, that analog product that I described for you, where we did maybe we had time in three weeks to do 20 customer interviews, may not have even been statistically relevant back in the day, and maybe we had time to look up things in a few books that may or may not have been accurate. There was certainly way better than anything the client had, but compared to what we can do today, where a light years ahead of where that was, and were able to answer 20, 30, 40 other questions that we couldn't have even thought of answering 30 years ago. And clients want to know, because at the end of the day, it's hundreds of millions of not billions of dollars in a transaction, and they want to do risk it as much as possible and find out where the upside is. And I just don't think that that passion for generating those results is going to go anywhere anytime soon. No, that's completely agree. In your experience, what are the key factors driving superior returns in P funds, value creation processes, and how do these relate to capability required in the focus of P operations teams? Well, that's a big one. There's a lot going on out there in value creation. The process is in teams right now. I'll say firstly that in our own experience, that the premium is still on the buy. And that means you need to buy an asset for the right price. Our experience, if we look back over the course of 30 years, in working with portfolio companies, if the fundamental assumptions of what you were buying were simply wrong, the client vastly overpaid, the ability of any value creation process to fix that, is kind of 50, 50 at best here, you're sort of flipping a coin just to whether or not you can do it. Assuming you get that right, I've always believed that what's most important is the process that you undertake. We'll talk about sort of what forms that can look like at what organizational and resource structures that can take over time. But the process needs to be rigorous and repeatable for every single asset that you buy. And what I mean by process is that you need to set, we call them value creation plans, the consultant slang is VCP, the value creation plans, but what they really are, are full ambition plans with a strategy to achieve it. Full ambition meaning, how high is up for this asset? Where can we go? Forget about the deal model. That's a financing issue. Forget about the confidential information memorandum. That's a marketing document. What is the unconstrained equity value of this business at full potential, really, in five years? Let's go get the facts and figure that out. And then once we do that, what are the three or four big things? Not 30, because like people, no company can do 30 things 100% well. But what are the three or four big buckets of things that if we do them well, we're actually going to get our full ambition or as close to our full ambition as we possibly can in terms of equity value. And then create a strategic plan around that to go and achieve it. That is the process that I like to see rigorously applied with every single investment. And why do I say every single investment? It's because no matter how smart GPs are, no matter how good they are, it's always a surprise. Some of the best investments, they didn't know they were going to be the best investments when they bought them. Some of the ones that were going to be most challenged, they didn't know they were going to be most challenged when they bought. So if you don't do the same thing with every single investment, you risk getting the maximum out of your best and you risk underperforming on some of the ones that weren't your best. And so I'm a firm believer on doing it the same way every single time, which isn't easy, by the way, because we live in a bespoke world. This is not companies are made up, they're very organic, they're made up of different types of owners, different structures, different personalities in the C suite. So you may have to approach this slightly differently to get it done. But it's the ethos of what we're trying to do and the rigor with what we're trying to do that we want to get done the right way, not necessarily follow every single step in the spreadsheet every single time, you know, down to 1,000 steps with every company. That's very, very hard to do. But if you're not trying to do it rigorously every single time, then you're not going to do it. And I think that's the greater failure and that's the bigger value leakage for the industry. So that's my sort of huge rant on kind of why, why process is very important process, Uber Alice here. It completely stacks up. It's interesting as well, because obviously given the maturity, I guess, to a point of the industry now, as you say, there's no necessary learnings you can take from the past. It's going to define what looks good going forward, but given the nuances of every single deal that will take place, both in terms of size, shape, culture, et cetera, as well, there's no one who fits all, I guess. That's right. That's right. You have to apply it. It's something that you're trying to be very deliberate and routinized about, but apply it in a bespoke way, which is a big, that's a tall order. And that's why I think we've seen, because of the changes you mentioned, Nick, in industry and business, and we just talked about GNI, that's a huge one, that the future is going to be different than the past. And so there is a continual re-looking on the part of private equity firms on what do I need on my own cost structure in terms of a resources group in order to deliver this type of process, or whatever process I'm trying to deliver, and what should I leave to outsiders? And I describe it as kind of, you need an ecosystem of some sort to deliver the value that you're trying to deliver, and explicitly deciding what that ecosystem is, and how it's going to be applied, is very important. And I think that there are a lot of ways that you could actually go about this, right? There are some firms that, once the deal is done, the partner in the portfolio or resources group becomes 100% responsible for the firm. They're on the board, they're running the show. The person who did the deal, the deal, the deal, the deal, the deal, the deal, the deal, the deal, the deal, the deal, many firms are actually not that, they're kind of the opposite. If you did the deal, you're the deal, the deal, the deal, it's what they call cradle to grave, that's kind of where the industry came from, you're going to own it from the day we close on it, until the day we sell it, and what goes right and what goes wrong is ultimately on you, sometimes financially, obviously from a responsibility perspective. And there are firms now that are more centralizing their approach and saying, "Well, that's good, we can have a philosophy of like either putting it on to someone in a group, or putting it on to the deal, indeed, but what is this ecosystem we want to have, and how does it operate?" And we've kind of embed and flowed from an era where there were firms, certainly the most activist firms that had lots and lots of people on their payroll saying, "Well, we're going to have people from every different type of business functional specialty area to try and generate value, and we're going to have sort of lots of experts on our team, and we're going to have HR specialists, and we're going to have IT specialists, and lean manufacturing specialists, and we're going to roll these all up." Folks have found over time that some of that has worked in areas like procurement, probably been the most successful, but if you go too far down, the specialist chain, what you find out is that every company winds up having that problem. Everybody has an IT problem, everybody has a lean manufacturing problem. That's kind of the nature of the beast. And so you can kind of get away from what I was talking about earlier, which is what is the big thing that's going to drive value and full potential equity value for this business? And what are the three, four big areas that we may need to go get it? That might not fit very well with my functional specialist lineup, and so maybe I need something more flexible. And I think a lot of the industry has now have hybridized a little bit to having generalists there, to having folks with experience that they know they're going to use 90% of the time. We buy B2B businesses, and so having somebody who's an expert and done a lot of B2B commercial excellence programs and knows what good looks like is probably a good idea to have on our team. Maybe not 20 people, but maybe one or two people that can actually create a team of outside experts and consultants and whatever we need that's bespoke and fit for this situation. That might be a good idea. That's an example. But finding that group of folks that are both on your payroll that you feel like you need because of who you are, what your DNA is as an investor, and what you need to do most of the time. And then what types of folks outside of your P&L are going to be useful to you, the majority of the time that you want to know, and you want them to know you and how you approach things, and you want to be able to work together. And so when you pick up the phone and call them, it's not, "Hello, we've never met before, but I've got an opportunity." It's, "We've got another one of these." And how do we do this? That could be academics, that could be industry experts, that could be consultants, that could be any number of folks that are playing with in the market these days. That's really what's driven the growth of my business over the last 18 years. I've been in this space for 30 years now. I mean, you're fortunate to have kept your hair. Obviously, I've not succeeded in that goal. But if I think about the bottom partnerships evolution over the last five years in relation to our work in private equity and the value creation, job title that's now really emerged now, the capability and the skills required and the flexibility of that talent has led to us creating now an independent consulting network of roughly around 11,000 independent consultants that we can parachute in to private equity firms when they've done a deal for those short-term value creation-orientated projects. And one of those areas, that this operational excellence piece as well, this is that's really driven that. From your perspective, how have you seen the emerging role of the Chief Transformation Officer, reshaping strategies and practices in private equity funds? And they've put for their companies because we've really seen that over the last couple of years, be a driving factor for my value creation success point of view. The role of the Chief Transformation Officer is only going to be increasing over time now. Of course, there's definition of terms if you look under the hood of what a quote unquote, chief transformation. officer is at a variety of GPs, they could be very different jobs right now and people doing very different things. I think there are two things, two general areas that are pushing the need for folks to what I'll call up skill into the chief transformation officer arena from where a lot of the portfolio resource talent was a few years ago. One is the fact that we now have more private equity portfolio companies and biode firms than ever before. The number is approaching 30,000 companies globally at as many multiples of what we had 15 or 20 years ago. The average GP has twice as many companies that they currently own than they did 10 years ago. There is a problem exiting in this industry and the problem really started in 2022. And into 2023, when the central banks, the ECB and the Fed essentially raised interest rates by 500 basis points over the course of 18 months. And that caused everybody's deal model to blow up. It was underwriting something and it also caused folks that were holding things and expecting a certain multiple of an exit to take a big and take a breath because suddenly the cost of debt for anybody trying to take them out of that business went up dramatically. And even though interest rates have humiliated in many markets, there is still what I call that bid ask spread. It's very recent. This was just 2023. Where interest rates stopped going up and started coming down. So it's only been barely a couple of years. And so it's tough to exit even in reasonable economic times. It's tough to get out. And what that causes is a liquidity crunch on part of LPs who've been expecting their money back. And what most people don't really understand that I've been trying to emphasize is that the levels of return as a percentage of nav say that LPs are getting today are no better than what they were during the GFC. So we are seeing the lowest level of liquidity going back. And if we're not careful with this macro instability, we may see another year that at 2025 to LPs. Then we've seen since the greatest recession for the last 75 years. And we're not even in recession. So this is causing a big problem. And this is not a small problem. This is a big problem with the capital P. And so if I don't have a fresh set of eyes with a mature executive who's used to the word in transformation is not an inappropriate word saying, okay, we're halfway through that buy and build. We were assuming interest rates are going to be X. They're now Y. We can't do it anymore. What have we got with this asset? What do we need to transform this asset into? What can it be in two years that I can sell for a reasonable multiple? That's now a real question that's being asked. Or our plan doesn't work anymore. The EBITDA didn't grow the way we should have grown. And so how do we think about doing that differently going forward so that we actually can exit this because it's going to be very difficult to raise money if our DPI's are not attractive to the LPs at the end of the day. So we've got that sort of pressure. The other pressure I would say has much longer live than that. Look at deals of Bain that over the last 12 years or so. And we look at all the sources of value where GPs have cashed out over time. And there's only three main ones, right? There's revenues, there's margin, there's sort of multiple expansion. About 50% of the value from cashing out of transactions has come from revenue growth. About 50% has come from multiple expansion and about zero has come from margin expansion. And for folks like you and I that have been kicking around this industry for decades, Nick, having value creation in a deal from margin expansion B zero is almost inexplicable. You mean, it's hard to even get wrap your head around. This entire industry was predicated upon levering up some businesses, taking some costs out of some companies that weren't efficient, making them better and then selling them and making a big profit. So looking back over it doesn't years and seeing a value number of zero coming out from margin expansion is number one, shocking. Number two, it's a little frightening when you look forward and say whatever interest rates are going to be going forward, they're going to be real. They're not going to be zero anymore. The zero decade we had was the anomaly, not sort of the real interest rate. So they can be what they're going to be, but they're going to be real. So I think you and I can agree that whatever the value we ascribed a multiple expansion for the industry going forward, it's probably going to be less than it's been over the last 12 years. And that means in order to generate the kind of returns that my LPs and other stakeholders want to see, that margin expansion number can be zero. And whether I'm actually doing carve outs that I'm needing to get more efficient and getting the margins up, or whether I'm buying fast growing software businesses, and I need to learn how to generate real operating leverage over time and ensure that EBITDA is going up as that revenue growth is skyrocketing toward the moon. I've got to go back and have a playbook to actually make that work because the industry hasn't done it as a whole over the last 12 years. And that calls for the kind of talent that achieve transformation offers that is going to bring to the game. This is big thinking stuff. This is not small. How do I get better at XYZ? This is we're getting zero from the margin department. I guarantee you from being our investment committee for co-invest that there's margin expansion in the deal model, it's just not happening. And it hasn't been happening at writ large. And it hasn't needed to happen because the multiple expansion has been there. But now it needs to happen. And so I think many GPs are realizing we need to do a rethink of what we're doing here because we have a short term crisis where we need to actually figure out in our portfolio of twice as many companies as we had 10 years ago, what do we need to do to transform these assets so that there is valuable as we want them to be? And then looking forward, we need to kind of rebuild some muscles, or build some new muscles since we're underwriting growth here things as an industry that we were before and make sure that we can transform these businesses, whether they're fast growers or whether they're carve-outs that aren't fast growers into what they can be and make sure we're pulling on one of those two big levers that are controllable revenue, but margin as well. - It's going to continue to evolve. There's never going to be an ending answer to that one. Is that? - There won't be an ending answer. And we didn't even say, I didn't want to say Gen AI too many times, Nick, but we didn't even say Gen AI. But that's a whole other reason to have a chief transformation officer. So it's no surprise that having someone who's really being thoughtful, and it used to be, is you'll well remember, Nick, that when you bought an asset, you didn't want to upset management. You just wanted the asset to go along and do what it did. And life would be fine, and the returns would be there. But because of the competitive nature of the industry and the prices that people need to pay, I can't do that anymore. The word transformation now needs to be apart. I mean, hearing that word even 20 years ago, in a GP investment committee meeting or talking about what we need, a chief transformation officer would have terrified half the room, right? And now it's kind of like, no, no, we actually need that because of all the facts and all the issues that you and I have just been chatting about. - And one of those issues that has been pushed down, it feels like it's been pushed down the list because of Gen AI. It has been the ESG sustainability topic because if you look back sort of three, four years ago, that was the number one topic. The boardroom's talking about. And that has fallen down the list. But it's still important. I guess with the rise of ESG functions in private equity funds, still what are the key factors that will contribute towards an effective integration of ESG into investment strategies? What have you seen at different shades a successful ESG approach from another one? - It's a great question, Nick, because as you mentioned, ESG is still vitally important. If for no other reason, if you want to be cross about it, many of the sources of capital have requirements that their GP partners have ESG programs and actually implement them. And so you're gonna face an ESG audit if you want money from source XYZ. And so therefore you'd better be actually doing things. I personally think the number one thing that is critical to implementing an ESG program that's real is to not have an ESG program. If this is something, if this is a bolt on, if this is something out here, our ESG team is gonna do something, you're going to fail. This has to be in the DNA of everything that you do. I view Gen AI the same way, by the way. - This ESG has to be involved in every single thing you do. In fact, the investors that I know that do it the best, they don't even say the letters ESG. Those are not formally banned, but we don't discuss that anymore. And what I like to talk about as to why this is important, Nick, is it's generational change. If you think about what people of a certain age, and I'm talking about, someone put this to me in a very interesting way, who's a GP of a good friend, who's been the business for many years. He said, "You know, our parents were born in the Great Depression." And so what was drilled into our heads and our generation is that you need to go out and get a job, 'cause we're struggling for food and buy a house and pay down your mortgage and be financially responsible. And these are the most important things that you need to do because we're where we come from. The current generation of people of a certain age and younger didn't come from that kind of background. Their parents, I wasn't born during the Great Depression. My kids were raised that way. And so they want the world to be different and better than they inherited. They're not as worried about, "Am I gonna get another meal?" With inflation, people were a little bit worried about that in the past, but they're worried about what the world's going to look like in the future. And if people aren't working for a better world, they're less motivated to be part of it. And that may mean if you're not doing the right thing with ESG for your company, they don't want to be your customer. And they don't want to be your employee 'cause you're not a business that's doing the right things for the world. But when you think about it that way, when you think about it in terms of market share, when you think about it in terms of engaging and attracting the best talent for your industry, that's different. Everybody can understand that. And you're saying, "Well, there's a whole group of people here, a massively important people that will be spending the lion's share of money in the future. All of these topics are crucially important. And if you're not addressing them, you don't have to call it ESG. You can just call it doing the smart thing for the business over time if you want to. Then you're not going to make the kind of investment returns that you need to make." And so I think for those reasons it's critically important to say, "Let's not call it ESG. Let's call it the right call whatever you want. You can't call it ESG for all I care. But it cannot be this bolted on thing that's hanging out over here. It has to be part and parcel of everything we do. As deal makers, everything we do is the value creation machine, but making sure that we are set up to succeed and to win and to gain market share and to have the best people on our team." I mean, obviously, as you said, you say, the market conditions, the challenges with the economies in various sort of countries, et cetera. ESG is still of paramount importance when it comes to still making. I think it is of importance. I completely agree with you that it is not the front page news. It was absolutely the number one topic for a while now, as all of the macroeconomic tummo and Genai sort of taken away a lot of the spotlight on that. Yes, but if you agree with me that these are fundamental economic demographic changes that are going to be there and they're going to be there in the future over time, it's still going to be important in order to win. So, it can't go away. It can so we can all say, "Okay, we need to stop for a minute and figure out how we're going to deal with Genai." Or we need to figure out where the heck inflation is going for the next six to 12 months, but I'm talking about generational issues, not issues of the next sort of two years, three years, five years. And I think it's still important for that reason, although it may not be quite at the top of the list in the way that it was just a few years ago. Let's get your cloudy crystal ball back out again for a second. The last question. Looking ahead then, what do you see as I guess major trends or shifts in the private equity sector of the next few years and how should firms prepare to navigate these changes? Well, I think we actually are Nick at a real inflection point in the private equity industry. This is something that Jim Colter, TBG calls private equity and buyouts the Rube Goldberg machine, which I think is very telling it for those that don't like or know Rube Goldberg machines. Those are very, very complicated machines designed to do extremely simple things, which is kind of what we've developed here as a private equity industry to buy a company and sell a company. There's an awful lot of nonsense in between those two things when actually that's what all you're doing. Now that it's a multi-trillion dollar global industry, what I think we're going, we're seeing right now, is the use of technology, the forces of maturation. The fact that, as I said earlier, not everyone can win anymore and strategy being important, forcing the maturity, the streamlining of the industry in a way that's going to dramatically change it. So I think we're going to see larger players in the industry that are growing. Public players have an imperative to grow. They will get bigger over time. We're going to see traditional asset managers, the Black Rocks and Fidelity's and Vanguard's and other folks of the world who have lots of pipelines into private wealth, which represents half the world's wealth, but has almost no access to private equity whatsoever right now, providing products for those folks at different pricing structures with different products that we've seen before. That's going to change the industry dramatically. It's going to change access. It's going to change service level requirements. It's going to change valuation requirements. We may see daily valuations at some point in the future, but it's quite clear that the supersizing of private equity and private markets is not going to change. It's only going to be in one direction. Investors are going to have to figure out am I going to be big and play in a part of that and going to lean towards scale because things are going to cost more money as we talked about earlier. Or am I going to be more differentiated and do things in a way that others aren't and find alpha, be an alpha generator in a way that's reliable and be more of a medium sized or niche player that does that. But whether I decide to do one or the other or some blend of both, it still creates an imperative that I need a strategy. And to me, fundamentally, NICCA strategy relies on three things. I have three things that I invest or I compete for. I compete for talent. I need the best talent to do the best deals. I compete for the best investment opportunities for my firm. And I compete for sources of capital. I need the lifeblood in order to run the business. And so I need a strategy to attract and retain the best talent. I need a strategy to find and get the most attractive investment opportunities for me. And I need a strategy and an organization to go and get the money, whether it's institutions, private wealth, wherever it's coming from, permanent capital, in order to keep all of those things going. And the interesting thing is that if I fail on any one of those three dimensions, I fail on all three dimensions because it all falls apart. So strategy has never been more important. Talking, the strategy consults those strategies important. But it's never been more important in a maturing industry. And understanding as the industry landscape changes over the next five to 10 years, what your ambition and your strategy is as an investor and how you're actually going to go about to achieve it has never been more important. Well, on that note, I can't think of a better way to close out this discussion. It's been brilliant talking to you today. Thank you for your time. Thank you for your insight. It's been amazing to hear about your career journey today and on the back of Baines Private Act 2 report this year, which I know is the cornerstone for the industry. It's been great to get you on that as well. So thank you for your time today. Nick, I'm grateful for the opportunity. It's been really fun to chat with someone that's been kicking around the industry for as long as I have been. Your hair looks great for me. Thanks, buddy. I appreciate that. [MUSIC PLAYING]