Dino
@DinoSawaya
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Private Equity Investor | Founder & Managing Partner @ Exonas Capital
Connecticut, USA
Joined May 2013
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Most middle market PE firms have no reason to exist
If you were looking at a CIM of the average middle market PE firm you’d more likely than not conclude that it was an undifferentiated, increasingly commodity-like business with a worsening future outlook
Who has a different
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RCP Advisors recently posted a presentation titled “The Case for Small Buyouts”
The presentation sets out observations based on more than two decades of data and research
I found the following slides particularly interesting:
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Basically it is impossible to structurally solve the issue of declining returns with larger fund sizes
That’s why there’s a pivot in the PE business model once a firm reaches a certain size - you go from wanting to maximize returns to wanting to maximize AUM. It’s completely
There is a misalignment between the GP and LP at private equity funds
It is well known that size has an adverse effect on IRR
It is much easier to generate returns while deploying $500M than it is while deploying $50BN
At a $50BN fund, your check size per investment NEEDS to
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@BigJohn043
@PrivatEquityGuy
I think in my entire PE career there has only been one company which I’d truly would have paid up for.
Think about that. Thousands and thousands of companies reviewed at some level and only one genuinely passed the “I’d really pay up for this” test…
It was an exceptional
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This is why future returns will be lower than historical returns across the PE asset class
From Goldman Sachs Private Equity Insights
The private equity industry is sitting on a record $1.2 TRILLION in dry powder as of today
There is more money chasing opportunities than good companies available
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@leah_walczak
This post would go down like a lead balloon in Australia…
At least the dominant flip flop there is the Brazilian Havianas
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If you acquire people based businesses where employees have special skills and expertise that cannot be easily replaced, be wary of the things you think you are going to achieve with the organization as a PE sponsor, particularly from a cultural perspective and particularly if
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People hate low margin businesses
People love high margin businesses
That is the wrong way to look at it. Look at ROIC. Plenty of high margin businesses produce rubbish ROICs and vice versa.
Don’t fall for first order thinking
Understand the underlying economics
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PE is all about building relationships
With brokers, LPs, portco mgt teams, advisors, etc
If you’re a transactional person without substance, character and integrity, you’re not going to make it long term
You’d be shocked how many people in PE fit the description above…the
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If you want to be successful as an independent sponsor, you need to create an environment where you have no pressure to deploy capital but the ability to move quickly when you spot opportunity…
Munger said it best (paraphrasing):
Successful investing requires “this crazy
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A self funded searcher deal is almost like an 80’s LBO, except the sponsor (ie the searcher) is personally guaranteeing the debt !
Back to the future !
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I placed a bid for a company. Came 2nd to an outrageously high offer from a PE fund.
The PE group did DD and then re-traded the seller. Deal fell over.
I get a call from the seller - “shall we rekindle the deal”? Sure I say.
Speak to the banker later that same day. “We are
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So I hit 1,000 followers on X recently
I never set out to gain followers on this platform - I joined in 2013 simply because Warren Buffett had joined Twitter (absurd reason yes) - and then I proceeded to do nothing with the account for a decade.
I started posting more
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You’re not a value investor in PE if you pay low multiples
You’re a value investor if you consistently pay less than the intrinsic value of the companies in which you invest, conservatively calculated
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Ladies and gentlemen, does anyone know of any good website and presentation designers with experience in the financial services space?
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Brad Jacob’s investment approach in one sentence:
Consolidate fragmented industries, ideally benefitting from secular tailwinds.
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I’m always very skeptical of PE firms that say they consistently buy decent or high quality companies at a discount to market prices…
It’s very difficult to do this outside of turnaround or “on-the-nose” companies (eg picks and shovels servicing thermal coal)…
It’s almost
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If I know one thing unequivocally, it is that the “holdco” nonsense on X has to stop…
It’s hard enough getting one platform deal right, but off the bat many clowns on X are talking about buying multiple businesses from day 1, often when they haven’t bought their first !
There
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To continue this thought, I suspect you will see two things happen in the PE market going forward
The bigger firms will become bigger (scale matters), especially as they start to tap alternative retail orientated sources of capital (HNW pools)
And more of the rest of the
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There is a symbiotic relationship between investors and operators in PE…
You can hero worship the operator skillset (as is often the case on X), but no operator can reverse an investment that should never have been made for whatever reason…
And the opposite is also true. A
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There is a lot of hate towards discretionary consumer companies - which are at greater risk of losing revenue in weaker economic environments
And that is in fact true for 98% of all consumer companies out there…
…But there is a small group of companies out there that cater
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The ability to make a lot of money in PE is dependent on your ability to say no to 99.9% of opportunities presented to you
But the bias to action is rightfully high once you own an investee company…
So you must be able to simultaneously sit on your hands for long periods
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It is very very difficult to find good investments to make in PE land…
What is a good investment?
A deal where you almost can’t lose money and where the upside is immense. Aka an asymmetric bet.
Why would capitalism allow you to make such a lopsided bet. Well 99% of the
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Value doesn’t mean buying at low multiples
Value means you’re paying less than intrinsic value, conservatively calculated…
But many value orientated shops struggle to move properly towards the latter…
Why?
Because the higher the multiple of earnings, the more important it
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It’s not just that it takes 3x+ more time, but the odds of actually closing a deal are minuscule relative to that effort as you’re dealing with an owner who doesn’t have their heart in selling…
Agreed. Here’s the primary reason why I avoid off market proprietary deals. And the same reason why a lot of my PE contacts avoid it for the same reason.
Off market means I’m going to 3x the time and effort to find an opportunity because most of the
#SMB
owners aren’t ready to
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There are two concepts that I keep coming back to time and time again as a PE investor…
1. Margin of safety
2. Opportunity cost
Internalize these and you’re well on your way…
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I am sick of hearing about holdcos on X !
It’s the flavor of the day but the potential consequences of going down this path without knowing what you’re doing can be disastrous, especially if folks are going to use SBA loans to give it a try…
Know your circle of competence and
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I previously wrote a post about why many (most?) middle market PE firms don't really have a right to exist. It was a controversial post to say the least...
Why do I say that do you ask? Many reasons...
For one, "deal sourcing" at these firms means bidding in highly competitive
@BoringBiz_
PE doesn't think of itself as a business. A lot of firms seem to almost exist to feed the egos of the founders. It is crazy.
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Capital / Opportunity Imbalance
Huge amounts of capital have been raised in PE land, but there is still an imbalance between the small buyout opportunity set and the amount of capital chasing those deals
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There is a lot of operator worship on X lately…
No one doubts that strong operators are a critical part of the equation in PE
But even the best operator is going to find it hard or impossible to undo a truly terrible investment decision - you are starting too far behind the 8
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The quickest way to discredit a forecast is to compare ROIC in the forecast period to ROIC in the historical period
The most fanciful forecasts typically see ROIC explode in the forecast period - pure nonsense
Forecasts don’t survive this test 9.9/10
I think my favorite things to read in a CIM is some combination of this:
"we expect to increase revenue by 100% over next 3 years as a result of increased investment in Sales and Marketing and accelerated upsell opportunities"
Then I immediately go to financials section and
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Those early to buy-and-builds really do benefit from multiple arb, but the multiple spread between platform and bolt on inevitably narrows as the trade becomes popular and then saturated…
Moral of the story: If you’re planning on executing a buy-and-build, be early (and do a
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The best way to describe the utility of a financial model in PE land is that it is a necessary evil for financing purposes
It doesn’t help you decide whether to invest in a company and it won’t illuminate the 2-3 drivers of a business (if you don’t know those drivers before you
@BusinessBoy231
In all honesty, in my 20+ year PE career I am not sure I ever understood a business significantly better by building a model. Maybe it is just me....
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One of my first bosses in PE (at a value shop) explained the essence of PE in one sentence, tongue in cheek:
“PE is about finding the least worst business to overpay for”
Tell me that doesn’t accurately summarize the trajectory of the PE market over the last decade and a half !
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One of my biggest frustrations with the PE fund set up
Other “investment professionals” pursuing deals that will simply never happen to give the appearance and feel of activity across the firm…
Activity ain’t progress
Opportunity cost is real !
There is absolutely zero
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Pricing
Valuations for small buyouts are “structurally lower”, which makes sense at a macro level given the elevated risk profile of smaller businesses
With that said, there are greater opportunities for mispricings in this part of the market…
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Reminder that you can make money by buying a crap business (with “fixable” issues) and making it less crap…
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Whoa
I just received an email distribution from a debt fund with a “new product” for “healthy” middle market companies with EBITDA of $15-35m
What’s the product you ask…
A unitranche of up to 7.5x !
Usually leverage at those levels has been restricted to highly
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Sadly this happens all too often in the LMM
And with brokers baiting inexperienced or desperate buyers into bidding silly numbers, you are seeing plenty of broken deals as a result…
Looking at and opportunity. Broker mentioned 9.0x gets deal done. Proceeds to send unsolicited LBO model for deal with returns pegged at entry multiple of 6.0x. 👍
Also heard deal shld benefit from k shaped economic recovery with LTM down 20% from prior year
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One of the single most important concepts in investing as espoused by the late Charlie Munger…
…which is misunderstood or simply unknown by virtually all of the PE market, whose institutional need to deploy capital means they cannot wait around to find a mispriced bet…
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Brad is one of the most amazing entrepreneurs you’re ever likely to encounter, and likely the most successful “independent sponsor” in history. Well worth a listen !
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@paularambles
Australian here
Sydney is so expensive these days, only Atlassian engineers can afford it !
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As I’ve long postulated, the PE asset class will increasingly struggle to outpace public returns over the long term given a multitude of factors, especially at the large end of town where it is an AUM gathering operation…
BLACKSTONE TRAILS THE S&P
Is this possible for a private equity behemoth?
Apparently it is
Getting hard to justify 2 & 20
Couple thoughts below
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You can do all the DD in the world but you don’t truly understand a business for at least 9-12 months after you acquire it
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One of the most accurate statements made about PE on X
@BoringBiz_
PE doesn't think of itself as a business. A lot of firms seem to almost exist to feed the egos of the founders. It is crazy.
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Bet on businesses that are characterized by
(I) People desperately wanting to give you money regularly (serious enthusiast businesses qualify here) or
(II) Where people have no choice but to give you money regularly (such as food testing businesses)
Want to achieve a better IRR?
Or a higher MOIC and an overall return on investment?
Either way...
Your goal is to bet heavily on portfolio companies whose customers enjoy the act of giving your business money.
There are many ways to achieve this...
Best ones are when... even
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@Will_Schryver
Massive overkill
This is nice to know stuff once you own the business
As a tool to evaluate whether to buy the business, it’s massive overkill.
You need to focus on the 2-3 variables that determine whether this is a good enough company and a good enough investment
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The best PE growth investments coincide with some kind of unique or early insight on the part of the investor related to the specific market or industry
For instance, go back say 9 years and there was little PE interest in maintenance orientated HVAC service companies - fast
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How to find mispriced deals
1. Look for companies with some business issue (eg supplier concentration) that are either solvable or not an objectively big issue after significant DD
2. Search for hard to do deals (eg very complex carve outs) as that will weed out a ton of
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PE has raised a bunch of money since 2020 - new and much larger pools of capital came into existence during this period.
Except that deal volumes fell off a cliff in 2023 and the start of 2024 hasn’t exactly been as busy as many people may have expected.
So what does this all
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If you’re not good at remaining calm and balanced through the inevitable ups and downs of an M&A process where you must also simultaneously raise the required capital for the deal at hand, being an independent sponsor is not for you…
Irrespective of whatever anyone tells you,
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The best PE investors are part Warren Buffett, part trader….
Be Warren Buffett on the way in…
…And a trader on the way out
Why?
Because there are windows of opportunity in markets.
It shouldn’t come as a surprise, but markets are not static. These windows come and go…
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If you rely on a financial model to tell you whether you should invest in an given business, you’re basically clueless
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Worked 10 months on a highly complex carve out deal. Capital raised, due diligence completed. Transaction documents largely negotiated.
Seller turns around and tells us they’ve decided not to sell to anyone !
The joys of PE and M&A !
PS: Reminder to maintain a pipeline of
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I don’t want to labor on about bad brokers (there are good ones as well), but I am seeing an uptick in bad behavior
The latest nonsense (and counter to previous indications from the very broker): “We need to extend the process by two weeks because everyone is away on vacation
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A few of us have never seen such a disconnect between seller value expectations and reality as we are observing right now…
Broker community pls step up and guide clients towards valuations that actually make real world sense - no deal, no fees is a great incentive to do so…
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Helpful hint: If you’re looking to find a mispriced acquisition, stay away from brokers that specialize in a particular sector…
The odds that they don’t know the right buyer set or how to price a particular asset are low
…Unless they are selling a company outside their
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@carrynointerest
Couldn’t agree more with this
Relationships are all that matter in old school SMB M&A
Those who can build genuine relationships will flourish in coming years
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Whenever you get the chance to partner with another super high quality investor on a deal, do it.
I’ve heard the “why split the economics” BS over and over in these circumstances.
It’s almost beyond doubt that two savvy street smart heads are better than one.
It just boils
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How to buy well 101
1. Find a decent (or better) company but hairy deal (that likely clouds the decentness of the underlying company)
2. See a way of growing the business that isn’t apparent to the owner, broker or other buyers. Yes, this happens from time to time…
Simple but
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Experienced buyers know that leverage is fluid through a negotiation
At certain points one side will have subtle or overt leverage over the other and vice versa…
Experience tells you how to play that leverage, and more often than not it means not taking every dollar at every
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@piktoggle_
Learn how to do deals from start to finish - so continue your apprenticeship at your current fund, then strike out as an independent sponsor and prove to the world you can generate good returns across several deals
Then, and only then, start thinking about raising a fund…
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It is wild the insights you can glean from consistent invoice data spanning many years with embedded notes about the service/s that were provided to the customer by the business in question…
If you’re not mining invoice data during commercial due diligence, you are truly flying
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This is pretty funny
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I went to buy Brad Jacob’s book only days after it was released…and it’s sold out…is there anything this dude ain’t good at !!
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If you can’t build genuine connections with people, forget investing in the LMM. Investing in this part of the market is all about relationship building.
You’re better suited to the middle market, where any clown can pay top dollar and win broadly marketed auctions (aka
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@privateinequity
@cfo_mm
ABLs are basically a secret in LMM land - virtually no one understands them - broker, seller, etc
If you’re buying an asset rich business for 3x there’s a decent chance of getting 50% of your purchase price financed through the ABL
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Losing deals at the last minute is tough
Especially when you’ve invested so much time into the relationship and opportunity
Even worse are the dead deal costs you incur if you’re literally at the finish line and something goes wrong…
Remember to never count your chickens
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Something that isn’t spoken about enough: M&A can be full of extreme highs and extreme lows
Nothing can quite prepare you for the lows, you take it on the chin and keep marching forward
Just try to ensure you have more highs than lows
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The process of underwriting an investment is simply the art of ensuring you’re paying a price such that you have limited downside and significant upside using conservative assumptions regarding the range of potential future operational outcomes (aka as an asymmetric bet)
It’s
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Cody Agee
@codywagee
is a superstar who is going to crush it with his investment in Sierra
A great study for others in the searcher and micro PE community
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For those involved in the data center ecosystem, one of my portfolio companies TeleGeography just released a game changing data product, The Market Connectivity Score, which measures current and potential market size for data centers across 3,000 cities worldwide
Honestly it’s a
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This is what kept Brad Jacobs from investing in the accounting space…
Will AI add to productivity or reduce the need for tax accountants altogether - or both…?
It's astonishing how rapidly AI is being integrated into the accounting industry. It will undoubtedly be a market disruptor, particularly for technical tasks such as preparing tax returns, in the near future. Many accountants will have to embrace AI as a valuable tool or risk
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Perhaps I’ve just missed the posts, but there was an interesting article in the FT about PE returns today.
According to the article, annualized IRRs for the industry fell below 10% per PitchBook data.
Whether you want to quibble with that particular measure or not, the fact of
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One of the least understood financing tools is the asset backed loan (“ABL”) facility, which in certain circumstances can be used as both a revolver and a term debt facility…
These facilities are less relevant for asset light businesses, but are particularly useful for asset
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There’s a raging debate between specialists and generalists in PE land - what is “better”?
I land on the generalist side of the debate
Apparently so does Mr Buffett…
“The thing to do is just find a good business at an attractive price and buy it” —Warren Buffett (2013)
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You don’t have to worry much about forecasting the future correctly if you’re purchase price is low enough
If experience has taught me anything, it’s that most of us have no clue what’s going to happen next week, yet alone 3-5 years into the future…
Play the anti-fragile game
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This is another truism in PE - rarely do you see the same standards PE firms apply to portcos applied back to the PE firm
It's astonishing how many PE firms don't hold themselves to the same standards as their portfolio companies. We go beyond by not only adhering to our portcos' SOPs but rigorously testing them on ourselves first to ensure they work. What's good for the goose...
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Managing your opportunity cost of time is one of the most important skills as an investor
I’ve passed over many otherwise solid investments because the upside is likely to be insufficient to justify the time and effort
This is particularly relevant to PE deals, where there is
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As a follow on from yesterday’s operator post, there have also been some really bad takes relating to PE on X lately
What motivates very inexperienced people to post authoritatively on the subject of PE investing is beyond me
As always, be careful whose opinions you
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Is customer or supplier concentration an issue in a deal you’re reviewing?
The “magic test” is to review the extent to which a change in current circumstances would create a situation of “mutually assured destruction” for both parties - ie for you and your customer or supplier
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AI will never replace the deal doer in SMB M&A, which is a human relationship game
Can’t say the same re stock pickers in the public markets
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Partnering with high integrity, like minded and intelligent investors on independent sponsor deals is a pleasure and is far superior in virtually every way to working independently.
Yes you must button up the legal arrangements, but you’ll seldom if ever need to refer to these
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Most people don’t realize that just because you can structure an investment with downside protection doesn’t mean the investment at hand is a good investment
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@jayvas
@SMB_Attorney
@ClintFiore
What Jay and Clint say is completely accurate in my experience
And it’s complete BS that brokered processes mean you can’t buy below intrinsic value ever…that’s just not accurate in the real world
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Sharp deal making requires the sponsor to be prepared to walk away from deals, or at least the ability to convince a counterparty that you are in fact willing to walk
Too often I see people capitulating to ridiculous asks by brokers and sellers in the name of “getting a deal
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Great advice from the late Charlie Munger
“Three rules for a career:
Don’t sell anything you wouldn’t buy yourself
Don’t work for anyone you don’t respect and admire
Work only with people you enjoy”
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As an aside, someone once told me that they wanted their firm to stay small and offer “artisanal alpha” to their LPs - it was a joke, but admittedly a pretty funny one at that !
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@XavierHelgesen
Tell me you haven’t seen a PE cycle without telling me you haven’t seen a PE cycle
Returns will slowly compress and PE will remain as popular as ever in the years to come
The fundamental driver of PE allocations - the pension returns problem - is unchanged
And the largest PE
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X is a terrible place to communicate nuance, which is especially true with investing related content
Beyond a few timeless principles, most of everything in investing is not black or white
And yet I see a lot of absolutist garbage on X that screams “agenda” on the part of the
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There is a good amount of deal flow in the LMM out there but quality is fairly poor
Anything of quality immediately attracts reams of interest and is trading at full prices
Many sponsors complaining that this is the most competitive market they’ve encountered
Got news for ya
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@SteveWiesnerSMB
Not sure it’s black and white. The counter argument is made in the book “Range: Why Generalists Triumph in a Specialized World.” There are pros/cons to being a specialist or a generalist…
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@PrivatEquityGuy
Debt for those building initial wealth
Equity for those “maintaining (or slow growing)” existing wealth
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My gut tells me that there are more likely to be more “sellers markets” than “buyers markets” going forward
Why?
Because the universe of available companies has not expanded at the same pace as the amount of capital chasing those companies has exploded
Its economics 101…
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@HighyieldHarry
PE M&A (ie one PE group acquiring another) is very hard, there are so many egos involved…
More likely the process of rationalization in future will involve firms simply winding down…
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@BigJohn043
John the amount of misinformed PE nonsense on X is extraordinary
It’s also a source of constant entertainment, at least for me !
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