Why ‘smoke and mirrors’ won’t cut it during fundraising

0:00I'm Madeline Farman, editor of PEI Secondaries Investor. Our integrated platform brings data, analysis and market intelligence together in one place, so you can price with confidence and know exactly who's moving in the market. And our data integrations bring that intelligence straight into your own systems. Find out more at pei-secondariesinvestor.com.

0:29So often when private equities, big players meet, it's behind closed doors. These are the meetings that make or break investing relationships where contentious issues are hashed out between huge institutional LPs and the GPs hoping to secure their allocations. Ultimately, this is where billion dollar decisions are made. I'm Chris Wachowski, global editor of investor intelligence with PEI group. And in this new mini series, we'll be bringing these vital LP-GP conversations out into the open, getting both sides' perspectives on everything from the megatrends reshaping how the industry works, like the rise of continuation vehicles and the distributions drought, right down to the fine details of LPA negotiations.

1:09Welcome to Commitment Issues from PEI Group.

1:15In each episode of this series, we'll be pairing up an LP and a GP and inviting them to sit across the table from each other for a frank and honest discussion about some of the big issues facing the private equity industry. The topic on the table today is a perennial favorite, fundraising and the challenges and opportunities that come with the tougher environment. It's perhaps the biggest issue in private equity today. Fundraising continues to be muted even though by the numbers totals look strong. The key is to look at the number of actual funds being closed and the number of funds trying to raise money.

1:50While private equity funds raised about$308 billion as of June 30th, up 9 % from the year before, fund closings declined 9 % from the prior year and marked the lowest number for the first half since 2022. Data suggests that only a handful of funds are actually attracting most of the capital from LPs, leaving everyone else to fight for the scraps. So how are LPs approaching both new relationships and new funds as well as re-ups and how are GPs finding ways to win commitments. Let's start by meeting today's LP. Hi, I'm Young Lee. I've been at Abbott Capital for a number of years. Abbott's been around for 40 and is a manager that invests in funds like Ridgemont but also Venture and other bio firms in the US and Europe.

2:38Thanks, Young. And let's meet the GP he'll be talking with? I'm Jack Purcell, one of the managing partners at a middle market private equity firm called Ridgemont Equity Partners based in Charlotte and been in the group for about 25 years. And Ridgemont recently closed its latest flagship? We did. We did. About a year ago, we closed on Fund 5, which was about a$4 billion pool of capital. It's Fund 5 under the Ridgemont moniker. Although if you actually look at the firm's 33-year history, we spent 17 years inside of Bank of America, spun our business out in 2010 and have raised five successive funds since then.

3:18So we closed on our most recent fund right in the fall of last year. Largest fund to date? It is, yes. Thanks to the support of many LPs, including Young and his team at Abbott, we were able to get in and out of the market with relative ease on a quick timeline and raised just about$4 billion, which is the largest pool of capital we've raised to date. And I want to get into the meat of the fundraising environment, but just a couple of questions on this. At that size, does that change anything about what you do? How do you kind of adjust to? Yeah, strategy-wise, it really doesn't. One thing that we've been focused on as a partnership is really staying in this segment of the middle market where we feel like we have a real competitive advantage.

3:59If you look at the constitution of our investor base, our partnership is actually, if not the largest investor, a top two or three investor in any one fund. And that alignment sort of ensures that we stay in this little sandbox where we think we have a competitive advantage. The size companies we invest in, very similar to the two preceding funds. And so it's really a continuation of the strategy that we've honed for the last 10 or 15 years. So when it comes to fund size, how does an LP think about fund size? almost always a bigger fund size is bad. That's just how hell pays think about it. We would love the same thing every time, people still being happy, even though there's making the same amount of money.

4:42We know it's not reasonable. But what we're looking for really is, are they staying in their strategy? So, even if they're raising more, are they moving up market? So, some firms will not do more deals. They will do the same 10 deals, but will claim that they have to do double the size. That is harder for us because we think that they're moving into a different part of the market where they have to source differently, but maybe also their toolkit from before doesn't apply. Like some small businesses, what's lesson 101 from private equity? Hire a CFO. Don't do QuickBooks anymore. Well, at a certain size, somebody's already done that.

5:19So, now your old toolkit doesn't apply. So, that's how we think about it. We prefer smaller increases if possible. We understand and recognize when certain partners have made their marks, the individual partners, and we'll give them credit for it. But in general, it's just harder to underwrite when the sizes go up more and more and exponentially. Is there kind of a percentage size increase that is a threshold or is it just case by case? We were just joking about this. There's a couple of ways to think about it. One is the GPs who are successful often enough are raising 100 % of their prior fund size, meaning a double.

5:58That's a sign of strength. GPs who can only raise 25 % or 50 % might have more questions like why? Why aren't they raising more? Why aren't investors interested? Now, maybe they're raising 25 % more and they're three times oversubscribed. That's from the GP perspective. From the LP perspective, we think of it more like how is it going to change our next investment. We underwrote X last time. If they raise 100%, that's probably going to change part of our thesis. If they raise 30 % next time, well, that's probably not much of a change, right? And so, there's no hard number and it depends on the size of the team and the strategy too.

6:33If you're super operationally involved, then how are you going to double the fund size with the same team? You're just going to go hire a bunch of experts. Well, how do we know they're good, right? If your strategy was just picking stocks, it's the dirty secret, but you can kind of scale easier, right? Because you're not operationally involved. You don't need more people. So there's different ways that we think about it. Chris, two things I'd add. I totally agree with Young's point. I do think some level of growth is a sign of progress, not only communicating progress and the vibrancy of the partnership externally to investors and other counterparties, but also internally to the next generation of talent that's coming up in an organization.

7:13So I think some judicious growth is a good thing for managers. The second thing is this business has, you know, scale matters and the ability to have a critical mass of assets under management and fee income to invest in all the things required to generate really strong returns over time. I do think that benefits scale players. We've certainly enjoyed that as a firm. When we started the business in 2010, there were about 13 of us. And today we have a team of almost 75 all in Charlotte. And the growth of our fund size is the growth of AUM. That's enabled that ability to invest in incremental headcount, incremental capabilities that ultimately adds value and hopefully drives better returns within our portfolio.

8:00So growth, while it's a hot topic for sure, every time we go out and raise and what should be on the target, where does the hard cap get set? And there's a lot of conversations with investor partners like Young over what's the right balance of growth versus moderation. I do think this growth is a strong internal and external signal of partnership vibrancy. I do think that's a real element. Yeah. No, I agree with Jack on the fact that if you don't grow, you might lose partners. And that's the last thing you want as a limited partner. There is one tweak. Of course, we're on different sides of the table quite literally here.

8:34But one thing that we think about is the scale definitely helps GPs, right? Like small GPs cannot afford to go higher a million-dollar AI expert times five, right? They just have to figure it out on their own. Larger GPs or people who have been successful have the means to do it. However, we have, I don't know, 50 years more of financial returns that would show you lower mid-market, which is where we focus, and the mid-market, the returns are much more volatile. You can get much more upside, you can lose, but there's much more of a spread. The law of large numbers, larger funds, they are just more banded in terms of the returns.

9:14So no matter what resources the GPs are throwing at these companies, some of the companies are already baked. They only can get a 3x out of it. And sometimes they need the extra resources to get back to the returns that they were getting previously, but at scale. Now, as LPs, we'll take that 3X as they scale. We love that. But there is a little bit of a nuance between, well, you're not going to get better returns than you had when you were a 500 million dollar fund. We don't see that often. Okay. And how does that play into today's market where we've had interest rate fluctuations, long gone are the days of the zero interest rate or very low interest rates.

9:54How does that idea play into what you're talking about now that it seems like operational improvements is really where you're going to find potential alpha? I think a lot of LPs focus a lot on the operation side and often value the partners who have operating experience. They were CEOs somewhere. In our history, we've seen both types succeed and fail. Some of the operators are terrible investors. They get over their skis or over optimistic on certain businesses that they feel like they know better. And or they will sit on the CEO's shoulder as if they were the CEO and will not let that CEO operate.

10:34And some firms or individuals at firms have quite literally failed. Like they have not done well, even as operators. Now, of course, we want operational help, like from the best people. But from our vantage, point, some of it is smoke and mirrors. Like we feel like some GPs hire and put them out, but they're not, either they're not effective people or they're not using them effectively. And so, we think that there's a mix. It's not just about operations. Yes, no more ZERP, but that doesn't mean per se that the operations are going to fill the gap there because they have to hire the right people and use them correctly.

11:11That's really hard for LPs to figure out which ones are smoke and mirrors and which ones are real. I think it's a fascinating topic you're picking at, Chris. And to me, it's sort of the topic when you think about where the asset class is going. If you think about the 2010 through, let's call it 2023 period, and if you could just sort of close your eyes and resect that six months around COVID for a second, right? That 13-year run was characterized by low inflation, low rates, very consistent plus two to 3 % US GDP, positive job prints month after month. And in hindsight, that was sort of the Goldilocks period, right?

11:50In terms of you just had this massive tailwind. And you think about where we are today, high on persistent inflation, much higher rates, right? The 10 years sitting at 4.8 % today, if you go back to early 2022, it's 1.75%. That's a huge change, right? Even to say it out loud, it's sort of almost, it's just shocking in some respects, but the environment's different. And so So there's this fundamental math problem when you invest and you run a basic buyout model or a buyout strategy like we're running as a firm where the wall you're climbing is just steeper. And the tools required in order to scale that wall in a safe way and at a reasonable speed are more demanding now than they've been in the past.

12:36And I think that's why this environment for our firm, it's one where firms that have have been around for 30 years like we have, and you've sort of seen these different seasons, whether it's the tech bubble bursting in the late 90s, the GFC, COVID. I think this concept of, you know, being an all-weather investor and having seen cycles like this before and understanding what tools to apply and what tools not to apply, I do think five or 10 years from now, sort of how those skills are applied, that will differentiate between the firms that emerge stronger from this or succumb to what, at least at a macro level or headwinds that we haven't seen in the preceding 10 or 15 years.

13:17Jack brings up a great point, like the market environment changed and the exit market changed too. We know a very large buyout shop that Jack and I know very well, where the junior partners thought they were still in the ZERP period, the zero inflation rate, and we're still trying to get three and a half X at exit. The senior partners came and said, guys, we're in a totally different environment. Also, there are fewer transactions right now. If we can get two and a half X, get out." And the junior guys are like, why would I do that? I'm just going to hold longer. Well, there's a math problem as Jack points out.

13:48We have to return capital at some point and that IRR degrades even if you hold it, right? But that framework has to reset and I think it has for some but as you can see in the market, the exit market is not fully liquid. People are still holding on to the exit because they're hoping to get back to some multiple that they had previously and don't know if it's coming back today. Touching on to Young's point about kind of facing the reality of the market and maybe choosing to take a lower return than maybe the initial kind of model or the initial hope. And have you guys had to deal with that kind of thing to decide we're going to just take this return?

14:26It's a good return. It's not what we were thinking of, but we're taking it. We have. Yes, we definitely have. And particularly in the last six or nine months, we've had a few exits where particularly if you ask our sector teams that are on point on these investments, there may have been a twinkle in their eye where, gosh, I thought this could be a three and a quarter times our money outcome. And if you can realize it at two and a half or two and three quarters, and it fits within the portfolio, trying to generate really strong returns at the portfolio level, that's a smart decision. And that's where I do think firms that have matured in terms of their governance structure, how the business is run, not individual sector teams, just thinking about their company, just thinking about the right time for them to sell their one business.

15:10And really at the investment committee or management committee level, thinking about, okay, we are going to self-identify this investment as a runner and we need multiple out of this one. We need three to five X for sure. And we're not going to sell it a penny short, But these two or three over here, these are actually great DPI IRR candidates. And back to the way we think about portfolio construction, when you have 15 to 20 companies in the fund, you actually have degrees of freedom in terms of self-identifying, okay, this portfolio company is serving this role in the portfolio. And so sure, maybe it's a little bit short of what we thought, but if it's one that we've identified as earlier than planned exit prospect, taking it off the table is often a smart decision.

15:55And we have done some of that, particularly in the last six or nine months. And I can't tell you how many private equity managers don't think about the fund. They only think, hey, I did great on this 5X deal. Like, that's wonderful. What about the rest of the portfolio? Or how about the 20 % you didn't invest? You only invested 80 % of the fund. Like, that doesn't help me as an investor. We were talking, I'm stealing your thunder, but they want to return money before raising money, right? Like sometimes LPs don't have money unless you give it back to us. Mostly the case, not true, but we want to see it back in our pockets before you come and ask for more.

16:30Not just because we want to see it, but because we have mouths to pay. We have obligations to fulfill, right? We've had the benefit of 100 plus percent net dollar re-up from investor partners since we started this business. And so we've had incredibly consistent long-term partnerships with our investor partners, including our LPAC members. And we've been coached over time. We've been given guidance over time on how to think about these topics, because many of them aren't, they're not necessarily intuitive. For folks that just want to be really smart and true to investors and generate good returns, the notion of sort of how to build your business in a thoughtful way, not just make good investments in a thoughtful way, there's nuance around that.

17:12And so we very much have benefited from the coaching and guidance of a lot of really high quality blue chip LPs over time that have made us in tune to some of the topics that we're talking about now. For 17 years, we worked for one LP. It was Bank of America straight off the bank's balance sheet. And so this notion of raising capital on behalf of institutional LPs was completely foreign to us. And if you look at our investor partner roster up until about fund four, it was largely North American based, largely US centric. And in particular, in this last fund five fundraise, which we wrapped up last summer, last fall, we really expanded the aperture of our LP base so that it is truly global in nature today.

17:56And that was one of our strategic goals as we thought about building the business over time. Do you like to see that? Do you like to see sort of an LP base diversify in managers that you guys are also growing with? Um, that's not as much of a issue or thought process for us. I know some groups of investors will follow on, right? So, if you get one cornerstone, then you'll get like five others. We don't have that kind of recognition. The only way we really look at it is there are certain LPs that only need a minimum return, like an 8 % or something. And when we see a bunch of them coming in, we look at the returns like, oh, these returns have come down.

18:40And that's why a bunch of these investors have come in because they see steady state. They don't need upside. A lot of LPs don't get paid for upside. They only can get fired. So, that could actually be a reverse signal without mentioning which types of investors, but the ones that just have a fixed level, you just have to have X percent and you're good. You're not going to get upside, but you will get fired if you take a risk, right? So that's strange, but there is a signal effect there. That's interesting. And Young, I'd be interested in your perspective on this, but just thinking about the point of marks and where assets are valued.

19:17It's a really tricky time period. I think this part of the reason that kind of DPI is the new IRR is because cash doesn't lie. Like what you got in a cash return, it is a number. There's no weird accounting methodology that you can come up with. It's how How many dollars did I get back relative to the dollars that I put in? And one of the things we're spending a lot of time talking about as a firm is just when we mark our portfolio, we want to be, and I'll put a little bit of data behind this comment, but we want to make sure we're not out over our skis because that's a credibility gap that I think is really hard to overcome with investor partners.

19:53I would much rather explain why we were 30 % or 40 % undermarked in terms of the profit sitting in our P &L in a given quarter before an exit occurs, then 10 % or 20 % overmarked. And so it's going to be fascinating to see over the next three to five years as a lot of these higher valuation assets that were put in the ground in a very different rate environment, very different inflation environment, when those assets are ultimately realized, it'll be fascinating to see what those realizations look like relative to the marks. I don't know if you have any perspective on that. You're absolutely right.

20:27No, I mean, we've seen, it's probably on the growth side, we've seen some managers hold on to their 2021 marks. Like what? There have been new comps since then guys not worth that. But Jack and I, he knows because I'm the lone voice of the LPAC. It is true. If you overstate and then have to pull it back, a 6X going to a 5X is a disappointment instead of a celebration. And now people are like, wait, what's going on with the rest of the portfolio? However, Abbott believes that you can be conservative without being two standard deviations too conservative. I knew that was coming. Be one standard deviation conservative.

21:03Get us close to the mark. So, cause we need to know what's happening real time in our portfolios, not some random sandbag mark. So we agree, be conservative, but not two standard deviations away. And most GPs are conservative with marks, right? I mean. Yeah. And the data, the data that we've seen is that something like 25 % of the dollar weighted premium or gain is not reflected in financial statements two quarters prior to exit. The slight jab under the table that Young was giving me is that if you look at our data set over time, we've had as high as 45 % of the dollar weighted gain has not existed in our financial statements two quarters prior to exit.

21:42So I do think it's a good push about being closer to market valuation, but I'd certainly rather be under the line than over the line. We both agree on that. Yes, we agree on that. I will say, go back to fundraising because this is what it's about. Not Jack's firm because they've evolved over time, but there are firms that are incredibly conservative, like what Jack's firm used to be, 45 % off or whatever. And when it comes to fundraise time, it's too late. You can't change your marks then. You can't change your methodology then. And now people are looking at something that's half the value that you're saying it is, but it's in the books.

22:16So which one, do we take your word or do we take this financials that is audited, right? That can hurt materially in a fundraise process. And people don't recognize it until it's too late and they can't raise. And with the LP base that kind of stable and growing, how have you guys approached kind of secondary sales? Like, have you had LPs that are looking to sell out for whatever reason? And what's your view on that? And you've seen that over time, obviously. Yeah, we've had a few, a very limited number. I can count them, Chris, on one hand over the years. And I don't know if this is the right approach to this or not.

22:50But back to this point about, you know, relationships are long. And if an investor partner of ours has a need, a liquidity need that has nothing to do with our firm or our performance, we view it as our job to help them achieve their objective. And if our job is to talk about the quality of our portfolio, the quality of our team, what the exit prospects looks like for that pool, even if we disagree that, hey, it really is not the smartest thing to sell out of this position right now, we view it as our job to be a cooperative partner. And the irony, I guess, of that approach is that we've actually met some new institutional investor partners by facilitating all that.

23:34And so in sort of an odd way, it's been a nice way for us to expand our group of investor partners while helping those that have supported us in the past achieve their objectives for whatever reason. And does the firm have kind of a restrictive list of approved buyers or, you know, at least a... Abbott's number one on that. That's right. Happy to price. Restricted? To restrict the list and put added in there. Oh, there you go. The buyer list. The approved buyer list. Approved buyer list. Right, right. Not the restricted list. Not the restricted list. Exactly. Right, right. No, we really don't.

24:07We've only dealt with it three or four times. And we have not, we've tried not to be dogmatic in our thinking about who can come in and who can't. And we've got enough diversity in our investor partner roster that no one individual sort of trading out their position to someone that, you know, might not be the best partner long term. That's not going to impact our business in any material way. And so we haven't we haven't been rigid in our thinking around any of that. Do you find that that's an opportunity on the LP side, especially nowadays with LPs who may be looking to rebalance or whatever it is, that there is an opportunity through secondary sales like that to get into managers or get more exposure to managers you might like?

24:51Maybe 10, 15 years ago, that was a play because some people like Jack had$6 billion of demand for$4 billion, could not get in. And so they might make a less financially oriented decision and a more strategic decision to try to get in. We have separate pools of capital. So we have a primary pool and a secondary pool. Our secondary is completely financially oriented. We will not mingle or mix it too. We never have. We never had to use that access. But we do know some players will. It's more so in venture when somebody's trying to get in. Now, generally Sequoia XL benchmark does not trade, so it doesn't really matter.

25:26But that's where we have seen it, where people are trying to get access. But these days, people don't use that as the tool anymore because the secondary market is so large and there's so many options. And financially, you can do better than doing something for access. Do you look to add new names to your roster each year? Yeah. So we have a few different sleeves. We do venture capital and we have for 40 years. We do small buyouts, large buyouts, Europe and emerging managers. In each of those are several different sleeves because we have different types of clients who want different things. But take North American buyouts, largest pool of private equity in the world, most sophisticated pool of private equity.

26:07We generally pick somewhere between three to five, maybe six names a year, including our re-ups. That's different from most of the market. Most of the markets, there's like 300 opportunities. They're going to pick a percentage of that. We're picking a fraction. And that includes our re-ups. And that's why I said, for us, it doesn't matter if you're a re-up or a new investment, you're getting underwritten like you're a brand new investment. And Jack will say, come on, man, you know us. How many references and meanings do you need? We're like, well, things change. People get divorced. People become empty nesters.

26:39People have different life goals. And we still think it's a human game. We know that processes and systems are important, but Jack being in that seat, very important versus the next guy. Like we don't know as much, but we know this guy has produced in his career and we want to continue backing him. So we still think of it as you've got to back the people and people are the variable that you have to diligence. It's not necessarily a system. You have to know that, but that's table stakes. And the people, just to add on to what Young is saying, when I sort of think about that investor partner view and I think about what's the right way to run our partnership.

27:16We've spent a lot of time, particularly in the last decade, thinking about not only how to have a cadre of really good investors, but to have a team of really strong partners. And the architecture around how to create a really strong and durable and cohesive partnership, we've put a lot of effort into. When you look at our firm, about two thirds of the team are hard dollar investors in our fund. All two thirds of that team participate in one carry waterfall. When the fund does well, everyone on the team does well. It's not like our healthcare partner has a spiff in the healthcare deals and doesn't really care about the industrial deals.

27:55It's a one team, one firm comp system mentality. Our management company is a hundred percent owned by the leadership team. Every partner at the firm is an owner of our management company. And we think sort of that plumbing, that architecture optimizes for, okay, how do we find the right team that wants to stay on the Ridgemont partnership for their career and ultimately give confidence to investors like Young that they are dedicated to the platform. They're dedicated to sort of perfecting their craft in a Ridgemont jersey and staying with the partnership over a really long period of time. And I think that when I think about our fundraise and the success, particularly last year, the most discerning investor partners Abbott included really hone in on that part of kind of partnership diligence.

28:43They get through all the math and, you know, your top quartile and your DPI is great. And, you know, these three sectors, congrats. But when they really get down to the partnership diligence, that's where I think our firm has put a lot of effort into trying to build a world-class private equity firm. That's really interesting. We've seen in this environment, I'm sure you've seen over the years, that people moving around seems to be more of an issue than ever these days, probably because of the market dynamics and things we've talked about, inability to kind of raise the next fund, things like that.

29:15We've seen people shifting all over the place. And I imagine that is a big part of what you guys are encountering on the LP side. And that's why we do so much diligence on the people. Because if Ridgemont hasn't had this issue, but if Ridgemont had a star investor who left, like if you weren't tracking that person, you didn't know which deals that person actually had led or whatnot, somebody later might revisit that press release and say, no, I was the head of that deal. I did this. And they're like, no, I know Jack was involved in that deal. You know, like you have to know the history in order to believe the new person's pitch on their new fund.

29:56Very hard to do because it's private equity for a reason. Not all the information is out there and you have to be able to have the networks to corroborate what this new person is saying. But there's a lot of movement because there are firms that are not doing that well. They're in the second or third quartile and there are good investors within that but are being dragged down by several other partners. Again, human person by person business. So if that person spins out, it's kind of a good thing, right? There's good turnover and bad turnover. That's bad for the firm, but very good for new investors who are like, that firm's not that good, but this person can be very, very good and has been historically.

30:36And that's what we're looking for. And other investors are looking for when they look for these newer emerging funds. LPs are also moving around way more than when I started in the business. Before it used to be someone had to die or retire for you to get a job. I remember because I was sending out resumes and I'm like, nobody is hiring, right? Today, there's a lot of movement in the LP and that can be very good in some sort because you basically double up an investor as a GP, right? That person leaves, goes to another firm. Now you got the existing investor and where that person left to. There is a downside though.

31:10If the person leaves, new CIO comes in. Usually a new CIO wants to make a mark on the business. old stuff's not mine, new stuff, and they might wash you out. So there is puts and takes there, but largely speaking, I think it's more positive when LPs move around, but I'm not, I don't know, largely. I think so too. I totally agree with that. And back to the point you were asking about earlier, Chris, with, you know, helping facilitate secondary trades if they need to happen within your book. I think having that mental mindset, there is fluidity amongst the teams with institutional investor partners and trying to be smart about, you know, helping someone out in their current role today because tomorrow they may end up in a different spot and be a partner with you in a totally different fund or transaction.

31:53And so I think taking that long view and recognizing that there is some level of turnover and fluidity, I think that's just a smart way to approach the relationship side of it. That's such an interesting point. And I know we're getting tight here on time. So just a couple more points. This idea of a firm that has some form of a succession idea, you know, as part of the firm, whether it's a formalized plan or whether they're thinking about it, they talk to you about it. Do you look for that in your partners and your GP partners? And do you find that they are doing it? Yeah. So, and you should definitely speak to this because you've had transitions too.

32:29I'll speak from Abbott's point of view first. Abbott's on our fourth generation already. Like a lot of private equity firms don't survive one transition. We've had multiple partners buy through or take over the firm. And part of that is kudos to the founders for setting it up this way. Kudos to the generations who have abided by that. But there has to be a formalized process. If it's willy-nilly and ad hoc each time, then any one generation can blow up the firm, right? It's been super helpful to have one systematic way for this to work and that people abide by that. We will say we always ask our GP partners about their succession plans.

33:14Maybe not when they're 40, but when they are a couple funds in or whatnot. We will not back people who have no succession plan, especially when they're older in age. I probably shouldn't say the age limit, but at a certain point, we've actually walked away from very strong investment firms, like people who have delivered 3X, 3X, 3X, but there's no succession. And they'll tell us, well, my father worked till he was 80 years old. Like that's not a succession plan. It's just, you're just going to hold chair for like another 20 years or 30 years. Like that's my, that's my idea. Right. So we actually have walked away from opportunities where we still think they will be successful as long as they're around, but we don't know how long that might be.

33:58And as we said, it's a human business, like health, illness, family issues impact at any time. But you've had this issue too. Totally. And Young's firm just celebrated their 40th anniversary of being in business. We celebrated in August our 33rd anniversary of being in business. So we're a little bit behind Young. But if I think about our partnership, we've had, depending on how you count it, sort of six or seven renditions of succession planning, which is sort of code for senior your partner's transitioning towards retirement. And the muscles you end up building around that, they grow to the benefit of the firm and the cohesiveness of the partnership in a way that's really powerful.

34:36And the first time or two, it's a little bit more ad hoc, tends to take a little bit more effort. There's often just a little bit more elbow grease required to get to a good spot. For our firm today, I totally agree with Young that it's now, it's a codified part of our partnership. And so not only for retiring partners to know what that glide path away from the business looks like, that's obviously important, but it's really important for newer partners to see that that glide path is established. There's an on-ramp and there's an off-ramp. Everyone adheres to it and it works. And it's a great topic.

35:15I'm glad we're getting into it. And it's one that I hope the industry, all the industry participants put a lot of time and effort into it because it, you know, it sneaks up on you quickly and you need to have a thoughtful, well architected plan. And it doesn't seem like this industry has been great at that. Well, we were talking, one investor told me a long time ago, when you hire sharks, what do you expect? They want to eat, right? And the big guy who founded the firm, he or she is probably also a shark who's holding all that economics for longer than they should. The other people want their shares or they're chomping.

35:55And so, I mean, this industry is like type A plus. I think that's one of the reasons it's been super hard. But there's also a corollary like you have to set it up right. But you can see in private equity firms, they don't always survive not only because of succession, but because the next set aren't as good. There's no guarantee that the next person under Jack is as good as Jack. Jack can deliver 3X. That person might be able to deliver 1.8X. Now, that's one of the hardest things for LPs. How do we know these great investors who aren't always the greatest managers can hire and manage and mentor the next generation well enough for this firm to do just as well as they did before?

36:37There's no guarantees in life for that. But I don't know if you were going to say something. No, I totally agree. And it's not just our industry, right? I mean, we see this in the mid-market companies that we buy that are founder-owned. Everyone's not batting a thousand in terms of their succession planning. And the amazing thing to me is that, back to Young's point, for an industry comprised of really competitive, really smart type A people who plan everything, plan their day, plan their hour, plan the minute, plan their family's affair, all this stuff, to not have a plan when you're thinking about the next chapter of your life and life after work, it's almost comical.

37:15And so I do hope all industry participants put as much time and energy into planning as a firm like Abbott has. So I guess final question, fundraising, private equity, things seem to be not for Ridgemont, but just when you talk about private equity these days, it seems like it's in kind of a down cycle right now. It's sort of negative views on where everything's going. So that's the question. Where is this all heading? And in the context of fundraising, maybe I'll start with Young, where do you see this in five years? Does this change? I mean, is it going to kind of consolidate down to a much smaller type industry?

37:58So a prospective client asked us this today, more so like, what's your theme today? What are you investing behind? What, you know, is it AI or are you doing healthcare more this year? Like, we see all the trends, but this is private equity. It takes 10, you're locked up for 10 years. Like, I can't tell you what's gonna happen two years, let alone five years when the exit happens and 10 years when the fun wraps up, right? Abbott's always preached, be consistent in how much you invest. It's kind of like what Jack was saying, invest over four years. That's what we really value, that vintage year experience because look at the quartile rankings.

38:37Sometimes the quartile matters more than the manager. Like the first quartile for great years can be like 25, 26%. First quartile for bad years can be like 17%. But those are both first core time. Like those are some of our best managers. They just can't beat the time period, right? And so, we would argue you invest the same amount every year. What happens to the industry? I think the number of managers or line items does generally consolidate, although there's these emerging managers coming up. If the high net worth or really the 401k market unlocks, then we're in a whole new ballgame. And I think it's super dangerous for a lot of retirees.

39:16Like you should not just throw money in, but if you could do it in a smart way or with an advisor that knows what they're doing, that's been in the space for a while, I would love to have my parents' money in the private equity markets because look at the last 20 years, even in down years, add that all up in any given like five-year period or 10-year period, like it provides alpha, provided you're in the first and second quartile of managers. If you're in a beta play of private equity, historically, you have underperformed the public markets. So I think it depends if that part of the market unlocks.

39:52The institutional side, probably more capital, but fewer line items because the economies are all doing well. So they all had to put money somewhere. What do you think? Well, I agree with you that the lights have been a little bit dimmer in the last couple years than they were in the preceding decade. I think part of that is just the relative performance to public equity returns. And the public equity returns have been exceptional, just exceptional. And so I think the benchmark, kind of the PME benchmark that private markets in general are up against, not only private equity, it's just been really tricky the last couple of years.

40:28That said, I'm personally just very optimistic about where things will go for the next decade. If you look at, all eyes are on the US in terms of alts. So you ask any institutional investor around the globe, what's the number one place they want to put their money? Everyone says the US. Within the US, I think the mid-market is a really attractive place. That's where our business exclusively focuses. There are 50 ,000 private companies with between 50 million of revenue and a billion of revenue on an annual basis in the US today. And a very small fraction of those is owned by private equity or other institutional asset owners.

41:07So you have a lot of families, entrepreneurs. Many entrepreneurs are at that age stage of life where they might not have a succession plan. What do they do? And so I think just structurally, the setup in the US for mid-market private equity is really sound. And the number of opportunities that firms like ours are going to see is really attractive. I think one level down for us, we end up focusing on very what I'll call basic businesses. Like we buy, if you can't describe our portfolio companies in one half of one sentence and you don't understand what it is, we've bought the wrong business. Like these are basic businesses, service companies, distributors, three very basic end markets, healthcare, industrials, business services.

41:50And I think there's a resurgence in that part of the American economy, whether it's near shoring, closer to home. For the longest time, people talked about just in time inventory. Now everyone talks about just in case inventory and this notion of a manufacturing resurgence in the US. I do think a lot of that is going to benefit these more basic businesses. So as we think about this fresh pool of capital that Young and other investors have given us last year, as we look at our current pipeline, our team and our capabilities, I just think the outlook for the next five or 10 years is really encouraging.

42:26So we're excited about what we see, despite the fact that I totally agree with you, Chris, the lights have been a little bit dimmer than probably we all have wanted in the last year or two.

42:51There, you'll be able to explore our LP database, where you'll find the investment strategies and commitment data for more than 13 ,000 LPs. This episode was produced by James Sutton, Natalie Novakova, and Graham Kerr of PEI's Special Projects Group and edited by Eric Fish. I'm Chris Wachowski with PEI Group. Thanks for listening.

43:16Hello, it's Toby Michnell from PEI Group here, interrupting your podcast to tell you that the Responsible Investment Forum Europe returns to London on the 17th and 18th of November, bringing together over 600 institutional investors, fund managers and sustainability leaders from across private markets. Now in its 17th year, it's the place to hear what's actually working from turning sustainability into value creation to navigating shifting regulation and investor expectations across private equity, debt and infrastructure. Visit PEIEvents.com for more information about how you could sharpen your strategy and build the right connections in London this November.

43:55That's PEIEvents.com.