Valuetainment - ＂Don't Even Bring Me the Deal＂ - The Red Flags That KILL an Investment

00:00:00.040 Okay, when I sell my business, I want the best tax and investment advice.

00:00:04.800 I want to help my kids, and I want to give back to the community.

00:00:07.940 Ooh, then it's the vacation of a lifetime.

00:00:12.200 I wonder if my out-of-office has a forever setting.

00:00:15.740 An IG Private Wealth Advisor creates the clarity you need

00:00:19.060 with plans that harmonize your business, your family, and your dreams.

00:00:23.480 Get financial advice that puts you at the center.

00:00:26.440 Find your advisor at igprivatewealth.com.

00:00:30.000 We have a saying as a firm that we're freakish about alignment.

00:00:32.660 So everything is about alignment.

00:00:34.480 We're the largest investor in everything that we do.

00:00:36.400 We've got $750 million of our own money, investor in our own vehicles.

00:00:39.780 So we always lead with our own money.

00:00:42.080 That's alignment.

00:00:42.920 Doesn't mean it's going to work, but it means we're aligned.

00:00:44.400 If we're not willing to bet our money, why should you bet your money?

00:00:47.140 Exactly.

00:00:47.920 But so what happened is the industry has continued to grow.

00:00:51.180 The ability to raise funds is highly dependent on how much of your own capital you're going to put in,

00:00:55.080 which is typically 2% to 5% of whatever it is.

00:00:57.580 So just use 5% because it makes the math easy.

00:00:59.480 You raise a billion-dollar fund, you've got to put up $50 million in your own money.

00:01:02.440 That's great.

00:01:03.120 You have a good track record.

00:01:04.080 You want to raise a $2 billion fund, now it's $100 million.

00:01:06.300 You want to raise a $5 billion fund, that's $250 million, and you haven't gotten your 50 back.

00:01:10.820 So where are you going to get the money?

00:01:11.960 That's why people will sell a stake to firms like ours because of the fact that they need growth capital

00:01:16.480 to be able to reinvest in their business, be able to grow.

00:01:19.400 And, oh, by the way, when they raise that $5 billion fund,

00:01:22.380 they're going to get 2% management fee on average, some higher, some lower,

00:01:25.320 and they're going to get literally that billion dollars, okay?

00:01:29.480 over a course of five years

00:01:31.540 just from managing that portfolio?

00:01:34.060 Five years, I'll use $10 billion.

00:01:36.000 $10 billion.

00:01:36.800 $10 billion is five years.

00:01:37.880 $200 million is 10 years.

00:01:39.400 So $200 million on a $10 billion fund.

00:01:42.000 Do that for five years because it's locked up.

00:01:44.020 It's contractual obligated.

00:01:45.000 You're talking about a billion dollars.

00:01:46.140 And oh, by the way, you take that $10 billion,

00:01:47.860 you turn it into $20 billion,

00:01:49.400 you get paid 20% of the profits.

00:01:50.680 You make an extra $2 billion.

00:01:52.840 That's what the opportunity is

00:01:54.380 to own a private asset management firm,

00:01:56.120 whether it be a $500 million firm,

00:01:58.100 a $5 billion firm, or a $10 billion firm.

00:02:00.720 That's why people will sell a stake.

00:02:03.100 And if we buy, let's say, 13% of somebody's position,

00:02:06.180 they still got 87%.

00:02:07.600 We're very aligned.

00:02:08.860 And that economic outcome

00:02:10.620 is what makes owning a private asset management firm

00:02:13.320 such an attractive business model.

00:02:15.180 I mean, imagine this.

00:02:16.160 You've got a lot of different businesses.

00:02:17.760 Imagine if you had customers

00:02:18.760 who are not allowed to fire you

00:02:19.820 and they have to give you a five-year contract.

00:02:22.220 It's pretty easy to budget

00:02:23.460 if you know your revenue for the next five years.

00:02:25.840 And oh, by the way,

00:02:26.460 if you have a billion dollar fund it takes you 20 people if you raise a two billion dollar fund it

00:02:30.880 doesn't take you 40 people it might take you another five or six so you have this huge operating

00:02:35.200 leverage the average operating margin for private asset management firms just for management fees

00:02:40.260 is 60 profit margins then on top of that they get the carry then on top of that they get the return

00:02:46.760 on their money they put in their own fund and they get the growth of the enterprise value because if

00:02:51.320 they grow from $3 billion to $30 billion, obviously they're worth a lot more money.

00:02:55.740 And we now have over 100 different firms that we own stakes in that manage collectively

00:02:59.700 $2.9 trillion in assets and have $12 billion of contractually obligated management fees

00:03:07.980 over the next 10 years.

00:03:09.140 They don't even ever have to raise another dollar, and they're going to make $12 billion

00:03:12.420 of revenue.

00:03:13.460 That's the sustainability, which is not correlated.

00:03:15.940 How hard is it to get into the business?

00:03:17.640 Oh, it's very, very hard.

00:03:18.940 It's extremely difficult.

00:03:19.440 What does it take to create a PE firm?

00:03:21.640 And succeed.

00:03:22.500 You've got to have a great track record.

00:03:23.720 You've got to have people that believe in you.

00:03:24.980 And then you've got to deliver performance.

00:03:26.000 Okay, so if I talk about putting a winning team, I'm talking to Tom Penn.

00:03:31.400 I asked him this question because he used to do the –

00:03:33.220 remember he used to do the collective bargaining agreements on ESPN.

00:03:36.220 He was so good at it.

00:03:37.080 I love when he does it.

00:03:38.340 But if I want to put a winning team and I ask Shaq or the late Kobe or Magic,

00:03:43.480 I said, what matters the most?

00:03:44.620 The owner, the coach, the player, superstar, you know, GM, what are the –

00:03:49.400 And then they would all give their philosophy on what's the most important hire.

00:03:52.560 On a P, if somebody wants to start a PE firm, what are the sequence, five steps, and what matters the most?

00:03:58.000 Private equity firm, I would answer very different than private credit or private real estate, but I'll answer your question with PE.

00:04:02.620 Yes.

00:04:03.040 You've got to have somebody who is the superstar investor who can convince people that they are the right person to back.

00:04:08.620 They obviously need strong partners that are going to be able to bring skill sets that are complementary to theirs.

00:04:13.420 You have to have somebody who has the relationship.

00:04:15.220 So one is somebody like you.

00:04:17.760 That certainly is one way to do that.

00:04:19.520 What's true?

00:04:20.820 And to be clear, there are firms that have different formulas,

00:04:23.200 but I'm going to give you what I see the most common

00:04:24.860 to where you have somebody who's a dominant personality,

00:04:27.840 a dominant investor who's got a great track record,

00:04:30.400 builds a team around them that allows them to have enormous credibility

00:04:34.440 to where people know that what they do, they have an edge.

00:04:37.680 And that's the key.

00:04:38.460 That's the formula that most people don't have.

00:04:40.560 Oh, I'm going to go buy stuff and it's going to be great.

00:04:42.880 No, it can't be financial engineering.

00:04:44.420 They've got to be able to add value.

00:04:45.740 They've got to be able to add alpha, as we call it, in the industry.

00:04:49.200 So what is it that they do that's totally different?

00:04:51.280 As an example, there's a firm literally right down the road from here called TriVest,

00:04:54.540 one of our favorite firms of one of our largest positions.

00:04:57.560 TriVest is an amazing firm, 30 years old.

00:05:00.360 All they do is invest in founder and family-owned businesses.

00:05:04.160 They're the first institutional capital in, and they go in and they make those companies better.

00:05:09.440 They buy it at, let's just say, seven times cash flow.

00:05:12.440 They put a little bit of leverage on it.

00:05:13.940 They grow the business dramatically.

00:05:15.740 They make it more profitable, better profit margins, professionalize everything they're

00:05:19.520 doing, and then they're able to sell it at 10 to 12 times.

00:05:22.920 It's not a complicated strategy, but literally in their history, they have what they call

00:05:27.820 the path to 3X.

00:05:29.260 They have done that on every fund they've ever done.

00:05:32.540 In 45 years.

00:05:34.080 In 35 years or so.

00:05:36.060 So they are a systematic alpha creator across generations of leadership, too.

00:05:42.200 They've actually had generational change over that period of time.

00:05:44.620 So I'm tracking. So far, you need a Christopher. What's the two? I need the four steps.

00:05:48.780 You definitely need at least two or three other really solid investment people that know how to break down opportunities to be able to build those businesses once you've acquired your stake or acquired the firm as a whole.

00:06:01.000 They're primarily control, as an example, using them, and I could give you 50 other examples.

00:06:05.940 But in that case, you also need to have somebody who's good at relationship management.

00:06:09.920 Somebody's got to have the relationships with either the institutions, the family offices,

00:06:13.140 or other large pools of capital that are going to give you money to manage.

00:06:17.640 You have to have a great operations, compliance, regulatory person, because this is a very regulated business.

00:06:22.460 Are you a Series 7, 66?

00:06:23.900 So we are not a broker-dealer, so all we are are 65.

00:06:27.740 RIA, we're a registered investment advisor.

00:06:29.840 That's all of our people are 65.

00:06:31.220 So the reason why I'm asking this question, say you have, you run a consult.

00:06:35.180 This is a selfish question here.

00:06:36.460 This is purely for me, so if you don't want to listen, you want to listen, it's up to you.

00:06:39.480 So say you have a consulting firm that you get deals that always come through to you.

00:06:44.220 Companies ranging from $5 million all the way up to $385 million in EBITDA, and we consult for them.

00:06:49.780 Could be multi-million dollar engagement, but we have constant deal flow coming in.

00:06:53.860 What do you do with the access to these deals that are coming to you of founders, they own majority of the company, and they would like to team up with our firm.

00:07:02.360 What do you do with the access to these types of deals that are coming your way?

00:07:05.420 It depends. It really is if you want to be the investor in that opportunity that you're helping

00:07:09.260 to improve. I mean, the vast majority of firms, actually, that's what they really are to the

00:07:13.660 firms that they acquire. They're a consultant. They come in as an advisor to be in the boardroom

00:07:19.680 to say, look, we got to make some tough decisions. We got to set really good goals. We got to make

00:07:23.220 sure that we get there. So you can absolutely translate that into a role of the investor in

00:07:29.420 that company. There's a lot of consulting firms that take, instead of a hard dollar fee, they

00:07:34.300 It will actually take a percentage of the company.

00:07:35.160 And we do that as well.

00:07:36.460 That's a way to monetize that.

00:07:38.460 We'll do cash and equity.

00:07:39.640 That's right.

00:07:40.360 Somebody could certainly do a fund once they have a proven track record.

00:07:43.400 The key is, for anybody, you've got to be able to show the good, the bad, and the ugly in how you've done.

00:07:47.960 You can't cherry pick just the winners and say, look how great I am.

00:07:50.900 So when you have to, you know, we look at 2,000 investments a year.

00:07:53.840 We might make 20 or 30 a year.

00:07:55.900 So somebody's got to literally convince me, and I'm not easy to convince,

00:07:59.840 that they can actually do this over and over and over and over again.

00:08:03.060 at good markets, bad markets, and that they're not just somebody that's really, really good.

00:08:07.440 Perfect. So that follows up with another question for you. So when you look at a deal coming in,

00:08:11.900 we scored a eight-point system that we look at to see if this is something for us to entertain

00:08:16.980 or not. And we've made, God knows, a lot of mistakes. I mean, we've made these mistakes

00:08:20.920 where it's like, oh my God, I like the guy's percentage. This is not the way to do it.

00:08:25.020 What used to matter to you 20 years ago when you were a little bit more green,

00:08:29.240 not unless you've been around for 30 years, but what used to matter to you 20 years ago where

00:08:32.960 no longer impresses you and what matters today when you say i think this is something we should

00:08:37.060 invest in the track record itself impresses me very little it really does and that's something

00:08:42.300 that will surprise a lot of people the track record obviously i want to know it's there but

00:08:46.560 more importantly i want to know the why behind it right you know as an example there was a great

00:08:50.380 firm i mean a well-known firm i'm not going to use their name they came into the office a couple

00:08:53.960 of months ago they have a fantastic track record but if you actually dig into it in every single

00:08:59.120 fund they've had one investment that has made basically the entire track record real and

00:09:04.180 everything else is very mediocre and they've just been able to do that every single fund well i don't

00:09:09.040 want to be in the one where they don't have that happen and that everything is mediocre or that

00:09:13.280 everything is just average but also what matters to me and i think to most great allocators is

00:09:19.500 persistency not not performance the persistency of the performance how do you measure that so do

00:09:26.040 they had every fund, I mean, perfect example would be is every fund is between 14 and the 16%

00:09:30.480 internal rate of return. That's a lot of persistency. That's highly unusual, but there's

00:09:34.580 a reason why they created that consistency off of five, six, seven, eight, 10 funds. If you have

00:09:39.200 one fund that's two and one fund that's 30 and one funds at three and one funds at 40. Okay.

00:09:43.380 That's not persistency. That's inconsistency. I don't know which one I'm going to get the bad

00:09:47.780 one or the good one. So what matters to me the most is persistency. And the other thing that

00:09:52.380 really i didn't care about much then but i cared more is pedigree okay yes i want to know that they

00:10:00.700 went to a good school they have a good education you do but generally speaking i don't care that

00:10:05.020 much did that matter to you more too much when i was 20 years now it doesn't i mean i tell me why

00:10:09.760 why because of the fact that there's some of the best schools that put out some of the worst

00:10:13.300 investors okay and some some great investors too but you cannot just say because they went to x y

00:10:20.200 or z that they're a great investor certainly i respect their intellect to be able to go through

00:10:24.720 a great school but that doesn't mean they're a great investor i love what some of the smartest

00:10:27.880 people i know in this industry that could not make an investment to save their life what's an

00:10:32.380 eliminator what is it like if i see these and your team knows guys if i see these three things don't

00:10:37.160 even bring the opportunity to me what are those things first thing is if they don't have an

00:10:40.640 auditor run don't don't walk auditor meaning like audited financials like qov like quality of

00:10:46.120 Learnings type of thing?

00:10:46.760 It doesn't have to be a QOE, but they better have an audited financials, okay?

00:10:50.660 If there's no audited financials, I'm out, period.

00:10:52.700 That's how we avoided Madoff.

00:10:53.900 That entire story I could tell you, that's how we avoided Madoff.

00:10:56.700 Let me ask you, let's say a person doesn't have it.

00:10:58.480 Will you say, go do your audited financials and come back to us?

00:11:00.760 Absolutely.

00:11:01.220 Okay, kind of like if I'm a realtor and I'm showing a million-dollar property,

00:11:04.040 but you don't even have pre-approval lender, you know, a bank that's giving it to you.

00:11:07.700 Kind of like that.

00:11:08.380 Absolutely.

00:11:08.840 And it's got to be an auditor we know, and it's got to be one that we trust.

00:11:11.560 Top 50, like BKD?

00:11:13.020 I mean, there's some specialties in certain industries and sectors, technology in particular.

00:11:17.400 They don't have to be that big, but we have to know they've been around and that they're not obviously conflicted.

00:11:21.560 What are the other two?

00:11:22.200 The other two would be basically where they have been lucky, right?

00:11:25.920 There's so many people that have made a great track record because they started at the right time.

00:11:30.000 There's some people we looked at the other day.

00:11:31.700 They started in 2009 in real estate. 1.00

00:11:34.280 You had to pretty be stupid to not make money in 2009 buying real estate, okay? 0.99

00:11:39.540 There was 2006. 1.00

00:11:40.820 Different story.

00:11:41.240 That's a different story.

00:11:42.180 So, and that's the third thing.

00:11:43.360 You got destroyed.

00:11:44.260 I don't want them learning on my nickel, okay?

00:11:46.720 I don't want somebody figuring it out with my money, all right?

00:11:49.740 They need to have proven themselves through different cycles.

00:11:52.440 I'm tracking.

00:11:52.900 What's your third?

00:11:53.660 So, that's the third, is they can't learn on my nickel.

00:11:55.900 So, the second is, it can't be that they just got lucky with their record.

00:11:59.620 Okay, I got it.

00:11:59.900 I missed it.

00:12:00.280 I mean, there's so many times that I see people that they literally got involved in something,

00:12:03.900 you know, in healthcare or in technology or in consumer, and they just happened to hit a lucky trend.

00:12:09.160 Right.

00:12:09.540 But that doesn't mean they could do it again.

00:12:11.480 Great feedback.

00:12:11.900 You see the distinction of being willing to focus on what's the worst-case scenario

00:12:16.200 and can you survive that, can you succeed from that, the level of discipline that he has.

00:12:20.360 The reason he's got a 96% profitability rating over 25 years is the level of discipline.

00:12:26.040 It's 90% of what we see, we're not even going to consider.

00:12:29.280 We're not going to go deep, but not even consider,

00:12:31.120 because he has that level of focus and discipline.

00:12:32.940 And that level of discipline disappears when you get excited about something

00:12:35.980 based on the track record, based on the pedigree,

00:12:38.280 based on whatever elements push your buttons.

00:12:40.480 Oh, it's another AI company.

00:12:42.360 People then stop evaluating with depth.

00:12:44.860 And this is Christopher's greatest strength.

00:12:46.600 Okay, when I sell my business,

00:12:49.100 I want the best tax and investment advice.

00:12:51.260 I want to help my kids

00:12:52.040 and I want to give back to the community.

00:12:54.420 Ooh, then it's the vacation of a lifetime.

00:12:58.780 I wonder if my head of office has a forever setting.

00:13:02.200 An IG private wealth advisor creates the clarity you need

00:13:05.520 with plans that harmonize your business,

00:13:07.540 your family, and your dreams. Get financial advice that puts you at the center.

00:13:12.920 Find your advisor at idprivatewealth.com.

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Valuetainment - September 26, 2026

＂Don't Even Bring Me the Deal＂ - The Red Flags That KILL an Investment

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