How PE Should Support Portfolio Company Acquisitions

23:12Everyone has their standard diligence items that they're looking to track upfront and progression throughout the close of the deal. And they're all close, some value some items more than others. So having clarity around what's valued and why is important, but they all want different things. Yeah, it sounds like there's quite a bit that varies there. You just got to figure out what their expectations are. Yeah. I wanted to talk about sourcing. I think there's a few lens of how private equity look at sourcing platform opportunities versus how they look at supporting, helping the portfolio company identify opportunities.

23:46Could we talk through that and maybe even how it differentiates from the corp devs role and how they look for opportunities versus how the private equity firm may help them do that? From what I've seen, there's a higher reliance on banker relationships for acquiring portfolio companies, whereas it's only the smaller investment banks that'll represent what a typical port co would acquire. If you're not a multi-billion dollar portco and you're in the metal market, a few hundred million of revenue range, you're looking at only a few investment banks that'll represent the tens of millions of revenue kind of businesses to get deals done.

24:19So you're more reliant on, at least on the corporate development side, relationships, a lot of relationships, relationships with owners, longevity in an actual business, trade show, who's putting up a booth and getting to know people on that kind of level versus going out to meet investment bankers at at different networking events like JP Morgan. How's the support from the PE firm? Is that a big driver for them identifying opportunities or does that still fall back on your lap, the mix? It's a mix. If they're bringing in a corp dev person, they want acquisitions. And in order to do acquisitions, they need a pipeline.

24:50Gotta do your job. Yeah, gotta show my value. Gotta show that I can get stuff done. It depends on what they're looking to do. Each private equity firm has their own resources and each one will give you access to what they're comfortable giving you access to. And by you, I mean the corp dev guy. a girl. There are a lot of great resources out there that I'm sure you've seen that helping diligence companies or markets or getting details on companies to narrow down opportunities is helpful. But also building a resource bank of internal exports, which could be on the board, it could be third parties that they trust, it could be whatever they're comfortable with.

25:22I've worked with private equity firms that don't want to spend money on third parties. They don't want to pay banker fees, they don't want us paying banker fees. So we can't reach out to third parties to help us source deals. And I've worked with ones where a deal is a deal and that's a one-time fee. So let's get a pipeline built. And depending on what the appetite is, it's communication, right? But understanding what the boundaries are that I can work within and Corp. Dad can work within. It sounds like if they're willing to provide resources to help source, you'd probably want to leverage it.

25:48Yeah, I can say that we've had a lot of resources at New Mountain Capital. Building that pipeline is important. I started here about a year ago and it hasn't stopped. The trajectory, the pipeline building, the sourcing. There's a lot of activity going on because we're spending time building relationships, getting to know companies, exploring new industries and adjacencies that help build our share of wallet for customers. And it creates opportunity down the road. Whether we want to do a deal now or in a month from now, we have opportunities because we're spending the time and energy building a pipeline.

26:20How does that support continue from sourcing into diligence depends on integration? I think it depends on the preferences of the private equity firm. Some of them like being involved in managing third-party advisors, whether it's their relationship or the company's relationship. Some of them like to be involved. They want to be involved with your financial advisor, your tax advisor, even your legal advisor. And I think depending on what they're looking to be a part of, whether they want to manage the relationship or just have the option to join a call that's happening or just see the diligence output put down the road.

26:54It's all going to be different based on the level of need of that firm and the reporting structure with him. Tell me more about reporting structure. I could see that varying as well. So what is the expectations range from how you report back to the PE firm? I've always had regular touch points with the PE firm and regular touch points with the C-suite at Portco. I'm an employee of Portco. I have a reporting structure, a formalized reporting structure, currently up to the CFO in past lives, it was up to a CEO. We have formal M &A calls with them every other week where we give them a full download on everything that's happening M &A-wise.

27:32And it's my job and the rest, our M &A team, our C-suite, to deliver that message. But anytime I have a question, pick up the phone and call them. Having that open line as needed is helpful, but it's not formal. It's more of an informal dotted line reporting line to them. I think there's two things to segment. Here's stuff that gets rolled up and then the C-suite has their own communication reporting responsibility, specific to M &A activity, obviously the pipeline reviews. But then beyond that, what other things would you be reporting back to the PE firm? From what I've experienced, a lot of regular touch points between the C-suite at the Portco and the board or the private equity firm, there's always interest in live transactions.

28:17So whenever there's something live, making sure that those to whom I report have the knowledge to relay the correct messaging and next steps and where we are with various levels of activity is important. And keeping the PE firm on my own terms with an aligned call or one-off, making sure that they have the knowledge is important. But my job is to report everything up the chain to RC level to give them the tools that they need to report to the private equity firm. And at the same time, I have a dotted line to the PE firm as well. There's no formal reporting structure, but we get on the phone once a week, catch up, make sure that if I have any questions or they have any questions, they're reporting up to at the PE firm as well.

28:56And they're going to get asked by their superiors how the M &A is going on at ExportGo and make sure that they have the knowledge that they need camera ported up as well. There are two kind of levels there. One is more informal and one is more formal, but not just pipeline, but I guess pipeline live transactions. And then how are the integrating businesses or integrated businesses performing on a post-close basis and giving them the weekly or bi-weekly or monthly knowledge that they need to report up their chain so they can have the, yeah, this business in India is doing great. It's up year over year, month over month, and we're glad we did the deal or it's not.

29:27And here's what we're doing to fix it. So we want to have some measurements of success. What's advice for private equity firms to best support corporate development in their port coast? And I feel like I see so many that are in the early stages of it, where they're just shaping corporate development as a function in their portcos and then just see a lot of them at that stage. So it's new for the company. And some of those key firms that aren't in the top 50 list, it's relatively new as well. Yeah. My advice would be just like getting any other deal done, more frequent communication is better. Whatever the relationship is, the more frequent the communication, the better, especially in the early ages, when you're trying to build the function and create the boundaries around how the function will operate, how it will report what you want it to report, how it will actually conduct M &A.

30:13Because I've seen times where the PE employees feel like they're being overruled by the corp dev folks. And I've seen relationships build or need to build a bridge to try to fix and repair some hurt ego on both sides before. So the frequent communication and the understanding of working together to building kind of a team to know that you're going to tackle deals together and that CorpDev is going to handle this and PE is going to handle this and how we're going to work together when we get to deals. And if we have one deal, it's going to change for if we have five or 10 deals. But having the relationship and having the frequent communication is important.

30:49You ever felt overly policed by a private equity owner? No, overly policed. I don't think so. I have felt that sometimes the amount to report might be overwhelming depending on what's going on. But I've also seen PE firms say, listen, we know you have a lot going on. You don't have to report all this stuff. Just tell us about X, Y, Z. And again, it's having the open relationship to raise your hand and say, I got too much going on right now. I need to skip this meeting. Or can I give you a shorter brief on what's going on? Or can you help me with something? Because there just isn't enough time of the day to get stuff done.

31:24Again, it all focuses on that relationship that you build with PE. I just want to flip that advice around for that first-time corporate development leader that is under a portfolio company or PE firm, advice for that person to make things work and have a good relationship with the PE firm? Be open, be honest, be vulnerable. You're going to be thrown into new things and raise your hand if you want advice. And one of the early pieces of information that I had, I would have one-on-ones with one of the partners at one of the private equity firms and asking for help on sourcing and pipeline development.

31:58I didn't realize that they go through, at least in the PE side, they have to source their own deals too. And they're measured based on their deal flow and their pipeline development skills. Being able to generate a pipeline, not just company performance and exit value and return on investment, but actually being able to bring deals to the table. So there's a lot of similarity and asking for help, leveraging the knowledge they have. Don't be shy to ask for help. I like that. Ask for help, learn their process because you can probably learn some things from them. So much of this has been around communication or relationship.

32:29Let's break that down some more. Give me some tips and tricks around it. Obviously, you're a nice guy, Brock. Give me time over here. So maybe it starts off with some fundamentals there. But are there ways you stage meetings to make them productive? Any little more tactical things they can teach me? It all comes down to being open and vulnerable and transparent. Whether it's upfront in the interview process or after you've been hired because you weren't sure how to go up on a touchy subject. But be honest, say, listen, my level of working with this skill set is this. how can I leverage you guys to help me get better and improve my skill set?

33:03Can we do weekly calls for 30 minutes? Can we do biweekly calls? Can I work with your team member on leveraging these resources or that resources? What resources do you have for me to leverage? How can I work with you guys to help me do my job better? And they'll tell you. They'll tell you what the opportunities are. They'll tell you if they want to give you time. They'll tell you if they don't have time for you. Asking for what you need, which I found is useful in all aspects of my life, that doesn't work, is going to help leverage that relationship and give you the tools to succeed in your crypto role.

33:31Oh, you're absolutely right. That is key. What does the reporting structure look like internally for you when it comes to M &A activity? I report directly to the CFO with a dotted line to the CEO. It's a dotted line because I'm not a formal report, but everything needs CEO sign-off, not just business unit leader sign-off before he goes to the board. I like to make sure that they both learn about M &A opportunities at the same time. I'm bringing it to their attention, whether it's an email or a phone call or a 50 minutes to jump on a Teams meeting. We have this interesting call and then creating a more formal meeting with actual business unit leaders.

34:03But our job is to support the growth of the entity, making strategic decisions, helping analyze opportunities, getting company alignment, and then presenting it to the board where we think it makes, in my opinion, cultural, economic, and strategic fit. making sure that you have a good relationship for me with our C-level, our executive team, for why deals make sense. I'm in full support on, yes, this deal makes sense. We like the people who run it today. We can work with them and we can really blow this market up with these resources. Again, it's the story. Everything working together is important.

34:38And when you have that feeling of this is a superpower to have, we buy this, it's a home run every time. Are there key little elements for them that really clinches the win in terms of the nailing that story down or having specific points around how it aligns with the strategy or finances? What are those real golden nuggets that you think are the key to pitching a deal? I think there are a few different parts to it. I'd work with the team on who relays the strategic message for why a deal makes sense. Knowing your audience, which is the board or the P firm or your M &A team or whatever you call them, and knowing who internally can relay the why for why the strategy makes sense.

35:19It's not always the CEO. It's not always Corp. Everett. But from my experience, it can be the specialist in the field, whether it's the business student leader or the head of sales or whatever the commercial arrangement is. It's finding the right person for that opportunity who can really tell the story for why a deal makes sense, leveraging their expertise for that part of the pitch. The rest of it is just data. You lay out their financials, you lay out your thesis, you lay out how you would roll it up or share resources or synergize. That's all you read and you have follow-up questions. But the story itself is important because it's going to change the shape of the future of the business and making sure that you have the right pitch and the right pitch person can change the trajectory early up front.

36:00Great tips. On the execution side, where does private equity draw the line? I feel like at some point they're like, all right, you're on your own. From what I'm seeing or heard, it tends to be around actual post-close integration activities. Is there any level of support that give you a list of consulting firms you should go hire? What does that look like? I've seen it differ at different private equity firms. Some of them like to know that you can cross-sell or your financial systems are talking and some of them want you to get a third-party advisor involved. and some of them want to hire a resource to dedicate to integrations.

36:36I think it depends on what the goal and the thesis of the private equity firm is. I spoke at the private equity firm a couple of days ago and they didn't integrate businesses at all once they acquired them. They would do deals to build up the portco and then sell it. And the next buyer would focus on integrating potentially and acquiring new entities. And depending on what the goals of the next exit are, I think the levels of integration differ. And the different levels of private equity, based on their experience, they understand this. And you'll see it depending on what they do with their current portcodes, asking about an interview process about how they integrate, what kind of integration they're looking for, and what they're looking for on exit, and kind of in general.

37:20I won't give you that kind of view about what they're trying to do with the business. But to me, I find integration to be highly time consuming and incredibly value creative if it's done well. The time is worth it if you can do it well. Do you think there's like a maturity curve for that private equity firm and how they view that approach? Probably. It's all resources. Their primary job is to spend that fund to make sure that they can get the returns for their investors. And some of them just focus on that, spending the fund. They're smaller, less resources. They don't have levels of associates and analysts that can dive in and work with companies on how they're integrating and why and what the outputs are going to be.

37:59And some of them don't care from what I've seen. They just want to know that you can cross sell and you can roll in the financials and put together a package on an exit. And you're right. Size has a factor because if you're working a bigger fund, you can set up an operating group to support portcodes in a very different way than a smaller fund. And you also know when to pause certain capital activities to focus on integrations. This has been a heavy year. Let's take off six months, make sure we integrate, make sure that we can go to market as one entity, not as two or five entities approaching the same market.

38:35Let's spend time focusing on that. And again, I think that's a little sophistication, which comes down to typically size and where they spend their own time. What's your approach with relationships with the target company look like? My relationship with a target company, I try to build it so that we create a personal relationship depending on kind of nothing. But I want to make sure that I get to know the people who own the business or the CEO, if it's not the owner, because deals don't always happen now. And having someone that I can call in three months or in six months or in a year from now, or send them an email and know that they'll respond or pick up the call or respond to my text.

39:11To me, there's more value in building that relationship for a no specific time period versus a I'm coming in because I purely want to buy our business. It's I really want to buy our business, but I want to get to know you as a person and getting to them as a person to help check that cultural box to see the fit. But it also helps you reach out when there might be better timing. People don't always want to sell their company from what I've seen to someone just because they have a checkbook. They want to make sure that their legacy is going to be continued down the road, that their employees that they've had for the past 15 or 30 years are going to be kept.

39:43They want to know that they trust and they want to work with the people that they're going to be getting in bed with because this is a lot of these folks, their legacy that you're buying. So having the trust in the relationship goes a long way. You find a variance in terms of how collaborative people are on the other end and how do you get around it or do things to enable better collaboration? I'll give you a couple examples. I bought a business from a founder a few years ago. The guy had started the business in the 60s. He sold to me in 19 or 20. And the guy had run it himself. He had a couple of lieutenants.

40:15And his plan was to walk away after he sold it. And by the end of it, he was sending my kids gifts in the mail. So we built this level of connection that was whatever you need, just let me know. I'll do it for you. But I've also worked with targets where this is the information that we're going to give you that we're willing to share. And that's all you're going to get. To me, that shows a level of cultural fit. Because when I want to spend not just money, but time for myself, my colleagues and my team to learn about and dive into a business, we want to make sure that on a post-closed basis, we're going to like working together.

40:49And to me, that's a red flag, cultural fit wise, that they're not going to let us fully under the hood. We're only going to lift apart, whether they're hiding things or not enough trust, or we just don't want to show you stuff because we don't want to do the work. To me, those are all just, yeah, I don't know if this is going to work, red flag. So the better the connection, the easier it obviously is to get done. But when you're working directly with a founder or CEO or family that's selling the business, the better the relationship, the better the outcome. It sounds like that's the whole theme of M &A.

41:16There's so much left that people don't emphasize in terms of building relationships. What happens when you don't grow your company to the ideal targets of the PE firm for their holding period? I think there are a couple different outcomes. One is they hold it longer until you are growing it to meet the metrics. or they could sell it at a lower multiple and just try to get out. I can tell you from the Portco side, we've acquired businesses that haven't performed according to our initial estimates, or even our pre-closed estimates with an updated budget and performance. And it's all about, okay, fine, what are we going to do now?

41:52And coming back with a plan for how we're going to turn things around, it might not be in six months, but it's probably going to be in the next year or two. What's going to change in the market? Why is it going to change? How are we going to do different? What resources are we going to allocate? How are we going to cross sell or market differently? Coming up with a full plan for this new business is important. Yeah, you got to manage with what you have to work with and get the best outcomes, best financial returns. Do you see PE firms buy other PE firms? I've seen PE firms make investments and funds of PE firms.

42:21I remember seeing a couple of years ago that a smaller PE firm was bought out by a larger PE firm and they just bought the whole portfolio. I don't know enough about that to really comment on it. you're entering in a whole new level of risk when you buy a portfolio of businesses. It's fascinating though, right? If you're a mega fund and you just have 10 billion that you need to spend, so you just buy a middle market PE fund that's got 5 billion under management, that's a unique return potentially. Buy them all at once, see what happens. It changes a lot of relationship dynamics, which you don't know how port codes are going to react.

42:54You don't know how your investors are going to react. I can foresee a lot of challenges there. What I've experienced is that sometimes mega funds will invest in funds of middle market PE firms as a way to diversify. And that's interesting, depending on the relationship and the access to opportunities you may have reach into pockets of other private equity firms and their resources and lots of potential leverage. Yeah, I know I'm drifting off topic. I just was curious, how come we don't hear too much M &A news within the M &A PE space itself? Hey, before we wrap things up, can I ask you, what's the craziest thing you've seen in M &A?

43:29Craziest thing I've seen in M &A? I was looking at a business in Eastern Europe a couple of years ago. And I remember the initial conversations. There was a historical relationship, CEO to CEO, and it wasn't their first conversation. But I remember hearing this guy was, he had a really interesting business, not making a lot of money, say low millions, but a really high $100 million plus purchase price that he was wanted for the business. And it was sky high. It was, there's no way we can get there. We give him an offer. And we're like, before we give the offer, we don't want to insult you. So we're just going to tell you about it while we're looking on the phone.

44:04And if you don't want it, we get it. Maybe as the business grows, we'll talk about it down the road. I've seen that guy actually achieve his exit value. Because instead of going PE, he went strategic. And the leverage of the resources and the synergies between PE and strategic, There's a different share of wallet. There's a different pocket opportunity for who can write larger checks. That to me was fascinating. That evaluation could be achieved, which to me didn't make any sense in any world, except for this one. So I think when people, a lot of times you talk with company owners and they might say, well, my company, I think it's worth X million.

44:42I'm like, oh, it's not worth X million to me. But if you find the right buyer, they might be willing to pay X million. But if you want to work with us, like this is what we're willing to pay. understanding that deals are all different. When you come up with your own valuation based on whatever metrics you want to, but at the same time, a lot more that goes into it than just the numbers. Yes, that's a good point. And then that perception of value is all beholden to the buyer. Yeah, yeah. Yeah, that is interesting. It is interesting how people drive value in some of these deals too, because it just makes less and less sense as the years go by.

45:16Brock, this has been great. I appreciate you taking time to have this conversation and teach me a few things about operating as a corp dev leader within the B environment. Thanks, Kassan. It's been a great conversation. Thank you for having me. Really enjoy the time. Hey, you're helping become a better M &A scientist. For those of you still with us, hope you are as well. Until next time, here's to the deal.

45:45Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

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