The Big Shift from Corporate Development to Private Equity

0:28Hello, M &A scientists. talent, and more. We do cap the number of free signups. So get registered today at mascience.com. Again, that's mascience.com. See you there.

0:47I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:11Hello M &A scientists, welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about the products and services we developed to support world-class M &A teams, or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com. You can get started by subscribing to our free weekly newsletter with all the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Joe Metzger, Managing Director at 777 Partners.

1:46777 Partners is an alternative investment platform that invests across a number of high-growth, attractive verticals with a strong focus on financial services. Today, we're going to talk about shifting from corporate development to private equity. Joe, how are you? I'm great. How are you, son? I'm doing great. I'm excited to have this conversation. This is a topic that comes up pretty often. I talk to a number of corporate development practitioners, and they're like, hey, I've been doing this for long enough. Where else can I go? Where can I pivot my skills? And I've seen a number of folks that take your path where they go from corporate development to private equity.

2:17So I'm looking forward to taking that apart. But before we get started, can we kick off with a bit about your background. My background is I graduated from NYU just before the financial crisis. So I actually entered banking right around the time of the last great financial crisis. I did that for a little over four years or so. And as most people who end up doing banking for that amount of time say, it wears on you because it is a grind. You end up developing a great skill set, but you may not want to work the sort of the 100-hour weeks all the time. I was looking at getting out of banking just probably around the 2012 type of time frame.

2:58And TI Cref, which was a sleepy sort of at that time, probably 95-year-old insurance company, originally founded by Andrew Carnegie, I think in 1918, was looking to develop M &A as a capability. T.I. Craft was a well-known company serving people in the not-for-profit field for their retirement. They had never really done M &A programmatically. Before I joined, they had done two proper M &A deals in the 90-plus year history of the business. They were really looking to develop M &A as a core skill set. And this was sort of part of Roger Ferguson's mandate as CEO to transform the company. I was probably the first or second person who was ever hired full-time at TIAAcraft to do M &A.

3:47And so that was really interesting and sort of unique experience. So I was there for just shy of five years or so, worked on a number of transformative acquisitions, and then went over to another life insurance company called Guardian Life with the view of rinse, lather, and repeat. And we can get into a little bit, probably in sort of the next questions around that four or five year type timeframe in corporate development, which does seem to be about the lifespan for corporate development professionals, especially sort of a more senior leader. Was at Guardian Life for just shy of five years and was at that point looking at different opportunities and had spoken to a recruiter who was focused on, call it the Southeastern US, had some family connections to Florida at that point, and made the move to 777 Partners in August of 2021.

4:41So I've been with 777 since then, and today lead their insurance investing vertical, which kind of cuts across life, property casualty, and health insurance. Can you share the journey that when you specifically went from working corporate development to transitioning into the private equity sector? What were the drivers that made you switch? There's a few things you realize in corporate development. There are finite lifespans. And one of the reasons for that is that it typically is oriented around a particular corporate strategy, right? You're in many ways at the whims of the C-suite. If there is an executive team that comes in, typically they have a mandate that may or may not involve M &A or otherwise joint ventures, other strategic partnerships.

5:26And for whatever reason, it seems four to five years is the timeframe that you get to develop that prune entities or subsidiaries that are not core to the future strategy. And then at that point, you move on. As an example, my former boss at TIAA-CREF, incredible guy, had been an M &A practitioner in different roles for different types of organizations for over 20 years. He is actually still at TI Craft, but after we completed a lot of the M &A that we had done, he actually moved into sort of a product role as the strategy shifted. When I looked at the future, I love doing M &A. I love doing deals.

6:05I saw the opportunity in moving to private equity really to be in many ways, a corporate development professional for a number of different entities. 777 today probably owns, call it 60-odd portfolio companies. I've sat on the board of about five or six of them. And in addition, support a number of others through kind of corporate development type activities, and in some cases, operational activities. That's what makes the sort of transition so exciting, is you still get to do sort of your corporate development work, but you really get to do it across a number of different entities. And typically, there are multiple mandates involved.

6:41There's not typically one central corporate mandate, we're going to get out of this business line, we're going to get into this business line, there's typically more of an opportunistic bent and frankly, the ability to move a bit more nimbly and more quickly. The joke around corporate development, especially for larger corporations and both of the ones that I work for, Fortune 500, it's like steering a battleship. Getting it to turn, getting it to shift the strategy is a monumental task. It can take in many cases that four or five year period just to reorient the business, reorient the board towards a different approach.

7:15It's especially true for the two companies I worked for were 160 years old or something at the time I left. It's different. Whereas the place I work now, you have in many cases about probably about half of the companies, I should say, that we own were internally developed. So that means they were developed in the past four or five years. It's a very different kind of framework and approach. There's positives and negatives to both. But for somebody who wants to keep doing M &A, which was the goal that I had, the private equity role can be particularly rewarding because there's definitionally, there's always companies that need to be harvested or potentially opportunistic acquisitions to be made.

7:55I want to click into this, Joe, because so far I'm hearing when you're in corp dev role, large company, mature strategy, they're not going to change it up on a dime. And then when you're working in this PE environment, you're working across a portfolio of different companies that are at an earlier stage where you're involved and things are shaping and changing pretty quickly. Did I get the gist of that right? That's absolutely true. In some respects, it has to do as much with the size of the company and sort of the stage of development of the company that you work for. I suspect for the mega cap private equity firms, there probably is something more programmatic that may resemble the large corporate environment.

8:30But obviously, the firm I work for is on the smaller side, probably have about$9 billion of assets or so across the platform. There is definitely a much nimbler environment that you're working in. Can you contrast the day-to-day difference between being in that corporate development role and being in this PE role? I'm trying to get a sense of, are you more of an advisor to these companies and you're just telling people what to do? Or what does the day-to-day actually look like between the two different roles? Yeah, sure. Absolutely. I would say that a huge contrast, and this kind of goes into what you as the kind of corporate development professional, sort of private equity professional actually does on a day-to-day basis.

9:08When you're in corporate, especially a larger corporate environment, you typically have a lot of resources available to you. You've got shared services. And especially in those environments, the shared services professionals, those guys, they want to work on M &A, right? They might spend their whole day on HR or IT. M &A is fun. M &A is sexy. So when I remember we developed a really good cadre of professionals internally at both of the previous organizations I worked at, you'd say, hey, we've got another deal coming up. They were always excited to work on it because even though they're doing it off the side of their desk, even though it wasn't necessarily part of their day job, that was really exciting for them.

9:43It changed up the typical day-to-day for them. The difference is in private equity, especially a firm where you have disparate businesses that may not necessarily have linkages to each other, your shared services doesn't tend to be as robust. So you tend to be, your efforts, your attention are required a lot more as a corporate development professional to kind of help out operationally. Someone needs help with a particular, let's say, HR issue, employee matter. You are typically the person who is connecting a handful of HR professionals you might have at corporate who have the subject matter expertise with perhaps the one HR professional.

10:18Because these are small companies. These are growing companies. They don't have a sort of an HR department. They have one person. As the, let's call it the intermediary, you are making those connections, right? You're spending a lot more time handholding, for lack of a better term, to connect resources at your portfolio companies with whatever resources you might have internally. And in some cases, you may not have that resource internally. And therefore, you're not going to have the resource internally, you might have to go externally. That's also something that's particularly important, right?

10:48You might go to an external advisor. It sounds like a lot of program development, you're essentially scaling across multiple companies? These are companies, especially, we tend to be sort of an earlier stage investor or sort of someone who's developing companies from scratch. So as a result, there's always more development that has to happen, right? You're not going to be building out just because the businesses can't support the cost. You're not going to be building out full HR departments, full IT departments, full accounting teams. You're going to be leveraging some shared services, but often there is still a lot more coordination that's required.

11:20So it's probably a matter of scale more than anything else. If I had to guess, the mega cap private equity firms probably have some level of shared services provision that's equivalent to what you might see at a Fortune 500. But certainly, it's not going to be the case for most of the mid cap and smaller cap. If I'm the P firm, right, I'm looking to bring in these partners such as yourself. I'm going to look at this space and the ecosystem and probably first look at the operators. folks that got a track record of running a company in a C-suite and growing it. How do you position yourself as a corporate development background to have a competitive advantage when you're seeking these kinds of opportunities?

11:59So you're talking about from seeking sort of employment opportunities. Yeah. Myself as a P firm, I'm like, why am I taking Joe up over the CEO in the space that senior tenure or whatnot? First of all, the skill set, kind of the technical skill set is just so similar. You might have different return hurdles in corporate versus in private equity. You might have different sort of investment time horizons. You frankly might have different criteria as to why you're buying a company, why you're investing in a particular company. But at the end of the day, that's just different formulas in Excel. The core skillset really is the same.

12:30And the ability to speak intelligently about transactions, it's a skill that's relevant across. And so I would say that if you have the technicals down, you have a tremendous opportunity to make that transition. Sometimes there is sort of a bias against professionals or coming from the corporate world, often because you are using external advisors, for example, on the banking side. We, a PI craft at Guardian, you acquire a large business, you sell a business, you're using investment bankers. The bias is, well, it's the investment bankers who are doing the work. That's not often the case, especially when you are the one who is presenting to your board or to your key constituencies, demonstrating that you have that core skillset, which frankly you learn in your days as a baby investment banker.

13:16I think fundamentally that carries you through a lot of this transition. The other thing that frankly is important when you are a corporate development professional is Rolodex development. Your relationships when you're in corporate are very critical for bringing those over to private equity because the key in private equity is making sure that you are in the flow, right? Everything else that's going on in the marketplace in your particular industry. I was fortunate at both Guardian and TIA. These are large companies. Wall Street wants to cover them. Wall Street sees a lot of fee opportunity covering those places.

13:49And so I developed relationships with people from the bulge bracket investment banks all the way down to the real boutiques and have carried those relationships with me. That's fortunate because it's enabled me to see all the relevant kind of industry deal flow throughout my transition from corporate to private equity. My joke is I've gotten a lot of investment bankers paid really well over the years. It's nice when they can return the favor. Often, especially at a smaller, perhaps lesser well-known sort of investment firm, you may not be covered by the street. But if you're bringing those existing relationships, then you have a tremendous leg up.

14:24We recently announced a transaction at 777 where the banker who was on that transaction was someone who I had been in talks with about different opportunities. Frankly, I think going back to my TI at Cref days and had never worked on a deal with them, just that continued discussion. And they were sell side on a recent opportunity, knew that we were interested because when I first joined 777, I let them know what our mandate was. And sure enough, we were on their buyer list and ended up winning the auction. Maintaining that Rolodex and cultivating that almost as if you are still a banker is pretty critical.

15:02I remember in another case, when I was an investment banker, someone who I was across the table from and had always had a good relationship with on a particular transaction. We knew each other from 2009. He ended up being our advisor at Guardian in 2021. It's a really long sales cycle, but it's important because bankers know that. So maintaining those relationships in order to stay in the market, in the know, is pretty critical. The big differentiators that you position yourself around is the technical deal skills and relationships that you have. Those deal skills, I just have a note here that says something about efficient frontier concept.

15:36Do you have any idea what we're talking about on that? I was talking about the efficient frontier in the context of M &A in corporate versus in private equity. There is this dichotomy and I can go into that, right? Because your traditional concept of efficient frontier really relates to optimizing your investment portfolio return for a particular level of risk. I was using the term to describe optimizing your M &A returns relative to the intangibles that are very difficult to measure with the XIRR formula in Excel. You talk about why M &A fails, and I think that you hear statistics, two-thirds of all M &A deals actually fail.

16:12We don't tend to speak of economic losses in the first instance. When we talk about M &A deals, sure, we talk about a business perhaps underperformed. But if you think about it, really, that's not why it failed. It failed because of culture. It failed because of what I'd call the soft factors. It's how did the integration go? What was integrated? What was housed locally? What kind of treatment or incentives did the management team get? What kind of oversight and governance was the target subject to? Was it an overbearing corporate parent versus one that was hands-off? Those issues tend not to be in focus as much for financial buyers of businesses in the way that they are for strategic buyers.

16:50So I think that as a corporate development professional, interestingly enough, you are looking much more at that efficient frontier, optimizing return for sort of the amount of intangibles because you have typically a lower return hurdle when you are looking at deals in the corporate side than you do in the private equity side. You can sacrifice a few points of IRR in order to, quote unquote, get the deal right. I'll give you an example. Typically, when you're doing a deal, you're buying people, right? The management team, the employees, very important, right? And how they're treated is very important, how they feel in an environment.

17:26When you're in the middle of negotiating the transaction, you're often typically negotiating employment agreements for at least the key professionals. You have to think, even if you are able to complete the transaction, you have to think about how do those employees feel when you are negotiating really aggressively with them on their employment agreement? Is that approach necessarily going to be conducive to a long-term beneficial relationship? You do get the deal done, but if you've really put the screws to this particular management team and given them employment agreements that they may feel like are onerous or unfair or off market, but they agreed to it because they felt they had to, as opposed to sort of holding their hand, bringing them along, making them feel like they're going to be valued members of this new organization you're acquiring.

18:09That's just one example of, yeah, sure, you might have been able to extract more IRR because you are, let's say, paying them less or giving them less in the way of sort of future equity optionality, but at what cost? At what cost to the overall, those sort of soft factors? Yes, you can get away with that probably as a financial buyer. If your hold period, for example, is three to five years, you can't get away with that as much in corporate. And I just might make the distinction because while I do work for a private equity firm, because we are structured as a holding company, we have really partners capital at play and not limited partners capital that we have to return after a certain period of time.

18:46We do have a little more flexibility in how we can approach it. And to go back to that recent acquisition that I was discussing that we just announced, that's a deal where we looked at that company and said, this is going to be the centerpiece of our strategy going forward, full stop. As many private investment firms are looking at now, we're transitioning to a bit of an insurance funding model or using the insurance balance sheet to help fund sort of other activities in a capital efficient way. We see that business as a critical strategic component for us, not as something we're going to flip in a few years.

19:20So I've seen that kind of from both sides, both obviously in corporate and private equity, but also even within this private equity environment where it's not a flip. And it was really important for us to make sure that the management team in this case felt valued because we want them around for a while. They've grown the business to a place where we wanted to buy it. In that case, why wouldn't you treat the management team with respect? Even within the private equity realm, you can certainly see things as more strategic than financial. And maybe I'm seeing that more than most because of the way that insurance is transforming the alternative asset management world today.

19:58Probably a different M &A science topic. You bring a strategic mindset to the table. Absolutely. Are you happier in private equity than in CorpDiff? I don't know that happier would be the right term. I think I'm always happy when I'm working on deals. You can be unhappy in both environments if there isn't a whole lot to do. And that can certainly happen in corporate. I might maybe say something a little controversial here. If you look at corporate, one challenge that can arise is that you may at times feel like politics is far more involved in the decision-making process than, let's say, meritocracy.

20:33And that can be true for transactions. It can be true for sort of HR matters. But especially Fortune 500 America, you tend to see a little bit more of that. As a result, that can probably stifle or slow your sort of deal activity. You've got programmatic M &A organizations out there, one in particular in and around MySpace that I think would get very high marks. And I've been across the table from them and they're great as UnitedHealthcare. They're programmatic about their approach. I don't know that they have a lot of downtime. They have basically what looks like a mini investment bank within their business because they have such a large corporate development team.

21:10I hold them in very high regard. But I think there are corporates out there who probably will let M &A or corporate development or other types of activities lie fallow, which if you look at a lot of the reports from the consulting firms out there is really something that you should never do. You should always be thinking about how you can transform your business. When that happens, not just not good for business, it's also not good for the employees who are there wanting to do deals because that's why we're here. That's sort of our raise on debt. When you're working on transactions in this type of role and with this type of background, that's when you're happiest.

21:41Fair enough. That was actually a softball question because what I really wanted to know is if you make more money in the private equity environment than in corporate development. Typically, private equity environments give you the opportunity for more upside. And I would say that's true both of private equity itself and private equity backed entities. So if you end up going and working for a business that is run by his own managed by a private equity firm that has an exit opportunity, where you're really earning your keep is in that carry, but it's not always carry, whether it's phantom equity, a profits interest, things like that.

22:16Typically, you have greater upside for that in private equity than you do in corporate. I suspect that's not true, frankly, for some of these tech companies that have seen their share prices appreciate. And we're just giving out shares in lieu of kind of cash compensation over the last decade or so. And we've made people fabulously wealthy just as employees of those companies. But obviously, in my sector and sort of financial services sector, where you tend to have companies that are more mature and they tend to be more oriented towards base bonus, maybe some sort of profits interest to try to match a little bit where people are coming from, which is typically the investment banking world, you tend to just have a bit more of a cap upside in the corporate world than you do in private equity.

22:57In private equity, if you can, let's, for example, let's say you can attach to a deal where you did a deal, you work it through that three to five to seven-year hold period and participate in its exit. If you've gotten points, quote unquote, on that deal, that's where the real kind of upside takes place because the capital appreciation has happened, It's purely a capital appreciation game. But from a cash compensation perspective, you tend to find things are largely equivalent, especially at the more senior levels. It really, your delta in the upside tends to be more around that carry profits interest type of thing that is, again, more commonly distributed in private equity.

23:36So that's the upside is being able to capture some of that carry and profit interest. Can you teach me how to negotiate that? If I was in all these roles, obviously they put an offer out. We got a lot of folks here that may be in that position here soon. Typically, what you'd want to do in that case is you'd want to obviously in your employment agreement, you'd want to see and begin when somebody is looking at... Now, are you talking about a case where you are already owned by a private equity room or where you are about to be acquired by one? Oh, I was thinking if I'm going to go sign up for your role, I want to be the next successor for your role.

24:06Teach me what you learned and how to negotiate. The thing is, this is new to me. So I learned from you and say, hey, where do I negotiate? Is there a certain range on carry that I should be negotiating? Is it per portco? What does this look like? Is it overall for the fund? I would say that in general, you take a lot more ownership of your portfolio companies, the thing that you're responsible for in private equity, because it's, again, typically a leaner environment. You have just a lot more direct access and influence to success or failure. Ultimately, there's a management team and there's macroeconomic factors that can be at play, but you have a lot more direct access to those returns.