The New Rules of Value Creation in Private Equity

0:00Sean Mooney:This is Why We Like It, a quick dive into the industries capturing our attention in the lower middle market in the United States. We're asking the questions that unlock why and where we see value in the lower middle market. I'm Sam, and each episode I'll share why a sector stands out. We're going to bring in the voices who know it best, and we'll point to where we think the future's moving. Welcome to Why We Like It. Today, we're talking about something that sits right at the heart of private equity. It's value creation, and specifically how that plays out in the lower middle market. Roughly two-thirds of U.S.

0:41Sean Mooney:buyout transactions fall into this segment. These are businesses typically generating between$5 and$100 million in revenue. They're often founder-led, operationally lean, and increasingly central to how private equity firms generate returns. But over the past decade plus, outcomes have been supported by multiple expansions and leverage. It's a story we all know well, and the world's changing. Today, capital is more selective, valuations are staying firm in almost every sector, and performance really depends far more on operational improvement and revenue growth. Execution, it's not optional anymore.

1:28Sean Mooney:It's decisive. And it starts early. We get stuck in to value creation way before we do a deal at Access Holdings. And that's what makes today's guest particularly well-placed for this conversation. Sean Mooney, darling in here today from the Music City, Nashville, is a 20-year private equity veteran. He moved from being a PE partner to founding and leading Blue Wave. It's a platform we use and is now trusted by hundreds of top private equity firms and thousands of portfolio companies. Sean's widely regarded as a leader in business assessment and value creation. His reputation precedes him. I knew about Sean far before I had the opportunity to meet him in person.

2:18Sean Mooney:And he advises leadership teams across the full spectrum of the ecosystem. He's regularly featured in all the magazines and publications you guys read, Forbes, Institutional Investor, Inc. Magazine, Adweek, CFO Magazine, the list goes on. And Blue Wave, it's become a key part of the value creation infrastructure in private equity. They combine technology, data, AI, and human judgment, our judgment, to connect investors and portfolio companies with pre-vetted operators, consultants, and all the interim executives you'd imagine across DD and execution and getting ready for exit. At Access, we've always prided ourselves in being able to support the full spectrum of value creation in a really hands-on way with our portfolio companies and management teams.

3:12Sean Mooney:And a lot of the time, we rely, particularly where we've got a challenge, on Blue Wave. Sean's seen that value creation journey from every angle. And as an investor allocating capital, working on behalf of RLPs, and as an advisor working alongside leadership teams, and as a founder building that connective tissue between capital and execution, Sean and his team play a really fundamental role in this ecosystem. So with that, welcome to Why We Like It, Sean.

3:47Sam Tidswell-Norrish:Sam, thank you so much. That was a very kind introduction. It really is a privilege to be here with you today. And the respect is incredibly mutual for accessing what you are doing and doing kind of private equity, the innovative in the right way. So I really appreciate the opportunity to join you and have a discussion about some topics that are really fascinating in that matter.

4:09Sean Mooney:Firstly, thank you for being here, taking the time out of your diary. I always love our conversations. There's a real meeting of mind and values in the world of value creation. It's not easy. Today, we'll dive into some of the nuances around how the industry varies, how different firms approach value creation, what you guys do, and where the industry is going. And it's going. It's moving fast. But before we get to the future, we're going to talk a little bit about your background and the path that led you to working at this intersection where private equity operators and value creation interconnect.

4:46Sean Mooney:So tell us a little bit about the journey to get to here today?

4:50Sam Tidswell-Norrish:Yeah, I'm probably almost like an inverse story that's typical. And so the way I think about my background is I was an accidental private equity investor who ultimately listened to this siren call of this pursuit of what I think was ultimately meant to be my true destiny of becoming an entrepreneur. And it started for me growing up in an entrepreneurial family in Texas. And so my summers were spent working in manufacturing plants in Texas, in blistering heat with steel toe boots and hard helmets. And I think there was a plant level bonus for whomever messed with me the most and had me do the craziest jobs.

5:31Sam Tidswell-Norrish:I could probably think of a whole podcast on that.

5:34Sean Mooney:Sounds like a landman.

5:35Sam Tidswell-Norrish:There were some similarities. And so, you know, of the stories shortly here is one day a guy named Ted Rader, who's my boss, and he talked like this. And he was like, Sean, today we're going to pour some cement. And so, cement is cement. And so, he had me go to the building store, and I got 80, 50-pound bags of cement. And he had me take them to the far corner of the plant property, and he had me hand mix all of them in 110-degree heat, and then pour them. And then my, and that was, I think my worst, my first week of my last or the last week of my first summer. And then I went back there probably about 10 years ago.

6:16Sam Tidswell-Norrish:And I noticed the only thing that was ever in to this day is on that slab of cement that I poured was my initials. And so there was a lot of character building on purpose, I think, because I was like constantly tested and kind of tried to learn and earn character. But I ultimately ended up going to college in Washington, D.C. And a lot of my friends grew up in northern New Jersey. And so, I asked them where they were going as we were approaching college graduation, and all their dads worked on Wall Street. And so, I said, oh, what are you going to do? And they said, we're going to go work for investment banking.

6:52Sam Tidswell-Norrish:And then my next obvious question was, what's investment banking? And I was like, well, if you guys are going to do it, I'll do that. So I did that. And then from there, I just kept on getting closer and closer to having my hands on the wheel. Private equity, and this was, I started working with a private equity firm within the investment bank. And this is late 90s, so it's early. One of the managing directors I worked with was leaving to do a new private equity firm. He brought me into the industry officially on a standalone basis in 2000. And then from there, the career built. And so I spent all the way up until 2016 building a career in private equity, where I ultimately became a partner and on the investment committee of a really great firm in New York.

7:31Sam Tidswell-Norrish:And then ultimately, I found my way to becoming an entrepreneur to solve my own problem.

7:37Sean Mooney:Well, let's talk about that problem for a moment. I'm also very intrigued to know what your family said when you decided to make that leap from security and an amazing career into the unknown of entrepreneurship. But what was that actual problem you were trying to solve, the one you were living every day that you felt the private equity industry wasn't addressing?

7:58Sam Tidswell-Norrish:It really goes back to some of the things you shared at the beginning of our conversation here. The private equity industry every year is getting more competitive. There's more and more capital chasing a similar supply of deals. And what I experienced from really the late 90s working in an internal P firm all the way up until the mid-2015s and has continued today is the industry growing into an industry. and the business of private equity turning into a business and the arbitrages of buying low, selling, high, evaporating. And so what I felt was, you know, originally I think we felt like we were architects.

8:37Sam Tidswell-Norrish:We would have these strategic plans. We would partner with someone. We'd give them some fuel. And then you could kind of do a kitchen or a bathroom proverbially. And then you could do quite well. As the industry matured, it was like, wow, I've got to be an architect. I've got to be an engineer. I've got to be a general contractor because it's not enough to have a blazing insight and went on the buy. We have to create true value. And every year I was looking at thousands of, you know, hundreds of companies probably at that time, and we would do a handful. They were all different. And I said, well, I need help for all of these things.

9:13Sam Tidswell-Norrish:We need to operationalize ourselves, but I also needed external help. And the reality is with every company being new, And then every business we owned, we couldn't project. Our operating teams had a hard time understanding where they needed to build resources. And so we were always guessing. And so I was like, gosh, what I need is third parties to help with that as a supplement. And the challenge I had was like, I can go to Amazon for consumer products. I can go to Yelp for restaurants. I can go to the expert network that we owned for one hour calls. But for the C-suite business needs that really matter, Literally, we were Googling and calling buddies.

9:50Sam Tidswell-Norrish:I go, what if we created a marketplace, a really high-end, hyper-intelligent one for C-suite needs? And then it struck me, that's a really good idea. But originally, I was going to back it. And then I had a journey that kind of said, well, why don't you do this thing?

10:06Sean Mooney:Well, firstly, congratulations for taking that leap. Let's dive into what that actually means. If you're listening and you work at a private equity firm or you're an LP that works with private equity firms or you're a service provider, if you're someone hearing about Blue Wave for the first time, what do you actually do with the private equity firm and the portfolio companies?

10:30Sam Tidswell-Norrish:Really what we are is what we refer to as a market network. And that's really a combination of a B2B marketplace and a business network. So kind of a higher complexity, higher kind of value-added B2B marketplace. And so what we do is we work with, as you shared, many hundreds of PE firms, thousands of their portfolio companies, as well as independent companies, family businesses, public companies find us. And what we do is we connect them with the exact fit, rigorously vetted third-party service providers that they need at the exact time they need them for due diligence, value creation, exit preparation.

11:07Sam Tidswell-Norrish:And the way we do this is we have deep, deep repositories of proprietary data on the ecosystem of providers. And so we know the providers before people call us. We have deep understanding of the use cases. We're a mirror reflection of what the top business builders in the world, firms like access do to build companies. And we are the enabler, the toolbox for them. And so we know the levers that are valued, and we pre-map these resources before we know who's really good at what. And then we use AI, we use data, we use human intellect in a way that superhumanly connects the private equity firms, the portfolio companies, independent companies, in a hyper-calibrated way with exactly what you need.

11:56Sam Tidswell-Norrish:And we do this in a way that's not only really, really excellent, but it's super fast. It's at the speed of private equity with exceptionally high standards that you all have. And the best of all, we're free to use. So we kind of created a what's the catch. Now, in the meantime, it's really hard to do all of that, but that's what we had to create in order to be successful, to serve people with the standards and the levels of excellence like access.

12:19Sean Mooney:I mean, I can give you a couple of off-the-cuff examples, but often when we're in IC or I'm talking to one of our deal team leaders, portfolio management teams, and they throw something at me that I don't have an immediate answer for, I often think, I'll give Sean a call. and just recently you guys helped us we had a very specialized role leadership role in one of our portfolio companies and the blue wave team helped us find a super specialized search firm and that worked through to completion another really good one one of the capabilities we built at access was we're now able to see vendor spend across the full suite of portfolio companies and we partnered with snowflake to do that and as we built that capability you know i was sitting there going well this this is awesome i've never seen data be visualized like this we can it's like real-time high frequency trading we can see everything happening but how do we turn that into value and so blue wave introduced us to a gpo strategic sourcing group that now helps us consolidate purchasing power and that's that's value that that hits the the bottom line and And if you're building out a value creation team, a private equity firm, it's very easy to suddenly scale your value creation team.

13:42Sean Mooney:In some examples, I've seen this uncontrollably. You start with 10 people and you end up with 20 and then 30. And as your portfolio grows, the value creation team grows exponentially. And the key is how do you create that value creation journey, the pain by numbers to build value against functional expertise without building the next Accenture? Because you can't afford to do that and you've only got a 2 % max management fee to feed everyone. And so that kind of brings me to my next question, which is the segmentation of value creation. How do you guys think about that segmentation by functional roles, marketing, sales, tech, ops versus specific solutions or products like procurement analysis or R &D tax or pricing optimization?

14:36Sean Mooney:Where do you see the firms getting the most leverage and how do you think about that segmentation?

14:40Sam Tidswell-Norrish:And are you saying this within the operating teams themselves or how they think about enabling specific projects? Kind of both. It's a really good question. So one, at the risk of uncomfortably flattering you all at Access, you do it in a really great way. And so part of it is you're bringing functional experts that have deeper domain expertise. I think it can be more challenging. the way that we did it in the earlier days of private equity is we would have kind of a former CEO who would be kind of try to cover the entire ground. And that was unfair to that person, because it was hard to be good at everything.

15:16Sam Tidswell-Norrish:And one of the things that I saw within my journey in private equity was it's if it's hard to be good at everything, you have to specialize, you have to have specialized expertise, which will then equip and inform understanding and diligence, which will then help you create your value creation faster. And so the way that you all do it, you're bringing functional expertise. You're also bringing thematic expertise and business model expertise. So I think it starts in those kind of approaches where you're building your team that's going to have fundamental understanding at the lever level that shows you during diligence, here's where you can add value before you own the business.

15:55Sam Tidswell-Norrish:And so first is kind of how do you set up the company? I think the ways that are working really well today, and it doesn't mean the other models don't work well, but if I were to start a PE from today, I would want to have some functional level experts that are then supplemented by external resources so that they can manage outcomes and be direct impactors within value creation. And part of that is because of just the nature of PE, you're seeing so many opportunities, and it's so competitive, you can't forecast where you're going to need your needs. And the 2%, as you said very aptly, was you can't build your own Accenture or McKinsey.

16:36Sam Tidswell-Norrish:No one can. Even the biggest of the big can't. And so the way that we see people doing it really well is you've got very capable experts. they can understand and see the current and then have a vision for the future in terms of opportunities, which by the way, is exactly how access does it. And then you can bring in external resources that they can manage to get things done, like in the procurement case, where it's like, we're going to bring in someone who sees exactly the type of spend in your portfolio company and billions of dollars a year, and they can immediately help you impact and get it done without having to take the time to learn it the first time and skin your knees.

17:12Sam Tidswell-Norrish:And so I think from that level, it's very important to orchestrate it the way that Access is doing it. And then secondarily, when you're thinking about attaching resources, once again, it's kind of, you know, that specialization really matters. And so you want to match the application, not just by do they do procurement spend, right? Do they do procurement spend for this industry, this type of company, this size of company, this amount of spend, this geography, the price point and budget? That's where a lot of people get it wrong is they'll try to bring an up market firm down, and then you'll get the C team.

17:49Sam Tidswell-Norrish:And then is the A-team available? And then you want multiple options that do that. And you use kind of a scorecard approach, just like you hire a person and say, who's the best for it? And that's the exact way we do it for our customers.

18:01Sean Mooney:One of the big stigmas of the private equity industry, one of the things that gave this industry not such a good name is you have private equity professionals, investment professionals who are really good at modeling, can build a crazy spreadsheet, but don't know how to build a business. yet they apply them from behind the screen. And that is something that I think founders have often found it very hard to get on board with. And the world we're moving into now, multiple expansion, leverage, and sitting in the safety of your armchair with an Excel model, it just doesn't cut it anymore. So from a founder's point of view, what's the difference between a firm that actually helps build the business and one that just monitors it.

18:46Sean Mooney:And I'll kind of quote our founder and managing partner, Kevin McAllister at Access. And this is unquestionably one of the reasons I chose to join Access is that partnership with the management team, the empathy, but also the capability to help them build stuff in scenarios that both the management team and the investor there may not have been in before. It's critically important.

19:13Sam Tidswell-Norrish:It's a really good question. And Kevin and I have talked about this over the years. And I think the way that, once again, not meaning to uncomfortably kind of flatter you all, but when the shoe fits, right? But the shoe fits, right? The way I always thought about this, and we get asked a lot about this question because of just the perch we sit in working with so many firms. And the way that I would say you want to look for P firm is like, do they run the business of private equity like a business? Do they have a sales team? Do they have a marketing team? Do they have an operations team? Do they have back office?

19:49Sam Tidswell-Norrish:Are they thinking about their business like a business? Or are they thinking of it like some of the firms that I worked at in every firm, frankly, in the early 90s, where it was more of kind of this round table where you would kind of wax poetic in front of whiteboards because you knew you could win on the buy. And that worked then. But today you need someone who's going to bring not just capital, but also resources that help So for instance, a lot of things that you will do where you'll bring in portfolio company People that come to your headquarters and you teach them things. So it's like are you gonna go hand in hand?

20:21Sam Tidswell-Norrish:Are you gonna show me insights? Are you gonna help us or is it a quarterly board meeting in midtown? And then we're gonna look at a big deck and then you know my the former me is going to come and say, look at this metric, what the heck is going on here? See you in a quarter. And so I think it's a partnership approach. It's someone that brings a variety of resources, operational resources that are supportive, a deal team that is strategic, that works well with the operations team, someone that is willing to invest in the actual enablement of the growth plan. And then ultimately, private equity used to be kind of like a three-piece band or maybe even like a series of instruments playing in different rooms.

21:01Sam Tidswell-Norrish:today it's more of a symphony of motion and do they all work well together not to put you on the

21:06Sean Mooney:spot but here's an exam question i'll give you a scenario you're you're on a blind date with the ceo of a fast growth lower middle market company now of course it's sector dependent but if they said to you what are the three areas you would recommend i think about working with blue wave on to improve my bottom line? What would you say?