Speaker 1: Well, today it's like KKR, Blackstone, Carlisle, Apollo. Those would
be the names that most people would hear about, you know,
in the news. But thousands upon thousands of funds you know, and.
Speaker 2: Firms out there, and a lot of really.
Speaker 1: Small ones that that people would not have heard of.
That you could have less than one hundred million dollars
in a fund and be a private equity firm, and
generally they wouldn't have a five million dollar minimum investment.
They may have a one million dollar minimum investment.
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Speaker 4: Ed Welcome you are listening to and watching the Financial
Survival Network. I'm your host, Carrie Letz. Hey, we've got
to a guest, one of my favorites. Haven't talked to
him in a while. He's the author of the Private
Equity Playbook, which is the best seller on this topic.
A new version is coming up and his name is
Adam Coffee.
Speaker 1: Adam.
Speaker 4: Great to have you back on. So before we get started,
you got to refresh our recollection. What is private equity? Well,
Carrie's good to see you. It's good to be back.
Speaker 1: Hell out all your listeners out there. You know, in
lay terms, what's private equity? Everybody on the planet seems
to understand and grasp the concept of a mutual fund.
We can go on our Schwab account, we can pick
a fund, we can invest our money, and then we
have instant liquidity.
Speaker 2: These are public funds. We can sell them.
Speaker 1: Today later on, you know, this, afternoon, tomorrow, next week,
ten years, always total liquidity. A fund manager pools all
of the money from the individual investors and then picks
a basket of stocks with which to buy and invest.
Sometimes we pay fees, you know, or loads to those
fund managers, and that's how they make their money, and
we're looking for the return. So private equity is similar
in construct and concept. You know, most private equity firms
they have a fund and the fund lasts for about
ten years, you know, so it's a ten year fund life.
They can invest money for the first five to six years.
They typically when they buy a company a private company,
they typically own that company for about five years, and
so they're seeking to improve it, grow it, do the
things that they do, and then eventually they have to
sell it because within that ten year window they have
to return all of the capital the proceeds back to
the investors. The difference is is that minimum investment size
of a private equity fund is about five million dollars
and you have to be a credited investor with a
ton of money because it's ill liquid This is a
private fund buying private companies. You have no liquidity for
it could be as long as ten years. So you
have to be willing to invest large sums of money
and essentially write it off for a very long period
of time until it comes back to you at Thentickel
end of the fund's life and so no liquidity. Large
minimum investments. Ool money from a bunch of investors and
then pick, you know, a basket of companies to invest in.
Usually they all invest six to eight percent of their
fund in any one company and not more than twelve,
which means a typical PE firm could own between eight
and sixteen companies in one fund. Big funds you know,
buy big companies. Small funds buy small companies. A big
fund like a KKR or a Blackstone with a thirty
billion dollar fund, they couldn't possibly buy small companies. They
only have five years to invest the capital. It would
take them one hundred years if they were buying small companies.
So big funds buy big companies, little funds buy little companies.
And you know, thirty three million small businesses in the
United State dates only three thousand on the planet that
have a billion in revenue.
Speaker 2: And so as you get bigger, you get rare very quick.
Speaker 1: Multiples being paid for companies are much higher as a
company gets bigger because those you know, large funds have
fewer opportunities to put money to work. There's there's more
competition and they have to pay more to get the companies.
So that's kind of the ecosystem.
Speaker 4: You know.
Speaker 1: When I wrote the first edition of the Private Equity
Playbook in twenty eighteen, there was two point eight three
trillion in assets.
Speaker 2: Under management at the time.
Speaker 1: Now there's over six trillion, you know, so we've private equity,
even though we thought it was bloated back then, it's
more than double than size.
Speaker 2: Just in the last five years.
Speaker 4: Okay, So who are the biggest players in the field.
Speaker 1: Well, today it's like KKR, Blackstone, Carlisle, Apollo, those would
be the names that most people would hear about, you know,
in the news. But thousands upon thousands of funds, you know,
and firms out there, and a lot of really small
ones that people would not have heard of. That you
could have less than one hundred million dollars in a
fund and be a private equity firm, and generally they
wouldn't have a five million dollar minimum investment. They may
have a one million dollar minimum investment. But just like
the amount of companies, how you got a ton at
the bottom of the pyramid and you've got only three
thousand on the planet with a billion at the top.
Speaker 2: You've got a bunch of.
Speaker 1: Pe firms, and there's a whole lot more smaller ones
than there are really giant, big ones.
Speaker 4: Okay, so hey, these little where do you think the
opportunity is, Because, like you're saying, there's only so many
billion dollar companies out there, maybe you aim lower and
you can get higher returns.
Speaker 1: I think so, I think I'll call it the action
in private equity right now is kind of going on
in the lower middle market. So these are funds that
would be sub a billion, sometimes a billion million and
a half, you know, so one hundreds of millions up
to a few billion, and call it, you know, in
fund size. Lower middle market is where you really can
take advantage of this thing called arbitrage. So let me
give you an example. I'm working on three buy in
builds right now in the accounting, bookkeeping, payroll services type space.
And so there's one point eight million small bookkeeping and
accounting firms in the US, and so they trade for
really low numbers. They generally have very high free cash
flow and a very nice profitability profile. They have no
capital expenditure, a lot of free cash flow. So if
I buy a bunch of small ones and don't pay
much for them, I can create something a little bit bigger,
and that little bit bigger company now trades for a
higher multiple, and so the difference in arbitrage. I might
have been paying three times to buy the small one.
So every dollar of earnings I'm paying three dollars to buy.
You know, I could be selling for ten dollars, you know,
five years down the road, making a seven dollars p
by doing nothing other than putting a bunch of small
good companies together, you know, and helping integrate them and
teaching them to scale and and learn how to improve
margins and what have you. And as a result of that,
the lower middle market, you know, I tend to see
multiples of invested capital being higher. So you know, the
big boys, if you're buying a company and you're paying
a lot for it, because there's not many of them,
your return profile is very different than when you're buying
these small ones. So in the lower middle market, it
would be typical to be modeling four x multiple of
invested capital five x multiple invested capital, so for every
dollar I invest, I get four to five dollars back.
And higher up the food chain, you know, they're underwriting
two and a half times you know, maybe maybe three,
but really hard to do when you're buying something that
that costs you, you know, hundreds of millions of dollars
or a billion dollars to buy, you know, and get
that kind of a turn in a short period of time.
Speaker 4: What what are some of the biggest private equity flops
that you know about?
Speaker 1: The biggest private equity flops? Wow, I think there's been several,
you know, over over the decades. You know, I could
think back to you know, like when when Hostess you
know was uh was going from private company or public company,
private company, you know, and PE bought it.
Speaker 2: You see it in a lot of retail.
Speaker 1: You see a lot of big retail companies that have
have have been.
Speaker 2: Bought by private equity.
Speaker 1: You know, I mean, without getting into specifics of which
fund or which name company, I see a lot of
action in retail. That's that's I won't call it questionable,
but these are these are typically longer shots. So you've
seen a real change, like in just American consumer behavior.
So a lot of these big anchor you know, retailers
that used to be found in shopping malls.
Speaker 2: Well as malls are dying.
Speaker 1: A lot of those big brands are dying too, and
private equity has stepped in trying to reach you innate them.
Speaker 2: You know, we talked off camera.
Speaker 1: It's like, you know, there are some some subsets of
private equity that are called distressed asset funds. So they're
they're looking for these companies that are like one step
away from from bankruptcy. And you know, once upon a
time they may have been very successful companies, but now
they've fallen on hard times, and there's funds out there
that look for deals like that where potentially you have
enough assets in the company to kind of recover your investment.
So you're you're kind of buying it below book value
of the assets and you're swinging for the fences trying
to bring them back. And if you can't, you know,
oh well, I sell off the assets and I make
some money on you know, on the assets for my investors.
So some people are out there looking for those distressed opportunities.
These are companies that probably would have failed, you know,
somewhere along the way eventually, and uh and private equity
brought in some capital and tried to tried to save them.
Speaker 2: Yeah, okay, So.
Speaker 4: You know, there's going to be winners and losers in
every endeavor in life, in business, just the way it is.
But if you're looking to invest in private equity funds,
how do you do it? What's the best way to
go about it?
Speaker 1: Well, you know, so first we have to pick our
kind of our favorite flavor. Let's say I like the
lower middle market, as I said, because I think the
average returns are higher and there's so many small companies
in the US, you know, and around the world in
every country that that.
Speaker 2: The mechanics of what's going on in.
Speaker 1: The lower middle market, I think are just more favorable
to good returns, and so I can do research about funds.
You know, one of the companies I ran was owned
by a great company, call it called the Autax Group.
Speaker 2: They're out of Boston.
Speaker 1: On any given day they own fifty plus portfolio companies
that are all lower middle market. They're kind of affirmed
that buys companies that have about fifteen million dollars in
earnings and they take them up to about fifty and
then they sell them upstream to some bigger pe funds
and so on. A company like that, if I, if
I do some just basic Google research, you know, tell
me about private equity firms that invest in the lower
metal market.
Speaker 2: I can get a list of names. I can now
go to their websites.
Speaker 1: I can I can look at their investor you know sections,
and I can start thinking and reading and looking at
the kinds of companies that they own. And you know,
with some basic research, I can develop a profile.
Speaker 2: There are ratings out there.
Speaker 1: They're private, you know, it's hard to get a hold
of the data without subscribing to a service that can
cost a lot of money. But if I'm a big
family office and I'm considering, you know, investing in private equity,
you know like morning Star for private you know, for
mutual funds, I can find ratings on past performance and
history of different pe firms and how their funds have done.
And you know, as a result, I can try to
use you know, call it past history as an indicator potentially.
Speaker 2: But and then that's it's you know, all of these
firms really think they have they have half.
Speaker 1: Of the firm is focused on raising the next fund
and the other half is investing and operating the companies
that that they that they buy. And so there's always
someone that I can talk to. And they frequently hold
conferences and investor meetings where I can then come and
hear them talk in person.
Speaker 2: You know.
Speaker 1: Annual meetings are always fun where they have CEOs up
talking about the companies that they're building. So, you know,
with some research, we can we can develop a list
of names. We can we can, but it takes it
takes the good old fashioned shoe leather of you know,
having to sit down and do some research just like
any other stock we invest in, you know, we we
we have to do.
Speaker 2: If we do research, we we tend to have better picks.
Speaker 4: Okay, I'll buy that. Hey, any particular trends at them
in private equity now that we should be aware of.
Speaker 2: Well, so, you know, in in the last four or
five years, we we left you know.
Speaker 1: Call it the period of low to no interest rates,
which allowed private equity firms to pay really high multiples
for companies and to lever, you know, comfortably lever you know, uh,
you'll call it half of the purchase price because the
debt was so cheap, and typically what a PE firm
buys a company, they used a combination of debt and equity. Recently, though,
interest rates have been ticking up, you know, and although
they're not record high, they are higher than they've been
in decades. And so you know, I remember, I remember
as a kid in the eighties, you know, house you know,
if you're buying a house, you know, mortgages could be
in the teens, you know, but but they are high.
And so as interest rates ticked up, that that created
an environment where we couldn't lever as much debt when
we were buying a company. And so I'll tell you,
you know, carry a game of chicken was played last year.
For about the first six months of the year. We
had sellers, you know, founders, you know, who had high
expectations on value and they're looking for really high purchase
prices because that's the way the market's been for the
last five years. And and then we had buyers who
were saying, I can't write you know, as you know,
it's like if I, if I can't lever as much
debt because of high interest rates, my equity check has
to be much much larger to do the same kind
of deal that that sellers are expecting.
Speaker 2: And so let me just tell you that that founders.
Speaker 1: Won the game of chicken, you know, because the one
cardinal sin of private equity is if I have a
fond is I can't do anything. I have to invest
the capital or I can't raise my next fund. And
that's because investors, you know, I'm I'm an LP, a
limited partner in several PE funds, and you know it's
like if I'm holding my money out on the side
waiting for you to call my capital, unlike a mutual fund,
I don't send my investment in up front. You know
the reason that that happens that ways because then private
equity would have to calculate the returns based on.
Speaker 2: The day I sent the money in, and they're like.
Speaker 4: You did it right, And then that doesn't look good
because tom right yep.
Speaker 1: So they delay calling the cap until they have a
company to buy, and then then they call the capital.
So I as an investor, I'm holding the money out
and I can't put it in the stock market.
Speaker 2: I need to be ready to send it in whenever
it's called. They've gotten five years to do that.
Speaker 1: And so you know, if if I can't put in
the market where I could get an eight percent average
return over a thirty year period, you know, I'm looking
for sixteen to twenty percent, which is what the better
private equity firms are doing is doubles and p.
Speaker 2: Five hundred, you know.
Speaker 1: And if you don't put my money to work, I
don't get the sixteen to twenty. I also don't get
the eight percent. I get whatever the prevailing money market
or you know rate is. And now I'm pissed. And
so you come back and say, hey, Adam, I'm raising
a new fund, and I say, you know, you didn't invest.
Speaker 2: My last capital. No way am I giving you more.
Speaker 1: So this game of chicken that got played last year
could only last for a finite amount of time, and
eventually the PE money had to start flowing again, and
so the founder's won. I'd say that valuations are kind
of down a little bit in a lot of industries,
but still very lofty valuations being paid. What's happening now
is private equity funds are writing bigger equity checks, or
they're bringing in co investors, some limited partners that they
want to reward and they're letting them. You'll also make
co investments, and so the money has to flow. So
deal flow is back to kind of normal. And what
will happen ultimately, you know, you think of why, and
you think of vintage. You know, this year was a
good year, that year was not a good year. Well,
all private equity funds are rated based on their vintage,
and the vintage of a PE fund is the year
they make their first investment. So as long as all
funds are being rated the same set of economic conditions,
you know, it's okay if returns are moderated for this
higher interest rate period, because ten years from now, by
the time all these funds are dead and gone, they'll
have already raised three more.
Speaker 2: Funds and this will be ageing history.
Speaker 1: So that's some of the trends I've seen is a
little bit higher equity checks, a little bit lower on
valuations right now. And you know, hey, everyone's looking for
interest rates to come down back half of this year.
Is it could be much as a point, which what
you're feeling, Yeah, I think, well, I think yesterday we
saw that eight hundred and eighteen thousand job you know,
job gains were reversed, so that puts extra pressure on
the FED. So I'm expecting half a point in September,
and I'm expecting could be another half a point before
the end of the years. So and they've been saying
for for over a year, you know, the downward pressure,
all pressure has been interest rates are going to come down.
The question is with what speed. And at some point
they'll normalize to a more normal level. And you know
that that that's a few points down from where we're
currently at, you know, and and people are looking for
that to happen over the next eighteen to twenty four months,
and so that should also aid you know, private equity
deal making getting done. You know, a lot of people
think private equity brings a ton of capital to the table,
but what they actually do is once they buy the
platform company using roughly fifty percent debt fifty percent equity historically,
they then put the checkbook away. So if they're doing
a buy and build and buy in fifteen twenty companies,
they're using all their debt, you know, on that are
are trying to use as much debt as possible on
that part of the equation to build companies so that
they can preserve their capital to buy more companies as platforms.
And you know, but you know, I would say that
most PE firms are not over levering companies. You know,
you hear about that in the news, But you know,
in reality, if a typical American buys a house and
they have a fifty percent down payment on that house,
most Americans would say, I'm not over levered. They would
be applauding the fact that they've got fifty percent equity.
Speaker 2: In their in their home, you know.
Speaker 1: And and so I'm always when I'm looking at deals,
you know, I'm looking for at least two times the
cash coming out of the company that I need to
service the debt. So at two to one debt service
coverage ratio is what I personally model when I'm involved
in doing buy and builds because if there is an
economic downturn in a company's earnings, saw, I want to
make sure that there's adequate cash flow within the business
to continue to the service the debt that's required. So
ideally you don't overlever, you put the right amount of
leverage on so that you have good debt coverage ratios.
Speaker 4: Okay, so private equity it beats working well.
Speaker 1: You know, I'm still setting in an office. I turned
sixty this year. Carry it and I said, I said,
after you know my you know, my third company, I
was like, I'm not going to do a fourth, big one.
I have ten years left in my career, you know,
in my own estimation, And so I've decided I'm going
to spend the next ten years teaching as many entrepreneurs
and business owners how to succeed beat the odds, you know,
and use the same tools that private equity uses on
a large scale, and I'm going to teach them how
to do it on a small scale. So I'm working
on eighteen buy in builds in total right now, really
smaller entrepreneurs, smaller companies, learning how to use MNA as
a tool, learning how to accelerate organic growth, improve margins.
And so I'm teaching smaller businesses how to how to
use you know, what the private equity world has taught
us over the last you know, thirty years, you know
or so and use it to their advantage. So instead
of making the shareholders you know, of these big funds
and firms, you know, billions, let's teach small guys how
to make one hundred million, you know, or millions.
Speaker 2: And I could win with that.
Speaker 4: Yeah.
Speaker 1: So that's that's that's going to be the next ten
years of my life is working with small companies. So
I'm working with sixty eight small companies eighteen doing buy
and builds and.
Speaker 2: Having a lot of fun. I'm working more hours now
than when I was a CEO, and you know, so,
I guess, but you don't feel like you're working, right,
I don't feel like I'm working. I'm having fun. So
why not? Yeah? All right, Hey, great having you on again.
Speaker 4: Just tell us how we find you on the web,
how we connect with you, Twitter, social media, website, all
that stuff.
Speaker 2: Yep.
Speaker 1: I don't, you know, don't have a social media team.
You know, I'm on LinkedIn multiple times a day. I'd
say best platform to reach out to me directly.
Speaker 2: Is LinkedIn, and you're going to hear from me.
Speaker 4: You know.
Speaker 1: My books are available on Amazon or anywhere you find
books and all versions audible and ebooks and softcovers and hardcovers,
so whatever you like to read. I can tell you
that based on all my sales, seventy three percent of
people out there in the world still like holding, you know,
a book in their hands and flipping paper pages at
least my Yeah, that's that's kind of the demographic numbers,
like seventy three percent, you know, and then the the
others are are split between ebook and audiobook.
Speaker 4: All right, excellent, Hey, appreciate you coming on as always, Adam,
I want to definitely touch base with you sooner before
your next update of book comes out, and just take
tell us again the name of the book.
Speaker 1: Name of the book is the Private Equity Playbook, second edition,
the first editions up there on the wall. And you know,
I decided after five years it was time to update.
You know, so much stuff has happened in the world,
so I appreciate everybody out there's for listening and for
your support.
Speaker 2: So Carrie, good to see it.
Speaker 4: Hey, and I guess we find that book wherever fine
books used to be sold.
Speaker 1: That's it, you know, or Amazon where current books are sold.
Speaker 4: Okay, Hey, it's got a question for Adam or myself.
Feel free to shoot me an email kl Atcarrie lets
dot com and you'll find a link to Adam's LinkedIn
that works. Yeah. On the show notes this interview on
Financial Survival Network dot com. Adam Pleasure. We'll talk to
you again soon.
Speaker 3: Take care, Carrie, thanks for listening to Carrie Letz's Financial
Survival Network, your solution to today's trying times. For the latest,
go to Financial Survivalnetwork dot com. Financial Revival Network now
more than ever