The Exchanges

Q wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. What are some of your favorite stories that are kind of emblematic of what the deal dynamics look like when you're trying to compete to buy a company?

A I think my favorite deal, we were buying the phone company of Ireland called Aircom. And it was a state-run telephone company, so it was poorly run, and it had gone public. They'd sold off their wireless business, so they're left with this landline business, and we were trying to buy it for four to five times EBITDA, and so we partnered up with Sir Anthony O'Reilly, who was Mr. Ireland. And we were the telephone experts, and it was Providence Equity and George Soros and Sir Anthony O'Reilly, and we were the biggest check. And another Irish entrepreneur named Dennis O'Brien partnered with another private equity firm, and it was a, an Irish brawl. You know, Tony O'Reilly owned the newspaper, so he would write about What a bad guy Dennis O'Brien was. Dennis O'Brien would go talk to another newspaper, and it was first time I'd ever heard our deal was on the radio, and people like screaming at each other, and because Ireland's such a small company, this was such an important company, and we worked so hard to win that deal, and was publicly traded, so the highest bid won, and we went out by a few pence, and it turned out to be a great deal for us, but it was a Donnybrook. And we would check into our hotel. One of my partners had his briefcase stolen because someone was trying to get information on what we were going to bid. And it was really something. And so I would go to Ireland on…

AI assessment note: “I think my favorite deal, we were buying the phone company of Ireland called Aircom.”

Q How did you go about that process of searching for them?

A I was the type of guy that just always asked people who was their favorite boss. The best operating partner we ever had at province equity was a guy named Barry Allen. He ran Ameritech, the phone company, and then he went to run Quest Communications when it was going belly up, and he was called in to rescue it. And this is a Midwest guy, grew up in Milwaukee, and I've never seen him have such a way with people. He was just a true leader. We bought the Ironman group, the World Triathlon Corp., and we put Barry in there to go work with the CEO. He doesn't know anything about triathlons, but he knew about leadership. And any company that guy touched, I think he worked for seven of our companies. He was seven for seven. Every one of them was a good deal. He always said, I'm a translator between the CEO and the private equity guy. He goes, I know what real leadership is. You private equity guys, you know, finance. And I would go rely on a guy like a Barry Allen to make sure we, if I had a question about a CEO, I'd say, Barry, you got to go help me here. And if Barry thought the guy was a good CEO or the woman was a good CEO, I slept that night. When he didn't think it was, then I knew I had a problem. And Barry, just a tremendous guy. And of the 10 operating partners, three were good, three were mediocre, four were not so good. Not because they were bad. They just didn't want to wor…

AI assessment note: “I was the type of guy that just always asked people who was their favorite boss.”

Q So when you think back to that specialty, right, there are business reasons to do it. As you said, there are sort of knowledge and network reasons to do it. What was the original impetus for why it worked?

A It was knowledge, and if we had just done cable TV, just that, we would have made a fortune as well, and just being really good in an industry that was a big user of capital, huge user of capital, and it was the right industry at the right time, and when you think of John Malone, And what he did, and Amos Hostetter at Continental Cable, we were just playing in that pool, and that turned out that pool was huge. Not only was it big in the United States, but I moved over to London in 1999 to open up our European office, and we owned the most cable TV in Europe than anybody at the time, and we made more money in Europe on cable TV than we ever did in the United States. And we had a, just an amazing track record. And just in cable TV, we had an amazing track record in wireless communications. And then we started doing stuff like competitive access providers or CLEX. And because we were early in these industries, we were able to get outsized returns. And I think in today's private equity world, if you don't have a competitive advantage, it's really hard. To make outsized returns, and people are doing it in software as a service now, and you're just seeing it all over that. If you don't have a competitive advantage, it's almost impossible to make an outsized return. Private equity is a great business if you want to step back. I mean, think about it. I always say we get to buy companie…

AI assessment note: “It was knowledge, and if we had just done cable TV, just that”

Q So as you built this up with your partners, you mentioned the word retire. What is that whole life cycle that you go through where you decide to step away really when the business is thriving?

A So I did it for 28 years, ok? And we had a run like, it was just an amazing run. It was awesome. And the last five to 10 years was just raising money mostly, right? And you getting away from what you love the most, which is just being with entrepreneurs. About five years ago, I took my family on a sabbatical. We went around the world for seven months. And I realized that after I came back that in seven months, our firm hadn't done a deal, had nothing to do with me. We had plenty of great deal doers. I'm thinking, I would have worked so hard during those seven months, and what would I have shown for it? And that's when I knew it was probably time to retire, and give the young team an opportunity, and, and plus, as you get older, and, you know, I always say I, I get fat and lazy. There is a time when you have to push out the senior partners, and so I was one that they were like, happy to see me free up some of my economics. What other business in the world do you work your heart out, right? And then you just give away the equity, To the younger generation, and that's just the way it always was, and then Blackstone decided to go public, and you realize that, you know, it doesn't have to be that way, and Providence Equity was never one to, we weren't big enough to go public. We probably could have, but we liked our private lifestyle, and so we were the first firm to ever do a deal …

AI assessment note: “that's when I knew it was probably time to retire, and give the young team an opportunity”

Q Why don't you take me back to when you first joined Providence way back in the early nineties and what was the firm like then and what was the private equity world like then?

A Well, actually, it goes back to Harvard Business School, where I graduated in 1991, and we're in the middle of a Gulf War, and it was three of us. I remember sitting at the gym at Shad Hall and at Harvard Business School, and I kept on telling everybody that I'm going into leverage bios. You know, private equity wasn't even really the word, and there was two other guys. We were sitting around, and I think I got a prize because I actually got the most interviews of anyone At private equity firms, and I actually couldn't get a job. And I'll never forget, I was sitting in a hot tub with a buddy of mine, and there was this firm in Connecticut called Kid Camp. Two guys, one named Kid, one named Cam, and I interviewed with them, and then there was another firm called McCowan DeLue, and I was interviewing with them, and it turns out my buddy and I were both interviewing with both. I'm thinking, all right, maybe he gets one, I get one, and that would be great, and so we were both interviewing at McCowan DeLue. They interviewed us 13 different times, and they had us do a psych test, and so my buddy said, geez, you know what, anyone interviews you for 13 straight times, And they can't make a decision. I don't think I want to work there. He got the job offer. He turned it down like that he would. I'm thinking I'm in. So then I don't hear a week, week and a half goes by, call up the firm a…

AI assessment note: “Well, actually, it goes back to Harvard Business School, where I graduated in 1991”

Q What stage companies are these that you're doing in your family office?

A All different stages. I guess I've been in the business long enough. Deals just find me. One company, the guy makes signs, and He sought me out cause he wanted me as a partner to help him, give him business advice. I put in a million and a half bucks and I bought a small percent of his business and his business is more than tripled. And to see his life change is just awesome. And you know what? I'm going to make three or four times my money cause we're in the process of selling the company. And I'm like, wow, this is great. But to see him Literally become very wealthy and he's going to put a bunch of money. He has a kid that's autistic and he's going to start doing research on autism. I mean, you can see just the great things that happen when there's a good exit like that. So I just love doing stuff like that. I own a bakery where we have a high end bakeries in Rhode Island. They were doing great until COVID, and because thankfully we have deep pockets, we kept them alive, and they'll do great again, but they certainly haven't done great in the last six months, but if you ever come to Providence, you go to Seven Stars Bakery, I guarantee you have the best coffee and the best pastry you'll ever have in your life. We do food really well in Rhode Island.

AI assessment note: “All different stages. I guess I've been in the business long enough.”

Q How do you structure the alignment of the duration that you would like to invest, as you say, longer and longer, from the structure of funds where the LPs are used to that kind of five-year turnaround?

A Yeah, it makes no sense, and why we all did it this way for years is you have a fund with a five or six year investment period, five year liquidation period, and you're starting to see these long dated private equity funds now. It makes no sense to own a great company and sell it to Carlisle, right? And then we buy a company from them. Why not just own it yourself? And I think over the next 20 years you're gonna see That change in private equity where You're going to own your winners longer, and you're going to find ways to pay out, in essence, carry halfway through the point, because people still want to get paid. And I think LPs realize that the friction cost of flipping companies from one private equity fund to another makes no sense. So I think you're going to start seeing these longer dated funds, and I think that's good for the business. And everyone, if we were really all smart, we would have just been Warren Buffett, right? And just done it through a public vehicle and, and never pay taxes, but we weren't that smart. He's a lot smarter than us.

AI assessment note: “find ways to pay out, in essence, carry halfway through the point”

Q So over the years within the media space, it started as Providence Venture and now much more well-known for growth and buyouts. What was that trajectory of what stage of companies you were investing in?

A Yeah. So as you write bigger checks, you were writing, you were investing in later stage companies. And so we kind of grew up that way. And it's funny. I look back a lot and say, okay, was it smart to grow so fast? And I think the private equity firm that has outsized returns and stays at pick a number of billion dollars and never grows. It's hard to attract young talent because the older folks get a little embedded. And it's hard for the younger ones to break through. So the only way they can break through is if you keep on growing the firm. And that's the key is you got to keep on growing the firm. So people who say, well, we show discipline and we don't raise more money than we can manage. Most great firms just keep on getting money thrown at them. And it's almost hard to say no. And so we kind of grew up with that. And then back in 2007, we had raised a bunch of money and then the world fell apart in 2008 and nine. And so I think just good investing. We had this new big twelve billion dollar fund. And we were trying to figure out how to deploy it, and our own portfolio company's debt was trading at 60, 65 cents on the dollar. Senior debt. And this is 2009, and I called up one of our LPs, and I said, he's a close friend, and I said, listen, we have this twelve billion dollar fund. Why wouldn't we just go buy some senior debt? No one knows the company's better than us, and I …

AI assessment note: “as you write bigger checks, you were writing, you were investing in later stage companies.”

Q And so in that trajectory from four or five of you at a hundred million and then 350 to four, eight, twelve billion dollar funds, where did the growth internally come easily? And where were there challenges along the way?

A Well, the funny thing is, is hiring folks to Providence, Rhode Island, wasn't the easiest thing. Plenty of people to hire in New York, and plenty of people to hire in Boston, and so my pitch used to be to the young guys and women, I said, live in Boston, take Amtrak, and that's what they used to do, and to this day, they still, a lot of them commute from the Boston area, because when you're young and single, Providence is a great place to raise a family, not the greatest place to be a young buck, and so it was actually hiring and growing the firm. It wasn't the easiest thing, but we made it work, and we got We would never get the person who got the job offer from Blackstone or KKR, and we actually liked that. We got the hungrier and scrappier person, and I did a ton of the hiring, and you hire a certain type of person, you can build a culture, and we always had this culture where we were kind of known as the good guys. We were the little guys from Providence, and, and whenever I would go head to head with a New York Well-known private equity firm. We would always win because we were the nice guys. I always thought, you know what? We're going to be partners with this people. You better like them. They better like you. And it was amazing how private equity gets a bad rap because of the outsized egos. And the truth is, Some of it's well-deserved, and we just made a living being th…

AI assessment note: “hiring folks to Providence, Rhode Island, wasn't the easiest thing”

Q So where does the sourcing come from? Is everyone looking at the same set of public companies to take private, big private companies?

A There's been a lot of flipping of private equity companies to private equity companies. We're all guilty of that. We set up a group called Providence Strategic Growth. They have 30 young kids cold calling companies. And Summit Partners has been doing that for years, and other firms have been doing it for years. I don't think there's a company in America that hasn't been called by a private equity firm. Capital allocator is going to be getting pitched by private equity firms that don't even know what you do. They're just trying to get to return a phone call. What used to be a nice niche is now an asset class that is not only here to stay, it's a fabulous asset class. And anytime you can get a preferred return of six to eight percent before you start sharing fees, that actually attracts pension money that will, it will always attract pension money because they're sitting there going, hey, our hurdle rate's seven, eight percent. If I can get the preferred return out of a private equity guy before fees, that's not such a bad deal. And why the 20% carried interest hasn't ever changed as far as, we're not complaining. We used to have a 25% carried interest, but you know, you would think it's so competitive that you could dial down the carried interest and investors would have more control, but they really don't, because it's just, there's so much capital out there chasing the good fu…

AI assessment note: “They have 30 young kids cold calling companies.”

Q Let's talk a bit about the whole investment process today for private equity firms. So as you're looking out at this landscape, where is the balance of deals coming from?

A It's interesting. There's been a huge, up until just recently, it was always better to just raise money through private equity than go public. The last five years, valuations have been higher privately than they were publicly, and so if you're a CEO, why do you want the brain damage of being a publicly traded company? So you saw the Airbnbs and all these companies just stay private for a long time. Now the market's obviously going crazy, and it's 30,000 Dow and even the Airbnbs are going public and the door dashes and the, those are all funded with private equity for a long time. And so when you think about the amount of money that was in private equity, it was really displacing some public equity. So there was plenty of deals to go around. Now you have the advent of the SPACs. And I always think of the SPACs, the public equity of competing with private equity. And SPACs used to be, well, if you couldn't actually get it in real investor, you just go to a SPAC. Now it's a competitive source of capital. And I think SPACs aren't going away. And so I think there's even more competition. So I just think there's just one overarching fact here is returns have to go down. They just have to. Now, with cheap leverage, we've been able to pump returns up, and leverage is about as cheap as I've ever seen it.

AI assessment note: “when you think about the amount of money that was in private equity, it was”

Q So as you look out going forward, private equity in general, where do you see other opportunities for evolution?

A My crystal ball is a little cloudy on this one because that's an amazing asset class. It produces good returns. The advent of SPACs, Is going to cloud that crystal ball a little bit, because that could become real competitive capital, and that will just make returns go down. And with every great idea in America or around the world, capital flows to great ideas. And the private equity business is a great business, and now you're starting to see the public guys saying, wait, why can't we be in the private equity business? And so they come up with a better form of SPACs now that is a little bit better alignment with the public investors, and that's just pushing prices up. So I do think private equity will have a dampening of returns, meaningfully dampening, but when the 10 years trading at. Maybe if returns are only single digit for private equity, that's still good enough. I just think returns have to come down.

AI assessment note: “My crystal ball is a little cloudy on this one because that's an amazing asset class.”

Q And if you were sitting on the other side, if you're an LP looking at different funds, and you're not one of these megas, but you have real capital, you may have a few billion dollars or whatever the case may be, how would you think about asking the right questions to tease out the differences between a couple different private equity funds?

A Well, every private equity fund is top quartile. Every single one of them. So amazing how you can have every fund be top quartile. It's a people business. Okay. And every firm has a culture. And when I was interviewing prospective employees or partners at Providence, I said, come, come spend a day with our firm and then go spend a day with other firms. A hundred percent of the time you will get a sense of the culture of that firm. A hundred percent. And that either fits your personality or doesn't fit your personality. And I think the same way with LPs. Every firm has a personality, and every firm has a drive and a hunger, and you can feel that. And I know that Apollo's personality is different than Providence Equity's personality. And by the way, Apollo's fabulous investors. Amazing. But a different personality. And our firm is different than other firms. And so I think you really have to match the people with what the LP is looking to get. A lot of LPs want co-invest. Smart way for an LP to invest. Invest in the fund and get co-invest. No fee co-invest. You're just managing down your fees, right? That's a great way to invest. And so some LPs will congregate to people who know that will, they're not too big that they'll offer co-invest. I think you're going to see a lot of that stuff.

AI assessment note: “I think you really have to match the people with what the LP is looking”

Q And what's your take on the advantages or disadvantages of middle market private equity?

A We were classic middle market until we weren't. And now there's firms that are lower middle market, or if you look at a group of companies in an industry, And you see enough opportunities. I don't care if it's middle market venture, but you're in the right cycle in the right industry. You can invest right along that early stage, middle market stage, late stage. You're going to make money the whole way. You just are just to be in the right industries. It's no different than the companies that crushed it during COVID. If you bought zoom stock in March, you're really happy right now. I'm a terrible public market investor, so I didn't buy zoom, but boy, I also didn't buy Peloton, and I love my Peloton, but you're in the right space at the right time. You're making outsized returns, whether it's private or public markets.

AI assessment note: “I don't care if it's middle market venture, but you're in the right cycle”