E421: Jack Purcell — Building an $11B Private Equity Firm

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27:39And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, man staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

28:10I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out as fast, receipts are instant. and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go.

28:40And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. What's the best pitch for why a company shouldn't go to an auction after meeting you?

29:10At the size companies we're investing in, David, these are typically$20 to$75 million EBITDA businesses. The market's liquid and efficient. And so this notion of, gosh, every other business that looks like this traded for 15 times cash flow, and we're somehow going to buy it for eight, like, that doesn't exist, right? These are very smart, sophisticated counterparties that we're dealing with. And so price discovery, price transparency, it's almost there. And so our model is not a we really want to have a ton of proprietary deal flow and get value-based investments. It's really how do we find super high-quality companies with great counterparties, great management teams that are growing nicely, where we can put elbow grease in and accelerate all that.

30:01That's what we're trying to do. And so I think for folks that are thinking about, gosh, should I do a one-off recap or sell it? I almost think as a given, they're going to get to a market clearing price, whether it's a big, wide open process, or even if it's directly negotiated, maybe there's a little bit of alpha picked up that way, but not a lot. 10 or 15 years ago, I'd answer it very differently. I've had a lot of private equity firms say that it's almost impossible to get these really bespoke and very specific types of partnerships put together within an auction process. Is that Yeah, true.

30:34Depends on the process and it depends on how much of a head start you have. And what I mean by that is if there's rigidity around information, if there's rigidity around the amount of relationship development time you can have, if there's rigidity around how much information is shared between the asset owner and the management team that you might have a relationship with, that can be trickier. Absent sort of a good head start with good knowledge of the company in the end market, it can be really tricky to crack that code. And there's a lot of businesses that go through processes like that, and we just don't participate in them.

31:05And so we've learned enough to sort of know what process archetype looks like one that we can win. And our efficiency in those is really good. If you look at broken transaction costs as a very simple metric of how efficient are our sector teams with actual conversion, we've got to minimus amounts that hit our PML every year. So we tend to know which processes we can succeed in, and we stay away from the ones that we don't. You just recently raised your fund five, roughly$4 billion. Before we started recording, you were telling me a little bit about your LP base, pension funds, insurance companies, sovereign wealth funds, family offices as well.

31:44Have you gone about building those partnerships with your LP base? First thing I'd say is we've enjoyed exceptional long-term partnerships with our LPs. With each success of fund we've raised, we've had well over 100 % net dollar retention, net dollar re-up. So we've enjoyed these partnerships, some going back to all the way when we spun out from Bank of America in 2010. And that's sort of our philosophy and ethos as we enter one of these partnerships. It's not, we talked about this earlier a little bit, David, it's not sort of a one fund trade for anybody, right? And so we're thinking about, hey, how do we partner with these folks over time, we have a commercial excellence program inside of our firm as it relates to prospecting with limited partners.

32:29We have a head of investor services who's delivering what we think is a white glove experience to our 90 institutional LPs from around the globe. And so it's a little bit different than 10 or 15 years ago when we were just getting going. This is a sales customer service function within our business, and we treat it as such. We have a formal commercial excellence program that we're working intra-fund to make sure when we get to the next fundraise, we're in an excellent spot, not only with our existing partners, with a select group of prospects that we've nurtured over time. So that intentionality around our IR effort and our IR apparatus, that served us really well.

33:08Outside of returns, obviously that's really important. What else underpins your relationships with your LPs? At the top of the funnel is kind of a basic top of the decision tree. There's sort of basic math of here, is this manager generating returns that are acceptable, right? And sort of the second order of how are the returns being generated? What's the quality of the team? What's the alignment look like? All the things we just talked through. There's also just a sort of treating our investor partners like partners. We don't use the term LP ever in our offices. We use the term investor partners.

33:46We say investor partners. We think of these 90 institutions as investor partners. They're supporting our business in a way that we couldn't grow the firm without them. And so being really intentional around the cadence of investor communication, being really intentional around the quality of our materials, the quality of our AGM, being really intentional around the experience when we spend time with our LPs. Being really intentional about what we choose to communicate at our LPAC meeting twice a year and really giving sort of an under the hood look at here's how our team is doing and here's how the investments are performing.

34:25If you do this long enough, you're going to have tricky situations and tough investments. And we have four values at the firm. I talked about the first, support the Ridgemont family. The second is communicate transparently and with our investor partners communicating transparently in particular the tricky news the bad news that just builds a level of goodwill and currency and mutual trust that has served us really i think it served us really well over time being wrapping all that into a commercial excellence program is important i personally figure out a way to see each one of our LPs in person every year, irrespective of the fundraising cycle.

35:08And it's a little bit of a travel commitment, particularly for folks in the Middle East or APAC or Latin America or Western Europe or all over North America. But that's important to me. That's important to our firm. It's important to kind of give regular updates in a way that's hopefully valued. So when you do have another fund you're about to raise, you're not sort of the, well, gosh, I really haven't seen these guys in five years. And all I heard was the good news. And here's the math now. It's a much more kind of fluid relationship. That's all part of our commercial excellence program. I got to meet Jonathan Gray, who's president of Blackstone.

35:43I asked him, how does he deal with a downturn's hand with his investors? And he said almost the exact same thing. He said, you can't over-communicate. I get on a plane and I fly to every single person, every single partner, and I tell them exactly what's going on. I tell them the knowns and I do as much communicating as possible. And actually that's extremely, especially he was talking in the context of global financial crisis, these really three standard deviation events. And that's extremely differentiated because most GPs want to hide under the covers and kind of go radio silent. And that's where these 10, 20 year relationships get broken overnight.

36:23Totally agree. And you think about our partnership been around for 30 years, right? You had the tech bubble, GFC, COVID. Like these things, they happen, right? And oftentimes they're exogenous to our core business, but they happen and they impact our business. And so just hitting it head on and sort of describing it for what it is and communicating transparently, in many ways, that's sort of all you can do. And we've tried to do our best at that over time. You mentioned going to APAC, going to LatAm. How do you think about the geographical breakdown of your partners? Money keeps moving west. The U.S.

37:02continues to be just a magnet for smart institutional LPs. And so we benefited from that. Second is we've seen more eyes focus on the bid market and kind of migrate from the large cap world to the bid market. We've been beneficiaries of that. And then the last point is a little bit about what we focus on. when we were out raising Fund 4 back in 2022. It was a very different period. And if you weren't talking about SaaS and tech and ARR multiples, it was really hard to catch the attention of a new institutional investor partner. That was so in vogue at the time. And our businesses are very basic and in some ways boring at their core.

37:47These are kind of like heartbeat of the American economy businesses. We always say if you can't describe our business in one half of one sentence and the listener doesn't understand what it is, it's not the right business for Ridgemont. And that was out of favor in 21, 22 when we were raising fund four. When we raised last year for fund five, it was very much in favor. That pendulum had completely swung back towards these more basic businesses, sort of heartbeat of the American economy businesses. And so money moving west, money moving to the mid-market, money moving to basic businesses, that in addition to team quality and strength of returns, that explained a lot of our success in this most recent fundraise.

38:26In 2021, 2022, did you have doubts that you guys were in the right business? We never had doubts. We always got to our hard cap. We had success attracting new capital. I'd say we had frustrations that there wasn't better attention paid to some of these more basic service companies, distributors, three core sectors, industrials, business services, healthcare. But these businesses have done well since the early 90s. And we think the outlook for some of them, particularly in the subsectors that we operate in, is really bright. So yeah, we always got there, but it's just interesting to see how that kind of momentum comes and goes.

39:04As a fund manager, there's always this question for any business, whether they double down on their strategy, whether they pivot, whether they evolve their strategy, what's your framework for figuring out, for example, if you would do a fourth industry? Our business is in some state of constant evolution. And if you look over time, we have certainly edged out into very logical adjacencies within our three core sectors. I'll pick one as an example. Within our business services effort, there are certain pockets of financial services that we have found attractive over time and we're spending a little bit more time on now.

39:44If you think about our history, 20 years inside of a bank holding company, we've known our way around some financial services assets. So yes, on the margin, there's sort of evolutionary changes in terms of where we invest. But again, this is not a market to be an industry tourist and to think of a new, hey, we're going to go stand up a consumer business tomorrow. We're going to go stand up a retail business tomorrow. We're going to go stand up a manufacturing business tomorrow. There's a lot of very sophisticated managers that are experts in those areas. We know where we are experts and we want to stay in those lanes.

40:17You won't see radical drift in terms of the sectors that we're focused on. It's chasing of novelty as a big failure mode for private equity managers. Famous management consultant, Peter Drucker, used to say that as CEOs got bored, they started doing M &As and destroyed company values. Same thing happens with private equity managers. They get bored of buying the same widget company. And five years later, their returns go down. They're kind of questioning why that happened. The nice thing about our business, I will say, is I'm glad we're in these three sectors because there are periods of time where, I mean, you think about particularly coming out of COVID, the supply chain unwind.

40:53It made parts of the industrial economy really tricky to underwrite. Think about transport and logistics as an example. And we had made many successful investments over years prior to that, if we were just a transportation and logistics firm, it would have been really tough sledding the last three to five years. But the fact that that's just one subsector underneath industrials and we have a vibrant and growing healthcare services practice and a vibrant and growing business services practice, there's plenty for our 70-person team to chew on in those different areas if one is a little bit more in or out of favor at the time.

41:26Is that something that you've pre-negotiated with your investment partners that you may drift from different verticals based on the relative value of those industries? We try and have roughly equal NAV weight across the three within a portfolio. It's really down at the subsector level where you may sort of lean into something or lean away from something. And again, this gets back to sort of the kind of more team-based mindset about how we run the firm. are nine members of the IC, Democratic Process, 40-point IC scorecard, big GP commitment. We're all rooting for the same thing. And so if there's a pocket of the industrials business that's soft and one of our partners who has particular expertise there is not having a particularly productive two or three year run, that's okay.

42:10That'll come back over time. We're thinking about this business over decades, not just little one fund increments. So the model's set up in a way to tolerate some subsectors being more active than others at different points in time. Are there trade-offs of having this democratic allocation of profits across different teams? There's trade-offs to any of these decisions when you think about running a business. The clear benefits are you get the benefits of kind of group knowledge. And it's more than one voice or mind making investment decision. And we've got a lot of really experienced people that have grown up in our system.

42:50It's also an excellent development tool. We have a 40-point proprietary IC scorecard. We have the data going way back in time where each IC member has voted on a deal. And then good news is three or five years down the line, you're going to know if it was a smart vote or not, right? And so that data repository has been a great training tool, particularly for some of the newer partners that come onto our IC as they're growing in their seniority within the firm. So there's a lot of benefits to it. At times, it can make us less nimble, for sure. It's not unusual to spend an hour or two amongst the nine of us kicking around something, even if it's an early-stage investment opportunity.

43:27But we think on balance, it's worth the cost of some of that. I was going to ask you about that. your nine member IC unanimous vote that's quite a strict process do you not worry that that leads to picking the least bad asset versus the best asset so this we were talking about this before we got going David it's sort of like hey if you're a baseball player would you rather be two for two with three walks or four for five and this four for five the question I always ask is It's like, well, are they four singles or did you get some extra base hits or an RBI in there or a home run? Were you compensated for the risk?

44:06Yeah, exactly. And if you strike out and you're fifth at bat, but you had four triples, that's a pretty good day at the plate. So it's something we spend a lot of time thinking about. We actually think about it less at the deal-specific level and more at the portfolio level. And what I mean by that is we're trying to put 15 to 20 companies in each fund. and within the fund, we want to have some variance. Like we will consciously say, okay, this asset that we all really like, this should be lower than average risk. And maybe we're only going to underwrite to two and a quarter or two and a half times gross MOIC returns.

44:46And we know what this company's role is in the portfolio. And we talk about this as an IC. That same group of nine will have another conversation where we say, hey, you know what? This is maybe it's higher than average risk. But we think there's a really good shot we can make five times gross returns on this. And this asset tagged that way fits at this point in the fund cycle, fits this point in the portfolio, doesn't have correlation with other subsectors where we're invested. And so we have really robust discussion about that. So by talking about that out loud, by being intentional around portfolio construction, it allows the nine IC members to say, okay, I'm not going to default to just where everybody feels great, that we're not going to lose our money and we're at least going to make it double.

45:32And so educating the IC on that ethos is really important to avoid the trap of, well, let's only do the things that everybody feels like we're not going to lose our money and make it double on. It's one of the most common biases, this over diversification. And Roger Vinson, who is at the Cornell Endowment, he was talking about how many LPs over diversify, they sometimes even triple over diversify. They want to make sure that every single company is super conservative, none of them lose money, and then every single portfolio, and then their entire portfolio, where really, they should be thinking about their entire portfolio of managers, how is that looking?

46:07What's the variance on that? What's expected return? What's the three standard deviation drawdown? but they get upset, obsessed on every single asset. And that's almost categorically a wrong way to approach an investment. Well, it's really just a path to buying market risk. Beta. Right. So you're a beta hog at that point. My first kid on the way in October, boy, maybe you could give me some advice. How do you navigate? You have to travel a lot with having your two girls. How do you navigate that? And how do you make those trade-offs? Awesome news on boy number one for you. Really exciting. I have no boy dad advice because I've got two daughters that are 14 and 12, rising high schoolers, crazy as that is to say.

46:48I talked a little bit about our firm culture around family first, and that sort of permeates the way a lot of us think about this whole kind of work-life balance topic. And it really is a priority for me and the rest of my partners, this whole family first approach. So if you kind of pull the group around Charlotte and our offices, you're going to find a ton of soccer coaches. You're going to find a ton of church league hoops coaches in the winter and little league coaches in the spring. And if it's a Tuesday night at five o 'clock and you need to check out for a couple hours to go coach little league baseball, it's really, that is your priority.

47:31And we make that crystal clear as a firm. And certainly as one of the leaders of the firm, I make that a priority for myself. Even with travel, I work pretty hard to make sure I'm doing a lot of day trips kind of out and back to get home for dinner. We run the business in a way where we try and keep in perspective what's really important. And distinction there may be flexibility around when you do your work, but expectation that you will work really hard. For sure. And we've got a really competitive in a good way culture. And so it's a kind of full throttle up, everyone grinding really hard, 70 people hard at it.

48:10We probably have, I bet 20 % of the firm, David, are former college athletes. And so we've got a lot of competitive intensity around the firm. Back to this culture point, throughout the year, depending on the calendar, we have a lot of different events or engagements that we run to sort of drive culture at the firm. The month of June every year is our fitness challenge. We take the whole firm, we divide the firm into four distinct teams, and it's cross-functional. So it's the folks that you don't work with every day. And for the month of June, there's a very competitive fitness scheme that's run with some algorithm I don't fully understand to calculate points to figure out who wins.

48:50It involves walks in the morning with your little kids in a stroller. It's awesome. But it's just one example of how building this family-first culture really matters. And it kind of blurs the lines a little bit between, are you working? Or the work-life lines are a little bit more blurry. That allows everybody to be fully present at home, but also not sacrifice the pace at width, the throttle at which they're working. It's a constant work in progress, but we're trying to do our best at that. You guys spun out in 2010. You're now at hopefully 75 employees, I believe. At which point did the culture become self-perpetuating?

49:27I think culture is one of those things that requires constant effort and can never be put on autopilot. Does it get easier? That's a great question. It requires the same level of intensity and intentionality to maintain culture. I think the difference as the culture becomes more embedded is the culture carriers expand. And the depth of folks in the organization that are really focused on perpetuating the culture grows. It's not just one or two folks that, hey, this is really important. We're going to invest in this in a way with real intentionality. It's a cross-organization at all depths of seniority where folks will kind of come up with an idea or pick up something that's important to them that perpetuates the culture.

50:19That part is really neat and rewarding to see. But the amount of effort and intentionality, it's required to keep it going. If you go back to 2010, when you had just spun out of Bank of America, and you could give yourself one-time-less piece of advice, what would that be? We talked a little bit about this earlier. Many times in this business, you want to be right. And you want to make smart and shrewd investment decisions. And there's a lot of weight on your shoulders from your investor partners, your business partners, your family. And that can create a level of defensiveness in some ways. That there are certain points in time where an aggressive offensive strategy is just fine.

51:07And I think about when we were coming out from the bank. We had no institutional LPs. we needed to go one for one every time we pulled the trigger. The future of the firm depended on that next investment. It had to be perfect. And I reflect back on the 2010, 11, 12, 13 vintages, and I wish we did 80 % of the things that we were wringing our hands over. Gosh, it's a really good investment. We think this will be a good one, but it's not perfect. And now it's easy to say that now, right, in hindsight. At the time, a little bit more aggressiveness, a little bit more, hey, let's not go two for two.

51:55Let's go seven for eight. That, I think, would have catapulted our business forward in a way that would have us in a better spot than we are today. We're in a great – I mean, looking back, we're in a great spot. And the fact that we've grown to this size and this much AUM, there's just tons of pride and nostalgia reflecting on all that. But I think at those critical times, being prepared to put a little more fuel on the fire, that was something I wish I had better perspective on coming out of the GFC. I think we learned from it. I think in COVID, we were definitely more aggressive in our posture.

52:32And some of the returns show that that was a smart decision and paid off. But particularly now that the size of our firm, the AUM, the capabilities that we have, we really are set up to take advantage of some situations if we see it. And so I think just being a little bit more courage of your own convictions, a little bit more confident, a little bit more ready to take the risk when it comes in front of you, that's a perspective that I value now that I did not have in 2010. And that 2010 vintage, was it a blind pool capital or were you doing deal by deal? No, it was interesting. When we spun out from the bank, the bank, and we had a wonderful relationship with the bank for a long period of time.

53:08We still have many of the senior executives at Bank of America that are investors in our fund as an LP today, interestingly. But the bank, in addition to helping us spin out some assets, provided us with what was effectively a warehouse line of credit that allowed us to keep investing. And then when we raised our first institutional fund, we trued all that up and we were off and running. But the bank has no formal tentacles into our business today of any sort. So you really had to get those right. We had to get them right. And this notion of one for one, we were living and dying by each one of those.

53:41And thankfully, they were great companies, great investments. One of those is in Indiana, not far from where you grew up, David, but also just a great vintage for the asset class. All those things sort of came together in a way that sent us on this journey. A lot of listeners don't know the amount of back and forth that comes into these podcasts. I've gotten to get to know you. You're truly a nice guy. And I say that as a double-edged sword, you're a nice guy as in nice person, but also has that held you back in private equity, which is known for being a really brutal industry? I don't spend a lot of time thinking about that.

54:19Honestly, I think we've all, particularly all the guests you've had on this show, we've all had such success in life in the grand scheme of things. It's a little bit of life's too short to be anything but thoughtful and kind to the people you come in contact with. And if you're sort of playing the long game and the currency you're looking to accumulate is the quality of relationships, the quality of friendships, the quality of partnerships. That's really what I think my partners and I are trying to optimize for. And so we don't, a firm culture is the sharpest thing from super aggressive, sharp elbow.

54:57Maybe said another way, do you find that your style starts a little bit slower and compounds more than other staffs? Definitely start slower. I think that's probably true of most of our firm and most folks from Charlotte. It's just a little bit more methodical, intentional, even just the relationship development aspect of our business, whether it's with investor partners or prospective CEO partners. It takes time to develop a relationship and to do it in a thoughtful way, and that's the way we've chosen to conduct ourselves, And that's served us well over time. Jack, this has been an absolute masterclass.

55:35Thanks so much for jumping on. Yeah, great to be here, David. Thanks for having me.