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Speaker 1: Well, today it's like KKR, Blackstone, Carlisle, Apollo. Those would

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be the names that most people would hear about, you know,

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in the news. But thousands upon thousands of funds you know, and.

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Speaker 2: Firms out there, and a lot of really.

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Speaker 1: Small ones that that people would not have heard of.

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That you could have less than one hundred million dollars

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in a fund and be a private equity firm, and

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generally they wouldn't have a five million dollar minimum investment.

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They may have a one million dollar minimum investment.

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Speaker 3: You're listening to Carrie let'sa's financial survival network where you

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get valuable information you just can't find anywhere else to

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thrive in today's trying times. You need the Financial Survival

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Network now more than ever. Go to Financial Survivalnetwork dot

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com and get your free newsletter and gift. Financial Survival

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Network now more than ever.

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Speaker 4: Ed Welcome you are listening to and watching the Financial

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Survival Network. I'm your host, Carrie Letz. Hey, we've got

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to a guest, one of my favorites. Haven't talked to

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him in a while. He's the author of the Private

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Equity Playbook, which is the best seller on this topic.

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A new version is coming up and his name is

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Adam Coffee.

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Speaker 1: Adam.

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Speaker 4: Great to have you back on. So before we get started,

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you got to refresh our recollection. What is private equity? Well,

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Carrie's good to see you. It's good to be back.

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Speaker 1: Hell out all your listeners out there. You know, in

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lay terms, what's private equity? Everybody on the planet seems

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to understand and grasp the concept of a mutual fund.

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We can go on our Schwab account, we can pick

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a fund, we can invest our money, and then we

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have instant liquidity.

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Speaker 2: These are public funds. We can sell them.

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Speaker 1: Today later on, you know, this, afternoon, tomorrow, next week,

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ten years, always total liquidity. A fund manager pools all

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of the money from the individual investors and then picks

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a basket of stocks with which to buy and invest.

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Sometimes we pay fees, you know, or loads to those

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fund managers, and that's how they make their money, and

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we're looking for the return. So private equity is similar

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in construct and concept. You know, most private equity firms

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they have a fund and the fund lasts for about

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ten years, you know, so it's a ten year fund life.

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They can invest money for the first five to six years.

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They typically when they buy a company a private company,

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they typically own that company for about five years, and

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so they're seeking to improve it, grow it, do the

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things that they do, and then eventually they have to

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sell it because within that ten year window they have

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to return all of the capital the proceeds back to

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the investors. The difference is is that minimum investment size

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of a private equity fund is about five million dollars

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and you have to be a credited investor with a

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ton of money because it's ill liquid This is a

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private fund buying private companies. You have no liquidity for

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it could be as long as ten years. So you

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have to be willing to invest large sums of money

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and essentially write it off for a very long period

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of time until it comes back to you at Thentickel

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end of the fund's life and so no liquidity. Large

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minimum investments. Ool money from a bunch of investors and

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then pick, you know, a basket of companies to invest in.

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Usually they all invest six to eight percent of their

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fund in any one company and not more than twelve,

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which means a typical PE firm could own between eight

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and sixteen companies in one fund. Big funds you know,

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buy big companies. Small funds buy small companies. A big

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fund like a KKR or a Blackstone with a thirty

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billion dollar fund, they couldn't possibly buy small companies. They

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only have five years to invest the capital. It would

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take them one hundred years if they were buying small companies.

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So big funds buy big companies, little funds buy little companies.

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And you know, thirty three million small businesses in the

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United State dates only three thousand on the planet that

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have a billion in revenue.

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Speaker 2: And so as you get bigger, you get rare very quick.

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Speaker 1: Multiples being paid for companies are much higher as a

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company gets bigger because those you know, large funds have

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fewer opportunities to put money to work. There's there's more

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competition and they have to pay more to get the companies.

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So that's kind of the ecosystem.

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Speaker 4: You know.

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Speaker 1: When I wrote the first edition of the Private Equity

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Playbook in twenty eighteen, there was two point eight three

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trillion in assets.

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Speaker 2: Under management at the time.

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Speaker 1: Now there's over six trillion, you know, so we've private equity,

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even though we thought it was bloated back then, it's

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more than double than size.

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Speaker 2: Just in the last five years.

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Speaker 4: Okay, So who are the biggest players in the field.

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Speaker 1: Well, today it's like KKR, Blackstone, Carlisle, Apollo, those would

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be the names that most people would hear about, you know,

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in the news. But thousands upon thousands of funds, you know,

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and firms out there, and a lot of really small

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ones that people would not have heard of. That you

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could have less than one hundred million dollars in a

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fund and be a private equity firm, and generally they

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wouldn't have a five million dollar minimum investment. They may

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have a one million dollar minimum investment. But just like

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the amount of companies, how you got a ton at

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the bottom of the pyramid and you've got only three

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thousand on the planet with a billion at the top.

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Speaker 2: You've got a bunch of.

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Speaker 1: Pe firms, and there's a whole lot more smaller ones

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than there are really giant, big ones.

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Speaker 4: Okay, so hey, these little where do you think the

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opportunity is, Because, like you're saying, there's only so many

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billion dollar companies out there, maybe you aim lower and

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you can get higher returns.

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Speaker 1: I think so, I think I'll call it the action

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in private equity right now is kind of going on

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in the lower middle market. So these are funds that

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would be sub a billion, sometimes a billion million and

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a half, you know, so one hundreds of millions up

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to a few billion, and call it, you know, in

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fund size. Lower middle market is where you really can

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take advantage of this thing called arbitrage. So let me

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give you an example. I'm working on three buy in

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builds right now in the accounting, bookkeeping, payroll services type space.

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And so there's one point eight million small bookkeeping and

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accounting firms in the US, and so they trade for

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really low numbers. They generally have very high free cash

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flow and a very nice profitability profile. They have no

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capital expenditure, a lot of free cash flow. So if

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I buy a bunch of small ones and don't pay

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much for them, I can create something a little bit bigger,

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and that little bit bigger company now trades for a

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higher multiple, and so the difference in arbitrage. I might

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have been paying three times to buy the small one.

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So every dollar of earnings I'm paying three dollars to buy.

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You know, I could be selling for ten dollars, you know,

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five years down the road, making a seven dollars p

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by doing nothing other than putting a bunch of small

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good companies together, you know, and helping integrate them and

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teaching them to scale and and learn how to improve

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margins and what have you. And as a result of that,

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the lower middle market, you know, I tend to see

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multiples of invested capital being higher. So you know, the

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big boys, if you're buying a company and you're paying

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a lot for it, because there's not many of them,

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your return profile is very different than when you're buying

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these small ones. So in the lower middle market, it

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would be typical to be modeling four x multiple of

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invested capital five x multiple invested capital, so for every

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dollar I invest, I get four to five dollars back.

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And higher up the food chain, you know, they're underwriting

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two and a half times you know, maybe maybe three,

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but really hard to do when you're buying something that

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that costs you, you know, hundreds of millions of dollars

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or a billion dollars to buy, you know, and get

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that kind of a turn in a short period of time.

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Speaker 4: What what are some of the biggest private equity flops

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that you know about?

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Speaker 1: The biggest private equity flops? Wow, I think there's been several,

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you know, over over the decades. You know, I could

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think back to you know, like when when Hostess you

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know was uh was going from private company or public company,

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private company, you know, and PE bought it.

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Speaker 2: You see it in a lot of retail.

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Speaker 1: You see a lot of big retail companies that have

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have have been.

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Speaker 2: Bought by private equity.

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Speaker 1: You know, I mean, without getting into specifics of which

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fund or which name company, I see a lot of

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action in retail. That's that's I won't call it questionable,

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but these are these are typically longer shots. So you've

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seen a real change, like in just American consumer behavior.

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So a lot of these big anchor you know, retailers

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that used to be found in shopping malls.

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Speaker 2: Well as malls are dying.

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Speaker 1: A lot of those big brands are dying too, and

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private equity has stepped in trying to reach you innate them.

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Speaker 2: You know, we talked off camera.

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Speaker 1: It's like, you know, there are some some subsets of

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private equity that are called distressed asset funds. So they're

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they're looking for these companies that are like one step

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away from from bankruptcy. And you know, once upon a

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time they may have been very successful companies, but now

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they've fallen on hard times, and there's funds out there

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that look for deals like that where potentially you have

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enough assets in the company to kind of recover your investment.

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So you're you're kind of buying it below book value

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of the assets and you're swinging for the fences trying

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to bring them back. And if you can't, you know,

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oh well, I sell off the assets and I make

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some money on you know, on the assets for my investors.

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So some people are out there looking for those distressed opportunities.

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These are companies that probably would have failed, you know,

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somewhere along the way eventually, and uh and private equity

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brought in some capital and tried to tried to save them.

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Speaker 2: Yeah, okay, So.

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Speaker 4: You know, there's going to be winners and losers in

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every endeavor in life, in business, just the way it is.

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But if you're looking to invest in private equity funds,

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how do you do it? What's the best way to

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go about it?

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Speaker 1: Well, you know, so first we have to pick our

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kind of our favorite flavor. Let's say I like the

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lower middle market, as I said, because I think the

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average returns are higher and there's so many small companies

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in the US, you know, and around the world in

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every country that that.

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Speaker 2: The mechanics of what's going on in.

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Speaker 1: The lower middle market, I think are just more favorable

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to good returns, and so I can do research about funds.

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You know, one of the companies I ran was owned

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by a great company, call it called the Autax Group.

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Speaker 2: They're out of Boston.

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Speaker 1: On any given day they own fifty plus portfolio companies

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that are all lower middle market. They're kind of affirmed

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that buys companies that have about fifteen million dollars in

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earnings and they take them up to about fifty and

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then they sell them upstream to some bigger pe funds

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and so on. A company like that, if I, if

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I do some just basic Google research, you know, tell

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me about private equity firms that invest in the lower

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metal market.

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Speaker 2: I can get a list of names. I can now

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go to their websites.

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Speaker 1: I can I can look at their investor you know sections,

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and I can start thinking and reading and looking at

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the kinds of companies that they own. And you know,

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with some basic research, I can develop a profile.

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Speaker 2: There are ratings out there.

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Speaker 1: They're private, you know, it's hard to get a hold

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of the data without subscribing to a service that can

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cost a lot of money. But if I'm a big

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family office and I'm considering, you know, investing in private equity,

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you know like morning Star for private you know, for

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mutual funds, I can find ratings on past performance and

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history of different pe firms and how their funds have done.

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And you know, as a result, I can try to

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use you know, call it past history as an indicator potentially.

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Speaker 2: But and then that's it's you know, all of these

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firms really think they have they have half.

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Speaker 1: Of the firm is focused on raising the next fund

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and the other half is investing and operating the companies

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that that they that they buy. And so there's always

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someone that I can talk to. And they frequently hold

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conferences and investor meetings where I can then come and

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hear them talk in person.

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Speaker 2: You know.

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Speaker 1: Annual meetings are always fun where they have CEOs up

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talking about the companies that they're building. So, you know,

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with some research, we can we can develop a list

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of names. We can we can, but it takes it

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takes the good old fashioned shoe leather of you know,

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having to sit down and do some research just like

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any other stock we invest in, you know, we we

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we have to do.

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Speaker 2: If we do research, we we tend to have better picks.

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Speaker 4: Okay, I'll buy that. Hey, any particular trends at them

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in private equity now that we should be aware of.

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Speaker 2: Well, so, you know, in in the last four or

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five years, we we left you know.

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Speaker 1: Call it the period of low to no interest rates,

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which allowed private equity firms to pay really high multiples

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for companies and to lever, you know, comfortably lever you know, uh,

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you'll call it half of the purchase price because the

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debt was so cheap, and typically what a PE firm

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buys a company, they used a combination of debt and equity. Recently, though,

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interest rates have been ticking up, you know, and although

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they're not record high, they are higher than they've been

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in decades. And so you know, I remember, I remember

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as a kid in the eighties, you know, house you know,

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if you're buying a house, you know, mortgages could be

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in the teens, you know, but but they are high.

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And so as interest rates ticked up, that that created

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an environment where we couldn't lever as much debt when

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we were buying a company. And so I'll tell you,

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you know, carry a game of chicken was played last year.

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For about the first six months of the year. We

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had sellers, you know, founders, you know, who had high

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expectations on value and they're looking for really high purchase

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prices because that's the way the market's been for the

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last five years. And and then we had buyers who

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were saying, I can't write you know, as you know,

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it's like if I, if I can't lever as much

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debt because of high interest rates, my equity check has

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to be much much larger to do the same kind

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of deal that that sellers are expecting.

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Speaker 2: And so let me just tell you that that founders.

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Speaker 1: Won the game of chicken, you know, because the one

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cardinal sin of private equity is if I have a

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fond is I can't do anything. I have to invest

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the capital or I can't raise my next fund. And

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that's because investors, you know, I'm I'm an LP, a

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limited partner in several PE funds, and you know it's

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like if I'm holding my money out on the side

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waiting for you to call my capital, unlike a mutual fund,

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I don't send my investment in up front. You know

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the reason that that happens that ways because then private

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equity would have to calculate the returns based on.

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Speaker 2: The day I sent the money in, and they're like.

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Speaker 4: You did it right, And then that doesn't look good

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because tom right yep.

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Speaker 1: So they delay calling the cap until they have a

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company to buy, and then then they call the capital.

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So I as an investor, I'm holding the money out

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and I can't put it in the stock market.

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Speaker 2: I need to be ready to send it in whenever

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it's called. They've gotten five years to do that.

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Speaker 1: And so you know, if if I can't put in

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the market where I could get an eight percent average

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return over a thirty year period, you know, I'm looking

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for sixteen to twenty percent, which is what the better

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private equity firms are doing is doubles and p.

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Speaker 2: Five hundred, you know.

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Speaker 1: And if you don't put my money to work, I

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don't get the sixteen to twenty. I also don't get

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the eight percent. I get whatever the prevailing money market

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or you know rate is. And now I'm pissed. And

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so you come back and say, hey, Adam, I'm raising

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a new fund, and I say, you know, you didn't invest.

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Speaker 2: My last capital. No way am I giving you more.

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Speaker 1: So this game of chicken that got played last year

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could only last for a finite amount of time, and

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eventually the PE money had to start flowing again, and

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so the founder's won. I'd say that valuations are kind

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of down a little bit in a lot of industries,

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but still very lofty valuations being paid. What's happening now

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is private equity funds are writing bigger equity checks, or

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they're bringing in co investors, some limited partners that they

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want to reward and they're letting them. You'll also make

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co investments, and so the money has to flow. So

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deal flow is back to kind of normal. And what

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will happen ultimately, you know, you think of why, and

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you think of vintage. You know, this year was a

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good year, that year was not a good year. Well,

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all private equity funds are rated based on their vintage,

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and the vintage of a PE fund is the year

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they make their first investment. So as long as all

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funds are being rated the same set of economic conditions,

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you know, it's okay if returns are moderated for this

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higher interest rate period, because ten years from now, by

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the time all these funds are dead and gone, they'll

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have already raised three more.

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Speaker 2: Funds and this will be ageing history.

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Speaker 1: So that's some of the trends I've seen is a

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little bit higher equity checks, a little bit lower on

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valuations right now. And you know, hey, everyone's looking for

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interest rates to come down back half of this year.

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Is it could be much as a point, which what

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you're feeling, Yeah, I think, well, I think yesterday we

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saw that eight hundred and eighteen thousand job you know,

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job gains were reversed, so that puts extra pressure on

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the FED. So I'm expecting half a point in September,

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and I'm expecting could be another half a point before

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the end of the years. So and they've been saying

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for for over a year, you know, the downward pressure,

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all pressure has been interest rates are going to come down.

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The question is with what speed. And at some point

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they'll normalize to a more normal level. And you know

355
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that that that's a few points down from where we're

356
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currently at, you know, and and people are looking for

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that to happen over the next eighteen to twenty four months,

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and so that should also aid you know, private equity

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deal making getting done. You know, a lot of people

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think private equity brings a ton of capital to the table,

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but what they actually do is once they buy the

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platform company using roughly fifty percent debt fifty percent equity historically,

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they then put the checkbook away. So if they're doing

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a buy and build and buy in fifteen twenty companies,

365
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they're using all their debt, you know, on that are

366
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are trying to use as much debt as possible on

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that part of the equation to build companies so that

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they can preserve their capital to buy more companies as platforms.

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And you know, but you know, I would say that

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most PE firms are not over levering companies. You know,

371
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you hear about that in the news, But you know,

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in reality, if a typical American buys a house and

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they have a fifty percent down payment on that house,

374
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most Americans would say, I'm not over levered. They would

375
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be applauding the fact that they've got fifty percent equity.

376
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Speaker 2: In their in their home, you know.

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Speaker 1: And and so I'm always when I'm looking at deals,

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you know, I'm looking for at least two times the

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cash coming out of the company that I need to

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service the debt. So at two to one debt service

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coverage ratio is what I personally model when I'm involved

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in doing buy and builds because if there is an

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economic downturn in a company's earnings, saw, I want to

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make sure that there's adequate cash flow within the business

385
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to continue to the service the debt that's required. So

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ideally you don't overlever, you put the right amount of

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leverage on so that you have good debt coverage ratios.

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Speaker 4: Okay, so private equity it beats working well.

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00:19:19,759 --> 00:19:22,599
Speaker 1: You know, I'm still setting in an office. I turned

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sixty this year. Carry it and I said, I said,

391
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after you know my you know, my third company, I

392
00:19:29,119 --> 00:19:31,279
was like, I'm not going to do a fourth, big one.

393
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I have ten years left in my career, you know,

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in my own estimation, And so I've decided I'm going

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to spend the next ten years teaching as many entrepreneurs

396
00:19:41,519 --> 00:19:46,160
and business owners how to succeed beat the odds, you know,

397
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and use the same tools that private equity uses on

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a large scale, and I'm going to teach them how

399
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to do it on a small scale. So I'm working

400
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on eighteen buy in builds in total right now, really

401
00:19:59,440 --> 00:20:04,559
smaller entrepreneurs, smaller companies, learning how to use MNA as

402
00:20:04,599 --> 00:20:08,640
a tool, learning how to accelerate organic growth, improve margins.

403
00:20:08,759 --> 00:20:12,720
And so I'm teaching smaller businesses how to how to

404
00:20:12,960 --> 00:20:15,880
use you know, what the private equity world has taught

405
00:20:15,920 --> 00:20:18,680
us over the last you know, thirty years, you know

406
00:20:18,839 --> 00:20:22,279
or so and use it to their advantage. So instead

407
00:20:22,319 --> 00:20:25,480
of making the shareholders you know, of these big funds

408
00:20:25,480 --> 00:20:28,960
and firms, you know, billions, let's teach small guys how

409
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to make one hundred million, you know, or millions.

410
00:20:31,400 --> 00:20:32,640
Speaker 2: And I could win with that.

411
00:20:33,079 --> 00:20:33,279
Speaker 4: Yeah.

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Speaker 1: So that's that's that's going to be the next ten

413
00:20:35,680 --> 00:20:38,640
years of my life is working with small companies. So

414
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I'm working with sixty eight small companies eighteen doing buy

415
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and builds and.

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Speaker 2: Having a lot of fun. I'm working more hours now

417
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than when I was a CEO, and you know, so,

418
00:20:49,319 --> 00:20:51,759
I guess, but you don't feel like you're working, right,

419
00:20:51,839 --> 00:20:54,000
I don't feel like I'm working. I'm having fun. So

420
00:20:54,440 --> 00:20:58,240
why not? Yeah? All right, Hey, great having you on again.

421
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Speaker 4: Just tell us how we find you on the web,

422
00:21:01,119 --> 00:21:04,759
how we connect with you, Twitter, social media, website, all

423
00:21:04,799 --> 00:21:05,359
that stuff.

424
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Speaker 2: Yep.

425
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Speaker 1: I don't, you know, don't have a social media team.

426
00:21:08,279 --> 00:21:11,720
You know, I'm on LinkedIn multiple times a day. I'd

427
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say best platform to reach out to me directly.

428
00:21:14,559 --> 00:21:16,400
Speaker 2: Is LinkedIn, and you're going to hear from me.

429
00:21:16,519 --> 00:21:16,720
Speaker 4: You know.

430
00:21:16,839 --> 00:21:19,440
Speaker 1: My books are available on Amazon or anywhere you find

431
00:21:19,480 --> 00:21:24,960
books and all versions audible and ebooks and softcovers and hardcovers,

432
00:21:24,960 --> 00:21:27,039
so whatever you like to read. I can tell you

433
00:21:27,079 --> 00:21:30,119
that based on all my sales, seventy three percent of

434
00:21:30,200 --> 00:21:33,319
people out there in the world still like holding, you know,

435
00:21:33,400 --> 00:21:36,680
a book in their hands and flipping paper pages at

436
00:21:36,759 --> 00:21:40,200
least my Yeah, that's that's kind of the demographic numbers,

437
00:21:40,240 --> 00:21:42,640
like seventy three percent, you know, and then the the

438
00:21:42,880 --> 00:21:47,480
others are are split between ebook and audiobook.

439
00:21:47,680 --> 00:21:51,599
Speaker 4: All right, excellent, Hey, appreciate you coming on as always, Adam,

440
00:21:51,640 --> 00:21:54,279
I want to definitely touch base with you sooner before

441
00:21:54,319 --> 00:21:57,839
your next update of book comes out, and just take

442
00:21:57,960 --> 00:21:59,319
tell us again the name of the book.

443
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Speaker 1: Name of the book is the Private Equity Playbook, second edition,

444
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the first editions up there on the wall. And you know,

445
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I decided after five years it was time to update.

446
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You know, so much stuff has happened in the world,

447
00:22:12,200 --> 00:22:15,799
so I appreciate everybody out there's for listening and for

448
00:22:16,079 --> 00:22:16,680
your support.

449
00:22:16,839 --> 00:22:18,079
Speaker 2: So Carrie, good to see it.

450
00:22:18,279 --> 00:22:21,119
Speaker 4: Hey, and I guess we find that book wherever fine

451
00:22:21,200 --> 00:22:22,359
books used to be sold.

452
00:22:22,640 --> 00:22:26,000
Speaker 1: That's it, you know, or Amazon where current books are sold.

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00:22:26,799 --> 00:22:30,039
Speaker 4: Okay, Hey, it's got a question for Adam or myself.

454
00:22:30,240 --> 00:22:33,559
Feel free to shoot me an email kl Atcarrie lets

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00:22:33,640 --> 00:22:39,160
dot com and you'll find a link to Adam's LinkedIn

456
00:22:39,559 --> 00:22:42,920
that works. Yeah. On the show notes this interview on

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Financial Survival Network dot com. Adam Pleasure. We'll talk to

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00:22:46,839 --> 00:22:47,440
you again soon.

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Speaker 3: Take care, Carrie, thanks for listening to Carrie Letz's Financial

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00:22:51,319 --> 00:22:56,319
Survival Network, your solution to today's trying times. For the latest,

461
00:22:56,400 --> 00:23:02,200
go to Financial Survivalnetwork dot com. Financial Revival Network now

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00:23:02,240 --> 00:23:03,079
more than ever