Pond Skipping w/ Advent International's John Maldonado

0:04John Maldonado: Advent was founded by Peter Brook in 1984. He had what was at the time a pretty crazy idea that private equity could become global. That's John Maldonado, managing partner at Advent International. For more than four decades, Advent has been one of the most consistently global firms in the industry. The first fund raised in 1987 was called the International Network Fund. A few years later, we had raised a pan-European fund. We were on the ground in London by the late 80s. We were in Germany in the early 90s, in Latin America by 1996, and then we expanded across Asia. Today on Dry Powder, I'll ask John how they combine deep sector expertise with true global scale.

0:51John Maldonado: We call it pond skipping. This idea, maybe it worked in North America. Could it work in Latin America or Asia? It's been a really successful playbook for us. And we'll discuss how they strive to deliver standout returns in a far more competitive market. We need to articulate a credible path to how we could have a breakout return. And for us, that means three plus times our money. I'm Hugh MacArthur, chairman of Bain's Global Private Equity Practice. And this is Dry Powder. John, it's terrific to have you on Dry Powder. We've been wanting to get you on for some time, and it's wonderful for me to see you today.

1:26John Maldonado: Good to see you too, Hugh. Thanks for having me. So let's start a little bit with the original founding vision for the firm and how that's still vital in shaping what you do today. Sure. The firm, Advent, was founded by Peter Brook in 1984. And Peter was a bit of a pioneer in the industry. So prior to getting his hands dirty with Advent, he had actually founded TA Associates in the 60s, also here in town. And he left TA in the 80s because he had what was at the time a pretty crazy idea that private equity could become global. He didn't just see what he thought was a market opportunity. He thought exporting private equity outside the U.S.

2:15John Maldonado: could help support local businesses. He thought it could be an engine for economic development. And it was a bit high-minded of him, but he embraced that. He actually referred to the founding of ADVIN as a noble experiment. So to say it was ahead of its time would be an understatement. And because of that, because we were so spread out, the second key founding part of the story was it had to have a strong foot in collaboration. The industry is hard enough when it's a group of people around one table and one office in one country, same time zone, same culture, same language. It gets exponentially harder when you start trying to do it across macro environments and languages and cultures.

3:01John Maldonado: So Peter and the founding fathers believed passionately that you had to bring people into the organization that spiked on collaborative ability. We had to learn how to operate as one firm really early. It sounds like quite the noble experiment indeed. And as you point out, very, very early in the history of the industry. And it also sounds like the founding principles were correct. When you look today at what's going on in the buyout world, it is global. It is complicated. It is a lot of cultural issues, a lot of macro issues. How is Advent positioned to keep generating alpha over, say, the next five or ten years?

3:38John Maldonado: I probably wouldn't have my job for long if I didn't believe we were incredibly well positioned. So we'll start with that. We'll say we're incredibly well positioned to generate alpha. But the truth is it's not going to be easy. The industry is at an inflection point. Today, there are nearly as many private equity funds in the U.S. as there are McDonald's. 12 ,000 versus 14 ,000, that's a hard data point to ignore. So the idea that we're going to generate alpha over the next 10 to 15 years, it all starts with strategy. We and the industry, whoever you are, you need to decide what you want to be.

4:15And when we as a firm turned 40 a couple years ago, we went through this very deliberate strategy review.

4:22John Maldonado: We decided that we were going to prioritize alpha generation for the long term. and remain focused on private equity, that allows us to remain highly aligned with our investors, which is becoming more of a rarity. That's the strategy. It's the bar we hold ourselves to. Alpha, private equity, alignment with our customers. Now, John, when people hear a term like alpha generator, which I've begun to use all the time at conferences, at different meetings, they kind of picture in their heads a small, hyper-specialized fund, but something that's very particular, very small, not really scalable. What does alpha generation look like at advent scale, which is obviously much, much larger than that picture in many people's heads?

5:05John Maldonado: Yeah, we actually use the term specialization at scale. For us, what that means is being a collection of specialized platforms operating inside the broader organization. So within every region, we've got five sector teams that we've organized around. Business financial services, tech, consumer, industrial, and healthcare. Each one of those SEAL teams within each of our regions has many subsectors that they've identified and they're going wildly deep in. And more often than not, when we consummate a deal, it's on the back of having tracked a company for years. Building relationship with the owners or the management team or the CEOs, developing an expert network of resources we would want to apply to that company.

5:58John Maldonado: That's, in our view, how scale has an advantage that you can bring down and allow a big organization to compete upmarket for a billion-dollar-plus equity check and effectively compete really in the middle market for$200 million equity checks. And Advent is doing both those extremes and everything in between. Where are you most excited to deploy capital right now? And what gives you the conviction that there are attractive places to put money to work? We're most excited to deploy capital where we feel like long-term demand coincides with technological change. And maybe to bring that down to earth, defense is one example.

6:41John Maldonado: Given the unfortunate continuation of global conflicts, we think there's going to be sustained investment in things like autonomy, software, next generation capabilities. So you can bring old school defense investing into the modern era with some new ways to invest. Tech enabled services is another place where we're spending increasing time. AI is allowing companies not just to automate tasks, but maybe more excitingly to improve productivity, not just for the benefit of margins. But what do you do with that enhanced productivity? You can't take it to the bottom line. But if you can get faster development, new product, exciting product ahead of competition, we think that that can create long-term sustainable modes.

7:28Okay. So whether it's in the core sectors or it's this defense trajectory, the secular trend that you referenced, it all comes down to me to what a unique advent deal kind of looks like wherever you happen to be looking. So can you walk us through what a prototypical advent deal looks like?

7:46John Maldonado: We've got two prototypes and they're on the extremes. On the one hand, a common deal profile for us has been a transformation deal. Those typically fall in the category of a take private, a carve-out, buying a founder-owned business where we have a very divergent vision for what the company can be. On the other end of the spectrum, and we call it the barbell, is the growth acceleration. It's taking a business that has great trajectory, but we believe that if we can bring the ecosystem of tools and resources that are under the advent hood, we could accelerate that trajectory. And sometimes it's very targeted, like bringing resources to go to market.

8:26John Maldonado: Sometimes it's M &A affording a company that had never had a balance sheet or a pocketbook with which to get on the front foot and consolidate an industry, giving them that opportunity. In the end, whether it's a transformation deal or an acceleration deal, what we're looking for is a fan of outcomes. We don't underwrite to a single case. We're thinking about downsides and upsides. But what we always seek across every deal in every region, in any sector, is we need to articulate a credible path to how we could have a breakout return. And for us, that means three plus times our money. And what we avoid is the middling middle of fine company, good neighborhood, decent deal, but you're range bound in your outcome.

9:14John Maldonado: We call it the arithmetic buyout, where you lever it up. If it can just grow at this percentage and you assume the same entry and exit multiple, well, that just manifests into a two times money deal. We avoid those at all costs. The organization understands that the only way that we, in a fund complex, can have a breakout fund is if every deal is held to the same standard. It has to have that breakout on the upside, and it has to be credible. It can't be pie in the sky. It has to be a realistic set of assumptions that get us there. The other thing I would say is, in the most recent years, it's been a heavy tilt toward primary deals.

9:53Yes.

9:54John Maldonado: So it has been buying from the public market, from corporates or founders. Our current fund, 75 % of the deals that we've done are primary deals. Right. Even at our scale and size, there's been a heavy, heavy pivot in that direction. And more often than not, that's a good starting point for why you're going to see that break out on the upside. So, John, you mentioned earlier this notion of cross-fertilization. But when it comes to value creation, could you share an example for the audience on where a playbook that you have from one sector might have translated well into another? Maybe I'll – I mentioned that we've done increasingly a number of primary deals.

10:32John Maldonado: And one capability that it turns out translates really well across sectors and in some instances really well across geographies is executing these complex transactions, especially the take privates and the carve-outs. Last year alone, we did three take privates. That's a heady number. Yep. Over the firm's history, we've done over 30. The three that we did last year, Hydric and Struggles, well-known household search name in the U.S., and we also did two other take privates in Europe, one called Ublox, one called Tenexta. So we've got this take private ability across regions. When you think about 30 over our history, we've done take privates in a number of geographies and the rules are not monolithic.

11:18John Maldonado: So having that experience, knowing how to approach long-only investors, knowing how to approach boards really matters. And then all the way through the execution, this power of turning local presence into global pattern recognition. So seeing a thesis in one market or one region and then learning to apply it in another, we've got a term for it. We call it pond skipping. This idea, maybe it worked in North America. Could it work in Latin America or Asia? It's been a really successful playbook for us. We also just last year did two carve-outs. We bought a business called the Essential Home Business from Rekke Benzinger, and we bought an aerospace and defense business from Coherent.

11:58John Maldonado: And even more so than take privates, these carve-out transactions have been real bread and butter for the firm. We've done over 70 over the firm's history. And one of the things that you learn is the stakeholders that need to be accommodated in these corporate carve-outs, they are manyfold. It could be employee unions. It's the board. It's the shareholders. And the experience base of having executed many of these carve-outs, sometimes in collaboration with the corporate parent, sometimes it's a clean sale. the muscle memory of how to accommodate all those constituents is a form factor that has allowed us to repeat that playbook really effectively over a long period of time.

12:47John Maldonado: Maybe said another way, that kind of complexity is where a repeatable playbook really matters. Right. Now, John, you've talked a lot about geography since we've started the show, and You actually at ADVENT have a uniquely balanced presence in both North America and Europe. Not many firms anywhere near your scale have the kind of scale that you do in each region. How do the two regions actually work together? How does that work realistically? I'll break it into two parts, tactical and then maybe more strategic. At a tactical level, each one of our five sectors has regular, call it monthly, global meetings where everybody in that sector in every country is on the same Zoom call.

13:30John Maldonado: And the goal is not to issue book reports to where we're spending time. It is a targeted exercise in how can I leverage my resources in my country to help you execute the deal that you just told me you're working on. And that fungibility of team, of resources, of operating partners, and making sure that we are connecting all the dots at a sector level is really important. And just the commitment to do that across all five sectors is where it starts. And then at the strategic level, we have interlocking investment committees. And maybe taking a step back, we have regional investment committees for each one of our regions for a reason, because nuance matters.

14:16John Maldonado: In each one of these regions, capital markets, regulation, culture, macro, they're very different. India, there's no resemblance to the European market in many ways, not the least of which is valuations. But each of these regional ICs also includes members from outside the region. And we do that so we can bring these global perspectives to bear, but also connect the organizational dots across the regions. So that's how we make it work on tactical, strategic level. And a recent example is we invested in an Australian share registry business. It's a challenger next-gen share registry business. and the European Investment Committee member who had worked on a share registry business deal that we had done many moons ago joined the deal team and the Investment Committee discussion so that he could impart his wisdom as we were sizing up that deal.

15:13John Maldonado: And it was invaluable to the deal team and the Investment Committee. Now, you've mentioned Latin America and I have visited with your team many times in Latin America. And if I can use a term my teenage boys might use, You are kind of viewed as an OG firm in Latin America. You are local. You are there. You've been there forever. You were there early. You mentioned the early globalization. What did that experience teach you, and how does it actually shape your approach to new markets today? Well, Latin America has taught us that local presence and patience matter a lot more than financial engineering because in markets like Latin America with less banker or intermediated deal flow, proprietary sourcing becomes the advantage and really the only way to get deals done.

16:03John Maldonado: Second, in Latin America, there really is no financial leverage available for these deals. Right. And in markets where financial leverage isn't available, you have to get more creative. You got to think about seller rollover. You need to talk about deferred payments or structures that create alignment with the sellers but allow you to create a more attractive return for the firm. To answer your last question, how has that affected our view more broadly, it shaped how we think about emerging markets outside of Latin America. This idea that you have to have local insight. You need to be flexible.

16:44John Maldonado: You need to recognize that the rules on the ground of one geography may not apply to another. And lastly, operational value creation matters a lot more than applying some standard operating playbook. Because in Latin America, what we're doing to create value and create these deals, it is unique. And it's a slightly different flavor. and recognizing that that different flavor is required to be successful in any one of these geographies or emerging geographies is a powerful insight that we took into the other regions that we've expanded. What has really changed most in how AdventSources deals in the recent years?

17:23John Maldonado: Okay, well, what hasn't changed is relationships still matter. AI is not going to replace a relationship with an owner or a CEO or a founder or sector leaders. So that's a constant. But what has changed and is rapidly continuing to change is that it's become more data-driven and thematic. We're combining that sector expertise and the global connectivity and increasingly bringing AI-powered pattern recognition to identify opportunities earlier and underwrite them faster. And in private equity, information used to be the edge. Today, it's evolving. Today, it feels like insight and speed to insight are the edge.

18:06John Maldonado: You still need to build those relationships, but if you can leverage some of these new tools to get to the insight or to get to the connectivity faster, it affords you a tremendous advantage. On the next episode of Dry Powder, John will share how Advent is navigating longer holding periods, harder exits, and rapid technological change. We have an ICAI robot. And I want to be clear, that robot does not have a vote. It's not a voting member. It's an observer. But it has proven to be an incredibly valuable tool. And we just started using it in the last three months. I'm Hugh MacArthur. Thank you for listening.