Relationships First w/ Inflexion’s Flor Kassai

0:03Flor Kassai: If you ask me to pick one aspect of a business to back, my answer would be I want to back a class A management team. That's Flor Kassai, managing partner and head of buyout at Inflection, a European mid-market firm that started in the UK and has gradually scaled across Northern Europe. What sets the firm apart, according to Flor, is not speed, it's patience. Inflection will spend years getting to know a company and a management team before it ever underwrites a deal. The vast majority of the relationships that our team builds don't go anywhere. And you can get hugely frustrated or actually you can accept that that's part of what we do.

0:41Flor Kassai: You build lots of relationships and a very, very, very small proportion of them are going to flourish. Today on Dry Powder, I'll ask Flora how she decides which founders are worthy of years or even a decade of attention. We'll also explore how that patience can accelerate value creation once a deal closes. I'm Hugh MacArthur, Chairman of Bain's Global Private Equity Practice, and this is Dry Powder.

1:06Flora, thanks very much for being on the show and welcome to Dry Powder.

1:10Flor Kassai: Thank you for having me. Now, Flora, in the past you've described that you like to build relationships with companies and management teams before you buy them. If we start at the beginning, how do you decide which companies and management teams you actually want to build relationships with in the first place? Yeah, so we start with this specialism, which is, although we cover six different sectors, we consider ourselves subsector specialists. So each of those sectors will focus only on a very narrow number of verticals, and they go very deep into those narrow subsectors. sectors. And what we look to do is to invest time and again across the different fund strategies that we have and across different regions.

1:50Flor Kassai: And we have plenty of examples where we've done, for example, in the VET space, we've done a VET roll-up in the UK with our minorities fund. We repeated that strategy in Ireland with our enterprise fund, which is our small-cap fund. We then repeated that in Germany with our buyout fund. And so we start with that specialism, then drill down and spot the companies that we look to invest in. But if you ask me to pick one aspect of a business to back, my answer would be, I want to back a class A management team. That for me is the top priority because I've been in this industry long enough now. And I genuinely believe that we are in the talent business.

2:32Flor Kassai: It's all about backing the best teams who know their businesses inside out, who know their industries. They can see the future within their ecosystems. They know what path they need to take and what they need to do to get there. And yes, we're there to support them. That for me is where we really double down in terms of looking to invest behind those people. Right. Now, Flora, some of these relationships I understand develop over two or five or even 10 years. What are you doing during all of that time to maintain these relationships? Take us inside and tell me what What does that look like? Yeah.

3:06Flor Kassai: Look, I don't think it's any different to maintaining any relationship that you would do with a friend or with a colleague or, you know, you do the same with a chief executive or founder. What do you do when you want to maintain a relationship with someone? You spend time together. You listen. You try to help each other when you can. And I mean, I think to be in this business, you have to really enjoy building relationships. You have to really enjoy people. I mean, in particular, I'm talking about the mid-market that is very relationship driven. You have to enjoy it. And you cannot go into it thinking, I'm going to get something out of this conversation.

3:38Flor Kassai: I'm going to get something out of this meeting. You have to go into it just for the sense of what you're going to learn, the good time you're going to have, and how you're going to progress your learning on that specific business or on that specific sector. Because the reality is that the vast majority of the relationships that our team builds don't go anywhere. And you can get hugely frustrated, or actually you can accept that that's part of what we do. You build lots of relationships and a very, very, very small proportion of them are going to flourish. But look, I'll give you an example, which is EasyFairs, which is an investment that we did in 2024.

4:13Flor Kassai: It's an events and exhibitions business. And we had been talking to that entrepreneur for 10 years, 10 years. It would have been very easy during the course of 10 years to give up and say, oh, this relationship is not leading anywhere. You know, what is the ROI and the time I've spent on this? But we insisted. And in fact, that business went through COVID. You can imagine that this type of business during COVID was on its knees. It was uninvestable for several years. Not popular, no. And we still spend time during that time talking to Eric Everard, the founder. But when eventually the business recovered a few years later, Eric never forgot that we were the only ones that kept calling him during COVID.

4:54Flor Kassai: During COVID, the phone stopped ringing, but we were the only ones still there and sharing. We were sharing what we were picking up, what his competitors were doing, other things that we were learning from portfolio companies, and being value additive to him. So eventually, when he decided to have a liquidity event, guess what? We were the first people he called, and now we're invested in it. And it's going really well. So it's the investment in the relationship and the persistence of that when you find what you believe is a class A manager or owner or management team that ultimately gives you a lot of information and influences your ability to win the deal?

5:32Flor Kassai: Yeah, it's absolutely done. So as you're doing that, Flora, what are you ultimately trying to understand about a business before you're willing to underwrite it? What's the aha moment when you figure out, yes, we want to invest in this business? Look, if I reflect on where we spend most of our time debating around the IC table, I think it comes down to risk-reward. So it's that delicate balance between the risks that are associating with delivering the plan and the reward that we're going to get if the team get it right. And in the execution of the plan, there are details that are specific to the business and to the sector.

6:18Flor Kassai: But some of the common ones that we deliberate over at IC are, for example, is this a new team? Have they done this before? Have they done it before in these markets? Have they done it before at this scale? How many levers of value creation do we have to play with? So if we find out eventually that this and these doors are closed, we have these other five doors that we can go and open. And then when we look at risk as well, we look at different scenarios, including, of course, the chances of losing money. And then we look at potential ways of structuring around that, if that's possible. So a lot of that time is spent on this very fine equation.

6:59Flor Kassai: And then the other thing that we spend a lot of time on understanding the situational dynamics. Why does this vendor want to vent now? And why are we the right partner for this business going forward? And so, for example, there was a business that came to IC a couple of weeks ago, where business was growing like a weed, had all of the right tailwinds, was backed by a very dynamic CEO, still young, so didn't need to retire, selling the dream. but somehow he wanted to be a slight part of it but not fully leaning in and and so that starts to raise an antenna say well that doesn't make a lot of sense given the size of the opportunity and then you look into the detail you say okay prices have been jacked up over the last couple of years and look at utilization levels are not sustainable look at the levels of employee so this has been sort of run to maximization as opposed to in a sustainable manner so ultimately we didn't do that.

7:53Flor Kassai: So those are the sort of the main debates that we have at our investment committee. Okay. So it sounds like it's relationship building. It's, if I can say, you said value creation levers, I could translate that as ways to win, number of ways to win in the marketplace. And then it's ultimately the fit with you as a potential owner. So if you put that together, Flor, once you own a business, how do you organize and how do you focus your value creation efforts to make sure you actually do get the returns that you're underwriting? Yeah. So when you're doing outside in diligence, of course, we do as much diligence and go as deep as we possibly can.

8:31Flor Kassai: And we come up with an initial version of a value creation plan. But the reality is that you can only really know what you have bought once you are able to lift the lid. And you can only do that once you own the business. And so what we do is we put in a process. We call it internally the Launchpad process. And every time that we do a new investment, every business that we bring into a portfolio goes through this internal Launchpad program. And it takes about three months. And it's essentially a series of diagnostic tests that we run. And it goes everywhere throughout the business, starting with the management team.

9:12Flor Kassai: So we do a full-fledged management assessment, which you don't have a chance to do when you're in the diligence process. And we compare what skills this team has versus what is the value creation plan for the business. Do we have the right skills? Do we need to supplement? We go then to the finance function. How is it organized? The quality of the board packs, the quality of the MI, the quality of the systems, the quality of the second and third sort of level below the CFO. look at the structure of the sales team, systems, et cetera, et cetera. We go area by area of the business, and that gives you a much better view of where the company is today.

9:51Flor Kassai: And actually, it helps you then rethink how you reprioritize that value creation plan because there are things that actually may have been second, third, because the management team only has certain bandwidth, and so things that you may have decided to do later, you may decide to bring forward because they're lower hanging fruit and you can get bigger bang for the buck. I love the fact that you're talking about people. That is not where I thought you were going to go when I talked about value levers and value creation plans. But this is a nice transition from your initial focus on relationship in building the investment pipeline to now the value creation process.

10:29And what you're describing is what I think very few firms do, which is actually look at what is it going to take in order to create the value that I've underwritten and then what types of management or board-level capabilities and competencies are required to execute on that. And do we have all of those? I mean, that is not typically where I hear a lot of people starting. And I think it's fascinating that you actually start there. So, Flora, can you give us an example where what you learned after closing this launchpad period that you're talking about actually changed your view of where the real value creation opportunity was?

11:04Did it was very different from where the underwriting was before that?

11:07Flor Kassai: So, I can't think of something that was a total pivot. That would be bad if it was a total pivot. That wouldn't be the best thing in the world. But something that maybe augmented what you thought. Yeah, exactly. Repertization, definitely. And that happens again and again. Yeah. And so Medicaid is a good example. So Medicaid is a business that does, it's a British skincare brand. And we basically knew that we wanted to push more into D2C. We needed to professionalize and scale the team because it was founder, entrepreneur-owned still. And there was a big story around internationalization of which the U.S.

11:42Flor Kassai: was a leg. But as we went into this Launchpad process, we found that the U.S. opportunity was a lot bigger and a lot more interesting than we had originally appreciated. And so therefore, we reprioritized that leg of the plan and leaned in a lot harder and a lot earlier. So we put in a strong U.S. team. We put in the resource behind it and medicating that being a massive success story in the U.S. we sold it last year to L 'Oreal. We still remain as investors alongside them because we see that there's so much more value to come. Now, when you make a change like that, that can be a little bit rattling to a management team.

12:24How do you keep the management team aligned with the plan if it does change within the first few months of ownership?

12:30Flor Kassai: Yeah. Look, I think that you need two things. One is the ability for the management team to adjust. And two, you need the right incentives to be in place. I think on the first point, this point of agility and ability to adjust to new information or a changing set of circumstances is a really important characteristic. I would say one of the critical ones that we look at when we are doing this management team assessment. And I think this is more important than ever today, where AI is creating some very rapid changes in nearly every sector. That first component is critical in that team. And then on the second point, as I said, incentives are everything, right?

13:08Flor Kassai: And we spend a lot of time in IC making sure that we have the right incentive structures in place to make sure that we are properly aligned with the team. Do you ever get to a place floor where you've decided that you have to change the management team at some point, that things are different than you thought they were, the capabilities are different than you thought they were, the relationship is different, and then how often does that happen and how do you actually handle that? Yeah, does it happen? Yes. Does it happen very often? No. What may end up happening is that there is one or two members of the team that you may need to replace.

13:41Flor Kassai: More often than not, what we end up doing is supplementing, because the team is not fully complete. And so we find that there's a gap. But when there's a change needed, we need to have the conversation. And that's why also alignment is important, because in particular, if you have to change the CFO, well, you know, being aligned with the CEO and understanding that to get the business from A to B, we need to make this change. And it's for these reasons. Of course, being aligned helps that conversation. So it's often something that's missing, not something that's broken. Once in a while, something's broken, but often it's something that needs to be augmented, which makes a lot of sense to me, particularly when the world is changing, as you described, technology's changing, geographic opportunities change, products change, and then you just may need some different capabilities than you realized at the initial beginning of the investment period.

14:29Flor Kassai: Yes. So, Flor, if I were to ask you to look five or 10 years into the future, how do you scale Inflection's relationship-driven model? And what's going to be the hardest thing to preserve as the firm gets bigger? It's a really, really good question. I think in terms of scaling, I think AI is giving us a massive edge now because it's helping us identify opportunities, companies that meet our criteria a lot faster. And so this means that we can be a lot more effective with our time using it on businesses, which are most likely to be an inflection type of investment. And also it means spending less time on our desks doing the research because we use these AI tools to help us do that.

15:20Flor Kassai: And we spend that time instead in person, face-to-face building relationships. In fact, one of the things that I track in our business in terms of ROI on AI that I want to see, and we track it and I show it to the team once a month, is the increase in the number of, we call it direct origination meetings. So meetings where we're firsthand having a conversation with a management team, with a CEO, CFO, chair of a business. And I've seen that increase now quarter and quarter by 25%. And we're only sort of beginning with this trend. So I think there's a ton more of potential here, but I'm already seeing, as I said, progress thanks to AI.

16:02So you're actually able to build the pipeline faster and more robustly within the six sectors and the subsectors underneath those that you invest in to get those first meetings and relationships going more rapidly. Is that right?

16:16Flor Kassai: Exactly, exactly. And then be more effective on each of those meetings that you have because they're likely to be an inflection candidate. So back to your question, I think that technology will make us more scalable. This will continue to be a relationship business, at least in the private equity mid-market. I am a huge believer in that. But I think using technology the right way will help us be smart about how we use our time so we can be more effective. In terms of what are my watchouts as the firm continues to grow. For me, it comes down to the one thing that we have to preserve, which is our culture.

16:55Flor Kassai: And I know that private equity doesn't talk about culture that much. I am a huge believer that culture is the secret sauce of inflection. It's the way you make decisions when information is incomplete, it's the behaviors that you accept in the business. It's what you do when things get really difficult. Sure. And I think this is a very special place. It's a place where there's institutional excellence. So yes, respect process, having a centralized IC, having a disciplined portfolio review committee, an active realization process. All of these things allow us to manage risk sensibly. But alongside that, it's a very entrepreneurial culture.

17:36Flor Kassai: So we don't want process to lead to bureaucracy. So we focus on giving people real agency, accountability. We want them to take ownership. We want them to push to find a way to make things better, to make things happen. It's a culture of continuous improvement. So we don't assume that what made us successful yesterday will keep working tomorrow. And I think this comes from a point of humility. And I talk a lot about the humility to the team as a core part of our culture, because I think that it's important that although we've been very successful today, that you have to keep earning your right to win.

18:13Flor Kassai: And I think that mindset is what keeps you open to new ideas, open to change what may not be working, could have worked before, but doesn't work anymore. And I'm very focused on this point. I sit, for example, in an open plan with my team because I want to hear the conversations. I want them to hear me. And I think I can keep a finger in the pulse of what's happening in the team more closely. I have weekly breakfast with different cohorts of the team and people come up with ideas of what can change, what is not working, what they're unhappy about. But all of that allows to keep this very flat structure, flat organization where ideas come from the bottom up and we can constantly evolve the model without doing a revolution.

19:02Flor Kassai: As I say, it's an evolution, but it's constantly evolving. So culture is intangible, but it's not vague. And I think it's a core reason why inflection has got to where we got to today. And that's the thing that I'm most precious about when I think of growth. Well, it might be intangible, but you made culture actually sound quite tangible on that description, Flor. I love the notion especially of humility. We don't talk a lot about humility on this podcast and private equity. I think it's a very interesting differentiator and a very interesting characterization of how you approach thinking about culture.

19:39Flor, now that you sit alongside the firm's founders, how are you thinking about succession and cultivating the next generation of leadership within inflection?

19:48Flor Kassai: Look, I think that for many asset managers, this point of succession is the elephant in the room. So it's something that no one wants to talk about. For us, it's actually the opposite. We're very proactive about conversations with our senior leaders about their roles. How long do they want to do this role for? What do they want to do next? and then in the way we bring in new leaders to work alongside the existing leadership, often for a number of years. So then that transition is very smooth and it gives both the individual that is taking that role time to adjust to the role while they're being mentored by the outgoing leader, but also the team in the business to get used to this new leader.

20:29Flor Kassai: You know, when I look at my own journey, Richard Swan had been head of buyout before me. and at each stage he was basically working alongside me. And when I took that role, he stayed alongside me as co-head for a while, acted as my mentor for several years. And in fact, Richard is still in the business today. He's still in the investment committee. So I still feel that I can go to him for support. So we are very proactive about succession and, again, not doing the move or making the move when you need to fill a gap, but actually thinking years in advance so that you have enough runway for a very, very smooth transition.

21:08Well, Flora, this has been a really fun and frankly surprising conversation. So you're telling me that private equity is not just about spreadsheets and cloud code and PowerPoint, but it's about people and relationships and really understanding what makes an organization win and what makes people work and how you align all of those things for success. And I never would have guessed that we were going to talk about that at the start of the episode. So I want to thank you very much for coming on the show. I've been educated. I'm sure our audience has been educated as well. It's been a fascinating chat.

21:38Thank you again.

21:39Flor Kassai: It's been my pleasure, Hugh. Thank you for having me.

21:45I'm Hugh MacArthur. Thank you for listening.

21:55Thank you.