Have you ever wondered about private equity and the experience of working with private equity? What do private equity firms look for in businesses? What do they look for in leaders? What is their operating rhythm?
David Evans, Managing Partner at Watermark Search, has extensive experience in this area and in this episode he chats to Mark Baldassarre, a highly accomplished leader in Private Equity. Mark brings over 25 years of private equity and international banking experience. He is deeply experienced in acquiring, integrating, and growing businesses, as well as providing strategic direction to company boards and management teams. Mark has looked at hundreds of private equity deals and has invested and exited in dozens.
David and Mark have a great chat explaining what private equity is and how it works. Mark then answers some interesting questions such as:
When looking to invest, what are the key things that you are looking for when you evaluate businesses?
What do you look for when you're assessing these businesses and the leaders? What is the difference between a good leadership team and average leadership team?
How have the good leaders reacted to external shocks and how have they got through the change? What are some standouts in your experience around some leaders that have navigated change?
What are the different operating rhythms that you partner with? What do you expect from them? How involved are you in the business? What are the board meetings like?
How do you support owner managers or leadership teams with getting the business ready for an exit?
Listen to gain their insights and advice for current and future leaders.
You can also find the podcast on several different apps, Spotify, Apple Podcasts, Breaker, Castbox, Google Podcasts, Overcast, Pocket Casts, and RadioPublic. Click here to listen & subscribe on your favourite app or read the transcript below.
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Private Equity - Business, leadership and high performing teams
Agile Leadership Lessons, Episode 5, transcript:
David Evans, Managing Partner of Watermark Search International:
Hello and welcome to the Watermark Search International podcast. On this podcast, we discuss leadership trends with experienced leaders on what is working, what isn't, and shared experiences on how we can all improve as a leadership cohort. I'm David Evans. Let's dive into this episode on leadership agility.
I am delighted to have a special guest with us today in Mark Baldassarre. Mark and I have known each other for a few years. We've been involved in some deals together and we're both often asked about private equity and the experience of working with private equity. What do private equity firms look for in businesses? What do they look for in leaders? What is their operating rhythm?
Mark and I got to chatting and thought, why don't we record a chat so we can share it with all of you today? Mark brings over 25 years of private equity and international banking experience. Mark is deeply experienced in acquiring, integrating, and growing businesses, as well as providing strategic direction to company boards and management teams. Mark has worked all around the world in international banking and private equity, private debt, venture capital across Europe, United States, South Africa, and of course here in Australia.
Mark has looked at hundreds of private equity deals and has invested and exited in dozens. Mark has worked across many industries; defence, health, engineering services, consumer products, logistics, storage, waste management, tourism, telco, and media to name a few. As you can hear, Mark has a lot of experience across a lot of different industries in private equity investment. I want to welcome you to the podcast, Mark. Thank you so much for joining us. Perhaps you could start with a little bit more about yourself, your firm, and where your firm focuses its time.
Mark Baldassarre, a highly accomplished leader in Private Equity:
Sure, David. Pleasure and thanks for inviting me here today. We're a private equity investor, as you described. In my role here, we focus on the Australian and New Zealand markets. We're targeting making acquisitions of companies in the order of magnitude of $50 million to $200 million of enterprise value so total company value. That means we're trying to buy, invest in, and own mostly private or family-owned companies.
Sometimes we can buy divisions of public companies or multinationals, but the private company domain is where we have had most of our success. We like to help transition founders of owners of businesses through new ownership or from private to institutional ownership, perhaps helping de-risk family wealth, succession planning. That's the motive we look for. In layman's terms, we're looking to buy and acquire stakes, typically majority control stakes in quality businesses. Then we like to own, manage, grow those businesses for periods between three to five years before moving on and passing ownership to the next owner, which we commonly refer to as an exit.
Monikers that are used to describe that could be growth investing, people think of words like MBO or MBI, management buy-in, management buyout, which I think is a key theme of our discussion today, and sometimes you hear the expression LBO or leverage buyout. I think important to explain that this is not venture capital. That's early-stage, high-risk, high-tech kind of investing, which is really a subset of private equity. We want to invest in established and profitable companies. That's typically how we operate here.
David Evans, Managing Partner of Watermark Search International:
Great. I think that's an important distinction between venture capital and private equity. People don't always understand the difference. I think that as you articulate there, Mark, understanding that these businesses are typically doing well, these are not generally high-risk businesses. They're doing well, producing good margins, and in good sectors. When you are looking to invest, what are the sort of key things that you are looking for when you evaluate businesses? I know you look at hundreds. What are the sort of two or three key things you are looking for when you're looking to invest in a business?
Mark Baldassarre, a highly accomplished leader in Private Equity:
I think I like to word it investible businesses, and we will keep using that word today. Investment. We're not transactors. This isn't a momentary buy and sale, clip the ticket and move on. We want to be partners and owners in businesses. Maybe to just explain what we look for is perhaps initially try and demystify private equity a little bit. There are expressions of barbarians at the gate and all those things from back in the '80s and the good old days.
You've touched on it there, we're looking for an opportunity to invest in a business that has the capacity for growth. That's not just cost cutting, it's not asset stripping, it's really what we're talking about, is looking for a business as a capacity to grow earnings. Sure, it's possible to improve earnings and call it profit by pulling levers to reduce costs; optimising operating structures and efficiencies and margins. As I said, this isn't just "Rip it out, cut it, and move on". We're looking for growth, and really ultimately growth begins at the top line at the revenue line. What characteristics does a business portray that show that it can grow?
A couple of ways you can grow. You can be inorganic. We can provide capital to a company to acquire its competitors, other related industries, synergistic acquisitions to grow into different markets or different geographies. That's a key driver. Then there's typically organic growth. How can we help a business invest in its product and its people and its assets to grow that top line?
Businesses that display those attributes are attractive to us. Without going into a long dissertation on evaluation methodologies, the value that we're trying to create is highly correlated to growth. The businesses that have a high capacity to grow, have shown a proven capacity to grow, and clearly, a future capacity to grow will attract higher value. That's really in the simplest form an evaluation multiple.
If I break that down to the company level, very simple stuff, good quality businesses, which means profitable businesses and capacity to grow. On your earlier point, we're not a turnaround-- we're not trying to turn something unprofitable to be profitable, it's already profitable. It's already growing. It's got a unique or differentiated product offering. What distinguishes it from its competitors? History as well. Trend is your friend. If a business has displayed certain attributes over time, can this be continued? How can we help to achieve that?
Margins. David, you touched on that before. We want to see businesses which have attractive margins, and these things that everyone looks for, there's no real magic or rocket science in this, but the higher the margin, the more attractive the business. If you're buying things in single to low digits of EBITDA or profit margins or EBIT margins, then the risk factor increases. We like to see a potential double-digit at that level.
Then market position. Does this have a defensible position? Is it a minnow in a large market? We talk about moats or threats to businesses. What's a defensive position? Then coming back to the word we're going to continue to use today is cashflow. The ability to turn profit into cash. Profit is a great thing and cash is more important. That means you take your profit and what's required to grow the business.
Where you have businesses with capital intensive, where you have to have a constant requirement to invest in hard assets, equipment, vehicles, and what-not to grow the business becomes a little less attractive than businesses that have an inherent ability to convert that earning into cash. At a macro level, we touched on that a little bit, but what sector is the business in?
Are there tailwinds in a particular sector which are going to help it grow? I could point out the defence sector at the moment, which has obviously got a lot of geopolitical discussions. That is an industry where you can see a capacity for the industry to grow so that you can also grow within the sector and then the sector itself is on the rise. How big is the market? How many players are there, what's the business market position, are there barriers to entry? How defensible is that?
We want to grow our business, which means we either have to take share, and we want to grow in a business in an industry that's also growing, and a combination of those two will help that top line. Are there existential threats to a business? Can a new entrant come in? Are there existence of gorillas that will have a say whether you can grow? In some industries everyone likes to play in their lane, and as long as you do the right thing, no one else will get upset. As soon as you start to hurt someone a bit bigger than you, they can come and nudge you out, and create a significant threat to the business. A whole bunch of factors. When all those things line up and ultimately they do, there's plenty of business around, then we become quite attracted to a business.
David Evans, Managing Partner of Watermark Search International:
One of my earlier managers taught me, and it's a pretty common saying, but it's certainly one that stuck with me throughout my career - profit is vanity, cash flow is reality. It sounds like these businesses that you're investing in are good businesses, in good markets, doing well with a high propensity to grow these businesses.
One of the things I wanted to unpack with you, Mark, a little bit today was around your experience and what you look for in leadership teams. As you know, this is my huge area of passion. I spent 20 years of my career in this area understanding high-performing leadership teams. What do you look for-- when you're looking at a business and all those metrics line up, they're in good sectors, they're profitable, they meet the requirements, you've got all these aspects that you're looking for, then let's go to the leadership team.
What is it that you're looking for when you're assessing these businesses and the leaders? What is it that the ones that have the X factor or ones that are missing, what are the things that have really inspired you when you've looked at businesses, and what's the delta and the difference between a good leadership team and average leadership team?
Mark Baldassarre, a highly accomplished leader in Private Equity:
There's many factors. That's an art as much as a science. When we make acquisitions and want to buy and own businesses, we want to help. This isn't, "You buy, get your broker to buy shares in the company, and you simply walk away." We want to be able to help that business grow, and we want to provide typically through capital but also through some strategy and other skills which we can talk about a little later.
I guess the first thing you look at is, and it's an easy one to say and perhaps hard to define, but it's the chemistry. We're going to be in partnership with the management team for the next three to five years. Three to five years seems like a long time, but it moves pretty quickly. Getting the management situation wrong can cost you a year. By the time you work out it's wrong, the chemistry isn't there, the skills perhaps aren't there, and you've lost a year, which is 20% typically of our investment horizon. It's quite a long time. The IRR clock that we're measured by ticks quickly.
Having that chemistry, being able to understand that you can work with people, that we're somewhat like-minded. Then look, we're coming in to help initiate some sort of change, the change of ownership being the first one. It's going to be different. How does the management team have the capacity to accept and then lead the change? Because change upsets people and not everyone copes well with change.
Their ability to, A, themselves cope with that, B, work with a new shareholder, C, execute on certain objectives, and importantly lead the team through change. The next one is really I think entrepreneurship. Private equity ownership might not suit everyone. There are some people who just like doing what they're doing. We're looking for owner-managers, not employees. We want people to come on the journey with us, have some skin in the game.
This isn't just about getting a job and maintaining a job per se. It's actually achieving a common objective and being rewarded for that at the back end. It's an investment partner, not necessarily an employee. Having an openness and willingness to actually invest alongside us which can say, "It's okay to have a job and get paid," it's another thing to put some hard-earned money on the table and have some risk in the game and skin in the game, as we like to call it, but then to the entrepreneur point, you'd want to seek and have a desire to have long-term equity upside.
Ultimately, all this that we do is about creating returns for our investors, and creating return for our investors starts with creating return for management, and having the ability to, A, want and desire to achieve that, to see the upside at the back end of the investment means we're all aligned. There's an alignment of interest that's really important.
All various factors, but when we assess and it's difficult when we're buying into a business, we're trying to assess management over- we're dating - there's a number of interviews, everyone's on best behaviour, and then it's only once you've closed the deal, you see how people ultimately behave. It's trying to look through all that. I think having a track record and being able to look into previous experiences and references is important but really capacity to accept lead change is really important David.
David Evans, Managing Partner of Watermark Search International:
One of the things that we've been talking about on this podcast series is leadership agility, and we believe at Watermark Search that those with higher leadership agility drive higher performance. You articulated it so well, Mark, and that is being able to cope with change. We are always thrown things that weren't in the playbook, weren't predictable, change in business conditions, regulatory changes, pandemic, these things happen.
In a five-year investment horizon, there can be one or two, or multiple of those. If I can ask you to reflect upon when you've invested and you've partnered with these owner-managers that you're in this partnership with, what are the key attributes or what have the successful leaders done, how have they reacted to these external shocks, and how have they got through the change? What's been some standouts in your experience around some leaders that have navigated some change?
Mark Baldassarre, a highly accomplished leader in Private Equity:
When you think about who you're trying to invest in, I guess one way to describe that is track record. We talk about-- it'll circle around to answering your question more directly but backing winners to win again, having a history of track record and the skills and competencies to run the business in its sector or market where they've had proven success and capability.
If you've done it before and you've had some longevity, you've typically been through those cycles and you can see, "This is what we did when it went wrong, and this is how we improved," or, "We're on a rising tide and this is what we do to float higher than everybody else." Really it's having that track record, and as I said, knowing what to do when things don't go well as much as what to do and to try - saying, "This is what happened last time, this is what we do." Experience is really important.
This isn't a training exercise when we hire managers into our businesses. You can grow your skills in a corporation and move through the ladders, but when you are certainly at the CEO level, the C-suite level in our investments, we need to hit the ground running from day one. We don't have time to learn. We need to see that there's that proven ability. It's the people who are strategic. It's not just an operational role that we're looking for. We've got a plan to execute, and that plan can change over time. When things don't go well, you need to be able to pivot pretty quickly.
It's a three to five-year journey. Someone that has the ability to take the plan, execute, pivot as required, and derive a certain outcome. You talked about it, it's really agility. The ability to adapt to new circumstances and new ownership. You've got to be agile. That's going to change, particularly for private family businesses that may have been owned by the family for many, many years, and people have worked for the same owners, and it's all nice and tranquil and great, and that's a wonderful place to be, but they haven't had the experience of having that sort of quite significant change.
Perhaps in a public company, a multinational management change, owners change every day. In our journey, it's a significant change and it's for a period of time. Being able to be agile and be able to bring people through that journey. What we really like to see is the best people, and this is quite easy to say, and you would've seen it many times, but good leaders that we're looking for are going to surround themselves with even better executives. Those who one day are capable of taking over from that particular CEO or CFO or whatever the case may be.
Some of us see them as an opportunity and not a threat. You typically see, and I've seen many times where poor leaders surround themselves with poor people, so they don't look bad. The best leaders we've seen have brought in super talent into the business to the point where they're making their jobs obsolete ultimately because we are going to sell the business. There is going to be a new owner going forward, and maybe the CEO or the leader of the business that time will have to exit and then sell the leadership team around him. That's really important for us.
Look, some of the other things around the ability to inspire, motivate, and really bring that team into the journey because it isn't just a one-person show. It is really bringing an entire team, CFO, COO, all the key lieutenants, and the people in the next levels down, that they're able to see the vision and execute on that vision. A lot of that comes down to EQ. It's easy to be a command-and-control type of person and maybe that was good back in the day. I think these days requires a bit of the softer skills as much as that.
How do you inspire, motivate, drive change, and bring people on the journey of explaining why we're going from A to B? Why are investors here? What are they looking for and how do we all get behind that? How does that all make us successful? We touched on it, dealing with the inevitable resistance that you'll experience. "That's not the way we did things. We've never done it like this before. That's not the way Mr. or Mrs. Owner before has done this over the history."
You really need some skills to manage and experience to manage through that. Then look, it is a journey. We are going to buy the businesses, own it, and ultimately sell it. The people we're looking for are who have got the ability and not afraid that at the end of a certain investment period, that their job might be obsolete, that they have sold the business to a strategic buyer and they back themselves that they'll be sufficiently rewarded that they can go on and find something else to do over that. It's quite an entrepreneurial person that you're looking for that has multifaceted sets of skills that really make them successful.
David Evans, Managing Partner of Watermark Search International:
One of the questions we often get asked is, what's the operating rhythm like in a private equity-backed vehicle? You touched on the leadership agility and all the attributes that we look for, and they're very similar attributes to what we look for in a listed company or a private company. High-performing leaders have very similar attributes and they can perform in many environments.
One of the things that we wanted to unpack a little bit is how do we convey to some people that maybe have never worked in a private equity-backed environment, what are some of the differences or what is the different operating rhythm that you partner with, Mark, and your owner operators? What do you expect from them? How involved are you in the business? What are the board meetings like? What's the operating rhythm like in your portfolio companies, Mark?
Mark Baldassarre, a highly accomplished leader in Private Equity:
Good question. I like to answer that, typically when I'm asked that, is to explain, look, we're owners of the business. We're not third party, we're managers on behalf of the shareholders. We're quite actively involved in the businesses, but we're not operators. We manage a portfolio of investments. We might have four or five that we look after. It's quite an active role. We don't get in there and hold the wheel. We're not trying to get in there and run the actual business, but we're not third-party, non-executive directors who have a fiduciary role, turn up once a month and have some strategic discussions and look back on the previous month and may not have any involvement between board meetings.
I like to describe us as semi-executive directors or semi-executive investors. We're professional owners of businesses and we're serial owners of businesses. A soft point to add in terms of success would be not just the financial success, but really the relationship that gets built with management, the partnership that we create with management, the fun that we have.
We're here for a short time, not a long time, I guess. Let's make sure we enjoy it. Then look, frankly speaking, we want to do the next deal. One of the most important things we get out of our relationship and management team is for them to be advocates for us in the future because when we're trying to get to buy the next business and people roll their eyes and say, "Why are you here? What do you want?" let's go and talk to some people we've worked with before, and they can explain to you how we behave.
When we're trying to buy a business, sometimes we're in competition, and management might be choosing between two owners. If we can create the relationship, the partnership, and the advocates for us, then we can see that as a real success factor in what we do.
David Evans, Managing Partner of Watermark Search International:
That relationship piece is key. You touched on it, Mark, chemistry was the phrase that you use. The chemistry within the existing leadership team, but also the chemistry between that team and potential new investors or private equity firms, and how you can all work together to achieve a successful outcome. There's going to be some frank discussions, to put it politely.
There's going to be some good times and there's going to be some really difficult times and some really hard decisions. That's the nature of what you're trying to do when you're growing these businesses. Not every day is a great day. There are hard days and you need to be able to work through those together as a unit, and through those times, you build some really strong relationships. If you can do that, then typically we see executives roll onto other private equity deals either with the same fund or other funds.
Mark Baldassarre, a highly accomplished leader in Private Equity:
100%. If it was really easy, everyone would do it, I guess. It's showing you mentally in the hard times. You buy investment in a great window, market activity, and economic growth, and everything just goes according to plan. You haven't had to do too much. That happens, but it's never a straight line, and it's navigating through those bumps and curves that does create a better outcome.
Importantly, ending the ownership with a good relationship, it doesn't always happen. Sometimes there are hard decisions that have to be taken, and then the ability to take those decisions sooner rather than later, identify what needs to be done and then moving on that sooner can be the difference between a good and a bad outcome. We get involved with management to help. We all have the same objective. I think the key thing to point out is when we make an acquisition, we don't go through all the time, cost, and energy to buy a business and then say, "Now, what are we going to do?"
Through that process, we've worked out what our strategic plan is, what are the levers we wish to pull over that period of time to grow our earnings, back to our original point. There's usually a set of steps. There's usually a hundred-day plan, and then there's a two to three-year plan. What we try to do is, having established that with our management team, how can we be helpful in one of the ways that we can bring certain skills that can complement the skills within the business?
Finance, M&A, getting a business exit ready, those skills are more in our traditional patch. We like to focus on some of those areas because we've done that multiple times and we can bring in those skills. We'll look at the investment plan and say, "Okay, part of that plan is to be inorganic." We might lead an M&A process and drive that and allow management to focus on the core.
You talked about board meetings. When we get to a board meeting, we know what's happened in the prior month. It's not like we get the board pack and say, "Okay, how did it perform?" We're speaking with management weekly. If there are any major issues that have risen, we'll get a call. If you're the chairman, there's typically a weekly call between the chair and the CEO, for example.
It's not a surprise each month. We'll talk about what happened and we'll go through, and importantly, focus on key things like health, safety, environmental, those really important factors, but then we'll be not so much looking back on the month, but looking forward on the next month and the next quarter, and looking at the plan and the budget for the year. Then as we get through the ownership cycle, we start to talk about the exit, becoming exit-ready and what do we need to do, and committees might be formed to focus on that.
It's a very active role in helping, but not running. I think that's probably the key thing is how can we help. Sometimes we'll be dragged off into the next transaction, we'll be a little less available, but we really need to support management and help them execute on our common plan.
David Evans, Managing Partner of Watermark Search International:
One of the things you touched on there, Mark, was around getting the business ready for an exit. In some cases, executive leadership teams may not have done this before, or may not have done it in the way using the experience that you might bring, Mark. What are some of the things that you support these owner managers or these leadership teams on getting the business ready for an exit?
Mark Baldassarre, a highly accomplished leader in Private Equity:
Sometimes I describe private equity as a storytelling exercise. You need to identify where the drivers of growth are and how easy those levers can be pulled. Sometimes helping articulate that is really important and identifying and actually helping present board reporting and management reporting in such a way that we're able to identify those levers and point them out to someone else pretty quickly.
It's due diligence, understanding what next. This is really important. We know what the next buyer is going to look for. We know because that's what we do every time and we're all similar. If we can get the business ready by saying, "Here's what's going to be important to the next owner," let's make sure those questions are easily answerable. If there are risks, let's make sure we put in place sufficient mitigants to protect against that. Let's not be caught short by something that someone else might find that we weren't aware.
It's a really diligent exercise of understanding the risks and opportunities in the business and making sure the data and the information and the story to support or substantiate that is relevant. Then, look, we're good at hiring the right people to do this. This isn't just necessarily a job for us and for management, we'll bring in the necessary skills and third-party consultants and resources to help in that. That could be bringing in professional investment banks or advisors to help us find the best buy for the business.
We might go through a process of doing vendor due diligence and preparing financial, legal, accounting tax processes so that we can run a streamlined process. We can sit in between management and run interference a little bit because the biggest issue when you are exiting is, both when we buy and when we sell, in a five or six-year period, is running interference for management, helping them continue to run the business while this process goes along because businesses can sometimes slide sideways when management is distracted. It's bringing those arms and legs and skills into the business to help through those periods.
David Evans, Managing Partner of Watermark Search International:
Thanks, Mark. One of the things that's coming to me as we have this conversation is really around the skills that you bring and those in private equity around really adding value, helping grow these businesses, and then positioning them to realise that value. I think it's a really somewhat unknown, and in many cases, underrated skill set. I think there's a lot of mystery around private equity. That's why we wanted to have this discussion and try and share some of our learnings and experiences with people.
What's also clear to me is that it's got to be a great business. You've got to have real leadership agility. We know good leaders can perform in almost any environment, and you've got to be able to create value. If you can't do all those things, it may not be a fit for private equity. If you'd like to know more about private equity, feel free to reach out to me or Mark directly, we'll put him in all the links and the socials on this.
I just want to thank you, Mark, for sharing some of your insights. I know we could go on for hours around the operating rhythm and the leaders and all that sort of stuff, but I hope this has given you out there a bit of a taste and a teaser of what the private equity model and rhythm is like. If you'd like to know more about it, don't hesitate to ask me or Mark directly. Thanks so much for joining us today, Mark.
Mark Baldassarre, a highly accomplished leader in Private Equity:
Thanks, David. A pleasure to speak and thanks for the opportunity.